Académique Documents
Professionnel Documents
Culture Documents
Water, Politics
and Money
A Reality Check on Privatization
Manuel Schiffler
123
Manuel Schiffler
KfW
Frankfurt am Main, Germany
ISBN 978-3-319-16690-2
DOI 10.1007/978-3-319-16691-9
vii
Acknowledgments
This book has been over 3 years in the making. Without the encouragement and
support of many people, this book could not have been written. I would like to
particularly thank Dr. Richard Franceys, who kept encouraging me to write the
book that is within me, for his patient review of the entire manuscript and for
improving the chapter on the United Kingdom. My gratitude also goes to Marine
Colon, who volunteered her detailed knowledge of the water sector in France,
Uganda, and Phnom Penh. Sophie Herrmann was a critical reviewer of several other
chapters, deftly spotting weaknesses of argument. Stefan Ehlert pushed me to go the
last mile and to rewrite the conclusion and introduction one last time so that they
hopefully meet the high standards I have tried to apply to the entire book.
My thanks also go to Professor Mark Oelmann and Edgar Firmenich who
reviewed and improved an early version of the Berlin chapter. Alejo Molinari
kindly reviewed the final version of the Buenos Aires chapter. I would also like
to thank Verena Seiler and Hartmut Beck for their comments on the Uganda
chapter. Annemie Denzer provided encouragement and advice throughout the final
year of writing this book. Marc Beschler smoothed over the language of the final
manuscript.
Any remaining errors are, of course, my own.
ix
Contents
Introduction .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Tragedy of Utilities in Developing and Emerging Countries . . . . . . . . .
The Water Privatization Wave of the 1990s . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Role of the IMF, the World Bank and the IFC . .. . . . . . . . . . . . . . . . . . . .
The Many Faces of Privately Managed Services . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Extent of Water Privatization and Private Financing:
Misleading Numbers .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Investment Financing in Water Supply and Sanitation .. . . . . . . . . . . . . . . . . . . .
Developed Countries: Investment Financing Through
Revenues and Debt .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Developing and Emerging Countries: Investment Financing
Through Grants and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Foreign Aid: An Overestimated Source of Financing . . . . . . . . . . . . . . . . . . .
Private Financing: Making Sense of the Figures . . . .. . . . . . . . . . . . . . . . . . . .
Utility Turnarounds: How to Assess Their Success . . . .. . . . . . . . . . . . . . . . . . . .
How to Avoid Comparing Apples with Oranges . . . .. . . . . . . . . . . . . . . . . . . .
Chapter Overview .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
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Contents
4. Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
5. Egypt.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
6. Jordan .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
7. The United Kingdom.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8. France .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
9. Germany .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
10. Berlin .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
11. Civil Society and the EU Concession Directive .. . .. . . . . . . . . . . . . . . . . . . .
12. The United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
13. The Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
14. Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
15. Cambodia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
16. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
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Index . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 209
Manuel Schiffler Manuel Schiffler has worked for over 20 years on water management and water utilities in more than a dozen countries in the Americas, Europe,
Africa, the Middle East, and Asia. He worked as a researcher for the German
Development Institute and as a project manager at the World Bank. He now supports
water projects in developing countries at the German Development Bank KfW. He
holds a diploma and a doctoral degree in economics from the Free University in
Berlin.
xix
Chapter 1
Introduction
Having a private water company take over a local water supply system brings up
elementary fears. Will private water companies overcharge their customers? Will
they cut off those who cannot afford to pay? Will they cut corners, compromising
water quality or service quality, letting infrastructure deteriorate for the sake of
higher profits? Only a few people ask other questions: Could private companies
perhaps bring about improvements, beyond and above what publicly managed
companies have achieved? Where private companies have been brought in, have
they served the people better or worse than publicly managed service providers?
Some people may not be much interested in the empirical evidence about water
privatization, because they already know the answers. For those who are convinced
that the impact of water privatization must be negative, since the quest for higher
profits inevitably comes at the expense of customers and service quality, this
book is probably not right. For those who are convinced that the private sectors
performance in terms of efficiency, service quality and customer service is always
superior to the performance of the public sector, this book is probably not right
either. But if you are not sure about the answers to these questions and are interested
in empirical evidence, this book which analyzes the reasons and the impact of the
privatization of water and sewer systems in 12 countries is probably right for you.
1 Introduction
who are reluctant to delegate decision-making powers to their staff. They may
operate in an opaque environment, without any accountability to outsiders except
to a strongman who put them in place as a political favor, and without external
incentives to improve their performance. Politicians set tariffs at low levels without
providing for alternative funding sources. For example, monthly water and sewer
bills in most cities in India or Pakistan are less than two dollars, barely worth the
effort to issue and collect them.
Moreover, the costs of utilities are inflated through overstaffing and water losses.
Often, more than twice as many people are employed by water utilities than are
necessary for them to function properly. One third of the water supplied either leaks,
is stolen, or is not fully registered by ageing meters the sum of these losses is
called non-revenue water in the jargon of the industry. Under such circumstances,
water does not make money for greedy investors. Rather, utilities leak money at
the expense of people. Labor costs and energy bills use up almost all revenues,
leaving next to nothing for the maintenance of pumps and pipes. This predicament
is worsened when customers fail to pay their water bills, or when some customers
steal water with impunity. Such an environment fosters mediocre performance in
the best case, and corruption in the worst, trapping utilities in a vicious circle.
To complicate matters further, there is often no strong public pressure to improve
service quality: Customers in many cities do not expect their tap water to be potable.
The middle class increasingly drinks bottled water instead. In India and in many
other countries, people do not expect to receive water 24 h a day. Until recently,
there was no single city in India that received a continuous water supply. Instead,
for many decades, people have built houses with roof tanks. In many countries, old
pipes are not replaced, an inherent acceptance of contamination or collapse. Implicit
trade-offs are made. The United Nations optimistically estimates that more than
90 % of the people on our planet have access to safe water. Anyone who has access
to a tap, a standpipe or a protected well is considered by the UN to be a recipient
of safe water. In truth, many people receive water that is not safe to drink. For
the poorest who live in slums and who often must rely on purchases of water from
tanker trucks, water is so expensive that they cannot afford the quantities necessary
to cover all their needs. The actual share of people that have access to safe water
on a continuous basis, thus, is certainly much lower than the UN statistics suggest.
Poor service quality is tolerated. The result is what may be termed just enough
utilities that provide a low-priced service that is accepted by most customers, but
that is below Western standards.
The Role of the IMF, the World Bank and the IFC
The 1990s were a time during which many governments in Latin America and
Eastern Europe, as well as a few countries in Africa and Asia, embraced liberal
economic policies. The International Monetary Fund (IMF) and the World Bank
Group, which includes the World Bank proper and the International Finance
Corporation (IFC), were key players in this endeavor. All three are owned by their
members, which include almost all countries of the world. They are often perceived
as a tool of Western governments who are said to dominate them. There was some
merit to this argument at the time of the Cold War. Today, while the President of the
World Bank is still traditionally an American, about half the voting rights are held
by developing and emerging countries, in line with their increased share in the world
economy. Also, more than half of the World Banks current staff is from developing
and emerging countries.
The three entities have different, sometimes overlapping mandates in developing
and emerging countries: The International Monetary Fund works like a firefighter during financial crises, quickly providing massive short-term loans when
needed. It attaches broad and general macroeconomic conditions to these loans,
including some concerning privatization.
The World Bank proper provides long-term loans and for the poorest countries
- grants for investment projects, as well as some for budget support.1 These loans
and grants are sometimes coupled with microeconomic conditions that often
focus on specific sectors of the economy. The World Banks employees, of whom
I was one, often work for many years in one sector. Through the preparation and
supervision of investment projects, many of them nurture long-term relationships
with professionals in their partner countries. Due to the nature of their work, they
often gain considerable knowledge of water supply and sanitation in these countries.
While the World Bank works with governments and state-owned companies, the
International Finance Corporation has a mandate to support the private sector in
developing countries. It thus is structurally different: While the World Bank proper
can help governments to strengthen publicly managed utilities or to establish publicprivate partnerships, the IFC exclusively supports private companies. In line with
this mandate, it has been involved in water privatizations in Eastern Europe and in
emerging countries, especially the larger ones, including the concessions in Manila
and Buenos Aires described in this book. Compared to the World Bank, the IFCs
corporate culture is closer to a commercial bank. Its employees are highly skilled
at analyzing commercial risks and structuring financially complex projects, but they
are typically not as deeply involved in one sector as World Bank employees are.
The World Bank provides financing through two windows. It provides hard loans at close-tomarket conditions through the International Bank for Reconstruction and Development (IBRD) to
its middle-income member countries. It also provides soft loans at close-to-zero interest rates and
grants through the International Development Association (IDA) to its poorest member countries.
1 Introduction
Beginning in the early 1990s, the IMF, the World Bank and the IFC promoted
the privatization of state-owned enterprises, including water utilities, by applying
conditions to loan packages. Their role in the global wave of privatizations had
an ideological element. At least at one time, no matter what the problem and the
local conditions were, the solution was always more private sector participation
the question was only of what kind it would be. During my early days at the
World Bank, the virtues of the private sector were self-evident to many but not all
employees. Once the Director in charge of water was confronted during a meeting
by an employee who said that in the country she worked on, the publicly owned and
managed water and sewer utilities were doing a good job, and that private sector
participation was not needed there. The Director coldly replied that if she did not
like privatization, she could look for a job elsewhere.
The power of the IMF and the World Bank Group is sometimes overestimated.
When a colleague of mine was told by a critical audience that developing and
emerging countries were like puppets on strings held by the World Bank, her
reply was: I wish I had only a fraction of the power that you think I have.
While smaller and poorer countries, such as Bolivia and Uganda, are more prone
to external influences, domestic politics often play a crucial role, as the chapters
on the attempted water privatizations in these countries show. In larger countries,
such as China, India or Brazil, external factors have even less influence. Without
the support of national governments and at least a large section of society, reforms
imposed from the outside are doomed to fail. For example, when Argentina
emerged from an economic crisis in the early 1990s and embarked on an ambitious
privatization program, its government strongly supported this policy and opponents
of privatization were weak. It is unlikely that external pressure alone could have
produced such a large-scale privatization without domestic backing.
Less numerous and less well-known than the privatizations are the cases in
which the World Bank supported publicly owned and managed water utilities. In
some cases, it pragmatically shifted its approach after publicly managed utilities
improved their performance, as was the case in Uganda. In other cases, it apparently
never pushed for privatizations and continued to support publicly managed utilities
from the onset, as it did in Phnom Penh, Cambodia. Over time, its enthusiasm
for privatization waned, mainly during the 2000s. While the idea never completely
disappeared, the World Bank has become less ideological concerning privatization
and more prone to support public utilities again, as it had done in all developing
countries before the 1990s.
Privatization in
Drinking Water
Supply and
Sanitation
Individual Plants
Jordan
Utilities
Asset Sale
Full
Asset
Sale
With Financing:
Concessions
Partial
Asset
Sale
Manila
Lease
Contract
England
Strategic
Investor
Berlin
1999-2013
Stock
Market
Phnom
Penh
Paris
19772012
No Asset
Sale
Without
Financing
Performance
-Based
Technical
Assistance
New York
City
Management
Contract
Kampala
1997-2004
Fig. 1.1 The many faces of privately managed water supply and sanitation services
partnerships. The many faces of water privatization are shown in Fig. 1.1, along
with examples covered in this book.
The most far-reaching form of privatization in drinking water supply and
sanitation is the full and permanent sale of assets, as occurred in England and Wales.
However, except for Chile, no other country has followed this model, which remains
very unusual in water supply and sanitation.
One way of accomplishing the above-mentioned public-private partnerships is
through the partial sale of shares in a company. Shares can be sold to a strategic
investor, as was the case in Berlin, or to a large number of investors through the
stock market, as in the case of Phnom Penh.
Another way is through concession contracts. These are common in France
and were also the most common form of public-private partnership in the 1990s
in Eastern Europe, as well as cites in developing and emerging countries, such
as Buenos Aires, Cochabamba and Manila. They transfer the responsibility for
financing and operating water systems for a defined period that ranges between 20
and 40 years, while keeping asset ownership in public hands.
There are also public-private partnerships without private financing. These are
in the form of lease contracts (as in Paris), performance-based technical assistance
contracts (as in New York), or management contracts (as in Kampala). Under all
these arrangements, private water companies can recover their costs and make
profits, even if water tariffs are below the level that allows for cost recovery. The
companies are simply paid by the government, rather than through tariff revenues.
Some forms of water privatization only cover a single treatment plant. Under
what is called a Build-Operate-Transfer (BOT) contract, international private
companies invest in a ring-fenced segment of the water sector. This form of water
1 Introduction
India and Brazil, extrapolating these figures to other countries. According to these
very rough estimates, more than 300 billion dollars of investment is needed every
year globally for water supply and sanitation, while actual investments are less than
200 billion dollars.
1 Introduction
high investment level corresponds to more than five times as much as water users
pay, contributing to spiraling public debt. In India, 80 % of the relatively meager
investment financing for urban water supply and sanitation is provided by national
and state governments in the form of grants, totaling about three billion dollars per
year. Such grants make sense when a new system is built. But they make much
less sense when existing assets need to be maintained. For this reason, and given
their limited tax base and increasingly high debt levels, governments are unlikely
to increase or even maintain investment grants. Budgetary constraints are likely to
force many governments to use more loans, corporate bonds or equity from investors
to support utilities.
Some emerging economies have already moved away from grant financing to
increased self-financing by utilities and borrowing, mostly from domestic banks. In
these countries, monthly water and sewer bills are in the range of 10 dollars, five
times higher than in India. In Brazil, utilities contribute substantial self-generated
funds, as do state-owned Brazilian development banks. In China, most water supply
and sanitation investments, totaling about 11 billion dollars per year, are financed
by utilities, municipal governments and domestic banks. Only the poorest regions
receive funding from the national government, and this is in the form of soft loans,
not grants.
This figure does not include domestic private investment by small-scale providers and investments
by households in wells.
10
1 Introduction
Did access to tap water and sewerage increase or decrease, in particular for the
poor?
Did service quality deteriorate or improve?
Did tariffs increase or decrease, and are they still affordable, defined as not
exceeding 3 % of household income?
Did the efficiency of service provision decrease or increase, as measured by water
losses, labor productivity and operating costs?
Did subsidies to utilities increase or decrease, and by how much?
Did corporate governance, the corporate culture of the utility and management
styles deteriorate or improve?
This definition is broad. Most analyses of water privatization focus on access,
quality and tariffs. Some downplay or neglect changes in efficiency or fiscal impact.
Few authors emphasize changes in corporate governance. Ideally, all six above
questions should be asked to truly assess the impact of a utility turnaround.
There is not a single case where there were improvements on all six counts.
A key dilemma with water supply and sanitation investments in most developing
countries is that they do have a high benefit to society, but a negative financial rate
of return because of low tariffs. In order to resolve this dilemma in the absence
of significantly increased grant funding, utilities must become more efficient, and
in many cases, they will have to charge higher tariffs. But how to assess a utility
turnaround if access increased, service quality improved and it had a positive impact
on the state budget, but resulted in higher water tariffs? Is it a success or a failure?
Or how to assess a utility whose real tariffs decreased because of inflation, making
water cheaper for its customers, including the poor, while its service quality remains
poor and the impact on the state budget is increasingly negative? These answers will
necessarily be subjective, and they are for you to find.
Chapter Overview
11
Chapter Overview
The 12 cases included in this book were chosen because of their notability, diversity
in terms of different forms of water privatization, and geographical diversity. I do not
claim that these cases are statistically representative. But the findings are coherent
with the results of empirical studies of larger samples of water privatizations quoted
in the books conclusions.
I start the book in Latin America with three chapters covering Bolivia, Cuba
and Argentina. The first chapter tells a thrilling story that most people who take an
interest in water, money and politics have heard of: the Water War in the Bolivian
city of Cochabamba in 2000. A foreign private water company, partially owned
by the U.S. multinational Bechtel, was chased out of the city amid bloody riots.
It had been accused of having leased the rain with support from the IMF and
the World Bank. Anti-privatization campaigners use the Cochabamba concession as
exhibit number one to illustrate the evils of neoliberalism when it comes to water.
The chapter provides a detailed analysis that goes beyond the usual clich of the
Cochabamba Water War as a victory against neoliberalism. Instead, it analyzes the
local politics behind the Cochabamba privatization and how the struggling water
cooperative serving the city fares today. The second chapter recounts how the
Socialist government of Cuba, frustrated by the inability of its public water agency
to provide water continuously to the people, quietly entrusted the water supply of
Havana to a private Spanish company, Aguas de Barcelona. This case illustrates
another mode of privatization, the mixed public-private company. The third chapter
tells the story of what was probably the most important water concession in the
developing world in the 1990s, the Buenos Aires water concession in Argentina
awarded in 1993. Supported by the IFC, it was meant to serve as a flagship deal to
be followed by many more around the world. However, the concession was flawed
in several ways.
The journey then continues to the Middle East, showing how publicly owned
and managed utilities in Egypt fail their customers and are a drain on the state
budget, despite decades of reform attempts supported by foreign donors, including
the World Bank. In nearby Jordan, the water supply for the capital Amman had
been entrusted on a temporary basis to the French water company Suez under a
management contract, showing yet another face of privatization. The government
12
1 Introduction
let its contract expire and benefited from the expertise it had received from the
private sector to build a better publicly managed water utility. The Jordan chapter
also serves to illustrate another face of water privatization: BOT contracts.
From there, the book moves on to Europe, where the water sector in the United
Kingdom, France and Germany is presented. The United Kingdom is the setting
for an unintended real-life experiment on the merits of different ways to organize
water and sewer utilities: England and Wales privatized the entire sector through
the complete sale of water companies in 1989, one more face of privatization. In
the meantime, Scotland kept its utilities public, while Wales moved to a not-forprofit model in 2000. The chapter analyzes how the performance of water and sewer
utilities evolved over the past quarter century in the various countries that make up
the United Kingdom. France is the country that invented the water concession in
the nineteenth century. It is also the home of the two largest international water
companies, Veolia and Suez. The models of service provision in France have
evolved considerably over time. The France chapter compares private and public
service provision within France, shows how regulation has forced more competition
and transparency on French water companies, and describes the recent trend towards
remunicipalization in France. Germany has a strong tradition of publicly owned
and managed municipal multi-utilities, the Stadtwerke, that provide different local
public services together. The Germany chapter shows how energy liberalization
has led to the partial sale of some of these utilities to energy companies and
how some German municipal utilities embarked on risky Cross-Border-Leases. It
also describes how the city-state of Berlin partially privatized its water and sewer
utility in an attempt to plug holes in its budget, and how citizen protests ultimately
led to the buy-back of the utility, albeit at a substantial cost to taxpayers. The
European Commission has been an active player in water supply and sanitation
in the European Union. Through stricter environmental and health standards, it has
improved service quality, while it has historically not interfered in how water and
sanitation services are provided. The chapter on civil society in Europe and the
European Commission describes how this changed in 2013, when the Commissions
Concession Directive stirred a lot of controversy, first and foremost in Germany,
where it was seen as a Trojan horse for water privatization. It shows what the
Directive had in mind, and how a European Citizens Initiative and the German
media defeated it in an effective, albeit somewhat misleading campaign.
I then move on to the United States, with its thousands of municipally owned
water and sewer utilities. But there are also privately owned, run and financed
utilities in the U.S., particularly in small towns, with a century-old tradition. An
attempt by foreign companies to bring private sector management to more and
particularly to larger U.S. cities failed around the turn of the twenty-first century.
However, as the chapter shows, the private sector reinvented itself and is now
helping municipalities such as New York City to become more efficient under
performance-based technical assistance contracts, showing that within the U.S.,
there are many different forms of water privatization.
The journey ends with three examples illustrating how dysfunctional utilities in
Uganda, the Philippines and Cambodia were turned around, with or without the
Chapter Overview
13
help of the private sector. The Uganda chapter describes how the corporate culture
at the National Water and Sewer Company (NWSC), under pressure to be privatized,
changed, giving more responsibility to its employees, and focusing more on its
customers while expanding access, posting a profit and keeping it public. In Manila,
the capital of The Philippines, two concessions for water supply and sewerage were
bid out one for each half of the city. The concessions in Manila are thriving under
the leadership of Filipino companies. The Philippines chapter describes how the
two private companies expanded access and improved efficiency and service quality
while keeping tariffs affordable. Last but not least, the Phnom Penh Water Supply
Authority (PPWSA) in Cambodia managed to turn itself around without bringing in
the private sector. It shows that a publicly owned and managed utility can change
its corporate culture, become more customer-focused and be very efficient. PPWSA
shows that water can remain affordable in one of the poorest countries on earth while
financing investments through interest-bearing loans and posting a profit. However,
in an unusual turn of events, the well-functioning public company has been partially
privatized through the stock exchange.
In the conclusion, the multiple forms of water privatization are reviewed. Their
differences and similarities, as well as their strengths and weaknesses, are analyzed
compared to the experience with purely publicly managed water utilities. This gives
rise to a nuanced picture, different from the common black-and-white rhetoric about
water privatization. I hope that you will benefit from this analysis and will share its
conclusions.
Part I
Chapter 2
In the film Quantum of Solace, James Bond fights the villain Dominic Greene,
who tries to get his hands on the water resources of Bolivia. The villain belongs to
a shadowy criminal group called Quantum that supports a coup dtat by an exiled
Bolivian general. In exchange for its support, Quantum wants a seemingly barren
piece of desert. As James Bond discovers, that piece of desert actually contains the
aquifers that feed the countrys water supply. The true aim of Quantum is to make
a ton of money from a monopoly on the vital liquid once their stooge is in power.
Fortunately, James Bond foils the evil plot and leaves the villain Greene stranded in
the desert with only a can of engine oil.
The movie was inspired by a real incident: the water war in Cochabamba, the
second largest city in Bolivia. For many, this water war was a fight of David against
Goliath, not too different from James Bonds fight against the villains of Quantum.
For them, the water war was a story of a grassroots movement that kicked a greedy
multinational company out of an impoverished country. Along the same storyline,
the Cochabamba water war is, to many, a symbol of neocolonial interference by the
World Bank and the foolishness of water privatization.
The true story, however, is not quite that simple.
17
18
In Santa Cruz, service had improved parallel to these investments. The World Bank
often accused of blindly pushing privatization on any water company within its
sights never suggested bringing in the private sector there.
Cochabamba was different. Service did not improve despite major investments
funded by international donors: Water losses remained high, water was supplied
only 4 h per day and water quality remained poor. This was a great source of
frustration, including for the employees of the international development banks who
saw that the investments they financed were not well taken care of. Only about 60 %
of the population was connected to the network. Everyone else had to rely on more
expensive alternative water sources. This included water tankers that supplied water
at five to ten times the tariffs charged by the local utility, SEMAPA, and wells that
those who could afford it drilled alongside those of the city and farmers. The city
also drilled deep wells next to ones used by farmers to irrigate their fields. The water
crisis in Cochabamba, as it was called in Bolivia, was a double crisis: a crisis of lack
of water resources, and a crisis of poor management of the local water utility.
Resolving the Cochabamba water crisis had long been on the agenda of the
national and local government. To solve the lack of water resources, various Bolivian governments since the 1960s had promoted the construction of the Misicuni
Dam. Jim Shultz, a Cochabamba-based U.S. journalist who heads The Democracy
Center, a research and advocacy organization, called the 300 million dollar project
shrouded in rumors of behind-closed-doors sweetheart deals. A first phase of
the project, a 20 km tunnel through a mountain range, had been started, but was
abandoned half-finished amid contractual disputes. The idea was ultimately to build
a large dam, in fact, the largest in Bolivia. The dam was to produce hydropower
and store water from the rainy season in order to irrigate fields and provide ample
drinking water for the growing city. It was expected that the Misicuni Dam would,
thus, resolve the lingering conflicts between farmers and the city.
But the second part of the water crisis, the poor management of the utility, also
had to be tackled. The government was well aware that its performance lagged
behind the performance of other Bolivian utilities. As a first step to improve the
utilitys performance, SEMAPA was to be transformed from a municipal department
into a public company. The World Bank went further and had included conditions
in its loans asking for the privatization of those Bolivian water utilities that did
not perform well. These included the utilities in La Paz and Cochabamba. The
government at the time was in favor of privatization: It had privatized its railways,
telephone system, national airlines, and hydrocarbon industry. The water supply for
La Paz had been entrusted to Suez under a concession in 1997 with encouraging
initial results.
19
included only 85 million dollars over the first 5 years and an additional 129 million
over the remaining duration of the concession. But the performance targets were
ambitious: 24-h water service, an objective that had remained elusive for decades,
was to be achieved by the second year of the concession. Access was to be increased
to 90 % for water and 88 % for sewerage in only 4 years. The company would also
have to serve the existing debt of the utility. On top of that, it was expected to pay
a concession fee to the municipality. To make the concession attractive, the contract
guaranteed a 15 % annual return on investment. The low water tariffs were to be
increased to cover the profit, but also the cost of expanding the network and to pay
the debt and fees to the municipality. In addition, tariffs were indexed to inflation.
Financing was to come from the private companies equity, but also through local
currency loans from Bolivian pension funds.
It would have been difficult to achieve these ambitious targets even in the best
of times. But in the climate prevailing at the time in Bolivia, it was challenging in
the extreme. Making a profit on top of fulfilling the contractual targets would have
been close to a miracle. The concessions in Buenos Aires and Manila (see Chaps.
4 and 13) were based on water tariff reductions at the start of the contract. The
Cochabamba concession was based on an initial tariff increase. Anyone familiar
with the sensitivity of water pricing in developing countries should have known that
the planned tariff increases were politically risky and therefore far from certain to
happen smoothly.
20
that the Misicuni project would be completed. Soon after his election, construction
of the tunnel and a small diversion dam was restarted with funding from Italy and
the Andean Development Corporation, a regional development bank.
The government then prepared another bid for the concession, this time including
the not-yet-awarded elements of the Misicuni project a large dam to store water
from the rainy season, and a canal to the city. At that time, the World Bank said
it had withdrawn its support for the privatization. To what extent this was actually
the case remains disputed. It did not announce its decision to the public. In a report
published in June 1999, it argued that no subsidies should be given to ameliorate
the increase in water tariffs in Cochabamba. The World Bank thus opened itself up
to charges that it had pushed for the privatization in the shape it took over the next
2 years.
The Privatization
21
International did the work on the ground for it. Now, in preparation for winning
more water concessions worldwide, Bechtel set up a new outfit called International
Water Holding, registered in the Netherlands where it only had a letter box. The
Holding Company held all the shares in International Water Limited. This was done
for tax reasons and because the Netherlands had a bilateral investment treaty with
Bolivia a fact that would become crucially important later on. To make matters
more complicated, in November 1999, Edison, an Italian construction company
specializing in the power sector, acquired a 50 % share in International Water
Holding right at the time the Cochabamba concession became effective. Aguas
del Tunari also included the Spanish energy company Abengoa and four Bolivian
firms a cement manufacturer, an engineering company and two construction firms.
One of these firms, ICE Agua y Energia S.A., was involved in the construction
of Misicuni. Aguas del Tunari was thus owned by seven power and construction
companies, three from abroad and four from Bolivia, none of which had experience
in the water sector. The water operations expertise was provided by UK-based
United Utilities.
The bid of Aguas del Tunari did not meet the conditions spelled out in the
bidding documents. In particular, Aguas del Tunari said it suggested deferring the
construction of Misicuni to focus on fixing leaks in the city instead. It also asked
for the legacy debt to remain with the municipality and for cancellation of the
municipalitys concession fees. These measures reduced costs and would thus have
required a lower tariff increase. But changing the conditions at this stage would have
put the other bidders at a disadvantage. It was clearly unacceptable from a public
procurement point of view. According to Bechtel, Aguas del Tunari was unable to
get its way. The government stuck to its conditions, and the concession was awarded
the expensive way.
The Privatization
In September 1999, the national government signed the unusually long 40-year
concession contract, and in November, Aguas del Tunari took over responsibility
for the water supply in the city.
22
The amount by which the tariffs were increased is a matter of debate. Aguas
del Tunari said average tariffs increased by 35 %, while the Cochabamba-based
Democracy Center calculated that the average was 51 %. Given the utilitys
complicated tariff structure, with four different residential tariff categories, an
industrial and a commercial tariff, and several consumption blocks within each
category, calculating the exact increase is not easy. The increase was designed in
such a way that the poorest should not be affected. Claudia Vargas, a lawyer at
the Bolivian water regulator, and the researcher Andrew Nickson argued that the
new tariff was actually pro-poor, because the burden of increased tariffs fell on the
wealthiest residential users as well as commercial and industrial users. According
to them, the water bill for a consumption of 12 m3 per month for the poorest
households was 3 dollars per month compared to 8.64 dollars for those living in
luxury apartments. They argue that the water tariffs in Cochabamba were only raised
to the level that already existed in La Paz and Santa Cruz.
But these complexities were not part of how the people of Cochabamba perceived
the situation. Their perception was instead shaped by another event; an event that
some say was unrelated to the privatizations, while in the eyes of others, it was
closely connected.
The Privatization
23
and what was not. But the lack of such a campaign also allowed the mayor to hedge
his bets by not clearly and openly associating himself with the privatization.
All the residents of Cochabamba knew was that a foreign private company had
increased tariffs for a basic necessity. They were made to believe this was done
to make large profits, not to cover the cost of bringing more water from Misicuni.
Although this was not supported by facts, water bills were described as leaping from
12 dollars per month to 30. Ironically, for some users, the bill increased because, in
the first 2 months of operations, Aguas del Tunaris water supply increased, a fact
that got completely lost in the fray.
What counts in the short-term in politics is not reality, but perception. When the
tariff increase came into effect on the first day of the new millennium, a perfect
storm was about to be unleashed.
24
capital. The government canceled the concession, the Coordinadora took control of
the utility SEMAPA and the water was in the hands of the people.
25
USD/m3
liter/capita/day
Persons
USD/month
USD/month
% of income
Middle class
1.07
100
5
16.05
364
4.4 %
Poor
0.66
70
6
8.32
200
4.2 %
Source: Authors calculation based on data from SEMAPA and other sources
Bolivia ask an impoverished country to pay compensation? The case was politically
sensitive. ICSID agreed to take on the case, but did not take a decision over several
years. Finally, in December 2005 Bechtel and the other international shareholders
dropped all their claims in exchange for a brief joint statement with the Bolivian
government that exonerated Aguas del Tunari from any responsibility for the events
during the Water War.
26
45 %
4.5
50 %
315
67.490
70.000
15
98 %
from 270 to 700, far in excess of the staff needed to run the company. Employment
again became a source of patronage, including for veterans of the Water War.
Performance remains poor, as shown in Table 2.2.
Conclusion
Looking back at what was achieved, protest leaders are sober. Oscar Olivera
admitted, We were not ready to build new alternatives. A Cochabamba resident
and activist during the unrest was even blunter: Afterwards, what had we gained?
We were still hungry and poor. Jim Shultz, revisiting the subject on the occasion
of its 10-year anniversary, wrote: A decade after people shed blood in the streets
to retake their water, the company that manages it remains riddled with corruption,
mismanagement, and inefficiency a source of graft for the citys mayor and the
union that represents the companys workers.
Chapter 3
On January 17, 2000, just as the protests against privatization in Cochabamba were
beginning to flare up, seemingly a world apart and gently tucked away from media
attention, the Socialist government of Cuba under Fidel Castro made a 25-year
commitment to entrust the operation of the drinking water supply of its capital
Havana to a private water company. On April 1st, just days before the foreign
employees of the private water company in Cochabamba had to flee in the midst
of riots, the private Spanish company Aguas de Barcelona, a subsidiary of the
French water giant Suez, began operating the water supply of Havana. How did
this situation come about?
When the Soviet Union collapsed, the Cuban economy went through a deep
crisis known locally as the Special Period. Deprived of subsidized oil and gas
supplies, as well as of a guaranteed market for its sugar exports, the economy tanked.
Agricultural and industrial production dropped, public transport was severely
restricted, there were widespread power outages, and food rationing was intensified.
Poor Service
During this time, the quality of the drinking water deteriorated. While 73 %
of Cubans had access to piped water at their premises, due to power outages,
poor maintenance and leakage in the network, the supply became increasingly
intermittent. Some municipalities in the Havana metropolitan area did not receive
any water for days, never knowing when it would be turned on again. When it came,
some houses just received a few drops. Due to shortages of chlorine, water supplies
were not systematically disinfected. The residents were supposed to be supplied
by public tanker trucks, but their movements were hampered by the fuel shortages.
When the trucks arrived, long lines formed. At the height of the crisis, 90,000 people
in Havana depended on tanker trucks for their water supply.
27
28
Conclusion
29
Residential water supply in Cuba was free until 1997. At that time, the government introduced a residential water tariff of 4 Cuban pesos per month, equivalent to
0.17 cents in US currency, one of the lowest water tariffs in the world, equivalent to
3.4 cents per month for a consumption of 20 m3 . Hotels and foreign embassies
are charged much higher tariffs, but for the majority of Aguas de la Habanas
customers, water is quasi-free. Water privatization and quasi-free water only fit
together because the government pays for the costs of the water supply, including
the fees of the private company. Socialism and private water thus go well together
in Cuba.
Conclusion
As of 2004, Aguas de Barcelona had reported significant progress. 95 % of the
citys residents that had to be supplied by tanker trucks before the private contract
now received tap water, according to the company. The continuity of supply had
increased from 7 to 10 h per day. However, water distribution losses are still
estimated at 50 %, and more than 100,000 residents of Havana still suffer from
an intermittent supply, a challenge beyond the reach of improved operations, and
something that can only be solved by significant investment of capital.
Chapter 4
With 12 million inhabitants on the shores of the Rio de la Plata, a huge and cheap
source of freshwater, the bustling metropolis of Buenos Aires was a great prize
to win for the worlds water companies. Argentina had just come out of a dark
period, one of instability followed by a military dictatorship that had cost the lives
of thousands of people and that ended after the disastrous war over the Falkland
Islands, called the Malvinas by the Argentines. The country returned to democratic
rule, but the economy did not recover. The new President, Raul Alfonsn, from the
Radical Party, took over in 1983, after democratic elections. The new government
inherited a high foreign debt, and inflation spiraled out of control, amid labor
disputes and frequent strikes. At the height of the crisis, close to the end of the
6-year presidential period, almost half the population lived in poverty. During the
elections, the opposition candidate from the Peronist party, Carlos Menem, stylized
himself as an advocate of the poor in the tradition of the partys founders, former
President Juan Pern and his wife Eva. The two, later subjects of the hit Broadway
musical and subsequent film adaptation, Evita, the latter starring Madonna as Eva
Pern, had ruled Argentina in the 1950s and are revered as icons by their followers.
Building on the enduring myth of the Perns, Carlos Menem promised to stabilize
the economy and to fight poverty. When the government lost the 1989 elections, the
situation was so bad that the incumbent President Ral Alfonsn asked to hand over
power to the new President Menem 6 months earlier than foreseen.
Once elected, Menem completely changed course and adopted neo-liberal policies. To his credit, his administration succeeded in reducing inflation and recovering
the economy. With the support of his coalition partner, the liberal-conservative
party UCD under lvaro Alsogaray, Menem to the horror of the left wing of the
Peronist party privatized state-owned companies across the board, starting with
telecommunications, electricity and gas.
At the same time, the French and British water companies set out on a course of
global expansion. The timing was good for them: After the fall of the Berlin wall,
privatization was en vogue. The French and British companies had few competitors,
31
32
because, in the other major industrial countries, the water sector remained largely in
public hands, often under the responsibility of local governments.
The two largest privatized English water companies, Thames Water, the utility
that supplies Greater London, and North West Water, the utility that supplies the
Manchester and Liverpool areas, were particularly eager to expand internationally.
And the French water companies, having won the Buenos Aires concession, the
largest water concession in the world, hoped that this reference would be a stepping
stone for winning more water concessions around the globe.
33
34
35
Ambitious Targets
The government had set ambitious targets. Over the 30-year life of the concession,
universal water coverage was to be instituted across the entire metropolitan area;
access to sewerage was to be increased to 90 %; 93 % of wastewater was to be
treated, up from almost no treatment; and water losses were to be reduced from
an estimated 45 % to 25 %. These targets were broken down in 5-year periods.
Approximately one million people would be connected every 5 years for the first
15 years of the concession. The required investment was about 4 billion dollars.
Investment during the first 5 years alone would amount to 1.2 billion. Moreover,
high standards for water quality, continuity and pressure had to be reached.
Despite these ambitious targets, private companies rushed to Argentina to be part
of the frenzy.
If Alan Greenspan had been in Argentina at the time, he might have said, in
typical understatement, that there was irrational exuberance in the air. But was
there? Or were private companies taking a deliberate risk, expecting they could
game the process in their favor once they had won the contract?
36
staff with the same qualifications as utility regulators in other sectors in Argentina,
such as the telecommunications or electricity regulator.
37
Convincing banks to provide loans for a deal that is not yet secured in an
untested market in a foreign country is hard. This is where the World Banks private
sector arm, the International Finance Corporation (IFC), came in, giving lenders
the comfort they needed. The IFC would put together a syndicated loan for the
winning consortium, leading the syndicate with a loan from its own resources and
putting together a package of loans from other banks. The involvement of the IFC
was crucial, because otherwise, the water companies would not have been able to
mobilize the debt they needed to finance the investments foreseen in the concession
contract. It also allowed them to plug lower interest rates into their financial model,
thus allowing them to bid lower than would have been possible without the IFCs
participation.
Another problem in setting the price for a bid for a water concession is
that it is next to impossible to estimate the costs of maintaining the assets of
a water company. Most of its assets are underground. The length, material and
age of the pipes are thus difficult to determine. Well-run utilities have detailed
and accurate asset registers. Not so OSN or the other 95 % of utilities in the
world. The available information in the concession contract concerning the state
of the existing infrastructure was so poor that the Argentinian government denied
taking responsibility for it. A rough estimation was made by a consultant based
on experience in England, but the difficulty in estimating the cost to maintain and
renew the existing network still made it hard for bidders to place the right price
on their bid.
38
Santiago Soldati, and 10.8 % by Sergio Mellers Meller Group. Both men were
close political allies of President Carlos Menem. A share of 8.1 % was held by the
Argentine Banco de Galicia. The remaining 10 % of shares were to be owned by the
employees of the company, as set out in the legal framework for the concession.
The financial proposals were opened on December 9, 1992. The French offered
a considerable tariff reduction of 26.9 %. This bid was followed very closely by the
offer of a 26.1 % reduction from the group headed by Thames Water International.
The third bid came from the British company North West Water; it offered a 10.1 %
reduction. Jerome Monod, CEO of Lyonnaise des Eaux, and his partners celebrated.
They had won the largest water concession in the world, and they expected it to
be only the beginning. The concession was not just a success for the winning
consortium. It was also hailed as a success for a development model that bet on
liberalization, globalization and privatization: The private sector, so it was said, was
able to provide water at significantly lower tariffs than the public sector because of
its greater efficiency. In this atmosphere, the concession was signed and came into
force in May 1993.
39
40
concludes that only 2.6 % of Aguas Argentinas investments between May 1993 and
December 2001 came from its own funds.
While the company became more leveraged, another problem arose. When the
concession was designed, it was apparently assumed that new water users would
not have any problem paying the infrastructure connection fee. This assumption
was unrealistic, because the fee was often three times higher than the regular water
bill. And it proved to be false. Many customers refused to pay the infrastructure fee,
which had been expected to be a major source of revenue for Aguas Argentinas.
In April 1996, street protests erupted in the suburbs against the fee thousands of
angry people blocked roads into the capital. Aguas Argentinas now badly wanted to
change the tariff system, and this required a renegotiation of the concession contract.
The Economic Crisis and the Second Half of the Concession Period
41
42
neighborhoods and slums are said to have been connected through a participatory
management model piloted by Aguas Argentinas.
1993
70 %
58 %
Target (2002)
88 %
74 %
Actual (2002)
79 %
63 %
43
When the government rescinded the concession in March 2006, it argued that
Aguas Argentinas had not complied with its obligations concerning expansion and
quality. According to the government, the supplied water had high levels of nitrate,
pressure obligations were not kept and scheduled waterworks were not executed by
the concessionaire. While all this was true, the government generously overlooked
the fact that it had also failed to live up to its part of the contract, in particular, the
obligation to raise tariffs in line with the devaluation of the Peso.
Between 1993 and 2000, Aguas Argentinas had invested around 200 million
dollars per year. It extended water access to 2.3 million people and sanitation access
to 1.4 million people across the entire duration of the concession. But it still failed
to reach the stipulated access targets. It also failed to reach the target set down for
wastewater treatment: Only the Planta Norte sewage treatment plant had been
completed, serving an equivalent population of barely 270,000.
44
drain on the already strained national budget a detail that is not publicized much
in Argentina. AySA has to rely completely on government subsidies to finance its
investments, and it still needs more subsidies to pay its recurrent costs, while the
economy is again in tatters. In December 2011, the government finally faced reality
and gradually began to increase water tariffs, although it remains to be seen if the
increases will be sufficient to make the utility financially viable again.
Legal Aftermath
In July 2010, the International Center for the Settlement of Investment Disputes
(ICSID) of the World Bank Group ruled on a claim by Aguas Argentinas against the
Argentine Republic. It concluded that the government had fulfilled its obligation to
provide full security and protection to the private investors, but had, at the same
time, not treated them in a fair and equitable manner. The Argentine government
was furious, because its claim that it was entitled to refuse contractually-agreed upon
tariff increases to defend the country and the human rights of its citizens during
an economic emergency had been denied by the arbitrators. The arbitrators had
decided to rule only on the liability of the government, while the damages would
be determined by an independent expert. The shareholders of Aguas Argentinas
announced that they would seek 1.2 billion dollars in damages, although they
privately expected a lower outcome. The Argentine government refused to accept
the claim, and announced its intention to seek annulment of the ruling. As of this
writing, no compensation has been paid.
Conclusion
The evolution of water supply and sanitation in Greater Buenos Aires can be divided
in three distinct phases: From the time of the concession award until the economic
crisis (19931999), private financing was mobilized, efficiency improved and access
increased. However, the poorest were left out, just as they had been left out under
public management before the concession. And there were several renegotiations
that benefitted the company, reducing its targets, cancelling fines imposed for not
having met targets, and reducing the risks of the company. The crisis changed
everything at the beginning of the troubled phase of the concession (20002006):
A new anti-privatization government was elected, and the government refused to
allow the tariff increase based on a clause that had been included in the contract by
the previous government just before the crisis. As a result, the concession died a
slow death after numerous failed attempts to rescue it. During this time, the private
company changed course in one important respect: It successfully reached out to the
poor, a policy that was continued after the renationalization in 2006. The publicly
managed utility that followed in the footsteps of the private company had to be
heavily subsidized, until the government agreed to allow what it had refused to do
when the private company was still there: to increase water tariffs substantially.
Part II
Chapter 5
While public water utilities perform very well in many rich countries, the same,
unfortunately, cannot be said of most developing countries, where poorly functioning water utilities are common. One of these is Egypt. After Cuba, the country has
one of the lowest water tariffs in the world: The monthly residential water bill
is less than 2 dollars per household. In Cairo, only half of the bills are actually
collected. Revenues are far from adequate for covering the operating cost of utilities,
let alone recovering investment costs. The government, while itself poor, still
subsidizes water supply and sanitation to the tune of 2.5 billion dollars per year.
This corresponds to 12 dollars per household per month, more than six times as
much as water users pay.
Dismal Conditions
The woes of the water sector are not isolated from the general woes of the public
sector in Egypt. The civil service is overstaffed and employees are underpaid,
leaving them unmotivated, and making it difficult to attract and retain competent
personnel. Some have a second job to make ends meet and only show up at work
for a few hours a day. Egyptian water utilities have 98,500 employees, an estimated
two thirds of whom work on water supply, with the other third handling wastewater.
This corresponds to more than four employees per 1,000 households, a relatively
high level by international standards. If a utility wants to request a tariff increase, it
has to follow an arcane procedure that involves numerous approval steps, including
final approval by the president of the republic and the national assembly! No wonder
that tariffs are only increased about once in a decade.
Not surprisingly, water bills are very affordable at about 0.2 % of the median net
household income, as shown in Table 5.1.
47
48
Table 5.1 Residential water tariff, water use and affordability in Egypt (without sanitation)
Residential water tariff
Water use
Household size
Typical residential water bill
Median net household income (estimate)
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.05
200
5
1.50
607
0.2 %
Foreign donors have a strong presence in Egypt. For four decades, since Anwar
Sadat turned away from the Soviet Union, western governments have provided
Egypt with generous aid. The World Bank, the European Union, Germany, France
and the United States are among the major donors in the water sector. A World
Bank sector study in the late 1970s observed dismal conditions: fragmentation of
operational responsibility, poor maintenance and operation, excessive water losses,
inadequate investment level, shortage of skilled staff, and low tariffs and inadequate
cost recovery. The donors were concerned about the lack of sustainability in their
investments. They wanted to avoid a repeat of the pattern of Build, Neglect,
Rebuild, familiar from other aid-recipient countries, so they pushed for sector
reforms to make service provision more sustainable, in particular, higher water
tariffs and autonomous, commercially-oriented public water utilities.
Investments have since picked up. This allowed expanding access to water supply
and sanitation, in both urban and rural areas. Drinking water production capacity
increased from 5.5 million cubic meters per day in 1982 to 21 million in 2004,
corresponding to an increase from 130 to 275 l per capita per day. Actually, water
use in Egypt is higher than in Europe, mainly because the extremely low tariffs
provide no incentive for conservation.
The problem of low investment levels had been resolved. But unfortunately, all
of the other dismal conditions observed in the 1970s prevail today, despite many
efforts at sector reforms.
49
reforms in its own peculiar way. Concerning the separation between water supply
and sanitation, the government obliged. But it did so in a way that did not affect its
centralized decision-making process: It merged the two organizations for water supply and sanitation, and created an even larger central entity with another Orwellian
acronym, NOPWASD, which stands for National Organization for Potable Water
and Sanitary Drainage. However, operations would become decentralized to entities
at the level of the 27 governorates. This partial decentralization created another
problem: Centralized investment planning and decentralized operation often clashed
with each other. Planning was often done without taking into account the operational
capabilities and on-the-ground knowledge of those working on system operation.
There were also different views as to how the governorate-level entities in charge
of operation should be organized: donors pushed for full-fledged, legally separate
water companies with autonomy in decision-making for finance and personnel. The
water companies were supposed to recover their costs fully through tariff revenues.
The government preferred public economic authorities, which were essentially
departments of the governorate administration without autonomy. In the end, out
of 27 governorates, water companies were established in only three, where donors
made substantial investments and pushed hardest, all located in the Nile Delta: The
Beheira and Damietta water companies that were supported by the World Bank, and
the Kafr el-Sheikh water and wastewater company that was supported by German
development cooperation.
However, old habits die hard. Despite the adoption of a National Water Pricing
Policy with the objective of reaching full cost recovery for water, tariffs were
either increased insufficiently or not at all. Ten years after the creation of the first
three water companies, an evaluation concluded that the companies were not as
independent or as decentralized as intended, and that they were not financially
viable. Nine years after that, a government report stated that infrastructure continued
to fall into disrepair, while the entities in charge of water supply and sewerage ran
large deficits that were only partly covered through subsidies. The report concluded
that there was a duplication of administrative entities, low cost recovery ratios,
and lack of qualified management and modern management systems. Another
government report a few years later observed that water and wastewater service
providers were overstaffed with poorly qualified and poorly paid employees, there
was no system to evaluate staff performance, billing and collection were poor
and done manually, there was no system to respond to citizen complaints, and no
procedures for maintenance. To sum up, not much had changed. No turnaround of
public utilities was in sight, despite massive technical assistance and financing.
50
also aimed at bringing the private sector into the game. However, the drive for
reforms was little match for the mills of the Egyptian bureaucracy. First, studies
were commissioned. Based on the results of these studies, the Cabinet charged the
Ministry of Housing in 1998 with the elaboration of two documents: a decree on
the reorganization of the water and wastewater sector, and a law on concessions
for water and wastewater. Both were elaborated and approved in principle by the
Cabinet in 2000, which then sent them back to the Ministry of Housing. However,
the water concession law, which was broader in its application and would have had
to go through Parliament, was never passed. So the reform package went ahead
without any provision for private sector participation.
A Kafkaesque Turn
One may have hoped that the decree on the reorganization of the sector would
at least create strong and autonomous utilities with full-fledged responsibility for
investment and operation, covering all governorates of Egypt. Not so. Instead, in a
Kafkaesque turn, the decree in its original form was discarded in favor of two other
decrees creating two new entities on top of the plethora of existing entities in the
sector. They were the Holding Company for Water and Wastewater, created in 2004,
and the Egyptian Water Regulatory Agency, created in 2006.
The new regulatory agencys tasks include reviewing proposals for tariff adjustments, monitoring the application of technical standards, reviewing customer
complaints and performance monitoring. Most of these tasks overlap with those of
other agencies: the Holding Company also reviews proposals for tariff adjustments
and the affiliate companies also review complaints. Thus, the new agency remains a
weak entity in the complicated web of Egyptian government agencies dealing with
water and sanitation.
Through the decree on the reorganization of the water sector, the three water
and wastewater companies and the 20 plus public economic authorities in the
governorates were transformed into Affiliated Companies of the Holding Company. The Holding Company was responsible for technical assistance to its Affiliate
Companies, training their staff and the collection of performance data on them. The
important responsibility for investment remained in the hands of the old behemoth
NOPWASD. The problematic separation between decisions on investment and
operation was left untouched. European donors were unsatisfied with the reform.
As a result, they decided to provide investment financing directly to the Affiliated
Companies, bypassing NOPWASD at the risk of duplicating its functions. Other
donors, such as the World Bank and, of course, the government with its own funds,
continued to channel their funding through NOPWASD.
With the passing of the reforms, tariffs in Greater Cairo were increased by
100 %. But given their low initial level and the erosion through inflation over
the previous years, they still remained among the lowest tariffs in the world at
29 Egyptian piasters per cubic meter, equivalent to about 5 cents at the time. The
51
52
later. None of this benefitted the water sector. The so-called Arab Spring has
dampened the enthusiasm of private investors for a long-term engagement in Egypt.
The financial situation of the affiliated companies, already on a weak basis, further
deteriorated. The Morsi government granted salary increases to civil servants,
including, despite all talk of autonomy, to those of the affiliated companies. These
higher costs were not fully compensated through higher government subsidies, so
that the companies have even less financial resources to maintain their infrastructure
than before. Furthermore, even fewer customers pay their bills. There was some talk
about the possibility of tariff increases, but nothing happened and, due to inflation,
the real value of tariff revenues accruing to utilities further eroded.
Conclusion
53
6.5
32
62
Conclusion
Egypt has largely eschewed the privatization wave of the 1990s. It mobilized
substantial public funding from its own government budget, including through
increased general debt. It also received substantial grant and soft loan funding
from major donors, including the World Bank, despite its refusal to open up to
privatization, with the exception of one BOT contract for a wastewater treatment
plant. The government has been unable to turn around its public utilities despite
laudable efforts at technical modernization. Reforms have been incomplete and
insufficient. They have not addressed core problems of underpricing, overstaffing
and poor management.
Egypt is not alone in this situation. For example, utilities in South Asia, where
water tariffs are also among the lowest in the world, are caught in a similar apparent
vicious circle of poor services and low cost recovery through tariffs. As in many
other developing and emerging countries, the prospects for further sector reforms
are bleak, and so are the prospects for the sustainability of water and sanitation
services in Egypt.
Chapter 6
Jordan is one of the most water-scarce countries in the world. Water tariffs are
kept low for political reasons, and water utilities are subsidized through foreign
grants and in many other ways, such as direct payment of electricity bills for
utilities by the state. One may not expect that water privatization would work in
such an environment. Yet three public-private partnerships have been undertaken
in this country: A management contract for the capital Amman; the financing
and construction of the countrys largest wastewater treatment plant, serving both
Amman and the neighboring city of Zarqa; and a large pipeline to supply the capital
area with water.
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56
water supply per week was increased from 8 to 46 h, and access was expanded
substantially without recruiting more staff, thus increasing labor productivity. A
functioning modern computerized customer call center was established, the entire
network was mapped using a Geographical Information System (GIS), and a
hydraulic computer model was developed and employees trained in its use. When
the contract ended in 2007, the newly created Jordan Water Company proudly
called Miyahuna, Arabic for Our Water took over from the Joint Venture.
Miyahuna benefitted greatly from the tools introduced by the private company and
the training provided, and was in much better shape than 7 years before when the
private company was brought in.
Another management contract was awarded in 2011 to a Joint Venture led by
Veolia for the northern part of the country, where performance indicators and skill
levels had remained low. But it failed to replicate the success of Amman. The
management contract was terminated after only a year and a half amid a lack of
political will to support the management contractor, contractual disputes, and strikes
for higher salaries. What had worked well in Amman had not worked in Northern
Jordan during a more difficult time that coincided with the outbreak of what was
then called the Arab Spring.
The divergent experiences in Amman and Northern Jordan confirm that there is
no one-size-fits-all approach. A successful model applied at one time in one place
can fail in the same country at a different time.
Funding source
Public funding
Private funding
Total
57
Amount (USD m)
78
92
14
17
77
60
169 169
Almost half the investments were funded through a 78 million dollar grant
provided by the U.S. government. The Jordanian Social Security Corporation was
to take a small stake in the project company, called the Samra Plant Company, irrespective of who might win the bid. The winning bidder was a consortium between
the U.S. construction services company Morganti and the French international water
operator Suez. As is typical for a BOT project, they provided equity for a smaller
share of the private financing portion (17 million dollars) and mobilized credits from
commercial banks led by the local Arab Bank for the larger financing portion (60
million). The government would pay 17 million per year to the consortium over a
period of 22 years, totaling 374 million. This would pay for the operation of the
plant and for the recovery of the 77 million in private financing with interest and
profit.
This allowed the government to mobilize investment without using its own scarce
resources at that time. The arrangement had another advantage: It increased the
likelihood that large infrastructure projects would be completed on time. The Samra
plant was completed in 52 months, within its schedule. Last but not least, the
arrangement has ensured that the plant is properly operated and maintained using
advanced technology, including biogas digestors and energy recovery, introduced
into the country for the first time. The plant has been well run and a contract for its
expansion was awarded in 2012.
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Table 6.2 Funding of the BOT contract for the Disi-Amman conveyor
Funding source
Public funding
Private funding
Total
Amount (USD m)
300
400
100
200
675
475
1,075
1,075
Note: Funding from the Jordanian government was financed through loans from the European
Investment Bank and the French Development Agency
the U.S. Overseas Private Investment Corporation, its French counterpart Proparco,
and the European Investment Bank. The equity was provided by the Turkish
construction firm GAMA and its part-owner, General Electric Energy Financial
Services. The project was completed in 5 years with a 1-year delay. The funding
structure is shown below (Table 6.2).
The completion of the Disi project in 2013 was a milestone for Jordan, alleviating
the countrys severe water shortage at a time when it hosted more than a million
Syrian refugees. Compared to infrastructure projects awarded in a classical
manner the private sector takes more risk in terms of timely project completion
under a BOT contract. In line with this incentive, the delay in project completion was
relatively limited. However, the preparation of any BOT project is time-consuming.
In the case of Disi the preparation took more than 10 years, much more than the
time saved through timely completion of the construction phase. Moreover, the
government faces substantial contractual claims from the project company and the
payments for the Disi project will be a burden on the state budget for many years to
come.
BOT Contracts: The Most Common and the Least Known Form
of Water Privatization
BOT contracts are the most common form of privatization for single facilities
such as a desalination plant, a water treatment plant, a wastewater treatment plant, or
a bulk water supply pipeline. However, they are much less well known by the public
than utility privatizations, and they are certainly less well understood. They are
also politically less controversial. Perhaps not surprisingly, such contracts for single
facilities are more common today than privatizations of entire water systems la
Buenos Aires or Manila. David Lloyd Owen, an author and consultant specializing
in water and the private sector, estimated that 909 million people about 20 % of the
worlds urban population received water or sewer services from private players
in 2011. More than half of this figure is actually for single facilities which supply
services to publicly managed utilities under BOT contracts or similar arrangements.
59
Part III
Chapter 7
The way the drinking water and sanitation sector was organized in the UK was
very different between its four constituent parts in the 1980s. In England and
Wales ten public Regional Water Authorities were in charge of water supply in
most of England and sanitation in all of England, while a few private water
only companies were in charge of water supply in some parts of England. In
Scotland, hundreds of municipalities were in charge of water supply and sanitation.
In Northern Ireland, water was provided free of charge by a single public entity,
just like in the Republic of Ireland, while costs were recovered through taxation.1
In 1989, the Thatcher government embarked on the most far-reaching privatization
of drinking water supply and sewer services in modern times. All publicly owned
water and sewer utilities were to be privatized simultaneously in the entire UK.
However, the efforts of the British government failed in Scotland and Northern
Ireland.
The institutional diversity of the UK water sector thus provides the setting
for a natural experiment for testing the impact of privatization by comparing the
performance in England with the performance in other parts of the United Kingdom.
Wales is a special case, where the water and sewer utility was privatized, but then
transformed to a not-for-profit company in 2000.
This chapter is limited to the comparison between the performance of the water sector in England,
Scotland and Wales.
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65
66
The Privatization
At privatization, the debt of the public water companies a substantial 5 billion
pounds (8 billion dollars in 1989 prices), 100 pounds per inhabitant was
completely taken over by the government. This measure was more generous than
any other water privatization be it in Berlin, Buenos Aires, Manila or Jakarta. The
private water companies were free of debt when they took over the water and sewer
systems.
A Green Dowry
Furthermore, the government even injected public money, a green dowry of 1.6
billion pounds (2.5 billion dollars) into the new companies to capitalize them. The
companies were then sold at prices, which, according to David Hall from the trade
union-affiliated Public Sector International Research Unit (PSIRU), were 22 %
lower than the value of the companies. This generated a one-time income of 5.3
billion pounds for the Treasury less than the cost of the debt forgiveness and the
green dowry.
The Privatization
67
Shareholder Democracy
The shares of the companies were not sold to strategic investors, but were floated on
the London Stock Exchange with shares heavily promoted and sold to individual
small scale investors. The share prices quickly began to rise. The government
retained one golden share in each company for 5 years. This allowed it to veto
the sale of the companies to foreign investors, in particular to the French water
companies that dominated the international market. When that period elapsed, four
of the ten companies were sold, but not to the usual suspects. Rather, most of
them were sold to power companies from the US, Germany and Scotland who
wanted to diversify into the water sector, including the German power giant RWE
that bought Thames Water. While both Suez and Veolia had already invested in
smaller, always private, water only companies, only one English water and sewer
company, Northumbrian Water, was sold to a French international water company,
Suez Environnement.
The regulator Ofwat allowed the water companies to pass the resulting revenue losses on to paying
customers. The balance sheets of water companies thus remain unaffected by this decision. The bill
is footed by paying customers, who face 2 % higher water bills.
68
buy English water companies only a few years earlier began to sell them. The buyers
were not utility companies, but institutional investors: A pension fund from Canada,
a bank from Australia, and the Sovereign Wealth Funds of China and Abu Dhabi, as
well as funds based in Hong Kong and Malaysia. Some investors bought all stocks
and simply delisted the companies they bought from the London Stock Exchange.
The Privatization
69
Amid complaints that the tariff cuts had been excessive and did not allow
companies to make the necessary investments, new Ofwat Director Fletcher loosened the reins again during the subsequent 5-year review cycle beginning in 2005.
Again, it allowed tariff increases above the rate of inflation, reportedly justified
by the ongoing requirements for investment which continued at approximately 7
billion dollars per year, a level considerably higher than assumed at the time of
privatization. However, when in 2012 a past water company Managing Director,
Jonson Cox, became Ofwat Director, against general expectations given his background, he reversed course again, dramatically cutting the target profit margin.
When, in December 2014, Ofwat published its final determination on price controls
for 20152020, the regulator showed its teeth again: Average water and sewer prices
will have to come down by 5 % after inflation, while companies have to increase
their investments to 44 billion pounds. Further improvements in service quality and
leakage reductions have been mandated and companies will have to compensate
customers if they fail to reach these targets. It thus seems that there was a kind of
yo-yo-regulation, with the regulator alternately being too lax and then too strict.
Critics have thus accused Ofwat of having been too lenient with the private
water companies most of the time with the 1999 and 2014 price reviews being
exceptions. They also say Ofwat has been too wedded to the private service
provision model, as exemplified in its initial opposition to the delisting of Green
Wales from the Stock Exchange, as described below. It has also been accused of
having missed important issues out of sight, such as increasing leakage levels in the
early 1990s and, more recently, the poor condition of sewers. The water companies
simply invested money where Ofwat or EU regulations put them under pressure
to do so, such as wastewater treatment, drinking water quality and after 1997
leakage. Because Ofwat paid little attention to the condition of sewers for many
years, water companies simply delayed the construction of new sewers until they
began to collapse.
But despite such weaknesses, Ofwat has gained substantial experience and, thus,
probably has at present much better information for monitoring the performance of
water utilities than any other public authority around the world in charge of such
supervision.
70
heavy rainfall periods. When combined sewers were designed, and for a long
time afterwards, combined sewer overflows into rivers were deemed an acceptable
nuisance. Not so today. Water utilities are under pressure from the EU to undertake
heavy investments to reduce or eliminate these overflows. After having neglected
such investments, Thames Water faced fines levied by the EU. In order to avoid
them, it proposed the Thames Tideway Tunnel. It would be a gigantic sewer under
the River Thames for storing the mix of rainwater and sewage, so that it can later
be pumped to wastewater treatment plants whose capacity has to be increased. The
Thames Tideway Tunnel would be 7.20 m in diameter and run at a depth between
30 and 70 m.
When first proposed in 2005, the project was to cost 1.2 billion pounds. Now, the
cost estimates have spiraled to more than 4 billion pounds before construction has
even begun. And as large infrastructure projects go, cost overruns are unfortunately
more than common. Thames Water would not finance this project with its own
resources. Instead, it plans a Build-Operate-Own (BOO) Project. This means that a
separate private company called, in this case, an Infrastructure Provider will be
set up. This company will mobilize equity capital and debt to build and operate the
project. The Infrastructure Provider will be procured through a competitive process.
Thames Water would be its client, but not its owner. Thames Water would pay a fee,
but it would pass all costs of the project on to ratepayers, which would increase water
rates by around 80 pounds per year for a period of 89 years, or more than 20 %
if there are no cost overruns. In theory, an Infrastructure Provider has incentive to
complete a project on time and at cost, because any delays and cost increases will
hurt its bottom line. However, the government often steps in and takes over some
risks to make the project more attractive to bidders who would submit lower bids.
But this carries significant risks for the taxpayer. In the case of the Thames Tideway
Tunnel, Thames Water has effectively called on the state to help it in funding new
investments. In response, the government agreed to act as insurer of last resort,
to provide short-term liquidity in the event of financial market disruption, and to
inject additional equity if required to cover significant cost overruns. Ian Byatt
is highly critical of the request for public funding to build the super-sewer. Why
should the private owners of Thames Water not be required to pay for the investment
themselves?
Byatt has gone further and criticized the entire project as unnecessary. He is being
joined by the engineer Chris Binnie, a former Director of Atkins, one of the largest
water consulting firms in the world. The matter is delicate, because Chris Binnie
had been the Chair of the Study Group that had initially recommended the Tideway
Scheme. He now says the cost explosion has made the project uneconomic and that
less costly alternatives should be implemented, such as greening roofs and creating
green spaces that allow the infiltration of rainwater in the ground, together known
as sustainable drainage. This can reduce the peak flows to the storm sewers so
that they overflow much less frequently. These measures would cost less, could be
implemented faster, and have other benefits, such as reducing urban heat islands
during summers, which are expected to get hotter with climate change. But Thames
Water moves on with its plan, undeterred by criticism.
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Table 7.1 Water tariff, water use and affordability in the service area of Thames Water (without
sanitation)
Residential water tariff
Water use
Household size
Typical residential water bill
Median net household income (estimate)
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
2.00
167
2.5
25
3,419
0.7 %
Increased Investment
Investments almost doubled from 9.3 billion pounds in the 6 years before privatization to 17 billion in the 6 years after, one of the key objectives of government.
Investments further increased and have reached more than 100 billion in the 25 years
since privatization. The investment target set by the regulator for the period 2015
2020 is 44 billion pounds, a substantial increase compared to earlier periods.
Reduced Pollution
The quality of water in rivers and canals improved, with the share of rivers whose
quality was rated good or fair increasing from 84 % in 19901991 to 95 % in 2001.
Many beaches in England were so polluted that it was considered a health risk
to bathe in the sea. Through substantial investments in wastewater treatment, the
compliance with coastal bathing water standards increased from 66 % in 1988 to
99 % in 2002. The rate of sewage treatment works compliance increased from 90 %
to 99 % in 2001.
73
1989 (%)
99.5
1.26
0.42
81.9
79.8
2003 (%)
99.87
0.06
0.05
99.8
99.5
Source: Ofwat, water and regulation: facts and figures, November 2003
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75
Cowboy Capitalism
The owners of Welsh Water then pursued an aggressive strategy of expansion
into other businesses: They took on massive debt and used the proceeds to buy
companies that had little or nothing to do with the companys core business. New
businesses included street cleaning, railways and even luxury hotels and a fish farm,
all in the service of maximizing shareholder value. In 1996, the company bought
an electric company in South Wales and changed its name from Welsh Water to
Hyder, a multi-utility focused on energy. In the new company, water was reduced
to a side business. To some extent, the acquisition made sense: Customer service,
billing and collection could be combined for both services, so that the company was
able to cut costs. But the acquisition made less sense if one looked at how it was
financed. After the buying spree, the company was highly leveraged, with a huge
debt load and limited equity.
As mentioned above, Ian Byatt, the outgoing Ofwat Director General (1989
2000), ordered an average 12 % tariff reduction in late 1999 to be implemented in
April 2000. The decision sent stocks of water companies into free fall, with some
stocks including those of Hyder losing 80 % of their value in 1 year. Regulators
had an eye on the company because of its excessive debt, which was close to
exceeding allowable levels. Hyder wanted to issue more shares, but investors were
not interested, forcing the company to sell its assets.
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77
in the markets, and thus ultimately failing its customers. It was also concerned that
the new model would be diametrically opposed to the equity-based system practiced
in the English water industry. After Barclays Capital heard about these regulatory
concerns, it withdrew its support for the takeover in May 2000. Green Wales then
approached Hyder directly to buy its water business. But Hyder, confronted by the
regulatory hurdles and seeing that Green Wales did not have the degree of financial
muscle it needed to build up, refused to sell.
It looked as if Green Wales had failed only months after it had embarked on its
ambitious project to buy Welsh Water.
78
The last obstacle to overcome was the issuing of the bonds. Most bonds were
insured by a U.S. bond insurance company, but none of the bonds carried a
government guarantee. Most were rated AAA despite the absence of government
guarantees and without any initial equity capital. The Green Wales bond issue in
May 2001 was extremely successful, being oversubscribed by 70 % and bringing
in capital at low interest rates, which was a key objective of Green Wales. Interest
payments per year were 4050 million pounds lower than for the bonds previously
issued by Hyder under private ownership. The bond issue was believed to be the
largest ever non-government backed bond issue in pound sterling at the time, raising
1.9 billion pounds to buy the company and to pay the advisers. Welsh Water was
acquired for 1.85 billion pounds, only one symbolic pound more than the total debt
of the company.
Performance Improvements
During the 10 years after Welsh Water ceased to be a private for-profit company,
it continued to outsource important activities, such as the operation of its assets,
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80
privatized in much of the rest of the country. Nevertheless, London made a second
attempt at privatization a few years later. In 1994, it succeeded in wrestling the
responsibility for water and sanitation from local governments as part of a broader
reform of those governments. Water and sanitation were now the responsibility of
three regional public service providers, and the plan was to privatize them. However,
this attempt was thoroughly defeated by Scottish voters in the Strathclyde water
referendum of March 1994. Seventy percent of voters in the Strathclyde region,
which includes about half the population of Scotland, participated. Ninety-seven
percent voted against the privatization proposal.
Scotland is a useful case for comparison. Following the 1994 vote against water
privatization, to the chagrin of the Scots, service quality remained below what it was
in England and Wales. But then the tables turned. In 1999, the Scottish government
created an economic regulatory agency for the water sector that has similar tasks
and methods as Ofwat in England and Wales: It approves tariff increases, monitors
service quality and promotes competition. In 2002, it merged the three regional
entities to create Scottish Water, a publicly owned not-for-profit corporation. In
2005, none other than Ian Byatt, the former English water regulator who, as head
of Ofwat, had cut the profits of water companies in 1999 and was still up to a new
challenge after official retirement, became the Chairman of the regulatory agency,
the Water Industry Commission for Scotland.
Initially, Scottish Water was like almost all water utilities in the world a
monopolist providing water to all households and businesses in Scotland. However,
the regulator radically changed this when competition for business customers was
introduced in 2008. For businesses, Scottish Water now became the bulk supplier,
while business customers could choose among 18 retail suppliers who charged
different tariffs and provided a whole range of services beyond water supply. In
particular, they offered water audits to identify potential measures to reduce water
and energy use. The idea behind this concept is that customers do not need water
per se, but that they do have needs, such as cleanliness, that should be served at
the lowest cost. Retail companies thus identify water and energy saving measures,
implement them and charge a fee that includes both the cost of these additional
services spread over a number of years and the residual water bill after the savings.
Since the bill for the whole package is lower than the original water bill prior to
the savings, both the customer and the company benefit, and the customer can
focus on its core business. For example, a charity running Dumfries House, an
eighteenth century country house in Southwestern Scotland, was reeling under its
high water bill. A water company identified major underground leaks inside the
property, repaired them, trained staff in how to prevent future leaks, and thus saved
11,000 pounds sterling in annual water bills.
Customers can choose between twelve water companies. Many of these companies are subsidiaries of private English water companies, but many others
are Scottish companies that were created in anticipation of the introduction of
competition for retail business services. In 2011, England followed the Scottish
model and introduced retail competition for business customers as well, albeit
initially limiting competition only to the largest customers.
Conclusion
81
Scottish Water is not allowed to borrow in the capital market or from banks to
finance its investment needs. Instead, it borrows from the government at an average
interest rate of 5 % as of 2012. But the availability of these loans is subject to
political decisions borrowing in the market may enable Scottish Water to obtain
cheaper financing for the exact amount needed and at the exact right time. So far,
Scottish Water finances most investments through retained earnings. Its debt is low
at only about a quarter of its balance sheet.
The performance of the Scottish water industry has improved substantially over
the first 10 years following the creation of Scottish Water. Today, the company
prides itself that water and sewer bills in Scotland are about 15 % lower than the
average in England, while service standards have improved and are on par with their
English counterparts. The Scottish regulator has developed a performance index,
based on which Scottish Water achieved an index value of 368, which is comparable
to 380 achieved by the best performers in England. The level of investment was 92
pounds per capita in 201213 compared to 74 pounds per capita in England and
Wales. Over a mere 7 year period (2005/2006 to 2012/2013), leakage was almost
halved, going from 1.1 million cubic meters per day to 575,000.
Scotland, where water and sewerage remained in public hands, thus has achieved
the same standards that have been achieved in England, albeit at lower costs without
dividends paid to shareholders and without huge bonuses paid to their executives.
Conclusion
All over the UK, revenues from higher water tariffs have translated into higher
investments and improvements in service quality. This chapter supports a central
assertion of this book which runs counter to the positions of both supporters and
opponents of privatization: On balance, whether water utilities are privately owned
or not did not make much of a difference in the UK. What counts are a sustainable
financing model, as well as modern, efficient and professional utilities. When these
were absent such as in England before 1989 and in Scotland during the 1990s,
both under public ownership water services suffered. Only once these conditions
were met as was the case in England and Wales under private ownership after 1989
and in Scotland under public ownership after c. 2002 water services thrived.
A byproduct of the English water privatization was the creation of an economic
regulatory agency for the water and sanitation sector, an innovation that was
emulated in Scotland for a publicly owned water sector. The two regulatory agencies
have become powerful tools for price regulation and for the benchmarking of utility
performance. They provide a useful complement to the traditional public regulation
of drinking water quality and the environment, adding an economic element to
regulation that is absent in almost all continental European countries.
Chapter 8
The French water sector is organized in a way that is quite distinct from the
organization of the sector in most other European countries. Unlike in England,
there is no full privatization of utilities through the sale of assets. However,
in contrast with other European countries, with the exception of Spain, most
municipalities delegate the provision of water and sanitation services to private
companies. Two thirds of French citizens receive their water from just three private
companies Veolia, Suez and the much smaller SAUR. They have signed a total of
4,700 contracts with municipalities for drinking water alone. These companies are
also the most active players on the international water market, serving, directly or
indirectly, 163 million people in about 40 countries in 2010, with Veolia and Suez
being by far the largest players. In France, where the state dominates the economy,
the strong presence of private companies in the water sector may seem counterintuitive. It is explained largely by history, as will be shown below.
The delegation of water or sewer services is usually done through concession or
lease contracts (Affermage). These contracts have a specific duration. When they
expire, this opens up the possibility of bidding them out again, which may result in
a change of operator. It also makes it possible to remunicipalize water and sewer
services at the end of the contract without paying contractual penalties. In all cases,
municipalities retain the ownership of the infrastructure and, unlike in England, they
even continue to finance a large share of the investments.
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85
better control the contracts they sign. In 2006, a new law created a National Water
Agency, ONEMA. The regulatory agency established for the first time a national
database to monitor the performance of water utilities in 2009, thus increasing
the transparency in the sector. However, the submission of data to the regulator
is voluntary, and ONEMA often struggles to obtain the data it needs to perform
its functions. A 2012 decree complements the legal framework by imposing higher
water abstraction charges on water utilities that have high leakage losses and do not
address the problem. Moreover, the Oudin-Santini Law passed in 2005 allows water
companies and water agencies to spend up to 1 % of their revenues for international
solidarity, i.e., for water supply and sanitation projects in developing countries.
Unlike its British counterparts, the French National Water Agency does not set
water tariffs. Its role is limited to the collection of data and to technical assistance.
Despite the creation of ONEMA, the economic regulation of water and sanitation
utilities in France is done predominantly by contract at the local level, with the
municipality being in charge of setting water tariffs and service standards through
the concession and lease contracts it signs with private companies.
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The private companies who held these concessions in nineteenth century France
provided untreated piped water to fire hydrants and public stand posts, as well as to
the premises of the rich. The companies had two types of revenue. First, they were
paid a fixed fee by the city for the public service they provided through fire hydrants
and distributing water at the public stand posts for free. This fee was supposed to
cover their costs without profit. Second, rich households that had their own house
connections paid fees to the companies. These latter revenues were the basis of the
companies profit.
87
it 12 years later after lengthy negotiations. Paris also gradually returned to public
management after a 50-year concession by Compagnie Gnrale expired in 1910.
The local governments in the larger cities then stepped in, took control of the
water systems and finally did raise taxes to finance universal access to piped drinking
water. The private water companies in France, deprived of new concession contracts,
reinvented themselves and became primarily contractors for public water companies
for the next two generations. Only in a few cities did private companies continue to
provide water services. At its low point in 1936, the share of private water operators
had declined to 17 %.
When the era of colonialism drew to an end, it also meant the end of most
international French water concessions. After the downfall of the Ottoman Empire,
the Turkish Republic rescinded the water concession for Istanbul; the Suez Canal
and the private water companies in Egypt were nationalized in 1956; and a few
years later, the Kingdom of Morocco ended the Casablanca concession. Only one
country, the Ivory Coast, with its staunchly pro-French President Flix HouphoutBoigny, bucked the trend: A private water contract was signed at independence in
1960. This contract was a lease contract. This same model also allowed French water
companies to stage a comeback in their home country.
88
treatment and particularly for wastewater treatment. Created in 1965, the funding
from the basin agencies helped to expand wastewater treatment and improve the
quality of French rivers. However, the subsidies were not financed by taxes or debt,
but rather from water tariff revenues that were used as an incentive for utilities
to invest in environmental clean-up. Altogether, only 15 % of water and sewer
investments in France are financed by private companies, while 85 % are financed
by municipalities with their share of the water bill, by basin agencies and by other
public entities.
All the while, the share of the private sector thus gradually increased to 32 %
in 1954, 50 % in 1975, and 80 % in 2000. During that time, Compagnie Gnrale
expanded into other sectors, such as electricity, public transport and solid waste
management, just as Lyonnaise had done right from the beginning.
Nationalization Averted
In 1981, the Socialist Franois Mitterrand became President. His government first
planned to nationalize the big water companies, just as it had been after the war.
However, the central government was loath to interfere with the autonomy of
municipalities, which held hundreds of contracts with the private companies. It was
also reluctant to shoulder the cost of compensating the private companies. Thus, the
private companies escaped nationalization a second time, and indeed, continued to
expand.
Paris Privatization
The coziness between politics and private water companies is exemplified by the
close political alliance between two men: Jerome Monod, the CEO of Lyonnaise,
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and Jacques Chirac. When the young Chirac was Prime Minister in the 1970s,
Monod had been the head of his office. Monod then became the secretary general of
a new party established by Chirac, the RPR. When Chirac became mayor of Paris
in 1977, Monod had moved on to Lyonnaise, where he quickly moved to the top,
arranging generous donations to the RPR along the way. In 1984, Chirac arranged
for the water supply of Paris to be privatized. Compagnie Gnrale already had
a service contract for water billing and collection on behalf of the city. Chiracs
administration could have launched a competitive bid for the entire city. But instead,
it arranged a deal. It decided to separate the city into two areas divided by the Seine
River: The left bank was awarded to the smaller of the two companies, Lyonnaise
des Eaux, under Monod, while the larger area on the right bank was awarded to the
larger Compagnie Gnrale. All this was done under a 25-year lease contract that
allowed for public financing of infrastructure. They allowed the private companies
to select contractors, so that construction contracts were passed on to subsidiaries
of the two water companies. It was clearly a profitable deal an arrangement that,
according to some, led to overinvestment in infrastructure and, thus, provided good
quality services at relatively high costs.
A Rip-Off in Grenoble
Another such example was the concession contract for the city of Grenoble in the
French Alps.
In 1987, Monod had lunch with Alain Carignon, then mayor of Grenoble.
Carignon was also Minister of Environment under Chirac, who had been re-elected
for a second term as Prime Minister. During that lunch, it was decided that the city
of Grenoble would sign a concession contract for its water system with Lyonnaise
des Eaux. It later turned out that Lyonnaise gave 3 million dollars in bribes directly
to Carignon and, on top of that, provided illegal campaign contributions to his party,
the RPR. Monod later denied any knowledge of these bribes. Carignon could freely
use a luxury apartment in a posh Paris neighborhood and got free plane tickets,
which he used in 121 cases. At a time when fat concession contracts had fallen out
of fashion in France, in 1989, the Lyonnaise subsidiary COGESE was awarded a 25year water concession without any bidding. A lone city councilor from an opposition
party, the Association Dmocratie Ecologie Solidarit (ADES), Raymond Avrillier,
challenged the decision in administrative court, but his plaint was quickly dismissed.
COGESE then proceeded to get the bribes back from water customers through
increased tariffs. The costs in its books were inflated through fraudulent accounting
practices to justify the increase before auditors. Tariffs were increased by a massive
164 % in one go, followed by annual increases linked to a price index that evolved
faster than inflation. Contracts were passed on to other subsidiaries of Lyonnaise,
again without competitive bidding and at inflated prices. The concession contract
also included entry fees equivalent to 35 million dollars paid to the municipality
in yearly installments. While not strictly a corrupt practice, these fees amounted
90
to a hidden tax; the municipality got its hand on cash that would be recovered
from citizens through higher water tariffs. At the same time, the municipality was
supposed to regulate the private company and keep its tariffs at reasonable levels. It
was a blatant conflict of interest, and no one except Avrillier seemed to care much
about it.
The case of Grenoble may have been extreme. Because of the lack of transparency of the French water sector, it is hard to tell to what extent the Grenoble
case was representative or exceptional. French water companies undoubtedly had
accumulated substantial technical expertise and were doing a good job of modernizing the water sector, introducing new technologies and especially helping smaller
municipalities to improve their management. But there was limited competition,
limited transparency, poor accountability and insufficient regulation.
International Expansion
The international expansion of French water companies was not led by the market
leader, the Compagnie Gnrale, but by its smaller competitor, Lyonnaise des Eaux.1
At that time, Lyonnaise des Eaux was still relatively small, the 40th largest company
Since the early 1990s, the two French water companies have changed their names several times.
CGE changed its name first to Vivendi Environnement and then to Veolia Environnement, the name
it maintains to this day. In the meantime, Lyonnaise des Eaux merged with the multi-utility Suez
and changed its name to Suez Environnement.
International Expansion
91
in France. Seeing little potential in expanding its home market, Jerome Monod
engineered a profound reorientation of the quiet old company: It began to expand
abroad by buying a stake in the Spanish water company Aguas de Barcelona in 1979,
and by gaining a concession in the Portuguese territory of Macao in China in 1985.
It also bought several water only companies in England in 1988, right before
the Thatcher privatizations, thus increasing the number of its foreign customers
(13 million) above the number of its French customers (10 million). But, as the
French sociologist Dominique Lorrain points out in his research on the company, its
center of gravity remained in France and its culture remained staunchly French. Its
employees had little international experience, except in the former French colonies.
The international expansion of the company began in earnest in the 1990s when it
merged with another company, Dumez, and won a large number of foreign contracts
in two waves. The first wave in 1993 included, in particular, the large concession
in Buenos Aires, as well as smaller contracts, such as one in Rostock, Germany,
and a management contract for parts of Mexico City. The next wave, beginning
in 1997, included concessions for one half each of Manila and Jakarta, as well
as concessions in Casablanca and Budapest. This was a massive challenge for the
company, whose managers had previously only worked in medium-sized French
cities. The biggest contracts held by Lyonnaise in France were for one half of the
municipality of Paris minus its suburbs, numbering about one million inhabitants,
and for Bordeaux including its suburbs, with 700,000 inhabitants. The first French
director of Aguas Argentinas, serving Greater Buenos Aires with its 10 million
inhabitants, had previously managed the water utility of Bziers, a town in Southern
France of only 70,000 inhabitants.
A factor that favored the French water companies during their international
expansion in the 1990s the Compagnie Gnrale quickly followed in Lyonnaises
footsteps was that the French model, with its many options of delegated management over a defined period of time, was more palatable to most governments
in developing countries than the English model of outright and permanent sale of
water companies to the private sector. But for every opportunity, there is a challenge.
As Dominique Lorrain explains, Lyonnaise tried to train a cadre of 50 international
managers from various countries to make the company a truly multinational company. However, these efforts apparently were not successful. The notion of having
supermanagers who would easily move from one country to another simply
clashed with the reality of the water sector. While the understanding of foreign
politics, laws and culture is essential in any industry, it is especially important in
the water sector, which is very local and depends heavily on government regulation.
Suez Environnement, as Lyonnaise is called today, had to learn this at a cost.
Its concessions in Atlanta in the United States, Buenos Aires and Bolivia ended
prematurely after massive disputes and heavy losses. In January 2003, the new
CEO of Suez Environnement, Gerard Mestrallet, announced a major restructuring.
The company sold some of its foreign concessions to local partners, such as in
Manila, and became very selective in pursuing new water contracts abroad. The
profit margins for the water operations were about half as high as the profit margins
in the energy sector, the other major business area of Suez. Frustrated by its foreign
92
adventures, Suez refocused more on the energy sector and effectively abandoned,
or at least severely curtailed, its international expansion as an operator in the water
sector, 10 years after it had won the first major concession abroad in Buenos Aires.
Remunicipalization
Grenoble Remunicipalizes After Corruption Was Exposed
Back in France, shortly after the Loi Sapin was passed in 1993, the funeral bells rang
for the corrupt deal that had brought about the Grenoble water concession and its
inflated water prices. The prosecution got wind of the deal, and in November 1995,
two Lyonnaise executives, as well as Alain Carignon, the mayor of Grenoble and
Minister of Environment from the Conservatives, were convicted of bribery. They
were sentenced to prison terms ranging from 3 to 2 years and fines were levied
against them. Jerome Monod, the CEO of Lyonnaise who had initially denied any
wrongdoing by the Lyonnaise subsidiary, lauded the court decision: Justice has
been done, he said, adding that the campaign finance practices were tolerated at
the time and that he had been among the first ones to ask that they should be
changed.
In June 1995, the opposition party ADES won the local elections in Grenoble.
It wanted to remunicipalize the water services, but it could not because of heavy
contractual fines. In a separate court case, ADES argued that the concession
contract was illegal and that customers should be refunded for what they had been
overcharged. A first instance court turned down the case, but ADES pursued it up
to the highest instance, the Conseil dEtat. There it won. In October 1997, 8 years
after the first appeal by Raymond Avrillier, the concession contract was declared
illegal and the High Court ordered COGESE to pay a refund to the water users of
Grenoble. In 2001, the water service in Grenoble was remunicipalized, making it
one of the first remunicipalizations of water services in modern Europe.
Paris Remunicipalizes
The remunicipalization in Grenoble was not a watershed for the French water sector.
Although Danielle Mitterrand, widow of the first French Socialist President, and
her NGO France Liberts pushed for the remunicipalization of water and sanitation
services, the French private sector remains strong in its home country. Today, there
are 4,700 public-private partnerships in France for drinking water alone, and about
700 contracts are bid out again every year.
When the city of Paris remunicipalized its water and sewer services, some saw
the balance tipping against the private sector in France. However, the remunicipal-
Remunicipalization
93
Table 8.1 Water tariff, water use and affordability in Paris (without sanitation)
Residential water tariff
Water use
Household size
Typical residential water bill
Median net household income (estimate)
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
2.51
138
2.3
23.92
3,433
0.7 %
Source: Authors calculations based on the annual report 2013 of Eau der Paris
ization in Paris was more the result of political maneuvering highly specific to one
place at one time. In fact, the private companies had done a good job in terms of
service quality in Paris. Old lead pipes had been replaced to improve drinking water
quality, water losses had been reduced substantially from 24 % to only 4 % and
the internal systems had been modernized, for example, by installing remotely read
water meters. This had come at a price, with water tariffs more than doubling during
the 25 years of the lease contracts. But given skyrocketing rents in Paris, the weight
of the water bill in household expenditures still remained acceptable, as shown in
Table 8.1, and water tariffs were not an issue that upset the public.
Unlike in Berlin, as we will see in the later chapter, there was no citizen group that
mobilized against the private companies. When the Socialist Bertrand Delano was
elected mayor of Paris in 2001, he talked about remunicipalization, but did not end
the lease contracts prematurely, thus avoiding the fines associated with such a move.
Only when preparing for his re-election campaign did he promise to remunicipalize
the water supply, a demand that had been pressed upon him by his political allies,
the Greens and the Communists. Keen to become a national political figure, Delano
wanted to be re-elected in the first round with no run-off, and to achieve this, he
needed the full support of his coalition partners. One of the few issues over which a
mayor has real control is, indeed, the water supply, and the lease contracts were to
expire in 2010, so that the remunicipalization could have been achieved at little cost.
The election turned out as Delano expected, and after his re-election in 2008, Anne
Le Strat from the Greens became deputy mayor. She immediately announced that
the two concession contracts would not be renewed after they were due to expire in
2010. The public utility Eau de Paris, which had been reduced to bulk water supply,
took over the entire system again, and water tariffs were reduced by 8 %.
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Conclusion
95
Conclusion
It is sometimes assumed that privately managed water companies are more expensive than publicly managed water companies. Evidence from France shows that the
tariffs set by private providers are indeed 12 % higher than the tariffs set by public
96
providers. But this conclusion has to be seen in context, since the conditions faced
by private and public companies in France are not the same. For example, public
companies do not have to pay for the acquisition of public land. Also, they are not
subject to corporate income tax or property tax. In addition, according to a study
by the research institute INRA, the municipalities with the most difficult conditions
tend to delegate service provision to the private sector. It thus seems that in terms of
tariffs, there is no clear difference between water services provided by publicly and
privately managed companies in France.
Another question is to what extent the governance of the French water sector has
improved. According to a study carried out for the Ministry of Environment in 2006
competition increased following the passing of the Loi Sapin in 1993. The average
duration of concession and lease contracts decreased to 11 years, the average price
paid to private operators declined by 9 %, and the average number of bids by private
operators for a given contract increased from 2.6 to 4.5. The creation of a national
regulatory agency of the water sector in 2006 has improved the monitoring of utility
performance, although the powers entrusted to the agency remain far weaker than
those that the British regulatory agency Ofwat enjoys. While substantial challenges
remain, one can still conclude that the governance of public-private partnerships in
the French water sector today is better than it was 25 years ago.
Chapter 9
In Germany, more than 6,000 municipally-owned water utilities produce highquality water that can be drunk from the tap. Leakage accounts for, on average,
only 6 % of water production, among the lowest in the world, in large part because
the network is regularly renewed. The pipe network is in such good shape that,
unlike in countries with a hotter climate and worse infrastructure, there is no risk
of recontamination between the treatment plant and the tap. Utilities in many
other countries chlorinate drinking water to prevent such recontamination in the
distribution network. Germany is one of a few countries in the world that provides
safe drinking water without the need for chlorination, and customers appreciate the
better taste of the water. According to a survey, 91 % of water customers are satisfied
or very satisfied with the service they receive from their local water utility. A high
level of service quality and technical excellence are hallmarks of the German water
sector, which is well regulated in terms of drinking water quality and pollution.
But the sector also has its weak spots. Economically, it is largely self-regulated,
with almost no role for the federal government, no British-style regulatory agency,
and only very light economic regulation of water utilities by the 16 states. In this
environment, a strange thing occurred: Around the turn of the millennium, many
German cities actually sold their water and sewer infrastructure to U.S. investors
to allow them to save on taxes, while providing up-front cash to the cities, as
described further below. The risks of these deals were often not well understood,
resulting in some cases of losses to utilities. Perhaps another weak spot is that
German water tariffs per unit of water are among the highest in the world, leading
to allegations that German utilities gold-plate their infrastructure. But despite these
high tariffs, monthly water bills remain affordable, largely because residential water
consumption is one of the lowest among wealthy countries: At 121 l (32 gal) per
capita per day, it is much lower than that of New York City, with 319 l (84 gal), and
London, with 167 l (45 gal).
Per capita tap water use in Germany has declined by 16 % over the past 20 years
from its already low previous level. The reduction was caused by more waterefficient appliances, the increased use of rainwater for lawn watering, and increased
Springer International Publishing Switzerland 2015
M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_9
97
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environmental awareness. This has actually caused some problems: Sewers are not
flushed sufficiently any more, sometimes resulting in a foul smell. Some utilities
have even appealed to their customers to use more water: Nathalie Leroy, Managing
Director of Hamburg Wasser, called saving water nonsense. We have too much
water, she said, leading to an increase in the groundwater level. Groundwater is
already high in Hamburg, so that the foundations of houses are damaged. And,
counterintuitively, saving water does not even help in reducing costs: 80 % of a
utilitys costs are independent of water consumption. The reduced water use forces
utilities to increase their tariffs per unit of water, so that water and sewer bills in
Germany have barely declined in inflation-adjusted terms despite the lower water
consumption.
99
and German publics, this form of financing spread among municipal utilities in
Germany, Austria and Switzerland in the mid-1990s. Under a Cross-Border-Lease,
a German city effectively sells its assets to a Trust based in the U.S. or in a tax
haven such as Bermuda, and then leases the same infrastructure back for the next
30 years. The services continue to be provided by a publicly owned and publicly
managed utility whose tariffs remain unchanged. According to the promoters of this
arrangement, consumers would not be affected.
The beneficiaries are American companies and wealthy Americans who save
taxes, then the lawyers, advisers and bankers who arrange and finance the deals,
and lastly the German municipalities who receive up-front payments for the sale
of their assets. In the short run, all three win. These contracts are typically more
than a thousand pages long. In all likelihood, many city treasurers and councilors
who became involved in these deals did not fully understand the implications of
the contracts, which were never even fully translated into German. City council
members only received a summary in German prepared by the advisers who had
come up with the deal. The contracts were secret and, thus, not subject to scrutiny
by the media, concerned citizens, or NGOs. Litigation was to be carried out at courts
in New York.
About 180 German cities and towns signed such cross-border-leases between
1995 and 2003, covering more than 30 billion euros of assets from water and
sanitation to tramways and waste incineration plants. Certain cities, such as
Leipzig, signed seven such contracts, covering every imaginable type of city-owned
infrastructure one after the other, even including schools in the end. Many mayors
and city treasurers were more than willing to accept the deals. They travelled to New
York City where pictures show them standing proudly in the posh offices of Wall
Street law firms.
A typical cross-border lease used 85 % of debt financing and 15 % of equity
financing. Of an amount of 100 million dollars used to buy infrastructure assets
in Germany, 85 million would be lent by banks. Equity investors from the United
States provided only 15 million dollars, but they were able to claim depreciation for
the entire investment of 100 million dollars over a period of 30 years in order to
reduce their income tax bill in the U.S.
The municipalities kept about 4 million, and the advisers took about 6 million
in fees, both paid up front. 75 million dollars were immediately transferred back
to two separate bank accounts, one of which was with the same bank that provided
the funds. The bank then invested the funds and paid the lease fees for the city
over a period of 30 years. 15 million dollars, the amount provided in equity, were
immediately deposited with a third bank that also invested the funds for 30 years.
These funds were supposed to allow the city to buy back its infrastructure after
30 years. The entire deal was a financial illusion created to save taxes for U.S.
investors. Many German city treasurers and bankers had no qualms about this
scheme: If the U.S. government wanted to allow its citizens to save taxes in this
way and German municipalities and utilities could get a piece of the cake, why not
go along with it?
100
The first time that the German public became aware of what might be brewing
was through a radio feature by the investigative journalist Werner Rgemer in
December 2001. He hit a sore spot. Some listeners called and complained: They
thought the feature had been a piece of satire, and were angered by the possibility
that the utterly realistic way in which it had been presented might cause listeners to
believe that it was true! Alas, it was true. During the following weeks, city council
members and citizens flooded the radio station with requests for a transcript of the
feature. This triggered more media attention. In the picturesque Frankish town of
Kulmbach, where a cross-border-lease for the towns sewers had been approved by
all parties on the town council, citizens began to mobilize against the decision. In
November 2002, a referendum stopped the deal 88 % voted against it. While the
transaction was relatively small, it had a symbolic effect: Both investors and city
councilors now treaded more carefully.
In any case, the death bells had rung for cross-border-leases. Senator Chuck
Grassley, an Iowa Republican and chairman of the U.S. Senate Finance Committee,
made a strong push for legislation to completely ban any new cross-border-leases.
It passed Congress in 2004. A year later, the U.S. government also abolished the
tax benefits associated with all cross-border-leases, including those already signed,
although legal battles in court dragged on for years.
The U.S. investors got away with their tax savings accumulated over more than
a decade. However, the municipalities had incurred a form of hidden debt: Funding
was mobilized once at the beginning of the deal, but the infrastructure had to be
bought back after 30 years. Suddenly, municipalities and utilities became entangled
in the web of global finance with risks they did not fully understand. During the
financial crisis of 2008, AIG the American insurance company that was involved
in most of the deals and that had invested the funds in risky assets was badly hit
and its credit rating deteriorated massively. Some municipalities shifted the assets
into safer U.S. treasuries and kept the arrangement going, but others, such as the
Landeswasserversorgung, a large association of municipalities in the Southwestern
state of Baden-Wrttemberg, negotiated an end to their contract. It lost 10 million
euros in the process.
However, it must be noted that even during the financial crisis, the magnitude of
the losses remained limited compared to the overall size of the German water and
sanitation sector, with its annual revenues of 13 billion euros in 2009. While the
exact losses are not known, there was no hike in water or sewer bills as a result
of cross-border-leases, and many Germans were not even aware that such deals
occurred.
Performance Benchmarking
101
and thus the major source of cross-subsidies, are electricity and gas distribution,
although energy sector reforms have reduced their profitability. Water and sewerage
are usually presented by utility executives and city officials as simply recovering the
costs of service provision, not a source of profits and cross-subsidies. However, the
reality is often more complex. Water utilities pay concession fees to municipalities
and groundwater abstraction fees to the Lnder, and they transfer profits to their
municipal owners. Depending on their legal status, some utilities also pay corporate
taxes. For example, Berlinwasser, the largest German utility, has been a reliable
source of financing for the city-state of Berlin, as shown in Chap. 10. The same
is true for Hamburg Wasser, for which all payments to the city-state of Hamburg
added up to more than one third of the utilitys water sales of 228 million euros in
2012. In the case of multi-utilities selling energy and water together, it is impossible
for an outsider to identify which share of the utilitys profits has been generated
by its water business. Many multi-utilities, such as Frankfurts energy and water
utility Mainova, are highly profitable, with a pre-tax profit of more than 20 % of
equity.
Performance Benchmarking
The Bundestag declared itself opposed to competition in water supply, but suggested alternative measures to improve the efficiency of the water and sanitation
sector. In particular, it recommended performance benchmarking, an idea that had
been applied to 14 utilities in Germany as part of a pilot project. Against this
background, the German Lnder and the professional and trade associations of the
102
water sector began to promote voluntary and confidential performance and process
benchmarking among utilities: A utility opens its doors and its books to specialized
consultants who analyze their processes and performance in detail, benchmarking
it against good practice in the sector, and recommending improvements. Today,
benchmarking has become a common feature of the German water sector and,
according to industry associations, is highly successful. For example, many utilities
found that their energy costs per cubic meter of water were far higher than average,
and subsequently made investments to improve the energy efficiency of their
operations. Others found out that they had more employees than utilities of the same
size. They optimized their internal procedures and gradually reduced their level of
employment by not rehiring employees every time someone left the company. Other
utilities optimized their practices for carrying out construction work. One small
utility realized that their traditional practice of digging open trenches to replace
house connections was far more expensive than the trenchless pipe replacement
used by more modern utilities. This technique consists of two pits dug at the ends
of the pipe section that needs replacement. A winch then pulls a cable by one of
its ends with a bursting head attached to the other end through the old pipe. The
device bursts the old pipe into pieces and pulls the new pipe behind it at the same
time, all underground so that no open trench has to be dug in the street or the
sidewalks.
Voluntary benchmarking thus has allowed German water utilities to become more
efficient without competition, privatization or the creation of a national regulatory
agency. Whether these improvements were passed on to customers in the form of
lower water tariffs remains unclear in the absence of available data.
103
tariffs. In its role as the regulator for water prices, which it had never played before,
the Ministry commissioned a tariff study. The study found that water tariffs in some
cities in Hesse, including the states largest city Frankfurt, were much higher than
in other German cities. For the first time in German history, a State Ministry used
its authority to order municipal utilities to lower their water prices. The Frankfurt
utility, Mainova, was ordered to reduce its water tariffs by 37 %. Infuriated, Mainova
and other concerned utilities challenged the findings in court. They argued that the
study had compared apples with oranges. But they did not back up their argument
with the required evidence. For example, the town of Wetzlar said its water was
expensive because its geography was hilly. However, in the town of Montabaur,
which is far hillier, water tariffs are 30 % lower. The water utility in Montabaur
had found creative ways to reduce the need for pumping by building a ring pipeline
around the city, and it reduced the costs of repairs by keeping an accurate digital
inventory of all its assets. In the end, the Court supported the position of the
Ministry. After some further legal wrangling about the amount of the reduction,
Mainova finally settled out of court and agreed, in 2012, to reduce its water tariffs
by 25 % for the next 2 years. After the expiry of the deal, the utility plans to increase
tariffs again. At the time of writing the tariff has not been increased although the 2year period had expired. After state elections in 2012, the new Minister of Economy
in the state of Hesse transferred the head of department in the Ministry who had
pushed for the tariffs to be reduced. The Ministry apparently did not stand any more
in the way of increasing tariffs again, but now the mayor of Frankfurt objected to
a tariff increase. If the tariff increase comes, it is expected that the city may lower
the concession fee that Mainova pays to the city to use its infrastructure in order to
reduce the impact of the increase.
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Conclusion
In sum, the German water sector is characterized by publicly owned and managed
local utilities with a high level of service quality, cost recovery and efficiency, while
there is very little economic regulation at the state or federal level. This model is
similar to the water sectors in Austria, Switzerland, the Netherlands, Scandinavia
and Japan. As the experience with cross-border-leases has shown, the model has its
flaws. But overall, it has served the German people quite well.
Chapter 10
While most of the German water and sanitation sector is in the hands of publicly
owned and managed utilities, as previously detailed, there was one high-profile
water privatization in Germany: its capital city Berlin. This privatization was not
designed as a French-style concession or lease contract with a predetermined
duration. Neither was it an English-style complete sale of assets to a private
investor. Instead, it was a partial privatization that was intended to bring money
into the coffers of the city-state of Berlin while at the same time making the utility
more modern and efficient. The privatization lasted from 1999 to 2013. It was
criticized as being unconstitutional, shrouded in secrecy, and guaranteeing riskfree profits to private investors while pushing up water tariffs. After a successful
referendum calling for the privatization contract to be made public, a change
in the city government, and an intervention by the Cartel Office, water tariffs
were reduced and the city-state bought all shares back from the private investors,
effectively remunicipalizing the water and sewerage utility known as the Berliner
Wasserbetriebe (BWB). How did this privatization come about?
105
106
The civil service and public enterprises in Berlin were overstaffed. In 1991,
the city-state had 3.4 million inhabitants and almost 344,500 direct employees. It
thus had more than 100 public employees per 1,000 inhabitants, two thirds more
than the German average of 61. This number was reduced to about 189,000 in
2009, bringing it to a level similar to the average. At public enterprises such as the
gas company Gasag, employees were offered generous severance payments called
golden handshakes.
Fiscal Motives
The city-state was loaded with heavy debt and had to deal with the reduction of
subsidies that the federal government had provided to West Berlin as long as the
wall had been up. The city government, the Senate, had to tighten the purse. The
Senate decided to privatize its utilities, not primarily out of a desire to improve
efficiency and service quality, but more to plug the holes in the city-states budget.
In the early 1990s, a coalition government including Christian Democrats and Social
Democrats sold minority shares in the electric and gas utilities, Bewag and Gasag,
to private investors. In 1994, BWB was legally transformed from a public entity that
had to seek the city-states approval on debt financing and all personnel decisions to
one that had more autonomy. The new structure was explicitly designed to facilitate
subsequent partial or total privatization, either through sale to a strategic investor or
the stock exchange.
The transformation also allowed BWB to expand internationally and into other
sectors unrelated to water, far outside its core mandate of supplying water and
sewer services to the residents of Berlin. As part of this controversial strategy,
BWB had tried, with limited success, to diversify into telecommunications and
solid waste management through the establishment of subsidiaries. It also tried to
win international water and sanitation contracts. One of the few successful foreign
endeavors of BWB was when it won a contract for the Budapest wastewater works
in 1997. To win the contract, BWB had entered into a Joint Venture with Vivendi,
the former Compagnie Gnrale des Eaux.
After elections in 1995, the Senate pushed its privatization program one step
further: Bewag and Gasag were to be fully privatized, and BWB was to be privatized
as well. RWE, an energy giant based in North-Rhine Westphalia, was interested in
buying BWB. RWE had bought a stake in Gasag in 1994, and it was also keen
to enter the global water market. Owning part of the water utility that served the
German capital was seen by RWE as an important stepping stone for their global
water strategy. Since RWE had no experience in the water sector, it teamed up with
Vivendi to buy BWB.
107
108
However, there was one more catch. The transaction could not be undertaken
within the existing legal framework. Therefore, the Senate asked a law firm to draft
a Partial Privatization Bill. The firm, Finkelnburg & Clemm, was co-owned
by Professor Klaus Finkelnburg, the President of the Constitutional Court of the
City-State. The same law firm also advised RWE and its partner Vivendi on the
transaction a clear conflict of interest. The Berliner Wassertisch says that RWE,
Vivendi and their advisers were closely in touch with the advisers who prepared the
privatization all throughout 1998, thus providing them an unfair advantage.
The Partial Privatization Bill was voted into law by the State Parliament in May
1999, when the selection of the private company was about to be completed. The
stated objectives of the privatization were to make the utility more efficient without
firing employees, to undertake a prescribed amount of investments to maintain or
increase service quality, to maintain constant tariffs for the first 4 years, and to
improve customer service. But another important objective was not stated in the
law: Generating maximum one-time revenues for the city-state of Berlin through
the sale of the company.
More Acrobatics
However, there was one last obstacle to overcome. The opposition in the State
Parliament, consisting of the Greens and the leftist party PDS, petitioned the
109
State Constitutional Court to review the legality of the partial privatization law. In
October, the Constitutional Court headed by Finkelnburg, the man whose own law
firm had prepared the law ruled that the law was legal. However, it required some
changes. It struck down the efficiency clause and did not allow profits to be set at 2 %
above the yield of government bonds. To allow the contract to remain as profitable
as it had been before, some more acrobatics was necessary. The contractual package
was modified to include a loan from the Holding Company to BWB. Under this
unusual structure, the remuneration on the loan was contractually defined as profit
accruing solely to the private owners. It was set as equal to the interest on 10-year
government bonds plus two percentage points the same level at which profits had
been set in the original version of the contract. In return, all profits of the Holding
Company would accrue to the city-state alone. The result was that the private owners
were guaranteed a fixed rate of return, while the city-state would receive the profits
that fluctuated from year to year. This unique legal structure made the public sector
bear most of the commercial risk, while the private sector bore almost none. The
lawyers had done a final piece of acrobatics to save the deal.
After the changes were quickly made, the contract was signed in November. The
sales price was 1.69 billion euros. The city-state was happy, Vivendi and RWE had
won the coveted prize, and the public protest was subdued.
110
Thomas Rudek asked for the privatization contracts to be made public and for the
privatization to be reverted. Unlike the politicians, the Water Table was adamant
about getting water back into public hands.
The Wassertisch launched a citizens petition to undertake a referendum requesting the publication of the privatization contracts. In Berlin, a referendum requires
three steps. First, 20,000 signatures have to be collected to request a citizens
initiative. If successful, within 4 months, 7 % of voters must sign the initiative.
Only after that step is a referendum held. At the beginning, the initiative Our
Water was small and not yet well known. It initially failed to reach the required
minimum signatures. When it reached the quorum in a second attempt in February
2008, the city-states government tried to declare the initiative null and void. The
government argued that contracts could not be made public retroactively. But the
Berlin Constitutional Court, from which Finkelnburg had since retired, ruled that it
had to be accepted, even if it was unclear if the publication was legal or not. The
Wassertisch, emboldened by its success, moved ahead. In October 2010, 280,000
signatures were handed over to the Senate, far more than the required minimum. A
few days later, a newspaper published the contract, and a few days after that, the
government also published it.
Still, the Wassertisch pushed for the referendum itself. It argued that not all
parts of the contract were published, and that contracts and decisions that were
not published should be void by law. The Referendum took place in February
2011. Ninety-eight percent voted yes. 678,000 participated, far more than the
required minimum. While the contracts had already been published, there was now
substantial public pressure to reduce water tariffs and remunicipalize Berlinwasser.
Remunicipalization
After 2 years of negotiations, in 2011, the city-state bought back the shares from
RWE for 618 million euros. Veolia as Vivendi was called by then after a change in
its name initially refused to sell its shares. But when tariffs were reduced, Veolia,
111
which was going through a corporate overhaul, budged. In September 2013, the
city-state also bought shares of Veolia for 590 million euros Berlinwasser was
back fully under municipal ownership and management.
112
200.0
150.0
100.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
50.0
0.0
Inflation
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
2.81
115
1.7
14.63
2,057
0.7 %
113
The price the city-state paid to buy the utility back was lower than expected: 29 %
lower than what the city-state had received when it sold BWB 14 years earlier. At
first sight, it seems that Berlin made a good deal. But actually it did not: Comparing
the two prices amounts to comparing apples and oranges. A few years earlier, the
capital of BWB had been reduced. The city-state had already channeled funds away
from the company, so what it bought back was less than what it had sold previously.
The buy-back thus was not beneficial to the city-states finances. Berlin wanted to
finance the buy-back partly by using the profits of Berlinwasser, but those dwindled
because of tariff reductions in 2013 and 2014. Almost all of the buy-back must thus
be financed through credits that will cost 60 million euros in interest and principal
per year over a 30-year period. This increases the already staggering debt load of
Berlin, which had increased from 38 billion euros in 2000 to 62 billion euros in
2013, making Berlin the second most indebted of the 16 German states.
Return on equity
Employees/1,000 households served
Leakage (m3 /km of network/day)
Leakage/water produced)
BWB
8%
1.2
2.8
4%
Good practice
n.a.
<2
<10
<20 %
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city-state, it spun off the subsidiaries engaged in solid waste management and
telecommunications, areas in which the company was not competent. This was
perhaps one of the most lasting achievements of the privatization. It is a decision
politicians could easily have made, but failed to do so.
But this was not the only improvement in corporate governance. The WIK study
also notes that Berlinwasser was, at least as of 2008, more transparent than other
German water companies concerning its costs. Most other German water utilities
publish much less data on their costs and are quite non-transparent. According to
WIK, Berlinwasser is a model to emulate for other German water utilities in terms
of transparency. Furthermore, WIK says that industry experts consultants and
academics claim that investments at Berlinwasser are more efficient than those
at other German utilities, and assert that the asset management practice should be
a model for the industry. The consulting firm notes that this is well known among
industry experts in Germany, but that it does not register with the public. A telling
tribute to the achievements of the management of the Berliner Wasserbetriebe is
that the CEO who had been brought in by the private owners was retained even after
the remunicipalization indeed, the entire management team around the CEO Jrg
Simon remained in place when the privatization was reverted.
Conclusion
Far from being a disaster, the privatization of Berlinwasser made the company
more efficient and ultimately more transparent. Tariff increases were only slightly
above the German average. If the city-state had been genuinely concerned about the
affordability of water, it could have reduced the groundwater abstraction fee which
it levies and which is among the highest compared to other German states. Or it
could have taken a more drastic step and switched to a not-for-profit model for its
utilities, as was done in Wales (see Chap. 7). But the Berlin government preferred
to give in to public pressure to remunicipalize Berlinwasser and to agree to popular
tariff reductions ordered by the Cartel Office. It thus effectively reduced the future
profits it will receive from the remunicipalized utility, and will have to incur further
debt to finance the repurchase. The remunicipalization of Berlinwasser may have
been a victory of citizen democracy over politicians and corporations. But in fiscal
terms, it was a case of making short-term political and financial gains at the expense
of future generations who will have to pay back the mounting debt of the city-state
the remunicipalization has caused.
Chapter 11
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11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .
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Despite being deftly worded, the citizens initiative made little headway at first.
It was signed by few people and the general public did not take notice of it. This was
even the case in Germany, where the Directive would have had the largest impact on
the water sector. Many other European countries would not have even been affected.
On the one hand, all water services in England were already privatized, with the
private sector also dominating in France and Spain. On the other hand, in some
European countries, the sector is resolutely under public authority, as is the case
in Scandinavia or Scotland, with the Netherlands having gone so far as to pass a
law in 2004 forbidding any private sector participation in water supply (but not in
sanitation). The frontier for private companies did not lay in these countries, but
in those with a hybrid structure, such as Germany or Austria. In some German
cities and towns, both water and electricity are provided by the Stadtwerke, in
which electric companies often own minority shares. Those municipalities would
apparently have been forced to bid out the concessions for water supply and
electricity. This was also to be the case if a municipality received services from
the public utility of a neighboring municipality, something that is not uncommon in
German towns. Nevertheless, the issue marred by complex legal subtleties still
did not attract much attention from the wider public.
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11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .
allegedly showing that water quality had deteriorated with privatization actually,
the study had only theorized that private companies had an incentive to do so,
without citing a single example of deteriorated water quality. The magazine then
emphasized the papers finding that there was no evidence that private water
provision was cheaper than public provision something, it should be noted, that
the authors of the paper had actually found. The reporters went on saying that
private companies neglected investments, that pollutants entered the drinking water
network, and that companies added chlorine or similar substances to compensate
for their lack of care for the network. None of this was actually written in the paper
by the University of Barcelona.
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In March 2013, the TV magazine Monitor reported on the topic again. It showed
an employee of the Stadtwerke Karlsruhe standing next to a water treatment plant.
The man said that the time-tested structure of the German water industry had to be
preserved, and that water should be taken out of the Directive. According to him,
the Stadtwerke Karlsruhe would have been forced to bid out water services because
they had a private minority shareholder, the power company EnBW. The magazine
also showed how the German Christian Democrats had expressed themselves at their
party congress against the EU Directive. Chancellor Angela Merkel was presented
in the magazine as continuing to support the Directive in Brussels, all while keeping
very quiet about it at home. It now looked like the issue could become a public
relations problem for the Chancellor.
The Monitor report and the Citizens Initiative had touched a nerve among the
German public. They rode on a more general sentiment that politicians in Brussels
and Berlin were out of touch with the real life of citizens and that lobbyists
determined policies behind closed doors. And they also rode on the fear that
privatization would reduce water quality and force prices up. It was a powerful
mixture.
In the end, two thirds of the more than 1.8 million signatures to the Initiative
came from Germany. The required legal minimum of 0.1 % of the population was
reached in 13 countries, including in Italy, Spain and Greece. In France and the UK,
the two countries in the EU in which private water companies had the strongest
presence, the initiative generated little traction and the required minimum number
of signatures was not reached.
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11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .
enterprises. Drinking water supply remained excluded from the Directive. However,
concessions that are awarded only for wastewater collection and treatment fall under
the Directive, as do concessions whose main subject is electricity distribution if
they also cover drinking water supply. The Commission repeated that the Directive
does not aim to privatize any service, but just aimed at promoting fair competition
once a public authority had decided to enter into a public-private partnership. It also
announced it would look again into the exclusion of water from the Directive within
3 years and report on it to the European Parliament and Council. The last word in
this chapter in the history of European water supply may thus not have been spoken.
Conclusion
The controversy around water and the EU Concession Directive illustrates well
the fears, but also the misunderstandings, associated with water privatization. The
Directive was designed to improve competition for concessions, if and once a public
entity had decided to enter into a public-private partnership for its water supply.
Parts of civil society mobilized effectively against the inclusion of water in the
Directive, arguing it was a Trojan horse to force the liberalization of the EU water
market through the back door. In a situation where it was hard for all stakeholders
to grasp the precise impact of the Directive, the interpretation of the opponents of
the inclusion of water in the Directive prevailed in the eyes of many people. The
EU Commission finally backed down under pressure, first modifying the Directive
to take into account concerns about forced privatization and then, when pressure
persisted, taking water completely out of the Directive.
Chapter 12
In the United States, water supply and sanitation are a responsibility of local
governments. As a consequence, the water sector is highly fragmented: There
are 54,000 public water systems nationwide, of which more than 90 % serve
localities with less than 10,000 inhabitants. Altogether, public water systems serve
242 million Americans, with the remainder of the population having their own
water supply. Most public water systems in the United States are owned by local
governments, and all water utilities in large U.S. cities are publicly owned. But in
the U.S., a public water system can also be owned by a cooperative or a private
company. 35 million Americans, almost 15 % of those served by public water
systems, receive their water from privately owned utilities, known in the U.S.
as investor-owned utilities. These utilities operate almost half of all public water
systems in the country, predominantly in towns.
Private water companies in the U.S. operate in two market segments. The
first segment, called the regulated activities, covers the investor-owned utilities
mentioned above. It is referred to as the regulated market because water tariffs
for investor-owned utilities, which are natural monopolies, are overseen by state
regulators. The second segment, called the unregulated activities, covers services
provided to publicly owned utilities for which the utility sub-contracts the private
company to provide specific services, such as the design, construction and operation
of a wastewater treatment plant or performance-based technical assistance. In this
market segment, the private companies do not directly bill water users, and the prices
paid for their services are determined at least in many cases by the market.
Of course, this market segment is subject to the same health and environmental
regulation as any other water supply and sanitation activity in the United States
the term unregulated only refers to the fact that the prices for the services are
not regulated by the state. Unregulated activities cover all kinds of public-private
partnerships, including concession and lease contracts, some of which can have
contract durations of up to 50 years.
The largest private water companies in the United States, American Water and
United Water, serve both the regulated and unregulated market segments. Taking
Springer International Publishing Switzerland 2015
M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_12
121
122
their unregulated activities into consideration, private water companies in the United
States serve more than 60 million people. In 2013, American Water, the larger of
the two, operated in 30 U.S. states, as well as in Canada. Its customers live in
over 1,600 communities with 10,000 inhabitants on average. Although listed on
the New York Stock Exchange, it is not really a large company by U.S. standards,
with annual revenues of 2.9 billion dollars. The second-largest-company, Suezowned United Water, had revenues of 764 million dollars and operated in 20 U.S.
states. American Water and United Water grew through mergers and acquisitions,
especially when tighter environmental regulations forced small rural investor-owned
utilities to modernize and invest more during the 1970s.
Infrastructure Backlog
A major problem for water and sanitation in the United States is the infrastructure
backlog. Many water mains in the U.S. were built in the early twentieth century
and have exceeded their lifetime. Every year, only 4,0005,000 miles out of an
estimated one million miles of water mains are replaced. At this pace, it would take
200250 years to replace all water mains in the United States.
The American Society of Civil Engineers (ASCE) has repeatedly rung the alarm
bells, but to little avail. In its Infrastructure Report Card, the ASCE has consistently
assigned a D grade to water and sanitation infrastructure in the United States.
According to the ASCE, investment levels must double to keep pace with the need
to replace infrastructure and maintain service quality. However, the limited funds
available for investment are not spent on rehabilitating infrastructure. They are spent
on upgrading water treatment facilities to meet more stringent drinking water quality
standards. Since these upgrades are required by law, they leave city officials no
room to maneuver. Many municipalities are reluctant to raise water tariffs, and in
the absence of federal investment grants, fewer funds are available to maintain the
water and sewerage infrastructure.
123
Unlike public water companies, private water companies are regulated concerning their tariffs. This is done through Public Utilities Commissions (PUCs) at the
state level which regulate the prices of all local private monopolies, from electricity
and gas distribution through local telephone services and private water supply.
Unlike in England, PUCs do not regulate through incentive-based price caps, but by
setting an allowed fixed profit margin on top of the companys cost and making sure
that this margin is respected. At first sight this type of regulation protects customers,
because profits are capped. At second sight, there is no incentive to reduce costs,
so that excessive costs can be passed on to consumers. However, it seems that in
practice, the average regulated water tariffs charged by private companies in the
U.S. are not higher than the average unregulated water tariffs charged by public
service providers.
124
Privatization Fatigue
In 2002, RWE-owned American Water bought the water system of the small town
of Felton in the San Francisco Bay Area through its subsidiary Cal-Am. Felton had
125
always had a privately run water system and this had not caused any trouble until
Citizen Utilities, the small company that ran the system, was acquired by Cal-Am.
Cal-Am immediately announced a 74 % tariff increase over 3 years. Although the
regulator, the California Public Utilities Commission, reduced the rate increase to
44 %, residents were still furious. They formed Friends of Locally Owned Water
(FLOW), and fought the takeover amid deteriorating service and poor management.
In 2005, the citizens of Felton voted to borrow 11 million dollars to repurchase the
utility, despite substantial efforts by American Water to defeat the vote. American
Water refused to sell, saying the system was worth 25 million. Years of legal
wrangling followed. Only days before a court would have set the price, the company
gave in and sold the water system for 10.5 million.
After these failures, the attempts to take over entire water and wastewater systems
were dead. In 2008, RWE sold its shares in American Water on the New York Stock
Exchange at a loss, after having reduced billions in shareholder value. The private
U.S. water companies focused on the markets where they were strongest: providing
technical expertise and, if needed, financing for the construction and operation of
advanced treatment plants.
126
compensate for the costs of the additional investments and the profits. It remains to
be seen how much water and sewer tariffs in Bayonne will actually increase over
the next decade and beyond.
Despite the tariff increases, the concession agreement was lauded by the Clinton
Global Initiative at its 2012 Annual Meeting as a featured innovation, and in
the same year, it also received an award at the American Water Summit, an event
organized by Global Water Intelligence, an organization that provides market intelligence to private investors. This turn of events is consistent with the slightly awkward
practice in which these entities hand out awards for public-private partnerships at the
time a contract is signed, rather than rewarding actual performance.
127
the new tunnel was begun when Richard Nixon was President of the United States.
It was opened by Mayor Michael Bloomberg in October 2013, finally allowing for
inspection of the old tunnel.
The fact that it took 44 years to build the giant replacement tunnel in two phases
and three sections is not really due to the technical difficulties of the project, which
the engineers could have completed much faster. The reason it took so long was
that city officials were reluctant to come up with the financing, postponing the giant
project several times. Being underground, the project was not visible. It also did
not provide any new amenities, but simply secured an existing service. Like many
other, often smaller water infrastructure projects, it was not well-known to the public
and offered little tangible benefit to politicians running for re-election.
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Table 12.1 Water tariffs,
water use and affordability in
New York City
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
1.66
319
2.6
41.29
4,659
0.9 %
the water bills are one small element such an amount pales. Water tariffs are
affordable, as shown in Table 12.1. Still, there were complaints that water tariffs
were getting out of hand.
Instead of further delaying investments or simply passing all additional costs
to its customers, the citys Department of Environmental Protection (DEP) now
began to look at how it could reduce its operating costs. In 2010, the DEP set
itself the aspiration of becoming the safest, most effective, cost-efficient, and
transparent water utility in the nation. It determined 100 specific goals to be
realized across all business areas. It initiated an operational excellence program
to make operations more cost-effective through energy savings, better inventory
management and streamlining workflows. In 2011, in order to achieve this objective,
DEP hired the private water company Veolia Water Americas, a subsidiary of the
French water giant Veolia, and the management consulting firm McKinsey. Initially,
they helped to identify savings. In this process, the employees are closely involved
in identifying better ways to conduct operations, while drawing on the global
experience of Veolia. Apparently, the collaboration worked well. In 2012, Veolia
Water North America won what it called a performance-based technical assistance
contract to implement the changes that were identified. This is expected to lead to
100200 million dollars in annual savings out of the 1.2 billion that the DEP spends
annually on operations and maintenance, thus keeping future tariff increases as low
as possible. The remuneration of Veolia is partly based on whether the cost savings
are achieved. In 2013, savings reached 15 million through activities as diverse as the
renegotiations of supply contracts, the reduction of fluoride dosage, re-alignment of
staff duties, automatic reading of meters, and consolidation of the vehicle fleet.
This public-private partnership seems to work well. Far from taking over utility
operations, Veolia helps a public water utility to become more efficient and provide
better service for its customers.
129
standards were violated and the District did not have enough funds to make the
necessary investments. Unlike in any other U.S. city, the decision as to what to do to
tackle the problem could not be made by the City Council alone, but had to be made
together with the U.S. Congress because of the Districts special status as an entity
that is not a U.S. state. There was talk of privatization at the time, but ultimately
the District and Congress chose a different route: in 1996, Congress passed a law
to create an autonomous utility under a Board with representatives from D.C. and
neighboring jurisdictions. The utility was authorized to set its water and sewer tariffs
based on the principle of full cost recovery and a 10-year financial forecast. Most
of the investments were to be financed by issuing bonds, while a smaller portion
of the funding was to come from federal grants and directly from tariff revenues.
Rates were increased immediately by almost 50 %, and on that basis, an investmentgrade credit rating was secured from rating agencies for the utilitys first bond issue.
A professional General Manager, Jerry Johnson, was competitively recruited. He
headed the utility for the next 12 years and managed its turnaround, securing its first
credit rating and initiating a multi-billion dollar investment program. This was only
possible through regular tariff increases, which were not met with protests. Between
2004 and 2012, the Board approved tariff increases between 4.5 % and 12.5 %
every single year, well above the rate of inflation. The average monthly residential
water and sewer bill more doubled from 34 dollars in 2004 to 69 dollars in 2013
for a consumption of 18.8 cubic meters. This corresponded to 1.36 % of median
household income, still slightly below the U.S. average of 1.57 %. The credit rating
of the utility improved in 2003 from lower medium to high investment grade, where
it remains as of this writing. This enabled the utility to raise debt at long maturities
and low interest rates. In 2014, it raised 350 million dollars with a 4.81 % green
bond with an unprecedented maturity of 100 years.
The funds were not only used to replace assets, but also to improve service
quality. For example, the technology of the Blue Plains wastewater treatment plant,
one of the largest in the world, was upgraded to remove nutrients to protect the
nearby Chesapeake Bay and to produce energy from sludge. The sewer network was
also upgraded to reduce incidents of raw sewage mixed with rainwater overflowing
during rainstorms into the Potomac River, the Anacostia River and Rock Creek, a
park in the middle of the District. The utility has also replaced all its water meters
with remotely read meters. This allows customers to review and compare their daily
water use on the Internet and to receive email or SMS alerts in case of unusually
high water consumption so that leaks inside homes can be detected quickly even if
no one is at home. In terms of social responsibility, the utility has a program that
helps needy customers to pay their water bills, called Serving People by Lending
A Supporting Hand (SPLASH). It is funded by voluntary contributions that water
customers are asked to make as part of their water bills, and is implemented by the
Salvation Army.
But there was also a major crisis that the utility managed poorly. In 2003,
the Washington Post reported on excessive lead levels in drinking water, after a
change in water treatment processes caused lead from service lines to dissolve.
The utility had tried to suppress a critical report by an expert and had even fired
130
its own water quality manager after she had asked her superiors to take action
on the issue. A hastily written report by the Centers for Disease Control and
Prevention (CDC) minimized the risks from lead in drinking water, but was later
shown to be scientifically indefensible by Congressional investigators. The utility
embarked on a massive program to replace old service lines. More importantly, the
water treatment process was adjusted by adding a substance, orthophosphate, which
reduced the corrosion of the pipes and the lead levels in drinking water. Through
these measures, lead levels declined again, but the reputation of the utility had been
seriously damaged.
In 2009, a new General Manager, George Hawkins, was brought in. Under his
tenure, investments were further accelerated. He also engaged more with customers,
rebranded the utility as DC Water and encouraged innovation, including those
championed by employees and even customers. The utility won numerous awards.
One way it engages with its customers is the annual taste test challenge. During
the contest volunteers taste two water samples, one being tap water and the other
bottled water, and decide which one tastes better. The majority of participants
preferred the taste of tap water or could not tell the difference between the tap and
bottled water.
DC Water has completely changed compared to a generation ago, when its
service was among the worst in the United States. Today, DC Water is one of
the leading utilities in the United States in terms of its innovation, environmental
performance, customer orientation and finance. This is another example of how the
right policies and the right institutional framework, as they were set in place in 1996,
together with professional leadership, can turn around a struggling water service
provider without the need to resort to privatization.
Conclusion
There is a backlog of investment in the U.S. water and sanitation sector. In the period
20012006, the most recent period for which data are available, funding for capital
investments came from three roughly equally important sources: One third from
current revenues, one third from private sector borrowing, and one third from other
mainly public sources including State Revolving Funds. Private sector borrowing
was mainly in the form of municipal bonds issued by larger utilities. Funding from
private investors in the form of equity was almost negligible at only 2.4 % of capital
investments.
If investment is to go up, how should the additional investment be financed? The
federal government is unlikely to come to the rescue, since the appropriations for the
State Revolving Funds have declined for years. The federal government is heavily
indebted as a result of the 200809 financial crisis, reaching a level corresponding
to 100 % of Gross Domestic Product (GDP) in 2013. State and local governments
are far less indebted at an average of 7 % and 11 % of GDP respectively in 2013.
Conclusion
131
But state governments are loath to assist local governments in an area that is their
responsibility, and some local governments are far more indebted than others.
Private water companies have a long history in the United States, operating
mostly in small towns. As a result of a 1997 change in the tax code, private water
companies had an incentive to expand into larger cities using the concession model.
However, a high profile concession in Atlanta failed, and several smaller cities
fiercely opposed water privatization, so that the U.S. water sector continues to be
dominated by publicly owned and managed utilities. Recently, there has been a
comeback of water concessions in some heavily indebted municipalities, such as
in Bayonne, New Jersey, as described above. More importantly, perhaps, some large
U.S. water utilities have ramped up investments and become more modern. One
example is the New York City Department of Environmental Protection (DEP) that
has teamed up with the private water company Veolia to increase its operational
efficiency. Another example is DC Water, a public turnaround success story financed
through bonds that has gradually unfolded over the past two decades. While the
paths chosen to modernize utilities in the U.S. are quite different from each other,
they have one thing in common: water tariffs went up, which is inevitable if the
infrastructure backlog is to be overcome without additional government grants.
Part IV
Chapter 13
In 1993, the same year the Buenos Aires concession was signed, President Fidel
Ramos of the Philippines spoke of a water crisis in the capital city of Manila, an
announcement that came as a surprise to many of the citys residents, who were not
aware of any such crisis. While the utility was in poor shape, people had become
used to its mediocre performance, and it had not been an issue of public concern
until the President brought it to the forefront.
135
136
137
The companies were expected to invest 7 billion dollars over the 25-year lifetime
of the concessions. Who would finance these investments? The companies were
expected to come up with only limited capital of their own. Most capital was to be
provided through loans, including low-interest loans in foreign currency.
The two halves of the city were not equally attractive. And there was disagreement as to which one was more beautiful. The IFC argued that investment
requirements would be higher in the Eastern zone and that bidders would, thus,
offer higher prices for this less attractive zone. The government did not want to
have widely different tariffs in the same city. Therefore, the expected higher costs
were counterbalanced by loading 80 % of the 880 million dollar legacy debt on the
seemingly more attractive Western zone a decision that would have consequences.
138
Manila, because it was interested in the construction works that would come with
the concession. Its international partners, Bechtel and United Utilities, had their
own reasons to bid low. Bechtel, as a newcomer to the water concession market,
was apparently ready to take greater risks to get a foothold in the international water
market. And United Utilities still reeled from its defeat in Buenos Aires, where it had
been outbid by Lyonnaise. In the financial model that accompanied its bid, Manila
Water made extremely optimistic assumptions: It expected to be able to reduce nonrevenue water very quickly, and its cost of capital was only 5.2 %. Manila Water
expected to raise loans at low interest rates, and it expected that most investments
would be financed by loans or tariff revenues, and not by its own capital. These were
bold assumptions.
Was it irrational exuberance or did the bidders assume right from the beginning
that they could renegotiate the concessions later on to gain more favorable conditions? In early 1997, the winning bidders did not wonder too much about these
questions, but instead celebrated their victory.
139
Million
Staff/1,000 connections
1997
49 %
3.0
28 %
26 %
9.8
63 %
2013
94 %
6.1
93 %
98 %
1.4
11 %
140
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.32
200
5
9.60
509
1.9 %
Conclusion
141
Conclusion
None of the two concessions in Manila achieved their original targets within the
specified time frame. After the Asian financial crisis the original targets proved
to be unrealistic and had to be adjusted. Improvements came much slower than
142
anticipated, but come they did. Today, the East Manila concession is regarded as
likely the most successful private water concession in the developing world. The
West Manila concession, contrastingly, was regarded as a failure for many years.
After Suez sold its share in the concession, however, performance picked up, and
today, significant improvements have been made in both halves of the city.
The success of the Manila water concessions was facilitated by the preparatory
work done by the government, which increased tariffs and reduced the number of
staff before privatization. It was also facilitated by the regulator which allowed
tariffs to go up within reasonable limits, whilst maintaining challenging investment
and efficiency targets. Then it was the companies who made the success a reality.
It was their focus on customer service and productivity that allowed to keep tariffs
affordable while using revenues to replace assets and expand service at no cost to
the taxpayer.
Chapter 14
143
144
their leader, Yoweri Museveni, President of the country in 1986, peace and some
sense of national unity were restored.
Not surprisingly, public enterprises in Uganda were in terrible shape, both in
terms of their physical assets and their managerial approaches. As Muhairwe has
told it, to cope with mounting economic hardships, employees resorted to all sorts
of coping mechanisms, including moonlighting and petty trade ( : : : ) in order to
survive. The virtues of punctuality, integrity, hard work and commitment ( : : : )
were abandoned. Coming late and absenteeism, dishonesty and corruption, abuse of
office, malingering, intrigue, rumour mongering and double dealing set in. At one
time during the regime of Idi Amin, the military governor in the town of Jinja was
told that customers were not paying their bills. Immediately, he ordered his soldiers
to storm the homes of residents to collect the bills at gunpoint. With this kind of
unsolicited help, it is no wonder that the NWSC, just like the entire Ugandan state,
had a terrible reputation. This was the utility that Hilary Onek inherited when he
became Managing Director of NWSC in 1982.
The Turnaround
145
write, under Onek, the company had made much progress, but it had focused on
the physical hardware and had neglected to transform its management approach,
the software of the water business.
The legal framework had become more conducive for improved performance
when NWSC had been reorganized under a new Statute in 1995. The new Statute
gave the Corporation more operational autonomy and the mandate to recover its
costs through revenues. Its Board composition was changed from one dominated
by government officials to a Board that included many professionals. Furthermore,
the government had approved a tariff increase in 1994, including an indexing of
water tariffs to inflation, so that a monthly residential water bill averaged about 5
dollars, a high level for a country as poor as Uganda. The NWSC water tariff was 64
cents per cubic meter, compared to 40 in Cochabamba, Bolivia, 20 in Phnom Penh,
Cambodia, and only 5 in Cairo, Egypt.
NWSC thus may have been in poor shape in 1997, but it was far from being a
basket case. It was in average shape compared to other water utilities in developing
countries, and it was in better shape than utilities in Egypt at the time or the utility of
Phnom Penh in Cambodia before it started its turnaround. The key events preceding
the turnaround, during the turnaround (1999-c. 2006) and in the years following it
are summarized in Table 14.1.
The Turnaround
In late 1998, the government appointed Dr. William Muhairwe as the new Managing
Director of NWSC. Holding a doctoral degree in business administration, he had
previously worked at the Uganda Investment Authority, quickly ascending within
that organization. At NWSC, the new Managing Director immediately initiated a
100-days program, aiming to adjust operational and financial inefficiencies, based
on the views and aspirations of his managers. His aim quickly became to show that
100 days program to improve revenue collection and cut costs, followed by a Service
and Revenue Enhancement Program to build customer confidence
Area Performance Contracts (APCs) to give more autonomy
NWSC Act introduces triannual
to area managers
performance contracts between
the government and NWSC
Programs/events
Tariff increase and tariff indexing to inflation
NWSC statute changed to provide more autonomy and mandating cost recovery
Muhairwe appointed managing director
2011
2013
2014
2010
2008
2004
2005
2003
2001
2002
1999
2000
Time frame
1994
1995
1998
146
14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize
The Turnaround
147
148
both the reduction in the number of employees and the increase in the number of
water connections.
Staff morale was, of course, affected by the uncertainty induced by the voluntary
departure program. Many employees wondered if they would still be working at the
company the following year. Remarkably, staff morale actually improved despite
this uncertainty.
The Turnaround
149
wet season, supply interruptions during the dry season, low water pressure,
slow implementation of new connections, erratic bills, disconnection despite
having paid their water bills, and the rudeness of field staff. But the overall
result has still been positive. Expectations of water customers in Uganda,
accustomed to years of neglect, are lower than expectations of water users
in rich countries. For example, customers appreciate that water cuts were
announced over the radio. Customers also appreciate the ambience in local
offices, that phone calls are made to remind them of payment, and that
they can settle arrears through payment plans in exceptional cases. Overall
customer care, water quality and pressure all receive very good ratings. A
customer satisfaction index shows that 85 % of customers are satisfied.
150
The Turnaround
151
under the private management contract with Ondeo, had prepared their business
plans and were ready to sign their contracts.
Initially, the autonomy was limited. For example, area managers were allowed to
hire low-level staff, but the hiring of higher-level staff still required approval from
headquarters. Similarly, small purchases were decided locally while bulk purchases
of pipes and chemicals continued to be done by headquarters to secure lower
prices. Still, the newly gained autonomy increased employee motivation. Results
were evaluated in workshops held on a quarterly basis in the respective areas, so
that lessons could be quickly distilled and shared. Area managers and employees
exerted substantial efforts to map all customers and assets, expand access, repair
broken meters, identify and repair leaks, and make sure bills were paid on time.
Crucially, they were given the means to achieve these objectives through working
capital advances from headquarters. At the end of the contract period in 2003, not
only had most areas improved their performance for all indicators, but for some
important indicators, such as non-revenue water and bill collection efficiency, the
improvements achieved by the internal Area Performance Contracts under public
management had been far greater than the achievements under the management
contract with the private company Ondeo in Kampala during the same time.
An Alternative to Privatization
The management and employees of NWSC were rightly proud of their achievements. Looking back at these achievements in comparison with the two private
management contracts in Kampala with Gauff and Ondeo, Muhairwe concluded:
The performance of both management contracts demonstrated that international
private sector participation was not the best way to go. The process of recruiting
an international operator ( : : : ) was too slow and too bureaucratic for our internal
process momentum ( : : : ). While the management contracts were expensive to
operate, the results were not impressive. ( : : : ) The fat salaries of expatriate staff
were not reflected in improved performance and, in many areas, the services
registered marked deterioration. The international contractors were not familiar with
the local environment. And it took them a long time to learn the ropes (some never
cared to do so) to cope with the local situation ( : : : ) The dual allegiance of the
workers to the corporation and to the private operator was bound to be a source of
tension and friction that blurred the lines of responsibility and accountability ( : : : )
NWSC had built a critical mass of professional managers and engineers who were
capable of operating water and sewerage services as businesslike ventures without
direction or supervision from the headquarters.
While the first internal performance contracts over a period of 2 years had
brought some achievements, they had not yet sufficiently changed the corporate
culture. There was still too much of a boss element, complacency and bureaucracy,
at least for Muhairwes taste. When he visited Harvard in 2002 to attend a
World Bank-sponsored workshop on infrastructure privatization, he was thoroughly
152
Actual (2003)
39
11
26
15
21
89
85
250
92
97
1090
95
95
670
The Turnaround
153
Actual (2006)
30
7
21
12
13
95
95
670
103
96
1119
90
99
1168
Source: Authors compilation from Ministry of Water and Environment and GTZ: Reform of the
Urban water and sanitation sub-sector, 2010
signed with the French company OSUL (Ondeo Services Uganda Limited), a
subsidiary of Suez, and ran for 2 years. The internal performance contract for
Kampala, as well as for other cities, was inspired by and based on the two
management contracts.
Indeed, NWSC employees are proud because the improvements achieved in areas
outside of Kampala without any private sector participation were greater than the
improvements achieved in Kampala under the management contracts.
In the second performance contract, the actual values from the end of the previous
contract were used as the baseline. All indicator values once again improved, but
this time, five of the six indicators were either surpassed or came close to being
achieved. Only the ambitious collection ratio target of more than 100 % was missed
(Table 14.3).
154
155
to all employees, who were required to take tests to see whether they had understood
the concept.
Perhaps not surprisingly, staff began to suffer from change management fatigue.
Employees were sick and tired of reading books and taking tests. The Managing
Director rushed into one change management program after the other, without it
being clear to employees what the additional benefits were. While the corporate
culture and motivation had clearly improved, things were still far from perfect.
Stagnating Performance
After its spectacular turnaround in the first years of the new millennium, NWSC
was unable to further improve its performance in line with the targets set by
the government. The third performance contract for 20062009, which included
a different set of indicators than the previous contracts, called, among other targets,
for an increase of the return on capital employed from 1.7 % to 3.2 % and a reduction
of non-revenue water from 33 % to 31 %. But instead of improving, the return on
capital employed declined to 0.7 %, and non-revenue water increased instead of
declining. In Kampala, non-revenue water stagnated at 39 %, an unacceptably high
level. The share of bills collected had declined again to 92 %, while the number of
employees increased substantially, eroding the efficiency gains made in the previous
years.
At the time that NWSCs performance was deteriorating the period between
2006 and 2009 Muhairwe wrote a book called Making Public Enterprises Work
in which he described how he had turned the company around.
The fourth performance contract for 200912 called for an increase of the return
on capital employed from 2.7 % to 5 % and a reduction of non-revenue water to
31 %. As of 2013, the results were quite mixed. The return on capital employed
was 1.5 %, and the target was readjusted to just 2 %. Despite some improvements
in Kampala, non-revenue water stagnated at 35 %. The ratio of staff to 1,000
employees also stagnated at 6, compared to a target of 5. And the collection
efficiency stood at 92 %, far below the target level, mainly because government
customers failed to pay their water bills.
156
Ugandans to pay in order to reach full cost recovery. He then asked the Ugandan
government to forgive the loans it had on-lent to the company.
In February 2008, the government agreed to the proposal and converted the 153.5
billion shillings of debt (90 million dollars) into equity. This was presented as a way
to make the company more commercially-oriented, because NWSC planned at that
time to borrow from the local capital market. A cleaned-up balance sheet would
facilitate that endeavor. Indeed, a week after the debt forgiveness, NWSC announced
that it intended to borrow 30 billion Ugandan shillings (18 million dollars) on the
bond market. NWSC expected to be able to borrow in local currency at lower
interest rates and for longer maturities compared to borrowing from commercial
banks. The World Bank assisted in structuring the bond issue. But amid strong
currency fluctuations and the global financial crisis, conditions for the bond issue
were not good. In 2010, the Ugandan Ministry of Finance stopped the bond issue
from going ahead, citing the need to first use conventional concessional financing
sources. Although foreign loans were denominated in hard currency, their overall
conditions longer maturity and lower interests were considered better than local
bond financing. But these loans would be borrowed by the government and as
opposed to the previous practice would not be on-lent to NWSC.
157
Muhairwes Exit
In November 2011, the Board of NWSC let Muhairwes contract expire after
13 years of periodic renewals. The termination came amid controversies about his
personal wealth and the lack of improvement in the performance of the company
over the previous 5 years.
According to the companys annual report, his salary was 378 million Ugandan
shillings in 2011, about 160,000 dollars. This was about ten times the average
salary of an NWSC employee. The Board hat authorized a substantial increase
back in 2006. At that time, Muhairwe had been mid-way through his second
5-year term (20032008). The initial spectacular improvements had petered out
into more lackluster performance. Muhairwe apparently then told the Board that
he was considering accepting an offer as the Managing Director of the National
Social Security Fund, a job that allegedly was better paid than his current job.
Muhairwe succeeded in negotiating a substantial increase in his remuneration and
other benefits as the condition for his stay, together with an extension of his contract
by 3 years until November 2011.
But there were also other questions. Muhairwe, who says he grew up in poverty,
and his wife, who works as a contractor, own substantial real estate. One of
their properties is the building that houses the Japanese Embassy. In 2007, the
Ugandan newspaper New Vision had included him in a list of the wealthiest
people in Uganda. Where did their wealth come from? Muhairwe was also accused
of allegedly having written his book using company resources, and of excessive
international traveling. Furthermore, the charity Muhairwe Education Trust Ltd, to
which Muhairwe donated the proceeds of his book sales, was housed in the offices
of NWSC.
In January 2013, Muhairwe became executive director of the Water Leaders
Group, a group launched by the British magazine Global Water Intelligence that
helps water leaders share their ideas and experience : : : to make the world better.
In April 2014, NWSC received the Water Leaders Award at the Global Water
Summit in Paris from the hands of Liberian President and Nobel Peace Laureate
Ellen Johnson Sirleaf. It was recognized for its innovations and efforts that have
resulted in significant increase in service coverage and supply reliability, as noted
in a press release by NWSC.
After Muhairwe
Back in Uganda, it took the Board of NWSC two years to select a new Managing
Director. The position was advertised, but the selection had to be canceled after
concerns raised by the Inspector General of Government (IGG) Irene Mulyagonja
amid suspicions that the process had been tainted by gross irregularities. The
process was then repeated, and Dr. Silver Mugisha, who had been in charge of
Institutional Development and External Service under Muhairwe for many years,
158
Indicator
Number of connections
Share of bills collected
Non-revenue water
Staff per 1000 connections
Operating profit (USh bn)
19971998
51,000
60 %
51 %
35
1.5
20122013
317,000
96 %
33 %
6
40
Sources: Jammal and Jones (2006), water and environment sector performance report 2013
was appointed Managing Director in September 2013. The salary of the new
MD was slashed to 229 million Ugandan shillings, 40 % less than Muhairwes
remuneration.
The new Managing Director prepared a Strategic Plan to achieve NWSCs vision,
set out in 2006, to become one of the leading utilities in the world.
As of 2014, a bill was being prepared to be passed by Parliament to establish an
autonomous regulatory agency, Uganda Water and Sewerage Regulatory Authority.
It was expected that it would monitor the achievement of performance indicators
more closely, providing an independent assessment similar to Ofwats mandate in
England and Wales.
Impact
Compared with the situation in 19971998, the performance of NWSC has significantly improved, as shown in Table 14.4. However, most of these improvements,
such as in labor productivity (staff per 1000 connections) and collection efficiency
(shares of bills collected), were achieved during the first five years, followed by
slower improvements over the following years that remained below the targets set
by the government in its performance contracts with the utility. The sixfold increase
in access during 15 years, which coincidentally made it to a large extent possible to
achieve the improvements in labor productivity, is particularly impressive.
Conclusion
159
Table 14.5 Residential water tariff, water use and affordability for NWSC customers in 2012
(without sanitation)
Residential water tariff (house connections)
Water use
Household size
Typical residential water bill
Median net household income (estimate)
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.76
44
5
5.05
116
4.3 %
Conclusion
Despite the shortcomings mentioned above, NWSCs turnaround and performance
in one of the poorest countries in the world are impressive. NWSC performs far
better than most water utilities in Sub-Saharan Africa, South Asia and even those in
the much wealthier Egypt. It is clearly in the same league as the best water utilities in
Africa which are found in Morocco, Tunisia, Burkina Faso, Senegal, Cte dIvoire
and South Africa, including both publicly and privately run utilities.
What makes the NWSC case special is that it has achieved a turnaround while
most of the utilities in the countries mentioned above have operated at high levels
of performance for many decades. Klaas Schwartz, a Dutch expert in urban water
governance in developing countries, points out that the turnaround of NWSC was
favored by many factors including a highly trained professional staff, a strong
institutional culture, a high level of support for investment and technical assistance
by international donors, and strong support from the government. A study by
the Boston Institute for Developing Economies for the World Bank concludes
that the improvements were not due to private sector participation under the two
management contracts in Kampala, but to the overall reforms at NWSC that were
undertaken simultaneously. Muhairwe had succeeded by taking the approaches any
international private operator would have used to reform a utility and implementing
them at a fraction of what it would have cost to pay an international private
operator for the same duration and for the entire service area of the company.
More importantly, perhaps, working for the public sector and being a Ugandan,
he had the knowledge, credibility and persuasion to win over the employees and his
Board members that no foreign managing director would have been able to muster.
Muhairwe himself credits the Stretch Out program inspired by Jack Welch for
what he calls the mental revolution in NWSC. According to him, attitudes and
work methods changed profoundly: Gone was the distance that had previously
kept the managers apart from their subordinates ( : : : ) In less than a year, stretch-out
transformed the Corporations organizational behavior beyond imagination, to the
astonishment of other public utilities and the satisfaction of our customers. The
profound change in the utilitys management style and corporate culture indeed is a
rare feat in a developing country.
Chapter 15
Ek Sonn Chan had a gun pointed to his head. As manager of the water utility, he
had dared to ask an army officer to pay the water bill for the army barracks, or else
the supply would be cut off. In the face of the less than optimal response, Chan
retreated. But the next day he came back with a handful of journalists and cut off
the water. The Army, under pressure from the public, gave in and paid its water bill.
161
162
The Turnaround
All this started to change when Ek Sonn Chan took over the company in 1993. Not
only did he confront customers who had not paid their bills, such as the army officer
who threatened to kill him, he also identified illegal connections, slapped heavy
fines on the offenders and regularized the connections. He also fired corrupt staff.
Ek Sonn Chan had the support of the political authorities, all the way up to the
strong man Hun Sen, for this approach. Without that support, he would not have
been able to make the sweeping changes he made. It also helped that late 1993 was
a good time to undertake reforms: Elections had been held earlier that year, so it was
possible to push through unpopular but necessary changes. Foreign donors came to
the country, so that substantial grant funding for public investments was available.
Ek Sonn Chan seized his chance.
The Turnaround
163
164
strengthened. Only then was the system expanded, block by block, following the
rational layout of the Master Plan. This is in contrast to the way water systems are
built in many other developing countries, where pipes are often added haphazardly
in one area or another, making it difficult to provide water on a continuous basis
and under constant pressure to all customers. In Phnom Penh, donors funded a new
water treatment plant and pipes were laid to substantially expand the customer base,
while all new connections were metered. The number of customers increased tenfold
between 1993 and 2010, so that the network was newer than in most other cities.
Beginning in 2003, clearly delineated hydraulic zones were established, separated
by bulk meters. Within these hydraulic zones, water losses can be easily identified,
also making it easier to repair leaks quickly. But it takes trained and motivated staff
to keep losses at low levels. At PPWSA, employees were not only trained, but teams
in charge of an area received a bonus if they reached their loss reduction targets.
Indicator
Number of connections
Share of population with access
Share of bills collected
Non-revenue water
Continuity of supply (hours/day)
Staff per 1,000 connections
Revenues/operating costs
1993
27,000
20 %
48 %
72 %
10
20
66 %
2012
234,000
92 %
100 %
6%
24
3
270 %
165
company, and recruitments were done based strictly on qualifications. The utility
went from being bankrupt to making a profit. It now has motivated, well-paid staff
who earn ten times more than before the turnaround of the utility. The companys
image, according to Ek Sonn Chan, is excellent, a rare feat for a water utility in a
poor country.
166
Table 15.2 Water tariffs, water use and affordability in Phnom Penh
Residential water tariff
Water use
Household size
Typical residential water bill
Median net household income (estimate)
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.18
120
5
3.24
181
1.8 %
Conclusion
167
One reason for the privatization was the mobilization of capital for the growing
company, making it more independent from donor loans. However, this objective
could also have been achieved by issuing local currency bonds, as other financially
solid utilities regularly do. The debt-to-equity ratio of 0.56 at the end of 2011
was very favorable. The company could have easily taken on more debt without
incurring high risks. Still, the government opted to issue shares. The share issue
brought 77 million riels (19 million dollars) of cash inflow, which was partly used
for investments and partly to bolster the companys reserves.
This was not done by seeking a strategic investor, but by bringing PPWSA to the
Cambodian stock exchange. Since the balance sheet of PPWSA was healthy and the
Cambodian stock market bullish, the stock offering was oversubscribed. Fourteen
percent of the companys equity is now held by a large array of shareholders, while
the government maintains an 85 % majority, with 1 % of the shares owned by
employees. Private shareholders are represented by one of seven Board members.
That Board member is a non-executive director with limited rights. The government
does not require dividends to be paid on its shares (Class A), although it receives a
small share of profits every year. In 2012, the company made a profit of 34 billion
Cambodian riels (8.5 million dollars) which was fully distributed to the private
ordinary shareholders. This amounted to a huge 44 % return on investment for
the shareholders.
The companys employees also received dividends for their 1 % of the companys
shares, amounting to an average of about 800 dollars per employee. This is
equivalent to more than 10 % of salaries and benefits. Dividends take up a significant
share of revenues, yielding a 44 % return on equity. Nevertheless, the company has
accumulated reserves of 55 billion riels (13.8 million dollars), to which 23 billion
riels (8 million dollars) were added in 2012 alone.
If bonds had been issued instead of shares, with a much lower yield than the
yield on equity, there would have been more flexibility to provide higher salaries to
employees, to provide discounts on water tariffs to the poorest, or to invest in the
much needed sewerage upgrade. The challenge for PPWSA now is how to sustain its
success in a more difficult environment: it has to pay dividends to its shareholders,
interest on its loans and maintain an aging network, all without the assistance of
the exceptional leader who managed its turnaround. Ek Sonn Chan now supervises
the drinking water supply for all of Cambodia from his position in the government,
facing the challenge of replicating his success outside the capital, so far with only
limited success, suggesting that the conditions that led to PPWSAs triumph are not
easily replicable even within the same country.
Conclusion
Institutional reform in the form of the creation of a utility that is legally separate
from the municipality, the absence of legacy debt, foreign aid, leadership and a
change in corporate culture were all instrumental in achieving the turnaround of
168
PPWSA. Without foreign aid, Phnom Penh could not have improved its water supply
the way it did. Almost all investments were paid for through foreign grants, and
later through loans. Foreign donors also helped to push for the creation of the right
institutional framework: the creation of an autonomous utility. Beyond that, foreign
experts from France and Australia provided substantial practical advice and training
on a wide range of topics ranging from hydraulics to customer service. Because
PPWSA had no legacy debt and initially received grants to expand the network, it
initially had no interest payments to make and could keep tariffs low while devote its
scarce resources to maintaining its infrastructure in good working order. However,
the most important success factor is not a hard financial or legal arrangement,
but a soft one. Good governance, integrity, transparency and accountability are
buzzwords of the international donor community. Too often they remain a mantra,
abstract concepts instead of reality. But, beyond the rhetoric, Ek Sonn Chan and the
PPWSA have shown what it means to put these words into action, and how actions
rooted in values can turn around an entire utility. The difference between Phnom
Penh and many other cities in developing countries was that the Cambodians put
foreign aid to the best possible use. When rain falls on rocky ground, it quickly
dissipates. But when it falls on fertile and well-tended land, the harvest is plentiful.
Chapter 16
Differences in Circumstances
Manila Water operates in a middle-income country with a per capita income of 2,600
dollars per year. It has the largest service area of the three utilities, although it only
serves one half of the huge metropolitan area of Manila. Because of its size and
concentration in one locality it benefits from economies of scale, coupled with the
ability to recruit talent in a large metropolitan area. It provides sewerage services,
which in developing countries tend to be less profitable than drinking water supply
because of low sewer tariffs. But because of the very limited sewerage coverage this
does not have a major impact on its finances. Because the Philippines is an emerging
country and because Manila Water is a private company, the company does not
have access to grant financing or soft loans by international donors. It achieved its
turnaround using only commercial financing. Manila receives its raw water from the
Angat-Ipo-La Mesa water system, a surface water system. The companies have to
treat the water in their own treatment plants.
Uganda is the poorest of the three countries with a per capita income of only
about 500 dollars per year. Its per capita water consumption is much lower than in
Manila or Phnom Penh. NWSC also has the most extensive responsibilities, serving
66 cities and towns in 2014. NWSC is also in charge of sewerage. To what extent
these responsibilities are a burden on NWSC is difficult to tell in the absence of more
169
170
analysis. Branches of NWSC in small towns in Uganda are apparently less profitable
than the capital branch, but non-revenue water in small towns is much lower than
in the capital. Given low coverage with sewerage and relatively high sewer tariffs
in Uganda, the financial burden of sewerage on the utility seems limited. The
settlement pattern in Uganda is less dense than in Manila or Phnom Penh, increasing
the costs of water distribution. The water network is not rationally laid out, making
it hard to reduce leakage. Government institutions in Uganda often fail to pay
their bills, something that is not the case in Phnom Penh or Manila. This makes
it harder for NWSC to increase cost recovery from revenues. However, NWSC
benefits from soft loans from international donors that are passed on as grants from
the government to NWSC. The largest cities served by NWSC receive their raw
water from nearby Lake Victoria. The water undergoes extensive treatment.
Cambodia has a per capita income of about 900 dollars. PPWSA is only in charge
of drinking water supply in the capital. Cambodia benefitted from substantial foreign
aid to finance investments and to provide technical assistance. In Phnom Penh, the
entire water system was rebuilt from scratch following a rational layout, making it
easier to subsequently identify and eliminate leakage. Phnom Penh receives its raw
water from the nearby Mekong River. The water undergoes extensive treatment.
It is difficult to compare the circumstances of the three utilities in the absence
of more data on the cost of water treatment, the cost of sewerage, and the relative
profitability of small towns compared to the capital in the case of Uganda. However,
based on the limited available information, it seems that NWSC faces the most
challenging conditions of the three utilities, while Manila Water probably operates
in the most favorable circumstances.
Performance Compared
Access and service quality increased in all three cases, although NWSC lags behind
in terms of access as shown in Table 16.1. All three utilities became financially
viable. One contributing factor is the large increase in their customer base, making it
possible to spread fixed costs for water treatment and labor to a larger customer base.
The performance of all three utilities is equally good in terms of service quality and
customer satisfaction, albeit no survey data on customer satisfaction are available
for Phnom Penh.
Table 16.1 Access and
service quality of Manila
Water, PPWSA and NWSC
compared
Access to water
Customer satisfaction
Continuity of supply
Manila Water
94 %
93 %
98 %
PPWSA
92 %
n.a.
100 %
NWSC
70 %.
85 %
n.a.
Performance Compared
171
172
PPWSA was a public utility turnaround financed first by grants and then by loans
from foreign development agencies. Institutional reforms were only implemented
3 years after the beginning of the turnaround. Tariff increases only took place in
year four. Only after the turnaround was completed, the utility tapped into equity
funding through the stock exchange. The efficiency gains were achieved under
public ownership, allowing the utility to accumulate capital from tariff revenues.
Bringing in private capital was not a prerequisite for taking on loans, because
PPWSA was creditworthy before its privatization.
Efficiency Improvements
Manila Water and PPWSA are more efficient than NWSC in terms of labor
productivity and non-revenue water. Manila Water and PPWSA provide their
services with only 1.4 and 3 employees per 1,000 water connections respectively,
less than half as many as NWSC has on its payroll.1 PPWSAs non-revenue water
expressed as it should be in cubic meters per kilometer of network length,
amounts to 9.5 cubic meters per day compared to 15.5 in Uganda, as shown in
Table 16.2.
This difference in efficiency has important implications for the financial situation
of the utilities, both in terms of the tariffs they charge and their fiscal impact.
Salary Levels
Average salaries and benefits of a utility employee at NWSC are a third higher (861
dollars per month) than at PPWSA (620 dollars per month), although Uganda has a
much lower per capita income than Cambodia. As shown in Table 16.3, salaries and
benefits at NWSC are quite attractive in the Ugandan context, compared to what the
two Asian utilities pay their employees.
Staff/1,000 connections
Cubic meter/km/day
% of water produced
Manila Water
1.4
n.a.
11 %
PPWSA
3.0
9.5
7%
NWSC
6.0
15.5
33 %
Since sewerage is only available to 8 % of NWSC customers, the responsibility for sewerage
alone cannot fully explain this discrepancy.
Performance Compared
173
Uganda
596
5
2,980
248
861
3.5
Cambodia
926
5
4,630
386
620
1.6
Philippines
2,611
5
13,055
1,088
1,441
1.3
Manila Water
60
24
21
42
43
190
191
PPWSA
32
22
23
26
7
110
24
NWSC
26
62
29
68
0
185
23
Source: Authors calculations based on NWSC, PPWSA and Manila Water annual reports
The spread of salaries in fairly egalitarian Cambodia is about one to five between
the lowest and the highest salary, compared to a spread of one to 35 in more marketoriented Uganda. The lowest-paid workers in PPWSA thus are paid somewhat more
than in Uganda, while the mid-level and high-level employees receive much less in
Cambodia.
Overall Costs
The most striking difference between the three cases is perhaps their financing
structure. NWSC does not pay dividends to its owner, the state, and it does not
have to pay interest or principal on its loans any more. Manila Water and PPWSA
pay substantial dividends to their owners, as well as interest, and have to pay back
their debt.
Table 16.4 compares costs and profits at the three utilities per water connection
in US dollars, in order to make the figures comparable. Depreciation is highest in
the case of Manila Water, perhaps as a result of the higher cost of construction in a
middle-income country compared to least developed countries. Salaries and benefits
are almost three times higher at NWSC, due to its lower labor productivity and its
relatively high salaries, as analyzed above. Striking is the high level of non-salary
174
operating costs at NWSC. A closer look at the income statements of NWSC and
PPWSA shows that the difference is caused by expenses for transport, premises and
administration, which are relatively high at NWSC. Although NWSC does not pay
any interest, its total costs are still higher than the costs of the two other utilities as
a result of its remaining inefficiencies.
All three utilities show a profit. NWSC retains its profits, while the two other
utilities pay a share of their profits out in the form of dividends to their shareholders.
In the case of Manila Water, profits are substantial, almost equivalent to the total
costs of service provision. In 2013, two thirds of these profits were retained and one
third was paid out as dividends.
Fiscal Impact
Manila Water and PPWSA both operate without subsidies. Instead, they pay
corporate taxes on their profits. Their fiscal impact thus is positive. NWSC, however,
is indirectly subsidized since the government decided to forgive its debt in 2008 and
to pass foreign loans incurred by the government on to the utility in the form of
grants. The fiscal impact of NWSC thus is negative, as the government has to pay
interest and principal on its loans while receiving no payments from the utility.
Affordability
Like most utilities in developing and emerging countries, all three utilities charge
much higher tariffs to commercial and industrial customers. Through these revenues
residential water tariffs can be kept relatively low, a phenomenon called a crosssubsidy. As shown in Table 16.5, the typical monthly residential water bill in Manila
is almost 10 dollars, much higher than in Uganda and Phnom Penh, where it is 5 and
3 dollars respectively. However, because the Philippines is a middle-income country,
water bills are affordable at 1.9 % of income, while they are unaffordable in Uganda
at 4.4 % of income.
Table 16.5 Affordability of water bills compared
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
Phnom
Penh
0.18
120
5
3.24
181
1.8 %
Manila
Water
0.32
200
5
9.60
509
1.9 %
Kampala
0.76
44
5
5.02
116
4.3 %
Conclusion
175
Conclusion
PPWSA, NWSC and Manila Water have shown that utilities in poor countries can
provide good and almost universal services. All three utilities show profits in their
books. They became so by expanding, focusing on efficiency, customer service and
changing their corporate culture, delegating more responsibilities to lower levels
of the company while combating corruption. PPWSA was very successful in its
efforts to increase efficiency. It showed that even in one of the poorest countries in
the world, a water utility can charge affordable tariffs, pay interest on its loans and
generate a substantial profit an achievement that has not been replicated in any
other least-developed country so far.
The circumstances in the three cases are different. Uganda probably faced the
most difficult circumstances. But it could have achieved more in terms of efficiency.
Manila had perhaps the most favorable circumstances. PPWSAs achievements
given its circumstances seem to be the most impressive of the three.
Part V
Conclusions
Chapter 17
This book has analyzed water utilities from 12 countries that seem to have little in
common: they range from the richest to the poorest, from those with a low level of
corruption and functioning states to those where corruption, nepotism and cronyism
are rampant and states are weak. It covers very different cultures from South East
Asia, East Africa, the Middle East, South America, North America and Europe.
Under all these different circumstances, it has shown that utilities can fail or can
perform in achieving the human right to water, no matter whether they are publicly
or privately managed.
The hypothesis that privatization, on average, does not make a big difference is
supported by statistical analyses of larger samples of water privatizations. A 2005
analysis by the World Bank reviewed six empirical studies on the impact of private
management on the efficiency of water utilities in Africa, Asia, Argentina and
Brazil. It concluded that there is no statistically significant difference between the
efficiency performance of public and private operators in this sector. In the United
States, a study published in 2005 found that, as far as household water expenditures
are concerned, whether water systems are owned by private firms or governments
may, on average, simply not matter much. A study by three economists published
in 2009 showed that in Argentina, Bolivia and Brazil, access to water supply and
sanitation increased to the same extent for utilities under both private and public
management. The study concludes that private sector participation, per se, may not
have been responsible for those improvements.
179
180
reforms without privatization have been halfhearted and have failed to significantly
improve the performance of publicly managed utilities. In Germany, there were few
changes simply because utilities perform and are no drain on state budgets. Some
changes, such as the privatization in Cochabamba, were so short-lived that utilities
quickly returned more or less to their previous level of performance.
In most cases presented in this book, there were substantial organizational
changes that were sustained over a long period. Many of them started with a
privatization, including those where private service provision continues until today
(England, Manila, Marseille, Havana) and those where water supply was remunicipalized (Berlin, Buenos Aires, Paris) or was organized under a new non-profit
model of service provision (Wales). A few of the cases with sustained organizational
changes started with a public utility turnaround. They include privatization attempts
that spurred the successful turnaround of a publicly managed utility (Uganda,
Scotland), the successful public turnaround of a utility that ended with a partial
privatization (Phnom Penh), and a public turnaround without privatization attempt
(Washington, DC).
181
Service quality increased in almost all cases.1 In none of the cases described
in this book did drinking water quality deteriorate. Thus, one of the other most
common fears associated with privatization also failed to materialize. One of the
reasons is that the quality of water provided by private companies continues to be
publicly regulated. More importantly, private companies actually are under more
scrutiny than public companies, precisely because the public and governments
mistrust them. They simply have more at stake: while public utilities in many
developing countries provide tap water that is not fit for drinking without suffering
any sanctions, private companies are at risk of losing their concession. They thus
have a stronger incentive to provide quality services than poorly regulated publicly
managed utilities. If private water companies want to increase their profits, fiddling
around with water quality would be the riskiest way for them to achieve this
objective.
In all cases covered in this book, water and sewer tariffs went up in the long
run. Decreases were short-lived during the first years of the concessions in Manila
and Buenos Aires. After a few years, tariffs had increased again above their initial
level. Remunicipalizations were sometimes accompanied by tariff reductions, such
as in Berlin. But in Buenos Aires and Cochabamba, tariffs had to be substantially
increased a few years after remunicipalization. Tariffs also increased during the
public utility turnarounds in Uganda, Phnom Penh and Washington, DC. A large
share of the increased tariff revenues was used to finance higher investments. But
another share was used to generate profits, both in the case of private companies and
in the case of some publicly owned companies that are required to pay dividends to
their municipal shareholders. Private companies usually pay higher interest rates on
loans compared to a public corporation whose debt is guaranteed by the state. For
example, loans from the World Banks private sector arm IFC and from commercial
banks, both of which were used in Buenos Aires and Manila, are more expensive
than loans to the public sector from the World Bank itself.
The efficiency of water utilities improved in almost all cases covered, albeit to a
different extent. Where efficiency increases were highest, utilities were better able
to deliver improvements while keeping tariffs affordable. In Manila and Phnom
Penh, water losses were reduced substantially and labor productivity improved
dramatically. Increased efficiency was an important element of their turnaround.
In Uganda and Buenos Aires, the improvements in efficiency were more limited. In
Berlin and England, labor productivity improved, but water losses did not change
much from the very low level in Berlin and the much higher level in England.
DEP in New York City has shown how efficiency can be improved through reduced
operating costs. Generally, the often higher capital costs of private service provision
must be outweighed by efficiency gains and improved service quality compared to
what a publicly managed utility would have achieved. While privately managed
The exceptions are Berlin and Paris, where service quality was already good before reforms were
initiated and where insufficient data are available to the public to assess any long-term changes in
service quality that may have occurred.
182
water utilities often have increased efficiency and service quality, there is no
evidence that these improvements systematically outweigh higher capital costs.
The fiscal impact of utility reforms varied over time. Often, it was positive during
the early years, but turned negative when reforms were rolled back. In Berlin and
Buenos Aires, the positive fiscal impact during the first years turned negative after
remunicipalization. In Uganda, the fiscal impact was also initially positive, but then
turned negative when the state decided to forgive all debt of the national utility.
In some cases, there was no change in the fiscal impact of utilities. In Paris, the
fiscal impact remained neutral after remunicipalization. In Egypt, the water sector
remained a massive drain on the state budget. Only in those cases in which reforms
were sustained over the long run was there a positive fiscal impact. This was mainly
because investments that would otherwise have to be financed through taxes were
now financed by private utilities, which in turn often charged higher water tariffs.
This is the case in the privatizations in England and in Manila, as well as for the
public turnaround in Cambodia.
In many cases covered in this book, there was a significant improvement in the
corporate culture of the utilities. These changes were driven both by committed
leaders and by legal reforms. In Uganda, Phnom Penh and Manila, employees were
given more freedom to make choices, received rewards for achievements, and were
held accountable for failures, in a clear break from the past, as described in the
preceding chapters. Overall, the utilities became more professional. In France, a
culture of cronyism was gradually pushed back by a fairer and more transparent
system. Changes in the overall legal framework for the entire water sector, such as
the Loi Sapin, a more active role by the Audit Office, and the establishment of a kind
of regulatory agency, gradually improved corporate governance in the French water
sector over two decades. However, when the corporate culture remained largely
unchanged, such as in Egypt, there was also no improvement in service quality.
Not a single one of the privatizations analyzed in this book has fully achieved all
its stated objectives. Some privatizations have never materialized despite substantial
efforts to prepare them, and some have been terminated much earlier than planned.
Those privatizations or public utility turnarounds that have brought improvements
in terms of access, service quality, corporate governance, efficiency and lower
impact on the state budget have done so only when governments have maintained
the initial policies over a long period, usually more than a decade. In all these
cases, improvements have come at the expense of higher water tariffs. Whether
the improvements were caused by privatization, or by other factors, remains a
matter of debate. The results of remunicipalization have also been disappointing in
Bolivia and Argentina, controversial as in the case of Berlin, and leaving a potential
financing gap as in the case of Paris. As mentioned at the beginning of the book,
assessing the various impacts of water privatization, remunicipalization or other
utility reform requires a judgment call. For example, are higher tariffs justified by
better service quality, increased access, or a lower impact on the state budget? This
and other questions about trade-offs are for the reader to decide, and each case will
have to be judged on its own merits.
Conclusion
183
Conclusion
When I speak to audiences from developing and emerging countries, I like to
ask which of three factors most impedes the achievement of the human right to
water in their own country: lack of money; water scarcity; or poor governance.
The result is always the same. While financing is clearly important, it is not
primarily a lack of money be it from foreign aid or national budgets that most
hampers the development of the water sector. Neither is it primarily constrained by
environmental factors such as climate change, droughts, pollution or the depletion
of water resources, although these factors are important. The key constraint to
achieving the human right to water in developing countries is the combination of
inadequate institutional frameworks, poor management and the often resulting weak
human resources that are called poor governance.
A utility needs professional, honest, well-paid and motivated staff. It needs
competent management. It needs an institutional environment that promotes transparency and accountability, an environment that rewards performance and penalizes
misbehavior, in short, a corporate culture that induces good behavior. It needs
money, and lots of it. Part of it must come from its revenues, which should be based
on tariffs that at least recover the costs of recurrent service provision. Some of it may
come from subsidies funded by domestic general taxation or from foreign grants, to
the extent that they are available. In many cases, they must come from repayable
loans or bonds. A good utility must be fairly efficient, without overly excessive
staffing, water losses, water stealing and unpaid bills. And if there is significant
poverty in its service area, it needs a mechanism that protects the poor from being
burdened with unaffordable bills, while compensating the revenue losses through
cross-subsidies or reliable government subsidies. In order to achieve all this, it needs
political support. It may need political backing to cut off rich and influential customers who steal water, or to make public entities pay their water bills. It may need
one-time funding to make severance payments to redundant staff. And it may need
politicians that are courageous enough to approve a tariff increase when needed.
The conditions necessary for a water utility to perform are more prevalent in a
functioning country. Indeed, there is a strong correlation between the performance
of a water utility and the per capita income of the country where it is located.
Nevertheless, this book showed turnaround stories from emerging countries and
even from the poorest developing countries. The private company Manila Water and
the publicly managed utilities NWSC in Uganda and PPWSA in Phnom Penh show
what can be achieved if all the factors mentioned above come together. It shows that
even a utility in the poorest country can perform well.
Independently of whether water supply is provided by a public or a private entity,
there are five observations that are common to all cases in this book. They are
perhaps so obvious that I hesitate to repeat them, but here they are:
1. There are numerous local, national and international players in the water sector.
None of them dominates and has the power to dictate changes.
184
Cairo
London Paris
Berlin
New
York
City
Current
management
Public
Private
Public
Public
Mixed Mixed
Private Public
Public
Management
in 2000
Public
Private
Private Mixed
Private
Subsidies
Capital
and
operation
No
No
No
No
No
No
Capital
No
Phnom Manila
Penh
Water Kampala Cochabamba
Residential
water tariff
USD/m3 0.05
2.00
2.51
2.37
1.66
0.18
0.32
0.76
1.07
Residential
water use
Liter/
capita/
day
250
167
138
121
319
120
200
44
100
Household
size
Persons
2.5
2.3
1.7
2.6
Water bill
USD/
month
1.88
25.00
23.92
14.63
41.29
3.24
9.60
5.02
16.05
Median net
household
income
USD/
month
607
3,419
3,433
2,057
4,659
181
509
116
364
Affordability
of water bill
% of
income
0.3 %
0.7 %
0.7 %
0.7 %
0.9 %
1.8 %
1.9 %
4.3 %
4.4 %
185
Berlin
0.55
0.02
4%
7,900
3.4
0.53
155
2.3
2.5
Phnom
Penh
0.28
0.02
7%
2,000
1.7
0.27
156
1.2
9.5
New
York
City
3.8
0.14
4%
10,500
8.3
3.66
441
1.3
13.3
Uganda
(NWSC)
0.22
0.07
33 %
4,704
2.5
0.15
59
1.9
15.5
Paris
(Eau de
Paris)
0.52
0.04
7%
2,000
3.0
0.48
160
0.7
19.5
London
(Thames
Water)
2.6
0.64
25 %
31,100
9.0
1.96
218
3.5
20.6
187
Chapter
2
Country
Bolivia
3
4
Cuba
Argentina
Jordan
7
7
7
8
England
Wales
Scotland
France
City
Cochabamba
La Paz
Havana
Buenos Aires
Samra/Disi
Amman
Countrywide
Countrywide
Countrywide
Grenoble
Paris
9
10
12
Germany
Berlin
United States
Marseille
Countrywide
Berlin
Atlanta
Felton
13
14
Philippines
Uganda
15
Cambodia
Phnom Penh
Type of PPP/reform
Concession
Concession
Mixed enterprise
Concession
Remunicipalization
BOTs
Management contract
Divestiture
Not for profit
Public turnaround
Concession
Remunicipalization
Lease
Remunicipalization
Concession renewal
Cross-border leases
Partial privatization
Concession
Divestiture
Remunicipalization
Performance-based contract
Public turnaround
Concessions
Public turnaround
Management contracts
Public turnaround
Partial privatization
Duration
2000
19972007
Since 2000
19932006
Since 2006
Since 2004/2009
19992006
Since 1989
Since 2001
Since c. 2002
19892001
Since 2001
19832008
Since 2008
2013
Since 19952004
19992013
19982002
20022005
Since 2005
Since 2012
Since 1994
Since 1997
Since 1999
19982004
Since 1993
2012
189
1989
1993
1994
1995
1996
1997
1998
1999
2000
Water privatization in England and Wales and creation of Ofwat as the economic
regulatory agency for the water sector
Water concession in Grenoble awarded
Newly elected Menem government in Argentina announces privatizations
Concession in Buenos Aires awarded
Loi Sapin passed in France
Ek Sonn Chan becomes General Manager of Phnom Penh water utility PPWSA
First renegotiation of the Buenos Aires concession
Water Crisis Act passed in the Philippines, paving the way for water privatization in
Manila
First cross-border lease between the United States and Germany
Bribery convictions related to the concession in Grenoble
Water and sewer utility separate from the District of Columbia created in Washington, DC
PPWSA created as a utility separate from the Phnom Penh municipality
Concessions in Manila awarded
Concession in La Paz, Bolivia, awarded
Second renegotiation of the Buenos Aires concession
French water companies and the German company RWE enter liberalized US water
market
Water Summit held in England to address high leakage during drought
Concession in Atlanta awarded
Muhairwe becomes General Manager of NWSC in Uganda
Partial privatization of Berlinwasser
Management contract in Amman, Jordan, awarded
English regulator orders price reduction; water cutoffs for nonpayment prohibited
Cochabamba Water War in Bolivia
Cuban Government creates a mixed public-private water company for Havana
Study in Germany recommending water market liberalization is rejected
Welsh Water created as a not-for-profit company
Economic crisis in Argentina
(continued)
191
192
(continued)
2001
2002
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Remunicipalization in Grenoble
Foreign institutional investors begin to buy English water companies
Atlanta concession cancelled
Scottish Water created as a state-owned company
Rate rebasing in Manila leads to a substantial tariff increase
First BOT contract in water and sanitation in Jordan signed for the Samra wastewater
treatment plant
Legislation in the United States ends cross-border leases
Holding Company for Water and Sewerage created in Egypt as key element of sector
reforms
English regulator relaxes price control
West Manila concessionaire goes bankrupt
In Felton, California, citizens buy back their water utility
Remunicipalization in Buenos Aires
Water Table created in Berlin to overturn water privatization
Beginning of regulatory action on water tariffs in some German states
Management contract in Amman expires, making place to a publicly owned company
Second BOT contract awarded in Jordan for Disi-Amman water conveyor
Remunicipalization in Paris
RWE exits US water market
National database to monitor the performance of water utilities established in France
Referendum Our Water in Berlin
European Parliament declares that EU Concession Directive is not necessary
International arbitration tribunal holds Argentina liable in Buenos Aires concession
case
Muhairwe leaves NWSC in Uganda
Partial remunicipalization in Berlin
European Citizens Initiative Right2Water
Partial Privatization of PPWSA in Phnom Penh; Exit of Ek Sonn Chan
Performance-based contract awarded in New York City
Full remunicipalization in Berlin
European Parliament adopts EU Concession Directive
New water and sewer concessions awarded in Marseille, reducing water tariffs
Ofwat, the water regulator in England, orders tariff reductions over the next 5 years
The state-owned utility or Buenos Aires announces massive tariff increases
193
194
Divestiture The permanent full or partial sale of assets from the state to the private
sector, either through the stock exchange or through the sale to a strategic
investor.
Economic Regulation (Infrastructure) The regulation of prices, costs, and service quality of an infrastructure service, either through setting a price cap or a
fixed rate of return on assets.
Equity (Equity Capital) Funds provided by the owners of a company, as opposed
to debt, with the sum of equity and debt equal to the companys capital.
Financial Leveraging The process of increasing the profit of a company by
increasing the debt-equity ratio as long as the return on capital invested is higher
than the cost of debt service. It increases the risk of losses in case the return on
capital drops below the cost of debt service.
Financial Statements The financial reports produced by a company on an annual
basis, including its balance sheet and its income statement.
Geographical Information System (Utilities) A computer database that shows
all the physical assets of a utility, in particular the pipe network and house
connections, on a map.
Holding Company A Company created for the purpose of owning other companies.
Increasing-Block Tariff A form of water tariff under which the price per unit of
water increases with the quantity consumed, usually within specified blocks of
water consumption.
Indexing (Tariffs) The automatic adjustment of tariffs to a price index, such as the
consumer price index or the wholesale price index (inflation indexing).
Institutional Investors Investors that are not individuals but funds such as pension
funds, insurance companies, private equity funds or sovereign wealth funds.
Lease (Infrastructure) A contract between a public entity that owns and finances
infrastructure and a company to provide a public service, under which the
company operates, but does not finance infrastructure and collects revenues.
Management Contract (Infrastructure) A contract between a public entity that
owns and finances infrastructure and a private company to provide a public
service, under which the private company only operates the infrastructure.
Median Income A statistical expression for average income, as distinct from the
arithmetic mean. The arithmetic mean is obtained by dividing total income by
population, and it is often incorrectly termed average income. The median
income is the income obtained at the midpoint when separating a population in
two halves from the lowest to the highest income. The median income is typically
lower than the arithmetic mean income, because of the very high incomes at the
top end.
Nonrevenue Water Water produced for which no revenue is billed. It consists
of leakage (real losses), water theft, and under-registration by water meters
(apparent losses), as well as water provided free of charge for certain uses such
as firefighting (authorized unbilled consumption).
195
Annex 6: Sources
1. Introduction
Figures on global access to water supply are taken from the Joint Monitoring
Programme for Drinking Water Supply and Sanitation of UNICEF and the World
Health Organization (WHO). The figures on the number of people served by private
players worldwide are from David Lloyd Owen, published in the Pinsent Masons
Water Yearbook 20112012.
2. Bolivia
The account of the Water War is based on the Cochabamba Water Revolt
and Its Aftermath by Jim Shultz, the Director of the Democracy Center in
Cochabamba, published in Dignity and Defiance, Stories from Bolivias Challenge
to Globalizationin 2009, and the article Leasing The Rain by the journalist
William Finnegan published in The New Yorker on April 8, 2002. Both are critical
of the privatization. An article by the researcher Andrew Nickson and by Claudia
Vargas who worked as a legal analyst at the Bolivian water regulator during the
preparation of the Cochabamba concession provides a different perspective in The
Limitations of Water Regulation: The Failure of the Cochabamba Concession in
Bolivia, published in 2002 in the Bulletin of Latin American Research, Volume 21,
Number 1. The World Banks version of the events is described in a paper entitled
Bolivia Water Management: A Tale of Three Cities by the Banks Operations
Evaluation Department (OED Number 222) published in 2002. International water
consultant David Bonnardeaux analyzes the privatization from a perspective that is
sympathetic to the World Banks position in the article The Cochabamba Water
War: An Anti-Privatisation Poster Child? published in 2009. The perspective of
Bechtel is summarized in Cochabamba and the Aguas del Tunari Consortium
197
198
Annex 6: Sources
3. Cuba
The Cuba case is based on various media reports, including a report by Patricia
Grogg for the news agency IPS in 2003 entitled Cuba: Ms agua potable en La
Habana por inversin extranjera and a 2010 article by Ivn Garca in the Spanish
newspaper El Mundo entitled La Habana y sus aguas perdidas. It also draws
on a 2004 presentation by Fernando Rayn and Martn Xavier Segura Ayala from
Aguas de Barcelona entitled La Gestin Privada Del Agua en Espana y Amrica
Latina: El Caso de Agbar, as well as the official websites of Aguas de La Habana
and the Grupo Martinon.
4. Argentina
The story of the Buenos Aires concession has been described from different angles.
The Peruvian economics professor Lorena Alczar, the consultant Manuel Abdala,
and the World Bank researcher Mary Shirley wrote a comprehensive analysis of
the preparation, award, and precrisis implementation of the concession in The
Buenos Aires Water Concession published as Policy Research Working Paper 2311
by the World Bank in 2000. How the concession first neglected and then began
to focus on the needs of the poor is described by Marie-Helene Zerah, Clarissa
Brocklehurst, and Kathleen Graham-Harrison in The Buenos Aires Concession:
The Private Sector Serving the Poor by the World Banks Water and Sanitation
Program in 2001. A critical description of the concession has been written by
the International Consortium of Investigative Journalists under the title Cashing
in on Buenos Aires Privatization, in: The Water Barons: How a few powerful
companies are privatizing your water published in 2003. Another comprehensive
and critical analysis, as well as a description of the remunicipalization of the Buenos
Aires water system, was written by the Argentine researcher Daniel Azpiazu and
Jos Esteban Castro, a sociology professor from the University of Newcastle who
specialized on water and institutions, in Aguas Pblicas: Buenos Aires in Muddled
Waters published the by Transnational Institute in 2012 in Remunicipalisation:
Putting Water Back into Public Hands. The July 2010 decision by the International
Centre for Settlement of Investment Disputes on the case of Aguas Argentinas
against the Argentine republic (ICSID Case No. ARB/03/19) also provides a very
readable and impartial account of the concession from the conditions preceding
Annex 6: Sources
199
it until its termination. Besides these main sources, I have also drawn on the
analysis by Miguel Solanes, an economist and institutional expert from the United
Nations specialized in water issues, in 2006 under the title Efficiency, Equity,
and Liberalisation of Water Services in Buenos Aires, Argentina published by the
OECD in Liberalisation and Universal Access to Basic Services, as well as an
analysis from Professor Martin Bosman, a regulatory specialist at the University of
South Florida, entitled A Review of Privatization of Water and Sanitation: Systems:
The Case of Greater Buenos Aires in 2006 and the article Failures in water reform:
Lessons from the Buenos Aires concession by Ariel A. Casarin, Jos A. Delfino
and Mara Delfino in Utilities Policy 15 (2007).
5. Egypt
The early history of failed water sector reforms in Egypt has been compiled from
various sources, including a 1991 Basic Contract Completion Report of Boyle
Engineering Corporation and National Education Corporation for the Water and
Wastewater Institutional Support Project (WWISP), a 1995 World Bank Project
Completion Report on the Beheira Provincial Potable Water Supply Project and
a report by Adel Sharabas, NOPWASD, Chief of Central Department of Lower
Egypt Projects, written around 2000 and entitled Water and wastewater sector
reform: the Egyptian experience. More recent reform efforts through the creation
of the Holding Company and the regulatory agency are described by Edouard Perard
from the OECD Development Centre in the Working Paper No. 265 (2008) entitled
Private Sector Participation and Regulatory Reform in Water Supply: The Southern
Mediterranean Experience; by Ahmed Badr of the Delegation of the European
Union to Egypt in an undated presentation Water Sector Reform in Egypt; and
by a presentation of the Holding Company for Water and Wastewater at the 5th
Conference of the Forum of the Water Directors of the Euro-Mediterranean and
Southeastern European Countries, Athens, Greece, July 2122, 2008.
The situation of water supply in Egypt is summarized in a 2007 report by
the Egyptian National Water Research Center Actualizing the Right to Water:
An Egyptian Perspective for an Action Plan by Shaden Abdel-Gawad and by
the Human Rights Council Report of the independent expert on the issue of
human rights obligations related to access to safe drinking water and sanitation,
Catarina de Albuquerque Addendum Mission to Egypt of July 5, 2010. The figures
on subsidies in Egypt are from USAIDs Cost Recovery and Pricing Models
Policy Paper produced under the Water Policy and Regulatory Reform Project
in 2012. Performance indicators are taken from the 20122013 Annual Report
of the Egyptian Water Regulatory Authority. The box on Alexandria is based on
an interview with Nadia Abdou with Jeremy Josephs of WaterWorld in 2012, a
presentation by Nadia Abdou on AWC at the 4th World Water Forum in 2012,
and a 2005 report by USAID/ARD entitled Case Studies Of Bankable Water And
Sewerage Utilities.
200
Annex 6: Sources
6. Jordan
The analysis of the management contract in Amman is based on the World
Banks Implementation Completion Report for the Amman Water and Sanitation
Management Project of 2007 and on conversations with senior staff at the Water
Authority of Jordan and the Amman water company Miyahuna. The description of
the Disi Water Conveyance Project is based on the Wikipedia article of the same
name, to which I made major contributions, and the sources quoted in the article.
The description of the BOT in Samra is based on a press release by Suez-Morganti
dated August 23, 2008 and conversations with senior staff at the Water Authority of
Jordan and the Jordanian Ministry of Water and Irrigation.
Annex 6: Sources
201
available on the website of Green Wales. The subsequent evolution of Green Wales
is based on its Annual Reports and on an article in the Pinsent Masons Water
Yearbook 20092010 Glas Cymru (Dwr Cymru Welsh Water).
8. France
The early history of the French water sector is based largely on two publications
by the French researcher Christelle Pezon from the IRC International Water and
Sanitation Centre in The Hague. They are Why did the Compagnie Gnrale des
Eaux not die with the concession contract in the early twentieth century? The end
of concession contract to supply drinking water and the persistence of private water
companies in the water sector in France, 2009, and Le PPP pour dvelopper les
services deau potable: quelques leons de lexprience franaise pour les PED,
written with L. Breuil and published in Aymeric Blanc and Sarah Botton (Editors):
Services deau et secteur priv dans les pays en dveloppement. Perceptions
croises et dynamique des rflexions, Agence Francaise de Developpement, 2011.
It is complemented by information from the website of Veolia Water on its
history and, in the case of the Paris privatization under Chirac, by the researcher
Martin Pigeon who works for the NGO Corporate Europe Observatory in Une
eau publique pour Paris: Symbolism and Success in the Heartland of Private Water,
published in 2011 in Remunicipalisation: Putting Water Back into Public Hands,
a book by the Municipal Services Project. The Grenoble case study is recounted in
David Hall and Emanuele Lobina: Private to Public: International lessons of water
remunicipalisation in Grenoble, France, Public Services International Research
Unit (PSIRU), 2001, as well as in Water and Power: The French Connection in
the book The Water Barons published in 2003 by the International Consortium of
Investigative Journalists. The history and internal culture of Lyonnaise des Eaux are
analyzed by the sociologist Dominique Lorrain, formerly at the Centre National
de Recherches Scientifiques (CNRS), in The local-global firm: Lyonnaise des
Eaux, 19802004, Sociologie du Travail, 2007. Basic figures on the French water
sector are taken from the publication Public water supply and sanitation services
in France. Economic, social and environmental data, published in 2012 by the
Association of French private water companies FP2E and the consulting firm BIPE.
The story of remunicipalization in France is recounted by David Hall in
Re-municipalising municipal services in Europe (May 2012) and on the Remunicipalization tracker at remunicipalisation.org. The political context of the remunicipalization in Paris is described by Dominique Lorrain in Leau Paris, les
simulacres du politique (2014). The Marseille case is based on press articles,
including La chambre rgionale des comptes pointe des irrgularits dans les
marchs de leau Marseille in Libration of April 28, 2014, and the blog Veolia
remporte les lections municipales Marseille by Marc Laim of October 9, 2013.
The figures on the impact of the Loi Sapin are from a study by the Ministry of
Environment carried out by the consulting firm TNS Sofres in 2006, quoted in a
202
Annex 6: Sources
9. Germany
This chapter is based on an analysis of the Annual Reports of Mainova, the multiutility serving Frankfurt, and on reports in the newspaper Frankfurter Allgemeine
Zeitung about efforts to regulate water tariffs by the German Lnder. The section on
cross-border leasing is based mainly on the 2005 book Cross Border Leasing by
Werner Rgemer and on the article in the magazine Die Zeit, Fr dumm verkauft,
of April 2, 2009. Figures on the overall German water sector are from the booklet
Profile of the German Water Industry 2011 published by the German Energy
and Water Association BDEW. The comparison of water prices in Montabaur and
Wetzlar is based on a report by the TV magazine ZDFzoom on May 8, 2013.
10. Berlin
The privatization of Berlinwasser until 2008 is analyzed by Mark Oelmann and his
collaborators from the consultancy WIK in the detailed technical study Zehn Jahre
Wasserpartner Berlin Eine Bilanz der ffentlich-privaten Partnerschaft zwischen
dem Land Berlin, RWE Aqua und Veolia Wasser (2009). An earlier study commissioned by the European parliamentary group of the leftist party Die Linke from
the political scientist Alexis Passadakis, himself from the advocacy group Attac,
made a critical assessment of privatization in Die Berliner Wasserbetriebe: Von
Kommerzialisierung und Teilprivatisierung zu einem ffentlich-demokratischen
Wasserunternehmen (2006). Two other critical assessments are by Thomas Rudek
in Privatisierung der Wasserversorgung in Deutschland, Folgen & Konsequenzen exemplarisch dargestellt am Beispiel der Teilprivatisierung der Berliner
Wasserbetriebe (BWB) (ca. 2009) and Rainer Heinrich in Rckabwicklung
der Teilprivatisierung aufgrund der Ungltigkeit der Vertrge (2011), both from
the Berliner Wassertisch, a body that opposed water privatization. The estimates
of costs and benefits of remunicipalizing Berlinwasser are taken from a study
entitled Kosten und Nutzen der Rekommunalisierung der Berliner Wasserbetriebe
(2009) by Joachim Schwalbach, a professor of economics specialized in corporate
governance, published together with his collaborators Anja Schwerk and Daniel
Smuda for the Berlin Chamber of Industry and Commerce.
The evolution of Berlin water tariffs from 2006 to 2013 is taken from the website
of Berlinwasser. The story of the referendum and the eventual remunicipalization
of Berlinwasser is taken from the Wikipedia article Volksentscheid ber die Offen-
Annex 6: Sources
203
204
Annex 6: Sources
Annex 6: Sources
205
14. Uganda
The situation before the turnaround of NWSC and the turnaround itself until
2006 is described in many publications, including in Struggling State-Owned
Enterprises: NWSCs Turnaround in Uganda (November 2006), written jointly by
Silver Mugisha, the companys long-time chief economist and current CEO, and
Professor Sanford Berg from the University of Florida, and in William Muhairwes
book Making Public Enterprises Work: From Despair to Promise published in
2009. It was also reviewed by the development economists Yahya Jammal and
Leroy Jones from the Boston Institute for Developing Economies (BIDE) in Impact
of privatization in Africa: Uganda Water (October 2006); by Klaas Schwartz, an
Associate Professor of Urban Water Governance at the UNSECO-IHE Institute for
Water Education in The Hague in The New Public Management: The future for
reforms in the African water supply and sanitation sector?, published in 2008 in
Utilities Policy 16 (1): 4958; as well as in a series of Case Studies of Bankable
Water and Sewerage Utilities by the consulting firm ARD Inc. for USAID in 2005.
Much less has been written about the performance of NWSC after 2006. I have
compiled it from primary sources including NWSC Annual Reports; the NWSC
Corporate Plan 20092012 (including the review of its actual performance under
the previous plan); the Governments Water and Environment Sector Performance
Report 2013; the African Ministers Council on Waters Country Status Overview:
Water Supply and Sanitation in Uganda: Turning Finance into Services for
2015 and Beyond published in 2011; the 2010 report by Momentum Capital in
Association with AF Mpanga Advocates Reform of the Urban Water and Sanitation
Sub-sector Consultancy Services for the Review of the Performance Contracts
with Water and Sewerage Authorities and the Development of the Next Generation
Performance Contracts for the Ministry of Water and Environment and Deutsche
Gesellschaft fr Technische Zusammenarbeit (GTZ); and the JanMarch 2014 issue
of the NWSC Newsletter Water Herald. The critical reports on Muhairwe are
taken from the Ugandan press, in particular the article Behind the scenes at
Muhairwes exit in The Independent of November 22, 2011, Germany holds
billions to NWSC amid inquiry from the Daily Monitor on June 6, 2013, and
Who Are the Richest People in Uganda? in the Sunday Vision of April 9, 2007.
The chapter also benefited greatly from comments received by Richard Franceys,
Senior Lecturer Environmental Science and Technology Department at the University of Cranfield, and from Marine Colon, a researcher in public management at the
206
Annex 6: Sources
15. Cambodia
The account of the Phnom Penh Turnaround is based on an article by Ek Sonn
Chan, former General Manager of PPWSA, with Michel Vermersch and Patrick
Vaughan, who worked as consultants for the consulting firm Safege in Phnom
Penh, in the article Water supply in Phnom Penh: from devastation to sector
leadership published in Water Utility Management International in September
2012; a conversation with Michel Vermersch; an article by Asit Biswas and Cecilia
Tortajada from the Third World Water Center in Mexico-City entitled Water
Supply of Phnom Penh: An Example of Good Governance published in the
International Journal of Water Resources Development in June 2010; as well as
a publication by Binayak Das, Ek Sonn Chan, Chea Visoth, Ganesh Pangare, and
Robin Simpson Sharing the Reform Process. Learning from the Phnom Penh Water
Supply Authority (PPWSA) published by the International Union for Conservation
of Nature and Natural Resources (IUCN) in 2010. Useful comments were received
from Marine Colon, a researcher in public management at the Social, Economics,
and Management Sciences Department of AgroParisTech who has done primary
research about the turnaround of PPWSA. Further data and information have been
collected from the websites of PPWSA, the Asian Development Bank, the World
Bank, and the French Development Agency.
16. Conclusion
The 2005 study on the efficiency of publicly and privately managed utilities is by
Antonio Estache, Sergio Perelman, and Lourdes Trujillo and is entitled World Bank
Infrastructure Performance and Reform in Developing and Transition Economies:
Evidence from a Survey of Productivity Measures, published as World Bank Policy
Research Working Paper 3514 in February 2005. The 2009 study on the impact of
privatization on access to drinking water and sewerage is by George Clarke, Katrina
Kosec, and Scott Wallsten, entitled Has private participation in water and sewerage
improved coverage? Empirical evidence from Latin America, published in the
Journal of International Development. The 2005 study on household expenditures
for water in public and private systems in the USA is by Scott Wallsten and Katrina
Kosec, entitled Public or Private Drinking Water? The Effects of Ownership
and Benchmark Competition on U.S. Water System Regulatory Compliance and
Household Water Expenditures, published as a Brookings Institution Working
Paper.
Annex 6: Sources
207
Index
A
Abdou, 51
Abengoa, 21
Aboitiz, 137
Abu Dhabi, 68
Affiliated Companies, 5052
Affordability, 25, 140, 158
Affordable, 97, 98, 122, 128
AGS, 117
Aguas Argentinas, 3744
Aguas de Barcelona, 2729, 37, 91
Aguas de la Habana, 28, 29
Agua y Saneamientos Argentinos (AySA), 43
AIG, 100
Albuquerque, Catarina, 52, 116
Alexandria, 48, 51
Alfonsn, Raul, 31
Allianz, 108
Alsogaray, 39, 40
American Society of Civil Engineers, 122
American Water, 121, 124, 125
Amin, Idi, 143, 144, 148
Amman, 5558
Andean Development Corporation, 20
Anglian Water, 37, 137
Annett, Nigel, 75
Arbitration, 24
Area Performance Contracts, 149151
Argentina, 179
Asian Development Bank, 166
Asiut, 52
Asset holding company, 79
Atlanta, 124
Audit Office (France), 84
Auditor General (Uganda), 156
B
Ballance, Tony, 71
Banco de Galicia, 38
Banque Paribas, 20
Banzer, Hugo, 19
Barclays Capital, 76, 77
Barlow, Maude, 24
Barnier, Michel, 84, 115, 118, 119
Basin agencies, 87
Bavaria, 98
Bayonne, 125, 126
BDEW, 116
Bechtel, 2023, 137139
Belgium, 84
Ben, Carlos, 34, 43
Benpres, 137, 138
Berliner Bankgesellschaft, 108
Berliner Wasserbetriebe, 114
Berliner Wassertisch, 108, 109, 112
Berlinwasser Holding Company, 107
Bidding, 33, 37, 135138, 140
Binnie, Chris, 70
Biswas, Asit, 71
Blair, Tony, 67
Blanchard, Kenneth, 154
Bloomberg, Michael, 127
Blue Plains wastewater treatment plant, 129
Bolivia, 179
209
210
Bond(s), 76, 78, 79, 122, 129, 155
Bonus, 164
Bonuses, 149, 150, 162, 171
Bordeaux, 91, 94
Boston Institute for Developing
Economies, 159
Bottled water, 2, 130
Bowles, Sheldon, 154
Brandenburg, 98
Brazil, 179
Bribery, 92
Budapest, 91, 106
Build-Operate-Own (BOO) project, 70
Build-Operate-Transfer (BOT), 5, 56
Bulgaria, 115
Bundesrat, 116
Bundestag, 101
Burns, Lord, 77
Business plans, 150
Byatt, Ian, 70, 75, 76, 80
C
Cairo, 47, 48, 50
Cal-Am, 125
California, 125
Camus, Bertrand, 125
Canada, 68, 122
Carignon, Alain, 92
Cartel Office, 105, 110, 114
Casablanca, 87, 91
Cassagne, Juan Carlos, 41
Castro, Fidel, 27
Centers for Disease Control and
Prevention, 130
Chan, Ek Sonn, 161168
Chausson, Loic, 95
Chesapeake Bay, 129
China, 68, 91
Chirac, Jacques, 40, 42, 89
Chlorination, 52, 97
Chlorine, 118
Cholera, 33
Clean Water Act, 123
Clinton Global Initiative, 126
Coca Cola, 51
Collection efficiency, 147, 151, 155
Communists, 93, 95
Community development, 165
Community groups, 165
Compagnie Gnrale, 85, 8791
Compagnie Gnrale des Eaux, 37, 106
Competition, 64, 77, 80, 101, 102
Index
Complaints, 162
Concession, 5, 8, 11, 12, 1823,
3243, 8387, 89, 9193, 96, 121,
124126, 136
Directive, 115
fee, 103
Congress, 100, 123
Connection fees, 153, 165
Conservatives, 88, 92, 95
Constitutional Court (Berlin), 108110
Consumer Council for Water (England), 66
Contingent liability, 59
Contracting out, 147
Corporate culture, 150, 151, 154, 159
Corrupt, 161, 162, 165
Cost recovery, 48, 49, 53, 155
Court, 89, 92, 99, 100, 103, 125
Cox, Jonson, 69
Credit rating, 100, 122, 125, 127, 129
Crickhowell, Lord, 65
Cross-border-leases, 98100, 104
Cross-subsidies, 100
Customer service, 148, 154
Customer surveys, 97, 139, 148
Czech Republic, 115
D
DC Water, 128130
Decentralization, 4950, 144
Delano, Bertrand, 93
Democrats, 123
DEP (Department of Environmental
Protection), 128, 131, 181
De Silguy, Thibault, 42
Disi, 57, 58
Drinking Water Inspectorate (England), 66
Drinking water quality, 181
Dry zones, 156
Dumfries House, 80
Dumol, Mark, 135
E
East Asian crisis, 138
Eau de Paris, 8487, 89, 9195
Economic crisis, 41, 43
Edison, 21
Efficiency, 162
Egyptian Water Regulatory Agency, 50
Employees, 3234, 38
EnBW, 119
England, 63, 64, 71, 7377, 7981
Index
Enron, 108
Entebbe, 144
Ente Tripartito de Obras y Servicios Sanitarios
(ETOSS), 35, 40, 42
Environment Agency (England), 66
Ernst & Young, 153
Estonia, 115
ETOSS. See Ente Tripartito de Obras y
Servicios Sanitarios (ETOSS)
Eurawasser, 108
European Citizens Initiative, 115
European Commission, 12, 115
European Innovation Partnership for
Water, 118
European Investment Bank, 58
European Parliament, 112, 115, 119
Evers, Hans-Jrgen, 101
F
Federal Environmental Office, 101
Felton, 124
Fernandez, Omar, 23, 24
Financial crisis, 155
Finkelnburg, Klaus, 108110
Flat hierarchies, 151
Fletcher, Philip, 77
Foreign aid, 8, 161, 168, 170
Fort Portal, 150
France, 48, 163, 168
France Liberts, 92
Franceys, Richard, 150
Frankfurt, 101, 103
French Development Agency, 58
G
GAMA, 58
Gauff, H.P., 145, 147, 149, 151
General Electric, 58, 151
German Association of Cities, 119
Germany, 48, 51
Global Water Intelligence, 126, 157
Global Water Summit, 157
Golden handshakes, 106
Golden share, 67
Grant financing, 8
Grassley, Chuck, 100
Green dowry, 66
Greens, 93, 95, 108
Green Wales, 63, 64, 69, 71, 7479
Grenoble, 84, 89, 90, 92
Groundwater abstraction fee, 112, 114
211
H
Hall, David, 66
Hamburg Wasser, 98, 101
Harvard, 151
Hawkins, George, 130
Hesse, 102
Holding Company, 50, 51
Hong Kong, 68
Human right to water and sanitation, 44, 52,
116, 141, 179, 183
Hungary, 115
Hyder, 7578
Hydraulic zones, 164
I
ICSID. See International Center for the
Settlement of Investment Disputes
(ICSID)
IFC. See International Finance Corporation
(IFC)
Ile-de France, 84
Illegal connections, 161, 162
Incentive payments, 162
Inflation, 19, 31, 34, 43, 69, 71, 74, 79, 153
INRA (French Research Institute), 96
Inspector General of Government
(Uganda), 157
Inter-American Development Bank, 17, 25
Internally Delegated Area Management
Contracts, 149
International Center for the Settlement of
Investment Disputes (ICSID), 24, 44
International Finance Corporation (IFC), 9, 11,
3739, 136138, 181
International Institute for Environment and
Development, 3941
International Monetary Fund (IMF), 2, 11, 41
International Water Limited, 20, 21,
137, 139
Investor-owned utilities, 121, 122, 124
Ireland, 115
Ivory Coast, 87
J
Jakarta, 91
Japan, 104, 163
Jinja, 144
Johnson, Ellen, 157
Johnson, Jerry, 129
Johnson, Spencer, 154
Jones, Chris, 75
212
K
Kampala, 143145, 147, 149152, 155, 156
Karlsruhe, 119
Kasese, 150
Kinnersley, David, 65
Kohlberg Kravis Roberts, 125
Kulmbach, 100
L
Labor productivity, 7273, 113
Landeswasserversorgung, 100
La Paz, 1720, 22, 25
Lawson, Nigel, 64
Lead, 93, 128, 129
Leakage, 66, 67, 69, 71, 73, 74, 79, 81, 85,
94, 113
Lease, 5, 6, 8385, 87, 89, 93, 96
Leroy, Nathalie, 98
Le Strat, Anne, 93
Lingeri, 34
Local capital market, 156
Lord Burns, 76
Lorrain, Dominique, 91
Lyon, 85, 86
Lyonnaise, 85, 8892
Lyonnaise des Eaux, 89, 90, 137
M
Mainova, 101, 103
Malaysia, 68
Management contract, 55, 56, 145, 150152
Manhattan, 126
Manila Water, 137140
Mannesmann Arcor, 108
Marseille, 95
Martinon, 28
Master Plan, 163
Mathias, Glyn, 78
Maynilad, 137139
Mbale, 144
McKinsey, 128
Meller, Sergio, 38
Menem, Carlos, 3133, 3840
Merkel, Angela, 119
Merrill Lynch, 108
Mestrallet, Grard, 91, 124
Meter readers, 162
Metro Pacific Corporation, 137
Metropolitan Water Board, 64
Misicuni Dam, 18
Mitterrand, Danielle, 92
Index
Mitterrand, Franois, 88
Miyahuna, 56
Monitor (German TV Magazine), 117119
Monod, J., 38, 40, 88, 91, 92
Montabaur, 103
Morales, Evo, 24
Morocco, 85, 87
Morsi, 51
Motivation, 21, 47, 148, 151152, 159, 163
Mubarak, 51
Mugisha, Silver, 157
Muhairwe, William, 143145, 147152,
154157, 159
Municipal associations, 83, 84
Municipal bonds, 123, 124
Municipalization, 64
Museveni, Yoweri, 144
N
Nader, Ralph, 24
Napoleon III, 85
National Water and Sewer Company (NWSC),
143159, 169
Natural monopoly(ies), 66, 121
Netherlands, 21, 24, 84, 104, 117
New Jersey, 125
New York City, 126128
Nitrate, 39, 43
Nolan Principles, 76
Non-governmental organizations (NGOs), 8
Non-revenue water, 53, 55, 138140, 151, 152,
155, 164, 172
Northern Ireland, 63, 73
North West Water, 32, 38
O
Obote, Milton, 143, 148
Obras Sanitarias de la Nacin (OSN), 3234,
37
Official development assistance, 8
Ofwat, 6669, 71, 7577, 79, 80
Olivera, Oscar, 23, 24, 26
Ondeo, 150152
Onek, Hilary, 144, 145
ONEMA (French water regulator), 85
Opinion polls, 33
Orthophosphate, 130
Oudin-Santini Law, 85
Overseas Private Investment Corporation, 58
Overstaffing, 106, 113, 136
Owen, David Lloyd, 58
Index
P
Pacos de Ferreira, 117
Pension funds, 19, 68
Performance-based technical assistance,
121, 128
Performance benchmarking, 101
Performance contract, 149, 150, 152,
154, 155
Performance indicators, 152, 157
Performance monitoring, 154
Peronist, 31
Phnom Penh Water Supply Authority
(PPWSA), 163169, 173
Poland, 115
Portugal, 117
Poverty, 165
PPWSA. See Phnom Penh Water Supply
Authority (PPWSA)
Prescott, John, 67
Private equity firm, 125
Proparco, 58
Public Sector International Research Unit
(PSIRU), 66, 166
Public Utilities Commissions (United
States), 123
Q
Quality of drinking water. See Water quality
R
Ramon Magsaysay Award, 166
Ramos, 135
Referendum, 105, 110
Regional Water Authorities, 6365
Regulatory agency, 35, 40, 41, 50, 66, 80, 81,
85, 97, 102, 157
Remunicipalization, 12, 9295
Republicans, 123
Republic of Ireland, 63
Return on capital, 155
Return on investment, 167
Reyes Villa, Manfred, 19
Ridley, Nicholas, 65
Roesler, Philip, 116
Romania, 115
Rostock, 91
Rudek, Thomas, 110
Rgemer, Werner, 100
RWE, 67, 106, 108110, 112,
124, 125
213
S
Salvation Army, 129
Samra, 56, 57, 59
Sapin, Michel, 84, 90
SAUR, 83
Scandinavia, 104
Schwartz, Klaas, 159
Scotland, 63, 67, 71, 73, 7981
Self-financing, 8
SEMAPA, 18, 21, 2426
Sen, Hun, 162
Severance payments, 106, 147, 183
Severn Trent, 71, 79
Sewerage, 167, 172
Shareholder democracy, 64, 65
Shultz, Jim, 18, 20, 26
Simon, Henri, 85
Simon, Jrg, 114
Slater, Robert, 151
Slums, 32, 36, 42, 165
Socialists, 88, 90, 95
Soldati, Santiago, 38, 40
Spanish International Cooperation
Agency, 28
Stadtwerke, 117, 119
Staff morale, 148
State Revolving Funds, 123
Stock exchange, 6769, 75, 76, 78, 122,
125, 167
Stockholm Industry Water Award, 166
Stockholm Water Prize, 71
Stock market, 5
Strategic investor, 106
Strathclyde water referendum, 80
Subsidies, 7, 49, 52, 88, 94, 106, 123
Suez Environnement, 6, 18, 20, 27, 55, 67,
8385, 87, 90, 91, 94, 95, 118, 122,
124, 141, 152
Surveys, 139, 148
Switzerland, 99, 104
T
Tariff structure, 163
Tax(es), 42, 67, 68, 71, 90, 9699, 101,
123, 124
Tax haven, 99
Technical assistance, 170
Technical assistance contracts, 5, 12
Thalia, 136, 137
Thames Tideway Tunnel, 6970
Thames Water, 32, 38, 67, 70, 73, 124
214
Thatcher, Margaret, 6365, 75
Toulouse, 94
Transparency, 84, 90, 109, 114
Trenchless pipe replacement, 102
Turnarounds, 143, 145, 154, 158, 161,
165167, 169
U
Ude, 119
Union(s), 34, 43, 136, 150
United Nations, 2
United States, 48, 179
United Utilities, 20, 137139
United Water, 121, 124, 125
University of Barcelona, 117
V
Value added tax, 107
Veolia Environnement, 6, 56, 67, 79, 83, 84,
90, 95, 124, 128
Vigilar, Gregorio, 135
Vivendi, 106, 108110
VKU (German utility
association), 116
Index
W
Wagenknecht, S., 112
Wales, 79, 81
Wastewater, 35, 39, 40, 43, 47, 49, 50, 53,
5558, 64, 66, 69, 70, 7274, 87, 88, 95,
98, 105, 106, 112, 120, 121, 123127,
129, 192, 199, 200, 204
Water Agency Seine-Normandie, 9394
WaterAid, 8
Water Industry Commission for Scotland, 80
Water Leaders Group, 157
Water.org, 8
Water quality, 1, 32, 35, 52, 86, 93, 95, 101,
122, 127, 130, 148
Water Quality Act, 123
Welch, Jack, 151
Wetzlar, 103
WIK (German Consulting Firm), 112114
Wolf, Harald, 109, 110
Work culture, 148
World Bank, 2, 4, 8, 9, 11, 1720, 24, 4850,
53, 55, 145, 147, 151, 153, 155,
159, 179
World Water Council, 95
Worldwide Fund for Nature, 118
WPD (US Power Utility), 76, 77