Water Politics and Money

Manuel Schiffler
Water, Politics
and Money
A Reality Check on Privatization
Water, Politics and Money
e_eslava@hotmail.com
Manuel Schiffler
Water, Politics and Money

A Reality Check on Privatization
123
Manuel Schiffler
KfW
Frankfurt am Main, Germany
ISBN 978-3-319-16690-2
DOI 10.1007/978-3-319-16691-9
ISBN 978-3-319-16691-9 (eBook)
Library of Congress Control Number: 2015936038

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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 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Part I
2
1
1
2
3
4
6
6
7
7
8
9
9
10
11
Latin America: Two Aborted Privatizations and One

That Endured
Bolivia: The Cochabamba Water War and Its Aftermath . . . . . . . . . . . . .

Before the Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Ambitious Targets, High Returns and High Risks . . .. . . . . . . . . . . . . . . . . . . .
A First Failed Attempt: The World Bank
and the Government Disagree . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Second Attempt: Enter Bechtel . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Increased Tariffs, Disputed Figures . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Leasing the Rain? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Water War .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
17
17
18
19
20
21
21
22
23
xi
xii
Contents
After the Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

The Heroes of the Water War . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
International Arbitration: Bechtel Claims Compensation,
Then Withdraws .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Cochabamba Revisited: A Sad End . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
24
25
26
Cuba: Water Privatization in a Socialist Country . .. . . . . . . . . . . . . . . . . . . .

Poor Service .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Enter the Tourists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Havana Goes Private .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Loans and Quasi-free Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
27
27
28
28
28
29
Argentina: A Flagship Privatization and Its Demise . . . . . . . . . . . . . . . . . . .

Before the Concession .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Preparing the Political Ground . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Dressing Up the Bride . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Ambitious Targets .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
How to Regulate a Private Water Company? . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Forgotten Poor .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Fog of Bidding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
May the Lowest Offer Win . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The First Half of the Concession Period .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Corruption Argentinian-Style: The Alsogaray Saga .. . . . . . . . . . . . . . . . . . . .
The First Renegotiation: Higher Tariffs, More Investment.. . . . . . . . . . . . .
The Second Renegotiation: Cancelled Fines, Less Investment . . . . . . . . .
The Economic Crisis and the Second Half of the Concession Period .. . . .
Serving the Poor, At Last . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
More Renegotiations Fail to Save the Concession .. .. . . . . . . . . . . . . . . . . . . .
Impact Falls Short of Targets .. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
After the Concession.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Return to Public Management: A Drain on the State Budget . . . . . . . . . . .
Legal Aftermath .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
31
32
33
34
35
35
36
36
37
38
39
39
40
41
41
42
42
43
43
44
44
Part II
5
24
24
The Middle East: Reform Deadlock,

with an Exception
Egypt: Kafka on the Nile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Dismal Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Decades of Tug of War over Reforms.. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Privatization Stuck in the Mills of Bureaucracy . . . . .. . . . . . . . . . . . . . . . . . . .
A Kafkaesque Turn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Arab Spring, Arab Fall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
47
47
48
49
50
51
Contents
Impact: Disappointing Results . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
52
53
Jordan: Private Plants, Public Utilities . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

The Amman Management Contract .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Build-Operate-Transfer (BOT) Contracts: Concessions for
Single New Plants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Samra Wastewater Treatment Plant: A Smart Mix
of Public and Private Funds.. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Disi-Amman Conveyor: 10 Years in the Making . . . . . . . . . . . . . . . . . . .
BOT Contracts: The Most Common and the Least Known
Form of Water Privatization .. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion: Benefits and Risks for Governments and Taxpayers . . . . . . . . .
55
55
Part III
7
xiii
56
56
57
58
59
Europe and North America: Private and Public

Utilities Compared
The United Kingdom: A Natural Experiment Between

Private and Public Management .. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Sick Man of Europe and Public Water . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Pondering Alternatives for Reform . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Regulation of Private Water Companies . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Green Dowry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Shareholder Democracy .. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
New Labor Turns Against the Private Companies .. .. . . . . . . . . . . . . . . . . . . .
Institutional Investors Take Over .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Over Their Head in Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Track Record of Regulation . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Private Water Calls for Government Help: The Thames
Tideway Tunnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Impact of Privatization in England .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Higher Bills and Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Increased Investment .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Improved Quality of Service.. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Reduced Pollution .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Loss of Employment and Increased Labor Productivity . . . . . . . . . . . . . . . .
Leakage Goes First Up, Then Down . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Operating Costs Reduced .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Welsh Water: A New Model Emerges . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Cowboy Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Revolution from the Managers.. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Revenue-Making Not-for-Profit Company Built
on Ethical Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
63
63
64
65
65
66
66
67
67
67
68
68
69
71
71
72
72
72
72
73
74
75
75
75
76
xiv
Contents
A First Transformation Attempt Foiled by the Regulator . . . . . . . . . . . . . . .

A Chance Event Creates a New Opportunity . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Support from the New Regulator . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Green Wales and Welsh Water Model .. . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Performance Improvements . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Welsh Water and English Water Companies Compared .. . . . . . . . . . . . . . . .
The Scottish Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
8
France: An Improved Partnership in the Motherland

of Multinational Water Companies . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Fragmented Local Government . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Improved Governance, Step by Step . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The History of French Water Sector . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Emergence of Private Water Companies in the
Mid-Nineteenth Century .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Demise of Water Concessions in the Late Nineteenth Century . . . .
The Post-war Comeback of the Private Sector .. . . . . .. . . . . . . . . . . . . . . . . . . .
Nationalization Averted .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Too Cozy Relationship with Politicians . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Paris Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Rip-Off in Grenoble .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A New Law Chastises Private Water Companies .. . .. . . . . . . . . . . . . . . . . . . .
International Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Remunicipalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Grenoble Remunicipalizes After Corruption Was Exposed .. . . . . . . . . . . .
Paris Remunicipalizes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Eau de Paris: Underinvestment at the Expense of Future
Generations?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Remunicipalization in Other French Cities . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Marseille: More Competition Instead of Remunicipalization .. . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Germany: Healthy Municipal Utilities, but with a Quirk . . . . . . . . . . . . . .
Tariffs and Affordability .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Cross-Border-Leases: Selling German Sewers to Help
Americans Save Taxes .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Is the German Water Business Profitable to Its Municipal Owners? . . . . . .
Competition in Water Supply? . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Performance Benchmarking .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Regulators Push Water Prices Down .. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Utilities Fight Back in Their Own Way . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
76
77
77
78
78
79
79
81
83
83
84
85
85
86
87
88
88
88
89
90
90
92
92
92
93
94
95
95
97
98
98
100
101
101
102
103
104
Contents
xv
10 Berlin: Privatized to Fill State Coffers, Remunicipalized

at the States Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Fiscal Motives .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Privatization Design: Institutional Acrobatics . . . . . . .. . . . . . . . . . . . . . . . . . . .
Selection of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
More Acrobatics.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Private Management and Rising Opposition . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Citizens Rise Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Cartel Office Joins the Fray .. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Remunicipalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Impact of Privatization.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Tariffs Increase, but Mostly Before Privatization .. . .. . . . . . . . . . . . . . . . . . . .
Who Gained More: The State or the Investors? . . . . .. . . . . . . . . . . . . . . . . . . .
Higher Productivity, Conflicting Figures on Operating Costs . . . . . . . . . .
Transparency and Management Improved . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
105
105
106
107
108
108
109
109
110
110
111
111
112
113
113
114
11 Civil Society and the EU Concession Directive: David

Beats Goliath, Using a Few Tricks . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
What Is the Concession Directive and Why Was It Introduced? . . . . . . . . . .
Opposition from Germany .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The European Citizens Initiative Right2Water . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A TV Documentary Stirs Up Public Sentiment . . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Public Relations Disaster for the European Commission . . . . . . . . . . . . . . .
A Powerful Mixture of Fear and Brussels-Bashing . . . .. . . . . . . . . . . . . . . . . . . .
Water Is Taken Out of the Concession Directive . . . . . . .. . . . . . . . . . . . . . . . . . . .
A Modified Directive Is Passed . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
115
115
116
116
117
118
118
119
119
120
12 The United States: Public Water in a Capitalist Country .. . . . . . . . . . . . .

Infrastructure Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Reluctance to Increase Tariffs .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Friends and Foes of Federal Financing . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Water Privatization Wave Hits the United States . .. . . . . . . . . . . . . . . . . . . .
Enter the Foreign Companies .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Privatization Fatigue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Private Equity Firms to the Rescue? . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Private Companies Serving Public Utilities . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
New York City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
44 Years to Build a Tunnel.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Keeping the Money from the Hands of the Politicians . . . . . . . . . . . . . . . . . .
The Federal Government Orders More Investments.. . . . . . . . . . . . . . . . . . . .
DC Water: A Public Utility Turnaround . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
121
122
122
123
123
124
124
125
126
126
126
127
127
128
130
xvi
Part IV
Contents
Asia and Africa: Three Successful Utility

Turnarounds, Public and Private
13 The Philippines: A Delayed Privatization Success Story in Manila .. .

Making the Concession Attractive . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Splitting the Service Area in Two Halves . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Bidding War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Private Management: A Tale of Two Concessions . . . . .. . . . . . . . . . . . . . . . . . . .
Impact: Increased Access, Improved Efficiency and Customer
Satisfaction .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Tariffs Go Down and Up, but Remain Affordable .. .. . . . . . . . . . . . . . . . . . . .
Did the Winning Companies Submit Dive Bids? .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
135
135
136
136
137
138
139
140
140
141
14 Uganda: A Public Utility Turnaround, Triggered

by Pressure to Privatize .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Before the Turnaround .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Heritage of Idi Amin and Milton Obote.. . . . . . . .. . . . . . . . . . . . . . . . . . . .
National Water and Sewer Company (NWSC) in the 1990s:
A Basket Case? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The World Bank Pushes for Privatization .. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Making Customers Pay Their Bills. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Cutting the Number of Employees by Half . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Changing the Corporate Culture and Focusing on Customers . . . . . . . . . .
Performance Contracts Between the Government and NWSC . . . . . . . . .
Creating a New Corporate Culture . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
An Alternative to Privatization . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Increasing the Customer Base . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Reaping the Rewards.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
After the Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Management Fads Galore .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Stagnating Performance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Government Provides Debt Relief. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Doubts on the Accuracy of Figures . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Muhairwes Exit.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
After Muhairwe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Impact . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Are Water Bills Still Affordable?.. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
144
145
145
147
147
148
149
150
151
153
154
154
154
155
155
156
157
157
158
158
159
15 Cambodia: A Public Utility Turnaround, Ending with Privatization.

Before the Turnaround .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Laying the Foundations of Success by Gaining Trust .. . . . . . . . . . . . . . . . . .
161
161
162
162
143
143
143
Contents
xvii
Creation of an Autonomous Utility . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Increasing Tariffs, Especially for High-Volume Users . . . . . . . . . . . . . . . . . .
Expanding the Network the Right Way . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Impact: Spectacular Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
After the Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
From Obscurity to Fame .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Privatization Through the Stock Exchange . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
163
163
163
164
166
166
166
167
16 Utility Turnarounds Compared: The Importance

of Corporate Culture and Financing . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Differences in Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Performance Compared .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Similarities in Changes of Corporate Culture. . . . . . . .. . . . . . . . . . . . . . . . . . . .
Differences in the Sequence of Reforms .. . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Efficiency Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Salary Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Overall Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Fiscal Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Affordability .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
169
169
170
171
171
172
172
173
174
174
175
Part V
Conclusions
17 Conclusion: It Is Not About Public or Private . . . . . .. . . . . . . . . . . . . . . . . . . .

What Has Changed over the Last 25 Years? .. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
The Impact of Privatization and Remunicipalization . .. . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
179
179
180
183
Annex 1: Management Modes, Subsidies, Water Use, Bills,

and Affordability in Selected Cities . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 185
Annex 2: Nonrevenue Water in Selected Cities According
to Different Indicators .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 187
Annex 3: Overview of Privatizations, Public Turnarounds,
and Remunicipalizations in This Book . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 189
Annex 4: Chronology of Key Events Covered in the Book . . . . . . . . . . . . . . . . . . 191
Annex 5: Glossary of Technical Terms. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 193
Annex 6: Sources .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
1. Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
2. Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
3. Cuba .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
197
197
197
198
xviii
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
198
199
200
200
201
202
202
203
203
204
205
206
206
Index . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 209
About the Author
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.
The Tragedy of Utilities in Developing and Emerging

Countries
About 90 % of water and sanitation utilities in the world are publicly owned
and managed. Unfortunately, in developing and emerging countries, many of
these utilities are run by purely political appointees. Their employees are often
unmotivated, poorly trained, incompetent, and sometimes also corrupt. They may
be led by men and they are mostly men who lack vision, who may not be
interested in improving how the utility performs, who communicate poorly and
M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_1
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 Water Privatization Wave of the 1990s

In the late 1990s, a wave of privatization swept through the world, starting in
England in 1989 and then moving to Latin America, parts of Asia and to a lesser
extent Africa. These privatizations were based on the assertion that the private
sector would be more efficient, more customer-oriented and better able to raise
financing than the fledgling public sector.
The Water Privatization Wave of the 1990s
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.
The Many Faces of Privately Managed Services

In order to better understand water privatization, one has to look at its many
faces. Most water privatizations actually keep the ownership of assets in public
hands, while allowing the private sector to run the utility and to finance investments.
They may be better described as private sector participation or public-private
The Many Faces of Privately Managed Services
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
privatization, separate from the utility as a whole, is now an increasingly common

form of water privatization for newly built plants around the world. Like lease
and management contracts, BOTs can be profitable despite low water tariffs. Two
examples of BOT contracts from Jordan are covered in this book.
The Extent of Water Privatization and Private Financing:

Misleading Numbers
According to the Pinsent Masons Water Yearbook, a publication that tracks the
participation of the private sector in water supply and sanitation globally, 909
million people in 62 countries, or 13 % of the world population, are served by a
water or sewer system where services are provided in one way or another by private
companies. This figure has more than doubled over the past 10 years. According to
the estimate, it now includes 309 million people in China, 61 million in the United
States, 60 million in Brazil, the entire population of England (53 million), 46 million
in France, 23 million in Spain, 15 million in India and 14 million in Russia. Many
of the private water companies are predominantly active in their home markets,
such as the Chinese, American, Brazilian and English water companies. By far,
the two largest internationally active private water companies are French: Veolia
Environnement, serving 125 million people, and Suez Environnement, serving 124
million people. However, the above numbers overstate the importance of private
water companies. For example, many Chinese companies that provide water and
sanitation services are state-owned enterprises that have only a minority of their
shares listed on the stock exchange. Often, they only manage a single plant in a
city, and not the entire utility. Likewise, out of the 61 million people in the United
States that are shown to be served by private companies, more than half are actually
served by publicly owned and managed utilities that have contracted out only one
type of service to a private company. And most of the 60 million people in Brazil
included in the above figures are actually served by mixed public-private water
companies that are listed on the stock exchange, but whose shares are majorityheld by Brazilian states. The number of people around the globe who are billed by a
majority privately-owned utility that provides all water and sewer services, thus, is
probably less than half the above-quoted figure of 909 million.
Investment Financing in Water Supply and Sanitation

Large investments are necessary in water supply, both to expand service and to
replace assets. Unfortunately, there are no reliable global figures on investments
and financing in water supply and sanitation. This is why I made my own estimates
based on national figures from the countries covered in this book, as well as China,
Investment Financing in Water Supply and Sanitation
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.
Developed Countries: Investment Financing Through Revenues

and Debt
About 200 billion dollars are needed in developed countries, as opposed to 150
billion of actual investments. Self-financing directly from tariff revenues is a
major source of financing. Some cities make self-financing more difficult through
the requirement imposed by public owners on utilities to pay out profits to the
government. Most public owners, however, do not require dividend payments on
the capital they invested in their utilities. Next to self-financing, bonds and loans
are major vehicles for investment financing in developed countries. For example,
Scottish Water borrows from the state; Welsh Water issues corporate bonds in the
capital market; and German utilities rely mainly on bank loans. In the United States,
many utilities finance their investments through bonds issued by State Revolving
Funds, a mechanism that blends funding from federal grants with funding from
bonds issued in the capital market. While there are still some investment grants for
water supply and sanitation in some developed countries, their share today is low.
Equity capital from private investors also plays only a limited role in most developed
countries.
Developing and Emerging Countries: Investment Financing

Through Grants and Debt
Out of the global investment need for water and sanitation, at least 100 billion dollars
are needed in the developing world, while only about 50 billion dollars are estimated
actually to be invested there. Of the 50 billion dollars that are invested today in
developing countries in water supply and sanitation, almost 80 % are financed
domestically and only about 20 % internationally. Private sources finance only a
small fraction of these investments.
Domestic financing for water supply and sanitation in developing countries
comes mainly from three sources: Grants and loans, as well as some limited
self-financing by utilities. Equity capital and bonds only play a limited role. Selffinancing is limited to a few developing countries with relatively high water tariffs
and efficient utilities. Countries with loss-making utilities exclusively or predominantly provide them with grants. In Egypt, the government provides subsidies for
water supply and sanitation to the tune of two billion dollars per year. This relatively
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.
Foreign Aid: An Overestimated Source of Financing

Only about 20 % of investments in water and sanitation in developing countries
are financed through some form of foreign aid, or as it is formally called, official
development assistance. Grants by non-governmental organizations (NGOs) that
raise funds through donations account for only a small share of foreign aid:
WaterAid, the worlds largest NGO dedicated solely to water supply and sanitation,
was able to raise 65.6 million pounds (105 million dollars) in the UK in 20122013.
Water.org, the U.S. NGO supported by actor Matt Damon, raised only 12 million
dollars in 2013. All NGOs together probably raise a few hundred million dollars for
water supply and sanitation. They thus provide less than 1 % of the 50 billion of
investment for water supply and sanitation in developing countries.
Government agencies such as USAID or UKAID and their counterparts in other
rich countries provide larger grants to governments in developing countries. These
total four billion dollars per year for water supply and sanitation. Some foreign aid
agencies have shifted some of their support from grants to subsidized loans. This
allows them to provide larger amounts of funding, because they raise all their funds
in the capital market and use grants to subsidize interest rates, or as collateral to
secure a good credit rating. Such loans from the World Bank, regional development
banks such as the Asian Development Bank, as well as aid agencies from Germany,
Japan and France, totaled six billion dollars per year for water supply and sanitation
in 2012.
Utility Turnarounds: How to Assess Their Success
Governments of developing countries have different policies for passing foreign

loans on to public utilities: For example, Egypt passes them on as grants in order
to keep water tariffs low. Uganda used to pass them on as loans, but then converted
them to grants, and subsequently passes the proceeds of new loans on as grants, also
in order to keep tariffs low. Some countries, such as Jordan, pass them on as loans,
but without increasing tariffs and making utilities more efficient, so that the loans
may have to be converted into grants in the future. None of them seems to have found
a good way to deal with this question. Only a few countries, such as Cambodia,
pass the government loans on as loans, while making utilities more efficient and
performing so that they are able to service the debt and maintain affordable tariffs.
Private Financing: Making Sense of the Figures

The extent of private financing for water supply and sanitation is sometimes
overestimated. According to the World Banks database for Private Participation in
Infrastructure, annual new investment commitments by private companies in water
and sanitation in developing countries are in the order of three billion dollars per
year. This corresponds to only 6 % of total investment financing in water and
sanitation in developing countries. But even this figure is exaggerated. Not all
investment commitments actually materialize, as many concession contracts are
terminated before their contractual end date. And of those that do materialize,
little is financed through equity contributions by private companies. Most private
investments are financed by loans that come from international institutions such as
the IFC and other banks. And a good chunk of investments are financed directly
from ratepayers over the duration of the contract, as was the case, for example, with
the concessions in Buenos Aires and Manila. The actual private investment in water
supply and sanitation in developing countries may well be less than one half of the
three billion dollars per year of investment commitments, split between foreign and
domestic private investment.2
Utility Turnarounds: How to Assess Their Success

Turning around a water utility means that it is transformed from a utility that
performs poorly to one that performs satisfactorily. Such a turnaround can be
achieved in many different ways: through privatization, through remunicipalization,
or by making a publicly managed utility work better. To assess whether a turnaround
was successful or not I ask six questions:
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.
How to Avoid Comparing Apples with Oranges

In every analysis, there is a risk of comparing apples with oranges. For example,
a World Bank publication estimated that water public-private partnership projects
have provided access to piped water for more than 24 million people in developing
countries between 1990 and 2007. This gives quite a positive impression. What
is missing here is context. Actually 1.23 billion people 50 times more! gained
access to piped water in developing countries during this period. Only 2 % of the
increase in access was achieved under private management, with some of it being
financed by public funds and tariff revenues. Ninety-eight percent of the increase in
access was financed by states and public utilities. What the World Bank publication
omitted is what scientists call the counterfactual, the scenario that would have
unfolded without privatization.
In this book, changes that occurred in one setting are compared, whenever
possible, to changes that occurred under similar circumstances, but without the
Chapter Overview
11
event whose impact is assessed, be it privatization, remunicipalization, or sector

reform. For example, the UK chapter compares the changes that occurred after
privatization in England with changes that occurred during the same period in
Scotland where water utilities remained in public hands. The tariff increases in
Berlin before and after privatization of the citys water and sewer utility are
compared with tariff increases in the rest of Germany. The increase of access in
the Buenos Aires concession is compared to the increase of access during the same
period in Argentinian cities where utilities remained in public hands, and so on.
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
Latin America: Two Aborted

Privatizations and One That Endured
Chapter 2
Bolivia: The Cochabamba Water War

and Its Aftermath
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.
Before the Privatization

Cochabamba is a city of about one million people nestled in a valley of the Andes
at more than 2,500 m above sea level. Historically, the citys water supply depended
on small rivers captured in reservoirs close to the city. However, these water sources
soon became insufficient for the growing city. Substantial investments had been
made in Bolivias drinking water supply during the 1970s and 1980s with the
support of the Inter-American Development Bank and the World Bank. They worked
with a cooperatively owned water company in Santa Cruz, a city in the Bolivian
lowlands, as well as with public utilities in the capital La Paz and in Cochabamba.
17
18
2 Bolivia: The Cochabamba Water War and Its Aftermath
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.
Ambitious Targets, High Returns and High Risks

The Cochabamba concession was much smaller than the big concessions in Buenos
Aires and Southeast Asia awarded a few years earlier: Investment requirements
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.
A First Failed Attempt: The World Bank and the Government

Disagree
Initially, in unison with the World Bank, the Bolivian government had wanted to
privatize the water supply of Cochabamba much earlier when the concession for La
Paz had been bid out in 1996. But the World Bank disagreed with many Bolivian
politicians on a crucial point: It was against the Misicuni Dam. It said the project was
too expensive and would take too long to build. Instead, the World Bank suggested
bringing water in from Lake Corani, arguing that this option would be faster and
less expensive. A first version of the concession contract included a project for bulk
water supply from Lake Corani, just as the World Bank wanted it. But the mayor
of Cochabamba, Manfred Reyes Villa, an influential member of the ruling coalition
government, and others tried to prevent the concession from going forward, amid
claims that local and international construction interests connected with Misicuni
were involved. Unable to challenge the World Bank directly, Reyes used a legal
ruse: He challenged the legality of transforming the municipal water department of
Cochabamba into a state corporation. The Supreme Court ruled in favor of the mayor
and cancelled the first bid in May 1997. The World Bank had been outsmarted by a
local politician.
In late 1997, Hugo Banzer, a general and former military dictator, was elected
President of Bolivia. Banzer had previously promised the citizens of Cochabamba
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 Second Attempt: Enter Bechtel

The concession still did not look very attractive. In Buenos Aires and Manila, the
IFC had supported the concessions. In Cochabamba, bidders knew that the World
Bank had withdrawn its support, so the project looked suspicious. The inclusion of
Misicuni made it necessary to increase tariffs much more than would already have
been the case without the project. There was an attempt to increase water tariffs
before the concession was awarded to soften the blow. But the tariff increase had
to be approved by the national regulatory agency and got delayed. The political
situation in the country amid a campaign to eradicate Coca planting was tense. Still,
the government and its adviser, Banque Paribas, moved ahead with the tender.
Not a single bid was submitted for the concession. The usual bidders for large
water concessions, including Suez, which held the water concession for La Paz,
shied away from the project. Apparently, they had decided that for them the
guaranteed rate of return of 15 % was not worth much if they risked losing all
their money at the beginning of the concession. The mixture of political tensions
and a flawed concession design was toxic.
The Cochabamba privatization could have ended here, before it had actually
started. But things turned out differently. Shortly after the deadline to submit bids
had expired, one unsolicited bid was submitted. It came from a newly formed
consortium called Aguas del Tunari. At the time, the public did not know who was
behind the consortium. Jim Shultz in Cochabamba found out that it was led by
International Water Limited, itself controlled by the US construction giant Bechtel.
International Water Limited was the company that had won the concession for East
Manila 3 years earlier.
But the full structure of the consortium was more complicated. The Londonbased company had a partnership with United Utilities International, a subsidiary
of the private water and power company United Utilities serving Northwest
England. Since Bechtel had no experience in running water systems, United Utilities
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.
Increased Tariffs, Disputed Figures

A year earlier, SEMAPA had requested a tariff increase. The government took a year
to approve it so that the increase did not take effect until January 2000, 2 months
after the private company had taken over. Thus, the full brunt of the anger over tariff
increases was directed at the private company.
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.
Leasing the Rain?

On October 29, the Bolivian Parliament passed a new law Law 2029, the Water
Services Law. The controversial law gave exclusive water supply rights to private
water concession holders, including the power to take over community-based water
systems that local communities had built with their own funds. Moreover, people
expected that the private company would also charge for irrigation water, which had
been free.
The new law was, it seemed, designed to make the privatization deal sweeter for
the consortium. In Cochabamba, the law created the impression that the company
would own the water resources and charge for their use or, as the New Yorker
magazine famously wrote, quoting a local peasant, that the company had leased
the rain. It also angered tanker operators, who felt their business was threatened, as
well as farmers who feared losing control over their water resources and wealthier
residents who would have to pay more for water. In fact, protests first started, in
November 1999, in the rural areas where farmers feared their water rights would be
jeopardized.
If the water service law was designed to facilitate the concession, it achieved the
exact opposite: It poisoned it. The law created uncertainty and fear which was
stoked further by the privatization. It did not help that the deal was shrouded in
much secrecy. Bechtel later said that it had pushed for an information campaign to
be carried out by the municipality, but no such campaign was conducted. Thus, an
opportunity was missed to explain to the citizens what was part of the concession
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.
The Water War

In January, protests against the water services law spread from the rural areas to
the city, igniting a cycle of more vigorous protest and repression. The foreign
engineers who had arrived just 3 months earlier in Cochabamba were unfamiliar
with Bolivia, and politically clueless. According to the New Yorker, Geoffrey
Thorpe, the companys manager, simply said that if people didnt pay their water
bills their water would be turned off. Anger mounted, and Oscar Olivera, the
President of the Cochabamba Federation of Factory Workers, and Omar Fernandez,
leader of the group of farmers, forged an alliance, the Coalition for the Defense
of Water and Life, or Coordinadora. Its aim was to repeal Law 2029 and to throw
Aguas del Tunari out of the city.
The workers and farmers were joined by students and street children in their
street protests. Subsequently, the government backed down and canceled the tariff
increase in February. Aguas del Tunari even provided refunds. But it was a case
of too little, too late. The demands of the protesters had not been met. Protests
continued, and protest leaders were arrested. Oscar Olivera was released again and
went into hiding, while his house was searched four times. Mayor Reyes Villa,
sensing the tide turning, was quick to distance himself from Aguas del Tunari.
Protests spread to other cities and, in early April, the government declared martial
law. When the police fired into the crowds and a protester was killed, the foreign
staff of Aguas del Tunari were told to flee the city.
In the meantime, newsletters sent out by the U.S. journalist Jim Shultz had spread
the word of the revolt against a private water company around the world. This
contributed to mounting pressure through thousands of emails sent to Bechtel. Then,
on April 10, the government signed an agreement with Oscar Olivera, promising to
cancel the concession, to hand over the utility to the Coordinadora, to repeal the
controversial Law 2029 and to release imprisoned protesters. To get a quorum to
repeal Law 2029, the government even rented planes to fly legislators back to the
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.
After the Privatization

The Heroes of the Water War
In mid-April 2000, the World Bank and the IMF held their Annual Meetings in
Washington, D.C. Protesters gathered in the city and invited Oscar Olivera to
come to speak to them. Come he did, addressing the crowd together with the
famous civil rights activist Ralph Nader. Maude Barlow, the Canadian activist
against water privatization, announced to the crowd: Our hero from Bolivia has
arrived! followed by standing ovations. Cochabamba had become a poster child
of the global struggle against capitalism, iconized in innumerable articles and films,
including the PBS documentary Leasing the Rain.
The leaders of the revolt, Oscar Olivera and Omar Fernandez, became heroes in
the eyes of many. In the following months and years, they were sought-after speakers
at venues discussing how to resist neo-liberalism and resource privatization. Evo
Morales, who is said to have thrown stones at policemen during the protests, rose to
prominence due to the events and eventually became President of Bolivia in 2005.
Unlike in the Bond movie, the villains in the real-life Cochabamba privatization
are not that easy to pinpoint. Only one thing is sure: If there was a real-life equivalent
to Dominic Greene, the villain of Quantum of Solace, he would have been
disappointed to find out how little profit and how much trouble was to be had in
a private water monopoly.
International Arbitration: Bechtel Claims Compensation, Then

Withdraws
In December 2001 the international shareholders of Aguas del Tunari, led by
Bechtel, claimed 25 million dollars of compensation from the government of Bolivia
for the expropriation of their assets. The claim for arbitration was submitted to the
International Center for the Settlement of Investment Disputes (ICSID), which is
part of the World Bank Group, on the basis of a bilateral investment treaty between
Bolivia and the Netherlands that protects Dutch investors in Bolivia. Now it became
clear that International Waters Holding, the Holding Company set up to invest in
Cochabamba that did not have a single Dutch shareholder, had been located in
the Netherlands in order to be able to sue the Bolivian government in case the
privatization ran into trouble. Critics of the privatization were incensed: How could
an international company whose turnover was larger than the entire economy of
After the Privatization
25
Table 2.1 Water tariff, water use and affordability in Cochabamba

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
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.
Cochabamba Revisited: A Sad End

What happened to the water supply of Cochabamba after the private company was
kicked out? The tunnel and canal from the Misicuni River were finally completed
in 2005 and provided additional water. The construction of the dam was started
years later with Italian funding but the dam remained incomplete at the time
of writing. The amount of water available to the city remains insufficient, despite
funding provided by the Inter-American Development Bank from 2002 onwards.
The water supply remains intermittent, and half the people of Cochabamba
remain without tap water, despite the canal from Misicuni. In 2006, tariffs had to
be increased substantially to cover the operating costs of the utility this time there
was no protest in the streets. Average residential tariffs under public management
are now more than twice as high as under private management at the height of the
Cochabamba water war. Because of the need to pump water from far away, tariffs
are higher than in La Paz, where water is supplied by gravity. Without taking into
account sewer tariffs, water bills are very high at more than 4 % of median income,
exceeding the commonly used threshold of 3 %. As shown in Table 2.1, this is true
for both the middle class and the poor, although those living in poor neighborhoods
are charged lower water tariffs.
The new participatory model of SEMAPA did not achieve much. Only 5 % of
the population participated in the election of the community representatives on the
Board of the utility. Moreover, because of irregularities in the voting, one election
had to be suspended and the seat of the elected representative remained vacant.
Perhaps more seriously, the number of employees at the utility sharply increased
26
Table 2.2 Performance indicators for SEMAPA, Cochabamba

Access to piped water
Employees/1,000 households served
Non-revenue water (%)
Water employees (estimated, excluding sanitation employees)
Total water connections
Households served
Continuity of supply (hours/day)
Collection efficiency
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
Cuba: Water Privatization in a Socialist Country
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
3 Cuba: Water Privatization in a Socialist Country
Enter the Tourists

To generate foreign exchange earnings, the government opened the country up
to tourism during the 1990s. Tourism was initially restricted to enclave resorts,
built with the help of private foreign investors. One of these investors was the
Spanish firm Martinon, based in the Canary Islands, which helped to develop the
resort Varadero. To build and operate the water supply system for the tourist resort,
Martinon had teamed up with the private water company Canaragua, the Aguas de
Barcelona subsidiary that ran the water supply on the Canary Islands.
Havana Goes Private

Impressed by the ability of the private sector to deliver, in 1997, the Cuban
government quietly asked the two companies to help in modernizing the water
supply for the three worst-affected municipalities in the Havana metropolitan area.
Just as at the Varadero resort, the private companies were not only asked to invest
in infrastructure, but also to operate it. The private companies were not paid by the
water users, but by the government, which saved precious foreign exchange because
it was able to reduce the fuel costs needed for the fleet of tanker trucks once the piped
water system worked properly.
Satisfied with the performance of the private company, the communist government went one step further. In February 1999, a Cuban delegation was invited to
Barcelona where it signed a framework agreement that foresaw the creation of the
mixed company Aguas de la Habana, jointly owned by the Cuban state through
its National Institute for Water Resources along with Aguas de Barcelona and the
Martinon Group. The company was formed on January 17, 2000, and on April 1, the
new mixed company began to operate. At the same time, the new company signed
a 25-year contract, which was kept secret, to operate the water and sewer system
for 8 of the 15 municipalities in Greater Havana, with the option to expand the
geographical scope of the contract at a later date.
Loans and Quasi-free Water

Some of the investments made by Aguas de la Habana were financed by soft
loans from the Spanish International Cooperation Agency, which increased its
engagement in Cuba as part of EU efforts to gradually open up the political and
economic system of the country. The Spanish loan financed the first ever major
rehabilitation of the Albear aqueduct, built in the nineteenth century to supply
Havana.
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
Argentina: A Flagship Privatization

and Its Demise
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
4 Argentina: A Flagship Privatization and Its Demise
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.
Before the Concession

But was Buenos Aires a city that was thirsting for privatization? The public company
in charge of water supply and sanitation in the metropolitan area, Obras Sanitarias de
la Nacin (OSN), was not a model of efficiency and customer attention. It provided
an intermittent but accepted water supply to the city itself. But, starved of loans,
inefficient and obliged by the government to charge low tariffs, it had failed to
connect most people in the suburbs. In particular, the poorest were left out. They
lived in what was euphemistically called Villas, slums built on occupied land that
lacked basic services. Sewerage was discharged without any treatment, making the
Riachuelo and Matanza Rivers that cross the city among the most polluted rivers
on the continent and a major source for disease for the people living next to them.
Sewage from latrines and septic tanks contaminated groundwater that was used as a
source of drinking water.
Besides the disastrous sanitary conditions in the Villas, there were also water
shortages in parts of the city during the summer, as well as frequent breaks and
interruptions. Water pressure was low, in some parts of the city water quality
was poor, and sewers overflowed during rainstorms. Water losses in the old and
crumbling network stood at an estimated 45 %. Moreover, the utility collected
only about 80 % of the money it billed. The company had about twice as many
employees as it needed to carry out its functions. Salaries were low, turnover of
skilled personnel high, and the entire workforce suffered from low productivity and
lack of discipline, according to a study that described OSN before privatization.
Since water availability was not a problem, the great majority of residential water
connections were not metered. There was no incentive to save water. Per capita
water use for those fortunate enough to have a tap was 350 l per day about the
same as in the United States.
The company needed two things: more capital for investments to improve the
existing assets and to expand the services to provide services to the entire population
and to treat sewage collected; and a change in corporate culture towards more
efficiency and customer orientation. The Menem administration expected to deliver
both by privatizing the company.
33
Preparing the Political Ground

The government wanted to complete the privatization of utilities while public
opinion was favorable. In 1989, opinion polls had still shown that a clear majority
of Buenos Aires residents rejected water privatization. But the public opinion had
changed over a period of only 2 years. Menem had succeeded in stabilizing the
economy, and the sale of state-owned companies had been part of that concept.
His administrations economic policies seemed to be working. Furthermore, the
government had promised to expand water and sewer access to the suburban areas,
as well as to reduce tariffs for those already connected. The privatization plans thus
appealed to both the connected and the unconnected voters in Buenos Aires. In
1991, opinion polls showed that more people were in favor of privatization than
against it. Then, in February 1992, an epidemic of cholera started in Argentina,
which appeared initially in the northern provinces of Salta and Jujuy, becoming an
additional justification for water supply reform.
The administration was politically careful in how it designed the concession.
It involved a broad selection of stakeholders, including a bicameral Congressional
committee that had supervised all privatizations, and an 11-member committee
in charge of the privatization of OSN. The committee included representatives
of various Ministries, the Municipality of Buenos Aires, and the Province of
Buenos Aires, where most residents still were not connected to the water and
sewerage system. The privatization committee also included a representative of
OSN employees.
The government opted not to completely sell the company, as it had done with
the telecommunications and electricity sectors. In those sectors, the growth potential
and cost recovery rate was high, so that privatization generated revenues for the
state. The water sector was different, with lower growth potential and limited cost
recovery. The government thus ruled against a complete Thatcher-style sale of
assets. Instead, it opted for a concession la franaise which would bring in
private capital without selling assets. All bidders had to commit to fulfilling the
obligations set out in the concession contract, including specific targets to expand
access and treat sewage collected. This implied a huge amount of investments in
the early years of the concession that where supposed to be recovered during later
years. It was assumed that private companies would be more efficient than the public
company, and that these efficiency gains would be so large that they would more
than compensate for the private companies higher cost of borrowing compared to
the government. There was thus a strong expectation that tariffs after privatization
would be lower than before. The bidding process provided incentives to make this
happen. The concession contract was to be awarded based on a single criterion: the
water tariff promised by the bidder, so that the company that provided the lowest
water tariff would win.
34
Dressing Up the Bride

The government knew that the success of the privatization would be judged by
the size of the tariff reduction that the private company was able to offer, and the
government very much wanted the transaction to be a success. Thus it dressed the
bride to make it more attractive for bidders, so that the water tariff reduction would
become as sizeable as possible.
First, the government had quietly increased water tariffs in the years before
the concession. In 1991 and 1992, tariffs were increased four times, to the point
that they had been doubled outright. But inflation at the time was almost as
high as the tariff increase, so it was not much noticed amid the general price
increase. The government also approved a hefty infrastructure fee for all newly
connected customers. This was supposed to provide a financial incentive for the
private company to connect new customers, but it also obscured the true cost of the
concession: While the government publicly argued that water tariffs would go down,
it knew that for new customers who would number millions, if the concession
worked the water bill would increase substantially.
Second, in a movement that was not related directly to the water privatization,
the government pegged the Argentine Peso to the US dollar at a 1:1 exchange
rate in April 1991. A Currency Board was to give credibility to the arrangement.
This policy ended the period of hyperinflation in Argentina, gradually bringing the
inflation rate down over a period of 2 years. This provided foreign companies and
lenders the comfort to invest with hard currency in Argentine companies whose
revenues were in Pesos.
Third, the government had agreed not to transfer the old OSN debt to the new
private company. This, of course, reduced the payment obligations of the private
company and allowed it to submit a lower bid than would have been possible had it
been obliged to service the old debt.
And fourth, the government had substantially reduced OSNs work force. 1,618
employees participated in a voluntary retirement program that cost the government
about 33 million dollars, or about 20,000 dollars per worker. The administration had
overcome opposition by involving the unions in the transaction. After the endless
strikes of the 1980s, the unions credibility was extremely low. A 1990 opinion poll
showed that only 8 % of the population approved of the policies of the unions. This
was far less than the 22 % approval rating for the military, despite their previous
brutal dictatorship. In 1990, the approval rating for entrepreneurs stood at 31 %,
much higher than for the unions or the military. Starting from such a weak position,
the union leaders first pumped up their rhetoric, vowing to fight to the last drop
of blood against privatization. But when the government asked union leader Juan
Carlos Lingeri to become a member of the privatization committee, he surprisingly
accepted. He then negotiated a 10 % share for employees in the new company.
Another union member, Carlos Ben, later on became a member of the companys
Board, representing the unions. The unions thus supported the deal.
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?
How to Regulate a Private Water Company?

While the political ground for the privatization was prepared rapidly and astutely,
its technical design was weak. For example, many considered a strong, competent
autonomous regulatory agency essential for ensuring that the benefits of water
privatization were shared between water users, taxpayers and the private company.
In Argentina, the government decided that a regulatory agency was needed.
Since Buenos Aires was the first water privatization in the country, the government
decided to set up a regulatory agency that would regulate only the Buenos Aires
concession. But it was not clear whether the national, provincial or city government
would set up and oversee the regulatory agency. In the end, all three entities
decided jointly to form the new water regulatory agency, called Ente Tripartito de
Obras y Servicios Sanitarios (ETOSS). Each entity nominated two members to the
Board of the regulator. They would chair the agency on a rotational basis, with
each term lasting only 1 year. During its existence, the regulatory agency would
have to balance the political interests of the three levels of government whose
representatives were often at odds with each other. Trying to please three masters,
all while remaining fair to the private company, was going to be a tough call. The
regulator became operational when the concession came into force. It was funded
through a regulatory fee imposed on all water users, a measure that was designed to
provide it with financial autonomy and thus a certain degree of independence from
political authorities. But despite this measure, the regulator remained weak. It had
no previous experience with regulation. Furthermore, it was perceived as not having
36
staff with the same qualifications as utility regulators in other sectors in Argentina,
such as the telecommunications or electricity regulator.
The Forgotten Poor

The needs of the poor were not explicitly addressed in the concession design.
The existing tariff system, albeit complicated and confusing, seemed at first sight
pro-poor. Residential tariffs were calculated based on five variables: location, area
of the plot, share of the plot area that was built up, type of construction, and
age of the house. One household could pay a hundred times more than another,
irrespective of its water consumption. Residents of new houses, even if poor, ended
up paying relatively high tariffs. For those not yet connected, connection fees
remained high and the infrastructure fee increased their water bill substantially, a
fact the implications of which were apparently not fully understood at the time
that the concession was designed. Furthermore, the concession kept a feature of
the previous legal regime unchanged: The expansion of access to slums and socalled villas was excluded from the concession contract, which only obliged the
company to provide access to urbanized areas.
The Fog of Bidding

Setting the right price to bid for a water concession is more an art than a science.
In theory, bidders estimate the investment and operating costs to achieve the
contractual targets over the lifetime of the concession. They will also estimate the
number of customers it could connect to the network over the same period. They
then make assumptions as to how it will finance its investments, in particular, which
share will be financed by loans at an assumed interest rate, which share can be
financed by the companys revenues, and which share will have to be financed by the
bidders own money. When the bidders set their own expected return for their funds,
the financial model produces the water tariff that needs to be charged to achieve
the expected rate of return. As the theory goes, some bidders are able to connect
customers faster or at lower investment costs, or they can mobilize debt at lower
interest rates. Because of their different degrees of ability in increasing efficiency,
they will make higher or lower bids. So the most efficient company wins the bid,
which will benefit the public.
So goes the theory. In practice, contracts can be renegotiated. A company that
assumes that the contract is sacrosanct will thus submit a higher bid than a company
that assumes it will be able to renegotiate the contract in its favor. In such a setting,
it is not necessarily the most efficient company that wins, but the one that believes
it is best able to argue their case with regulators (and influence politicians) after the
contract has been awarded.
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.
May the Lowest Offer Win

Despite these caveats, bidding went ahead. It was undertaken in three stages:
prequalification, a review of technical proposals, and the opening of financial
proposals for those who passed the previous two stages. The bid was to be awarded
to the company that proposed the lowest tariff, with the expectation that the tariff
would be lower than the existing tariff. Interest in the concession was substantial.
Almost all the large private water companies in the world at the time participated,
despite the ambitious targets set out in the concession contract. Five consortia, each
consisting of an international lead company associated with local partners, passed
the prequalification stage. But this number was soon reduced to three. The Spanishled consortiums technical proposal failed to qualify. More importantly, the French
consortia led by Lyonnaise and Generale decided to make a joint bid. Although this
reduced competition, the government accepted the alliance of the two companies.
The new joint consortium was called Aguas Argentinas. It was 50.4 %-owned
by foreign companies. Lyonnaise held the lions share (25.3 %), followed by the
Spanish Aguas de Barcelona, which was itself controlled by Lyonnaise (12.6 %).
Compagnie Gnrale des Eaux (8 %) and UKs Anglian Water (4.5 %) held smaller
stakes. 39.6 % of the ownership was by Argentine companies, including a 20.7 %
stake by Sociedad Comercial del Plata, owned by the prominent businessman
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.
The First Half of the Concession Period

The early days of Aguas Argentinas were bright. After many years of neglect,
investment finally picked up again. The trees growing in the water treatment tanks
were removed. The number of households newly connected to the water and sewer
network picked up. Customer service also improved: For example, the response
time to complaints became much shorter with computerized customer records and
the establishment of a modern call centre. Aguas Argentinas also offered retirement
to another 2,000 employees at a cost to the company of 50 million dollars. The
employees gladly accepted the package.
Aguas Argentinas had arranged a first debt package together with their bid. The
companys debt-to-equity ratio was 1.38 in 1993, a reasonable level that provided
plenty of equity as a cushion for risks. But the initial funding was insufficient to
achieve the investment targets spelled out in the concession contract. For that, new
financing was needed. In this situation, the IFC came to the rescue. It played a key
role in putting together a second financing package for the concession. As an anchor
investor for a new company in an untested market, it mobilized 15 other international
banks to provide a syndicated loan to Aguas Argentinas. In addition to the debt
financing, IFC acquired 5 % of Aguas Argentinas shares in November 1994. The
syndicated loan totaled 172.5 million dollars. Due to strong market interest the loan
syndication far surpassed the original target, the IFC wrote in a press release at the
time.
The concession, it seemed, was off to a good start.
The First Half of the Concession Period
39
Corruption Argentinian-Style: The Alsogaray Saga

Fortunately for Aguas Argentinas, or so it seemed, the company had found a
strong ally in the federal government. Mara Julia Alsogaray the daughter of lvaro
Alsogaray, the man who had helped Menem become President, had become Minister
of Environment in November 1991, just before the concession was awarded. She
remained in this position until the end of the Menem Presidency in 1999, and was
instrumental in the privatization of the telecommunication and steel companies. But
that good fortune would take on a more troubling note when she was later involved
in a number of corruption scandals related to these privatizations. She would
eventually be convicted for corruption in a case unrelated to the water privatization
in Buenos Aires and became the only member of the Menem administration to
actually serve time in prison on corruption charges. Alsogaray had a flamboyant
lifestyle, providing ample fodder for the tabloid newspapers, with her love affairs
and a high-profile divorce from her husband. She once posed for a magazine at
a ski resort wearing nothing but a fur coat. For many, she was a symbol of the
corruption and greed during the Menem years. But at this earlier stage, she was still
in a position of considerable power, and it was she who would become the main
negotiating counterpart with Aguas Argentinas.
The First Renegotiation: Higher Tariffs, More Investment

In 1994, the government asked the company to accelerate some investments, such
as the construction of the General Belgrano water treatment plant and a program to
drill clean wells instead of wells contaminated with nitrate. The company accepted
the request, but in return negotiated a 13.5 % tariff increase. Moreover, the water
and wastewater infrastructure connection fees were substantially increased by,
respectively, 36 % and 48 % in 1994 as part of the first renegotiation. Aguas
Argentinas thus benefitted greatly from the renegotiation.
At the same time, the company further increased its debt. The loan agreement
with the IFC initially required that the debt-to-equity ratio remain below 1.9. A
World Bank researcher, Manuel Abdala, had calculated as early as 1994 that Aguas
Argentinas could only be profitable at the level of debt prescribed in the contract
if its investment targets were reduced or its tariffs increased. Indeed, the company
tried to do both. On top of that, it took on more debt than was allowed in its original
loan agreement. In 1995, IFC and its partner banks provided a second syndicated
loan of 150 million dollars. In the same year, the company received a 70 million
dollar loan from the European Investment Bank (EIB) for a wastewater treatment
plant. The debt-to-equity ratio had reached 2.37 by 1996. Debt played a key role in
financing investments. Indeed, the actual leveraging was much higher: One analysis
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 Second Renegotiation: Cancelled Fines, Less Investment

In February 1997, Menem issued Decree 149 that authorized his Minister of
Environment, the by then infamous Maria Julia Alsogaray, to negotiate directly with
the company, bypassing the regulator ETOSS. One month later, French President
Jacques Chirac visited Buenos Aires and had a discussion with government officials
concerning the water privatization issue, which was close to the heart of his old
friend and ally Jerome Monod, the CEO of what was by then called Suez, the major
stakeholder of Aguas Argentinas. Shortly afterwards, the renegotiation, conducted
without the regulatory agency, was concluded. It allowed for spreading the costs
of connecting new customers to all customers. This change was designed to be
revenue-neutral. Furthermore, the renegotiation also cancelled fines imposed on the
company by the regulator for not having met its targets, including the accelerated
investment targets for which the company had been rewarded with a tariff increase in
1994. The company claimed to have exceeded its target for the expansion of water
access 82 instead of 81 %. But this had been disputed by the regulator. There
was no doubt that the company lagged behind on sewerage at 61 % compared to a
target of 64 %, and on wastewater treatment at 0 instead of 2 %. The renegotiated
contract cut back investment and coverage targets for the fifth year, thus avoiding
further penalties. More importantly, it opened the way for further renegotiations that
favored Aguas Argentinas. For example, in mid-1998, the government had approved
a significant rate increase, allowing Santiago Soldati, an ally of Carlos Menem, to
sell his share at a hefty profit to Suez. Soldati had paid 50 million dollars in 1992.
He was able to sell his shares 6 years later for 150 million dollars. His exit was
well-timed for him, since trouble lay ahead for Aguas Argentinas.
In June 1999, when the company was already in a difficult spot, the InterAmerican Development Bank (IDB) arranged a 300 million dollar syndicated loan,
further increasing the companys debt-to-equity ratio.
In November 1999, during the last days of the Menem government, Aguas
Argentinas managed to sign a new contract. Shortly before its difficulties would
The Economic Crisis and the Second Half of the Concession Period
41
really begin, it succeeded in gaining significant advantages. It further reduced

investment commitments, erased a few fines that the regulator had managed to
impose despite the earlier reduction in targets, and crucially pegged rate
increases to the exchange rate with the US dollar. Moreover, a former Menem
adviser, Juan Carlos Cassagne, was made the President of Aguas Argentinas,
securing him a key position before the Menem government was ousted in the
elections.
The Economic Crisis and the Second Half of the Concession

Period
Since 1999, the Argentine economy had spiraled down into an economic crisis of
ever greater proportions. Unemployment was on the rise, salaries of government
employees were slashed, and an IMF program was initiated imposing austerity
measures. In December 2001, the government defaulted on its external debt, and
in January 2002, the fixed-parity exchange rate with the US dollar was abandoned.
The Peso was allowed to float freely and quickly lost 70 % of its value.
At that time, Aguas Argentinas had 700 million dollars of foreign currency debt
in its books. It now demanded that the Central Bank provide US dollars at the old
1:1 exchange rate so that it could continue servicing its debt. The government was
obliged under the renegotiated concession contract to do so, but it refused. Aguas
Argentinas then asked for a 42 % tariff increase. When the increase was refused,
the company froze its investments and defaulted on its loans. The perfect storm had
happened.
After the economic crisis, the concession ground on for another 4 years amid
contractual disputes, but it was clear from then on that it was hanging by a thread.
Serving the Poor, At Last

To its credit, during the crisis, Aguas Argentinas stepped up its programs to increase
access in the poorest neighborhoods, in an effort to regain credibility. The issue of
access to the poorest had been ignored during the design of the concession and
during its first years. Only in 1999 was a community development unit created in
the company, which employed social workers and social scientists to find a way to
provide slum residents with better access. It worked on the basis of an analysis done
together with the International Institute for Environment and Development Latin
America, contracted by Aguas Argentinas. In 2001 a social tariff was introduced
that included subsidies to vulnerable families who were identified by neighborhood
associations and local authorities under the control of the regulatory agency and
Aguas Argentinas. Between 2003 and 2005 alone, about 100,000 inhabitants of poor
42
neighborhoods and slums are said to have been connected through a participatory
management model piloted by Aguas Argentinas.
More Renegotiations Fail to Save the Concession

But belatedly helping the poor would not be enough to save the concession contract.
Suez also nominated a new French President to the company to replace its Argentine
President in December 2003. Suez sent Yves Thibault de Silguy, a former European
Commissioner and politician who had been an advisor to Jacques Chirac when
he was French Prime Minister, to renegotiate the concession. Initially, he was
partly successful. In May 2004, he convinced the government to commit to using
public funds for water investments and to suspend, once again, additional fines
that had been imposed on Aguas Argentinas. In exchange, tariffs would remain
frozen and Suez would suspend its arbitration claims at ICSID, the international
tribunal in Washington. However, in October 2004, the negotiations took a new turn:
Suez once again asked for tariff increases, more public funds and an exemption
from income tax. The Argentine government deemed the proposal unacceptable,
and the relationship became more confrontational. In March 2006, the Argentine
government finally issued a decree that cancelled the concession and created a new
public company to take over from Aguas Argentinas.
Impact Falls Short of Targets

The regulator ETOSS estimates that, during the period 19932002, the company
only met 61 % of its contractual investment and expansion targets on the basis of
the lower renegotiated investment commitments. As shown in Table 4.1, the targets
for water supply and sewerage extensions did not even come close to being met,
even during a period that was made up predominantly of the pre-crisis years.
Access to water and sanitation in urban areas in Argentina increased at a similar
rate in other cities where water and sewer services were not privatized. Overall,
access to piped water supply in urban areas in Argentina increased from 78 % to
88 %, a ten percentage point increase compared to a nine percentage point increase
in the Buenos Aires concession area.
Between May 1993 and January 2002, the mean residential tariff increased by
88 %, while during the same period, the Consumer Price Index only increased by
7.3 %. The private company made a profit of more than 20 % over net assets between
1994 and 2001.
Table 4.1 Increase in access to water supply and sewerage targets vs. actual
Access to water
Access to sewerage
1993
70 %
58 %
Target (2002)
88 %
74 %
Actual (2002)
79 %
63 %
After the Concession
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.
After the Concession

In 2006, Dr. Carlos Ben, the union representative who became a member of the
board of the private company Aguas Argentinas as an employee representative,
became President of the new public water company Agua y Saneamientos Argentinos (AySA). A loyal follower of Presidents Nestor and Cristina Kirchner, he remains
at the helm of the company at the time of this writing. During the 8 years of public
management, the government committed to showing that it invested more than the
private company did. Fueled by public investment subsidies, investments picked
up again: During this time period, the first major wastewater treatment plant in
Buenos Aires was completed at Berazategui, the Bicentenario Plant, pre-treating
the wastewater of four million people. In Lujn area, at a northern location, a new
large water treatment plant was completed, and other existing plants were expanded.
The company prides itself that, over 6 years, it has expanded access to water supply
to one million people and access to sanitation to about 700,000 people. Thus, about
1.7 million people gained access to one type of service or the other over six years.
Aguas Argentinas provided 3.7 million people with access over 12 years. On an
annual average basis, access thus had increased at the same pace during the private
concession and after it ended.
Return to Public Management: A Drain on the State Budget

After a 12-year tariff freeze, while costs increased with inflation averaging 10 %
per year, sales revenues at AySA are now lower than personnel costs. The company
has little debt, since all the debt remained on the books of the private company
Aguas Argentinas. Although AySA is in the fortunate situation of paying almost no
interest, it incurs heavy losses. With sales revenues in 2012 equivalent to only 160
million dollars and costs of more than 500 million dollars, the utility is a constant
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
The Middle East: Reform Deadlock,

with an Exception
Chapter 5
Egypt: Kafka on the Nile
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
5 Egypt: Kafka on the Nile
Table 5.1 Residential water tariff, water use and affordability in Egypt (without sanitation)
Water use
Household size
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.05
200
5
1.50
607
0.2 %
Source: Authors calculation
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.
Decades of Tug of War over Reforms

Before 1981, a single entity, the General Organization for Potable Water (GOPW),
was in charge of planning, investment and operation of drinking water systems
throughout Egypt, with the exception of Cairo and Alexandria. Another entity, the
General Organization for Sewerage and Sanitary Drainage (GOSSD), was in charge
of planning and investment for sanitation. Coordination between investments in
water supply and sanitation was poor, so that water systems were often built without
any consideration for sanitation.
Donors once again pushed for change. The government, entrenched in a tradition
of central management and state domination of the economy, implemented the
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.
Privatization Stuck in the Mills of Bureaucracy

Faced with such a debacle, donors pushed for a second reform in the mid-1990s. At
a minimum, the second reform was to complete that which had not been achieved
under the first, namely the introduction of decentralized autonomous public water
companies. But the Zeitgeist was different, and more was expected. The reforms
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
Holding Company then initiated a number of useful activities: It replaced 800,000

non-functioning water meters, created a central laboratory, procured computerized
control systems and customer databases for its Affiliated Companies, and assisted
them in establishing customer hotlines. Despite all of this, the core weaknesses of
the sector were not resolved.
Box 5.1. A Water Company Led by Women

Alexandria Water Company (AWC) has been led since 2002 by a woman,
Nadia Abdou. Trained as an engineer, she has worked her way up through
the ranks of the company, occupying different positions including being the
elected employee representative at one time. She became chairperson at AWC
when the preparatory work for the 2004 reforms, granting more autonomy
to affiliated companies such as AWC, was underway. Technical assistance
from the United States and Germany was provided to turn the ailing, lossmaking utility around into a successful publicly managed utility. Nadia Abdou
and her board of directors, which consisted almost entirely of women at the
time, seized this opportunity. The company upgraded its water laboratories,
certifying them according to international standards. It increased compliance
with Egyptian drinking water standards from 90 % to almost a 100 %.
Since most of its tariffs are regulated and employees cannot be laid off,
the company had only limited scope to increase cost recovery. That scope,
however, was used deftly. Revenue collection was improved by granting
more responsibility and incentives to front-line employees. For example, field
inspectors, meter readers and collectors received bonuses for each illegal
connection they discovered and for exceeding monthly targets. Nadi Abdou
also recalls how she negotiated the (unregulated) water tariff with the local
Coca Cola bottling plant. When she announced an increase from 0.80 to
3.00 Egyptian Pounds (0.110.42 dollars), the company threatened to leave
Alexandria, but then gave in. Through these efforts, the company generated
revenues equivalent to 150 % of its operating costs in 2004.
However, while AWC has kept up its technical achievements, its financial
performance deteriorated again. Today, the water regulatory agency ranks
the company only fifth among the affiliated companies in terms of financial
performance.
Arab Spring, Arab Fall

Egypt saw a lot of political upheaval in the beginning of the second decade of this
century: the demise of the Mubarak government in February 2011, the election of
the Islamist President Morsi in June 2012, and his removal by the military 1 year
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.
Impact: Disappointing Results

While access to piped water supply and to sewerage increased over the past two
decades thanks to heavy government-financed investments, service quality in Egypt
remains poor despite the reforms. In 2009, a study by the Ministry of Health had
shown that drinking water for half a million people in Asiut in Upper Egypt was
unfit for human consumption. The chlorination systems of wells failed for lack of
maintenance and were shut down, resulting in the water provided to residents being
untreated and contaminated with bacteria. Two years later, nothing had been done to
address the problem. In 2007, in the village of Wardan in the Nile Delta, the water
became very dark. The authorities declared that they were not responsible. Instead,
they claimed that residents were to blame themselves because some of them had
installed booster pumps to suck water from the network, in order to compensate for
the very low pressure provided by the utility. In slums, most residents do not have
access to piped water at all. They must buy water in canisters provided by tankers
at the cost of two to three Egyptian pounds for 25 l, about 300 times more than the
tariff for piped water.
When Catarina Albuquerque, the UN special rapporteur for the human right
to safe drinking water and sanitation, visited Egypt in 2009, she noted limited
transparency and accountability concerning water and sanitation. She was told
that complaints to the authorities remained unanswered. She noted that it was
exceedingly difficult to obtain information about the quality of ( : : : ) drinking
water and there was confusion about where to send complaints. The situation
remained Kafkaesque. She concluded that the overlapping responsibilities create
a situation where no institution considers itself accountable for the problem in
question, adding that the overall lack of transparency and access to information
in the water and sanitation sectors creates an atmosphere of suspicion, which is
characterized by a lack of confidence in the quality of drinking water and overall
distrust of the government.
Conclusion
53
Table 5.2 Performance of Egyptian water utilities in 2012/13

Staff/1,000 households served
Degree of cost recovery (%)
6.5
32
62
The performance of Egyptian water utilities remains poor, as estimated by the

regulatory agency and shown in Table 5.2 for the Egyptian fiscal year 2012/13. The
level of non-revenue water leakage as well as stolen and under-registered water
is roughly estimated at 32 %, but could well be higher.
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: Private Plants, Public Utilities
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.
The Amman Management Contract

In 1999, the Water Authority of Jordan signed a Management Contract with a Joint
Venture led by Suez Environnement. According to the contract, the Joint Venture
was responsible for operating and managing water and wastewater services in the
Governorate of Amman, while ownership of assets remained with the state. The
private company was paid a fixed fee from a World Bank loan and a variable
performance fee to be paid from a portion of the increase in net revenue that the
contract would generate. Water tariffs were not increased, and the contract was
structured in such a way that it could be profitable despite the lack of cost recovery
in the water sector.
The contract was intended to improve certain performance indicators, as well as
strengthen management capability and develop the skills and knowledge of the staff.
To this end, a small team of experienced expatriates and Jordanians worked with,
and trained, around 1,250 local staff. After 7 years, the Joint Venture had complied
with 12 out of 15 performance targets; certain overambitious target values had been
revised and the contract had been extended for 2 years beyond its initial duration of
five. In the end, non-revenue water was reduced from 54 % to 42 %, the duration of
55
56
6 Jordan: Private Plants, Public Utilities
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.
Build-Operate-Transfer (BOT) Contracts: Concessions for

Single New Plants
Another model for private sector participation introduced into Jordan was the
Build-Operate-Transfer (BOT, pronounced Bee-Oh-Tee) contract. As explained
in the introduction, under a BOT contract, the private sector finances, builds and
operates a plant, and then hands it back to the public sector at no charge when the
contract expires after 2030 years. Like management contracts, BOT contracts can
work even if water tariffs are low, because states, rather than cash-starved utilities,
guarantee payments under such contracts.
The Samra Wastewater Treatment Plant: A Smart Mix of Public

and Private Funds
In the case of Jordan, a BOT contract for the 169 million dollar Samra wastewater
treatment plant was signed in 2002 between the Jordanian government and a private
consortium. The consortium was selected through international competitive bidding.
The funding was a blend of public and private sources, as shown in Table 6.1 below.
Build-Operate-Transfer (BOT) Contracts: Concessions for Single New Plants

Table 6.1 Funding of the
BOT contract for the Samra
plant
Funding source
Public funding
Private funding
Grant from USAID

Jordanian government
Equity by sponsors
Bank loans
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.
The Disi-Amman Conveyor: 10 Years in the Making

In parallel to the Samra project, the Jordanian government launched a second much
larger BOT project for the construction of a large water conveyor, the 1.1 billion
dollar Disi-Amman Conveyor. The contract was awarded in 2007 after more than
10 years of preparatory studies and several false starts. Like the Samra plant, the
BOT scheme involved a blend of public and private financing. But in this case, the
government did not benefit from a foreign grant. Instead, it had to borrow from
international donors to mobilize its contribution. As usual for BOTs, the private
financing consisted of a mix of equity and debt. In the case of the Disi-Amman
Conveyor, the debt financing did not come from private commercial banks. Instead,
it came, presumably at better terms, from international financial institutions such as
58
6 Jordan: Private Plants, Public Utilities
Table 6.2 Funding of the BOT contract for the Disi-Amman conveyor
Funding source
Public funding
Private funding
Jordanian government grant

Government stand-by facility
Equity by sponsors
Bank loans
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.
Conclusion: Benefits and Risks for Governments and Taxpayers
59
Conclusion: Benefits and Risks for Governments

and Taxpayers
BOTs provide tangible short-term benefits. Since design, construction and operation
are in the hands of one private entity, it has strong incentive to optimize the lifecycle
costs of the investment. For example, in the case of the Samra plant, the private
consortium designed it in such a way that most of the plants energy is generated by
the plant itself through biogas digestors and mini-hydropower plants at the intake
and outflow of the plant. This means higher investments at the beginning, but lower
operating costs over the lifetime of the project. Public entities, especially the weak
entities found so often in poor countries, typically do not properly analyze and
exploit such synergies. Another way the private company adds value is by exerting
all efforts to make sure that a project is finished on schedule, because it otherwise
loses money. When a public entity contracts a private firm to build a plant, the delays
are paid by the taxpayer, and the public entity has few incentives, and frequently few
instruments, to ensure timely completion.
The annual fees paid to the private companies are high, since they include the
interest rate on privately contracted debt and the profit margin of the operator. As
mentioned above, the fees are often higher than what public utilities, with their low
water and sewer tariffs, can afford. Therefore, governments often support BOTs
in different ways, including through guarantees from the Ministry of Finance for
payment of the fees. BOT contracts thus are a form of hidden debt. They constitute
what is called a contingent liability for the government it is the public utility,
not the government, which is obliged to pay fees, so these liabilities often do not
officially show up as government debt. But when the public utility fails to pay
the fees, the government has to bail it out: The contingent liability becomes a real
liability for the government.
Thus, the benefits and risks of BOT projects outlined above have to be balanced
carefully against each other when deciding whether or not an infrastructure project
should be carried out as a BOT.
Part III
Europe and North America: Private

and Public Utilities Compared
Chapter 7
The United Kingdom: A Natural Experiment

Between Private and Public Management
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.

Ten years after Margaret Thatcher had been elected Prime Minister for the first time
in 1979, she embarked on a major privatization program across all sectors, starting
with telecommunications and gas. One of the objectives of the privatization was to
1
This chapter is limited to the comparison between the performance of the water sector in England,
Scotland and Wales.

63
64
7 The United Kingdom: A Natural Experiment Between Private and Public. . .
create a shareholder democracy: Stocks in the privatized companies were sold at

relatively low prices to ordinary people who had never held stock before. Another
objective was to introduce competition, something that is technically much easier
to do for telecommunications and energy than for water supply. Competition was
expected to increase efficiency and service quality. The government also wanted to
reduce what is called the public sector borrowing requirement, i.e., the public deficit
including the deficits of publicly owned companies. Infrastructure investments were
to be financed by the private sector, not with taxpayer money. But the fiscal motive
was not really in the forefront, as Nigel Lawson, Chancelor of the Exchequer at
the time, noted in his memoirs: The prime motives for privatisation were not
Exchequer gain, but an ideological belief in free markets and a wider distribution of
private ownership of property.
In fact, the word privatization, which had hitherto been unknown, was invented
in the process. Since the Second World War, nationalization had been the
buzzword of economic policy in Britain and many other countries so much so that
the policies of the Thatcher government were first labelled de-nationalization,
until the term privatization was first used in an editorial by John Elliott in the
Financial Times.
The Sick Man of Europe and Public Water

The first water companies created in Britain had been private companies. But most
of them were municipalized beginning in the 1870s, culminating with the creation
of the Metropolitan Water Board that took control of all competing private water
systems in Greater London in 1902. Only in a few localities had private water
companies been spared by the municipalization (companies that continue to provide
water services up to the present day). Thus, by the 1980s, the bulk of water services
and all sewer services in England and Wales were provided by ten state-owned
corporations called the Regional Water Authorities, often working in partnership
with municipalities. They had made some remarkable achievements, such as the
construction of the Thames Barrier that protected London from flooding and the
cleaning up of the River Thames so that the salmon returned to its waters. But
in many respects, the British water sector lagged behind. During the 1970s, the
United Kingdom was often called the sick man of Europe because of its moribund
economy. There was still only limited wastewater treatment, and coastal bathing
waters were polluted. Residential water connections were unmetered, and many
water and sewer pipes dated back to Victorian times. As in many other countries,
old sewers were designed so that they overflowed into rivers during heavy rains. But
the Regional Water Authorities were constrained by debt ceilings and, thus, invested
less than they should have to maintain their infrastructure properly.
65
Pondering Alternatives for Reform

The alternative of keeping the Regional Water Authorities in public hands, providing
them with the same level of one-time financial support that the privatized companies
received and modernizing them, was not seriously considered by the conservative
government. There are several explanations for this. For one, at the time, regulation
had been ineffective in improving the Authorities performance. In 1988, the former
head of the North West Water Authority and former Chairman of the National
River Council, David Kinnersley, wrote a book entitled Troubled Waters, in
which he criticized the fantasy and rhetoric and administrative fudging of
the Environment Department, describing a potent culture of government concealment. The EU had given its member countries 10 years to clean up their bathing
waters in a 1975 Directive. Britain lagged behind in implementing it. According
to Lord Crickhowell, the chairman of the National Rivers Authority, the permit
system in place at the time for controlling pollution was designed to avoid an
embarrassing number of failures and an excessive number of prosecutions of public
organizations. Private companies could be better held accountable, it was believed,
than public companies. But was full privatization the only alternative for achieving
this objective?
The German and Scandinavian model of commercially-oriented public companies was apparently never considered. Utilities in these countries borrow without
guarantees by the national government, and their borrowing could thus arguably
have been excluded from the public sector borrowing requirement. But in the British
context of the time the creation of a shareholder society and ineffective regulation
of public companies such a model did not fit. The French model apparently was
briefly considered. David Kinnersley, who advised Nicholas Ridley, the Secretary of
Environment at the time of the privatization, suggested adopting the French model of
public-private partnerships. This would have allowed the regulators to hold private
companies accountable while avoiding the payment of large dividends, since some
of the investments would have been publicly financed. But the proposal was not
further considered. The Zeitgeist was to privatize all utilities using the same model
of selling shares in the stock market. The water industry was to make one more
contribution to the shareholder democracy cherished by Margaret Thatcher.
Water privatization was planned for 1984, but due to public opposition, it was
delayed until after the 1987 elections. According to opinion polls, 87 % of the voters
opposed water privatization. Clearly, it was not a popular measure.
Regulation of Private Water Companies

Partly in response to these concerns, regulation was tightened. While privatization is
often associated with deregulation, in the water sector, it is quite common to increase
66
regulation in parallel to privatization in order to prevent the abuse of a natural

monopoly. In the case of the English and Welsh water industry, the regulatory zeal
significantly increased. At the time of privatization, many performance indicators
were simply unknown. For example, the level of leakage was never measured,
and the monitoring of service quality was rudimentary. All this changed with
privatization.
Private water companies in England and Wales operate under licenses and are
regulated by three regulatory entities: The Drinking Water Inspectorate, in charge of
regulating drinking water quality; the Environment Agency in charge of monitoring
water abstractions and wastewater discharges; and the Office of Water Services
(Ofwat). The economic regulatory agency Ofwat was established in 1989 in parallel
with privatization. It approves tariffs, monitors service quality, and can impose fines.
Maximum limits on tariffs are set for what became 5-year intervals in advance.
Tariffs are calculated based on an estimate of operating costs taking into account
increased efficiency, a similar estimate as to how much capital maintenance would
be required in the coming asset management plan period, and a target rate of return
based on the value of the utilities assets. Outperforming these estimates allows the
private companies to make higher profits, though a proportion of any such gains
would be shared with customers at the subsequent price reviews. In addition, Ofwat
established Customer Service Committees (now Consumer Council for Water) in
each region to provide a mechanism for the voice of customers to be heard.
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.
New Labor Turns Against the Private Companies

The election of a Labour government under Tony Blair in 1997 brought about
significant changes for the water industry. While in opposition, Labour had called
the water company bosses fat cats, and now the party was in a position to go after
them. First, the new government imposed a windfall tax on the excessive profits
of all privatized utilities. Second, following several years of drought and criticism
of massive water leakage, the government held a Water Summit. At the summit,
Deputy Prime Minister John Prescott announced that the government would set
leakage reduction targets over the next 5 years, backed up by hefty fines. Third,
Parliament prohibited any disconnection of residential customers for non-payment
of water bills and prohibited flow-limiting devices through the Water Industry Act
1999.2 Last but certainly not least, the regulator Ofwat, having taken note of the
efficiency gains achieved by the private companies, ordered a tariff reduction. It
thus unintentionally triggered a process that led to the emergence of a completely
different model for service provisions for one of the water companies Welsh Water.
Institutional Investors Take Over

The ownership structure of the industry began to change during the 2000s. The
private power companies from the U.S., Scotland and Germany that had rushed to
2
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.
Over Their Head in Debt

In parallel, debt levels began to soar. The water companies were highly leveraged,
their debt accounting for 72 % of their assets on average, with some companies
having more than 90 % debt. The rating agencies started to downgrade them.
Financial leveraging not only helped to increase the rate of return on equity, it also
cut corporate income tax: Payments on interest fully count as costs, and thus, profits
and taxes on profits are slashed by loading on more debt. This provides an incentive
to reduce equity, so that little equity capital is left as a cushion in times of crisis.
The Track Record of Regulation

As the regulator of the English water industry, Ofwat has built up an impressive
array of information on the industry, in order to compare the performance of the
private companies and to monitor their service quality. In no other country can such
comprehensive, publicly available, nationwide data on the performance of the water
industry be found.
Before the creation of Ofwat, the traditional approach to the regulation of natural
monopolies was to take the price at which a product was produced, add a fixed
profit rate, and set the price of the product accordingly. Water tariffs for private
utilities in the U.S. have been set on that basis, called rate-of-return regulation,
since the nineteenth century. British economists now introduced a new variation of
economic regulation for utilities, called price-cap regulation: Prices are set for
a given period usually 5 years based on an estimate of the needed capital and
operating costs and a rate of return, but an assumption is made concerning efficiency
gains during this period. The tariffs thus are lower than they would have been under
the traditional rate-of-return regulation. If a company becomes more efficient
during the regulatory period than the target efficiency gain set by the regulator for
the entire industry, it can increase its profitability above the rate used by the regulator
in setting the tariffs. If the company fails to increase its efficiency, its profits will be
accordingly lower.
How did this model work in practice? During the first 5 years after privatization,
companies exceeded the expectations of the regulator and pocketed huge profits.
Then, the regulator tightened the screws in 2000 and profitability declined.
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.
Private Water Calls for Government Help: The Thames Tideway

Tunnel
By far the largest single investment in the British water sector for many years to
come is the Thames Tideway Tunnel. The objective of the tunnel is to eliminate
the overflow of diluted sewage in the Thames River during heavy rainstorms. These
overflows are part of the design of any old sewer network: Until the early twentieth
century, there were no separate sewers for storm water and sanitary sewage. Instead,
both flowed through so-called combined sewers. These sewers overflowed during
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.
The Impact of Privatization in England
71

Unsurprisingly, the debate on the impact of water privatization splits observers into
two camps. On the side of the supporters, Tony Ballance, former Chief Economist of
Ofwat, now with Severn Trent, one of the largest private water and sewer companies,
writes: Service to customers has been improved, new drinking water standards have
been met, tighter environmental standards have been achieved, and new investment
attracted.
On the side of the opponents, Singapore-based Professor Asit Biswas, recipient
of the Stockholm Water Prize, concluded his analysis of water privatization in
England as follows: Englands water consumers are being ripped off. High leakage
rates and the privatization of the water supply have provoked a price explosion. Time
to bring the water supply back into public hands.
So who is right? When trying to answer this question, one should not make the
common mistake of comparing the situations before and after an event over a long
period of time. Rather, one must assess other factors that influenced performance
over this period in an albeit hypothetical attempt to compare the situation after
privatization with what it would have been had privatization not occurred.
In the case of the English water privatization, one has to ask: What would have
happened without privatization if the public authorities had obtained access to the
same debt relief, access to new debt, subsidies and tariff increases that the private
companies had? The trends observed in Scotland and continental Europe during the
last 25 years can help to answer these questions for each aspect of performance
individually tariff increases, investments, service quality and drinking water quality,
pollution, leakage, and the efficiency of service provision.
Higher Bills and Profits

In the 20 years after privatization, water and sewer tariffs in England and Wales
increased by 45 % after adjustment for inflation. In 2013, average water and sewer
bills were 376 pounds per year, corresponding to 21 pounds (38 euro) per month.
They had become among the highest in Europe, together with those in Germany.
Table 7.1 shows the water tariff and bill without the sewer tariff in dollars, for
purposes of comparison with other countries. It shows that the water tariff alone
accounts for only 0.7 % of median income and thus remains highly affordable.
But could these increases have been lower? On the one hand, as outlined
below, the private companies became more efficient in some respects, such as labor
productivity and operating costs, but not in others, such as level of leakage. On the
other hand, the private companies paid out hefty dividends. In the 1990s, the pre-tax
return on capital was well above 10 %, much higher than required to attract capital
to the sector. After the 2000 price review, the pre-tax return on capital in the water
industry returned to a more reasonable level of 67 %.
72
Table 7.1 Water tariff, water use and affordability in the service area of Thames Water (without
sanitation)
Water use
Household size
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
2.00
167
2.5
25
3,419
0.7 %
Source: Authors calculations based on annual report 2013 of Thames Water
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.
Improved Quality of Service

Initially, service quality remained the same, but then it improved. In 2003, 14 years
after privatization, all indicators of service quality had improved (Table 7.2).
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.
Loss of Employment and Increased Labor Productivity

Private water companies have become more efficient in terms of labor productivity,
providing improved services with fewer employees. The workforce fell from 40,000
to 31,400 between 1990 and 1999. There were no layoffs, but the reduction
was achieved by not filling new positions. The staff level corresponds to about
73
Table 7.2 Service quality after privatization

Water quality tests in compliance with standards
Properties at risk of low pressure
Unplanned interruptions over 12 h
Written complaints answered with 10 working days
Billing contacts answered in 5 working days
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
1 employee per 1,000 households served, a very efficient level in international

comparison. However, the loss of employment is also a downside of privatization.
Since then, private water utilities have begun recruiting again. While figures are not
strictly comparable because today more services are provided than in 1989, e.g.,
concerning wastewater treatment, it is still notable that total employment in the UK
water industry (including Scotland and Northern Ireland, which are not included in
the figures above) has risen again to 41,000 in 2013.
Leakage Goes First Up, Then Down

Water leakage in England, and especially in Greater London, is higher than in
many Central European cities. According to environmental journalist Fred Pearce,
leakage in London remains higher than in Paris, New York or Singapore. It is also
significantly higher than in Germany, the Netherlands or Japan. Since the late 1990s,
the regulator has tried to push water companies to bring leakage levels down. There
are no reliable data on leakage levels in the pre-privatization era, since there were
no bulk meters or customer meters, which are necessary to monitor leakage levels.
It is thus impossible to tell if leakage has declined since privatization or not.
Thames Water executives blame high levels of leakage on the old age of the
network, since 44 % of the mains are over 100 years old, with some being as much
as 150 years old. It appears that Thames allowed water leakage to increase until
the company came under public criticism when a drought hit Southern England in
the mid-1990s and a hose pipe ban had to be enforced. This came at the same time
that the Labour government came to power, leading to the 1997 water summit and
mandatory targets for leakage reduction over the next 5 years.
Still, leakage in Greater London increased from 662,000 m3 per day in 1999/2000
to 946,000 in 2003/2004. Only afterwards did the company tackle the issue
seriously, resulting in leakage levels declining to 894,000 in 2005/2006, still missing
the regulatory target. The company then beat the reduction targets for 8 years in a
row, reporting that, in 2013/2014, leakage had been reduced to 644,000 m3 per day.
While this is certainly a substantial achievement, it is also merely a return to a level
of leakage comparable to that 15 years earlier.
74
Box 7.1. Leakage in London and in England: An International

Comparison
Leakage in the service area of Thames Water in Greater London is higher
than in Berlin, New York City and in Phnom Penh, as shown in Annex 2,
no matter which indicator for leakage is used. Leakage is also about twice as
high as in other English cities. One of the reasons is the geology of London,
which is characterized by aggressive clay soil that corrodes the older cast
iron pipes, as well as by vertical movements that cause breaks. Still, this
does not explain why leakage levels in England are much higher than in
Germany. One explanation lies in the approach for dealing with leakage.
England follows the approach of an economic level of leakage: Leaks should
only be reduced until the cost of leakage reduction per unit of water is lower
than the economic value of the water itself. Thus, if it is cheaper to expand a
water treatment plant or to save water by other means than fixing leaks, the
leaks are not fixed. Germany, however, follows a standards-based approach:
Pipes are replaced if their conditions are determined as being below standard
as part of an inventory, no matter what the costs of replacement are compared
to other costs.
Operating Costs Reduced

Operating costs in the water industry in England and Wales remained fairly constant
after adjusting for inflation in the 21 years between 1989 and 2010. Since the asset
base increased during that time, for example, through the construction of numerous
new wastewater treatment plants, this is an improvement. In 1989, the government
expected that operating costs would increase by about a third during the subsequent
5-year period, but they increased by less than half as much. During the next 2year period beginning in 1994, the companies for the first time submitted their
own projections of operating expenditures, projecting a significant increase. The
regulator, going through this exercise the first time, changed the projections and
based water tariffs on a projection of constant operating costs. The companies,
however, beat that challenge and reduced operating costs to the level of 1989,
partly by reducing the number of employees. Over the next two 5-year periods,
the regulator set its tariffs based on a slight reduction of operating costs and then
allowed a moderate increase. The operating costs then were very similar to what the
regulator had expected.
In summary, the private companies first exceeded the expectations of the
authorities in terms of their ability to reduce operating costs, and later on met those
expectations.
Welsh Water: A New Model Emerges
75

Like all other water companies in England and Wales, Welsh Water became a private
company traded on the London Stock Exchange during the water privatization under
Margaret Thatcher in 1989.
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.
A Revolution from the Managers

Nigel Annett and Chris Jones, managers at Welsh Water, were unhappy with the
Cowboy Capitalism practiced by the companys owners. In early 2000, Annett and
Jones left Welsh Water and created an unprecedented scheme: They founded the
not-for-profit company Green Wales with the sole objective of buying the water
activities of the company that had employed them. Hyders water business was
valued by Ofwat at 2 billion pounds at that time. How could a mere handful of men
and women even dream of mobilizing such a sum for their project? Fortunately,
Chris Jones was a finance expert who had worked at Her Majestys Treasury and
76
at an international economic consulting firm. Nigel Annett had been an investment

banker before becoming a Director at Welsh Water.
The idea of Green Wales emerged at a propitious time. It was a year after the
Government of Wales had been established within the United Kingdom, so Welsh
politicians were inclined to introduce policies that set Wales apart from England.
Green Wales brought in an influential conservative politician, Lord Burns, who
had been Permanent Secretary at HM Treasury, the second-most powerful man in
the Ministry of Finance after the Minister. Lord Burns, although not from Wales,
accepted the position of Chairman of Green Wales and became a powerful advocate
in London for the plan hatched by Annett and Jones.
A Revenue-Making Not-for-Profit Company Built on Ethical

Principles
The ethics of the new company were to be based on the Nolan Principles, developed
a few years earlier by a government commission led by the judge Lord Nolan in
response to a series of corruption scandals. The seven Nolan principles include:
Selflessness, integrity, objectivity, accountability, openness, honesty, and leadership.
There are countless principles of business ethics, all ripe with high-sounding ideals.
Their true test is always in whether they are genuinely enacted. The founding
directors of Green Wales, it seems, were serious about breathing life into these
principles. But they were not bleeding hearts: They were keen to create a financially
sound company that would receive good grades from rating agencies in order to
raise funds in the capital market at the lowest possible cost.
At the time, two companies, Nomura from Japan and the US power utility WPD,
were locked in a fierce battle for a hostile take-over of Hyder. They bid up share
prices at the London Stock Exchange from the very low levels reached after the
regulator had tightened the screws. The companies were not interested in Hyders
heavily regulated side business of providing water in Wales. Their target was the
more profitable electricity and gas business. And this opened up an opportunity for
Green Wales. The Americans were perfectly happy to sell Hyders water business to
Green Wales, provided they could pay the price. Green Wales, formally established
in April 2000, wanted to raise funds in the capital market through the issuance of
a massive corporate bond with the help of Barclays Capital, an investment bank
specializing in bonds issued by public entities.
A First Transformation Attempt Foiled by the Regulator

While the bond issue was being prepared, an obstacle appeared. Ian Byatt, still
Director General of Ofwat at the time, had to approve the transaction, but he did
not like the proposal. Ofwat was concerned that Welsh Water would become a
mutual owned by its customers, devoid of equity capital, unable to raise debt
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.
A Chance Event Creates a New Opportunity

WPD then bought Hyder in October 2000, after it had bid up the share price in
competition with Nomura to more than double the level it had been at its low
point. WPD proceeded quickly to sell all of Hyders side businesses. For the water
business, the Americans signed an outsourcing contract with United Utilities, the
water and power company for Northwest England. But the deal fell flat because it
infringed on European procurement law. This chance event was what opened up
another opportunity for Green Wales and its plan to transform Welsh Water into a
not-for-profit company. For that purpose, knowing that the Americans wanted to sell
the water business quickly, Green Wales offered a price below the regulatory asset
value of the company.
But the water regulator still had to be convinced.
Support from the New Regulator

In early November 2000, Lord Burns, Chairman of Green Wales, sent a letter
to the newly appointed Director-General of Ofwat (20002012), Philip Fletcher,
addressing concerns that body had raised. Lord Burns emphasized that Green Wales
would not be a mutual, but a company that would strive for efficiency for the
benefit of its customers, increasing competition by outsourcing more activities than
had been the case under Hyder. The company would continue to be regulated by
Ofwat and would report as if it was listed on the stock exchange. It would use its
profits first to build up equity in order to be able to manage risks, and only then
would provide rebates to its customers. The strategy ultimately proved successful.
Ofwat cleared the acquisition in January 2001, providing certain conditions were
met. These conditions, such as a public commitment to customer benefits and
limiting its activities to the single purpose of providing water and sewerage services,
actually further reinforced what Green Wales stood for. It almost looked as if Ofwat
had been so convinced that it had tried to outpace Green Wales in its efforts to
achieve its own goals.
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.
The Green Wales and Welsh Water Model

What emerged in Wales is a model that combines British-style utility regulation with
a not-for-profit model. This is a model that did not exist until that day and that is
still almost unknown in continental Europe.
Green Wales, the owner of Welsh Water, is a company that has no shareholders,
but only members. Its 66 Members receive no dividends or other compensation.
Most of its Members are chosen by an independent selection panel, separate from
the Board, after public advertisement. The selection panel is chaired by a person
independent from the company. As of 2014, the panel is chaired by Glyn Mathias,
a retired Welsh journalist. Any Welsh resident can apply for membership. Members
must have diverse backgrounds in terms of gender, age and residence. Membership
is personal and Members are not appointed to represent any particular group or
stakeholder interest. They include teachers, writers, a former Bishop, Professors,
independent consultants, engineers, accountants, lawyers, human resources professionals, employees of charities, a mayor, a retired union official and a dentist. It
is the Members who appoint the Board at the Annual General Meeting, and who
can, in principle, fire them. The Board of Green Wales then appoints the Chief
Executive of Welsh Water. The bonuses of its Executives are not linked to quarterly
earnings or stock price increases, but to the achievement of service quality standards,
the reduction of water bills and environmental improvements. The whole company
structure is designed to be transparent and to ensure that Welsh Water acts in the
interest of the general public. In order to ensure transparency for bondholders, Welsh
Water also continues to report as if it was listed on the London Stock Exchange.
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,
The Scottish Turnaround
79
customer services and billing, to private companies. These happened to be the

private water companies in England, including United Utilities and Severn Trent.
It was thus closer to an asset holding company than a full-fledged utility. Only in
20112012 did Green Wales end the outsourcing contracts with Veolia, Severn Trent
and United Utilities. Green Wales now provides all these services in-house, having
become a full-fledged utility.
Not-for-profit is no excuse for poor service. Indeed, we believe that our different
business model must be a spur to excellent service and the best possible efficiency,
says the companys 2013 annual report. During its first 10 years as a not-forprofit, the main focus of Green Wales was on reducing the cost of financing, which
accounted for the lions share of its costs. By improving its credit rating, it reduced
the cost of its bond financing. Most Green Wales bonds are bought by UK-based
pension funds and life insurers. Furthermore, financial gearing was reduced to 63 %,
down from 93 % in 2001, and leakage was reduced from 245,000 m3 per day in
2001/2002 to 193,000 in 2010, a 21 % reduction.
Welsh Water and English Water Companies Compared

How did Welsh Water fare after it was turned into a not-for-profit company in 2001?
Did it provide better value for money than the private companies in England?
Water and sewer bills in Wales remain higher than the average bill in England.
But according to Ofwat, inflation-adjusted bills in Wales fell by 0.8 % per year
between 2000 and 2015, while inflation-adjusted bills in England increased by an
average of 0.5 % during the same period. According to the company, almost 15 %
of Welsh Waters customers spend more than 5 % of their income on their water and
sewerage bill, despite the fact that no dividends are paid and customers are granted
rebates. About 5 % of residential customers received some form of support from the
company to pay their bills. Welsh Water says it believes that this is more than any
other water company does in terms of helping poor customers deal with high water
and sewer bills, probably referring to English water companies.
In 2012, Welsh Water became what is probably one of few utilities in the world
to receive more thank-you letters and emails than complaints. Ofwats independent
research gave Green Wales a customer satisfaction score of 92 %, ranking it second
on the industry league table in terms of customer satisfaction. In addition, 83 % of
employees say they are proud to work for Welsh Water.
The Scottish Turnaround

Unlike in England and Wales, water supply and sewerage was a local government
responsibility in Scotland in the 1980s. And the Scottish mayors, many of them from
the then-opposition Labour Party, warded off privatization attempts when water was
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
France: An Improved Partnership in the

Motherland of Multinational Water Companies
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.
Fragmented Local Government

There are more than 36,000 municipalities in France, some of them with less than
100 inhabitants. The water sector thus is highly fragmented. This fragmentation
is somewhat mitigated by the fact that many municipalities are part of municipal
associations that can take many different forms (Intercommunalit). It is often
these associations, and not each individual municipality, that are in charge of
83
84
8 France: An Improved Partnership in the Motherland of Multinational Water. . .
providing water supply and to a lesser extent sanitation, or contracting out

these services to the private sector. For example, in the metropolitan area of Paris
(commonly referred to as le-de-France), with its 12 million inhabitants, there
are like a microcosm of the entire country three different models of service
provision: First, a large municipal association regroups 144 municipalities with
four million inhabitants. This association has delegated the responsibility to provide
drinking water and sanitation to Veolia under a lease contract. Second, there are
several smaller municipal associations that mostly provide water and sewer services
directly. And third, in the heart of the metropolitan area lies the municipality of Paris
proper with its two million inhabitants. The municipality of Paris used to delegate
its water and sewer services through two lease contracts to Veolia and Suez, but now
provides these services directly under public management.
Despite the existence of municipal associations, the water sector in France
remains highly fragmented. There are 14,200 public entities in France in charge of
water supply, and 17,200 in charge of sanitation. This is higher than in Germany,
with its 6,400 service providers; higher than in Belgium, with its two regional
water companies in Flanders and Wallonia respectively, as well as about 70 other
water utilities; much higher than in the Netherlands, with its ten regional water
companies; and also much higher than in England, with its nine regional water and
sewer companies, as well as a handful of water-only companies, and in Scotland and
Wales, each with its single water company.
Improved Governance, Step by Step

Unlike in Germany, the national government in France plays an active role in
shaping the conditions under which municipalities and private companies provide
water services. These interventions had a positive effect on the French water
sector, which was characterized by a lack of transparency and cozy relations
between politicians and the executives of water companies. This has led, in some
cases, to corrupt behavior, as in the case of Grenoble described further below.
Various central state institutions have taken an active role in the water sector to
combat these excesses: The Loi Sapin (an act named for the Minister of Economy
and Finance at the time, Michel Sapin) limited the financing of political parties
by private companies (such financing was completely banned 3 years later) and
forced more competition on the water sector in 1993; the Loi Barnier in 1995
(named for the Minister of Environment at the time, Michel Barnier, who later
became European Commissioner) for the first time required water utilities to submit
comprehensive data on their performance to their municipal owners. In 2003, a
report by the National Audit Office (Cour des Comptes) criticized the lack of
capacity of many municipalities to manage complex concession and lease contracts,
in particular regarding unjustified increases in certain fees. It also concluded that
the municipalities do not use the numerous legal instruments at their disposal to
The History of French Water Sector
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.

The Emergence of Private Water Companies in the
Mid-Nineteenth Century
The concession contract with a private company is a French invention from the
nineteenth century. The first private water concession in the world was awarded
in France in 1853. It was given to a company created by Count Henri Simon,
a conservative politician who had supported a coup that allowed Napoleon III to
become Emperor of France. As a reward, the Emperor issued a decree that granted
Simons Compagnie Gnrale des Eaux the exclusive right to supply the city of
Lyon with drinking water for no less than 99 years.
The concession was quickly followed by a 50-year concession in Paris and
concessions in other French cities, as well as abroad. At the end of the nineteenth
century, the Compagnie Gnrale provided water services in Venice, Naples,
Lausanne and Constantinople. In 1880, the French Bank Crdit Lyonnais founded
the second large French water company, Lyonnaise des Eaux. It won water contracts
in France and abroad, including in the French Protectorate of Morocco. The
international expansion of French water companies in the late nineteenth century
was closely linked to colonial expansion. The Suez Canal even gave its name to the
French Suez Canal Company that built and operated it, and which also oversaw the
drinking water supply of the cities along it. More than a century later, Suez would
merge with Lyonnaise des Eaux to become the second largest water company in the
world, Suez Environnement.
86
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.
The Demise of Water Concessions in the Late Nineteenth

Century
However, the system had many flaws. The tariffs for house connections were set
in advance for the entire contract period, which was often 50 years or even more.
Changes in the contracts were difficult, and if any additional obligations were added,
the companies understandably wanted to be compensated for the additional costs.
Under the first concession contracts, the companies had no incentive to provide
piped water to the homes of the poor, because the poor were unable to pay the tariffs
for house connections set in the contracts. After a series of cholera epidemics in
Europe in 18631875 and 18811896, and thanks to a better understanding of how
cholera was transmitted, many municipalities wanted to change their concession
contracts in two crucial respects: They wanted to expand house connections to
everyone, and they wanted to introduce water treatment. But the poor were not able
to pay for these costs, and the municipalities were reluctant to raise taxes. The model
of the early concessions thus was ill-suited to provide universal coverage to cities
with widespread poverty.
In the Paris suburbs, private companies had contracts with dozens of municipalities. An emergent middle class in these municipalities resulted in more people
than expected asking for house connections, allowing the companies to make higher
profits than anticipated. This led to endless disputes. From the mid-1870s to the
First World War, the French Supreme Administrative Court heard 78 cases between
municipalities and private water concession holders. Amid complaints about poor
water quality and excessive profits, there was a general sense of dissatisfaction
with private water concessions. Some municipalities wanted to force companies to
treat water, others requested lower tariffs or faster investments, and some wanted
to terminate the concession contract before its term. In most cases, the Supreme
Administrative Court sided with the water companies. Frustrated, municipalities
thus let the concession contracts elapse when they came to term, or ended them
early even if they had to pay high penalties.
The municipality of Lyon decided to terminate its 99-year concession contract
ahead of time in 1888. But, faced with stiff penalties, it only managed to terminate
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.
The Post-war Comeback of the Private Sector

Unlike in England, where most water utilities remained publicly managed until
1989, the private water companies in France made a surprising comeback in the
first decades after the Second World War. This comeback was not driven by any
national policy for privatization. Quite to the contrary, the post-war government
considered nationalizing the private water companies altogether. But the companies
managed to grow by taking advantage of opportunities in small towns. After the
Second World War, many small towns built drinking water systems for the first
time, but had little experience in running them. They were overwhelmed by the
new responsibility and were glad to accept a helping hand. Beginning in the 1960s,
municipalities also had to cope with more stringent environmental standards and
many started to build their first wastewater treatment plants. The private water
companies successfully marketed their technical and managerial experience to help
municipalities cope with these challenges, often in parallel with the creation of
associations of smaller municipalities. The growth was based on lease contracts.
These contracts kept the responsibility for raising finance with the public sector.
Even the traditional concession contracts were modified in such a way that a share
of tariff revenues (part municipalit) directly went to the municipal coffers, where
it was earmarked for water investments. A substantial share of water and sewer
bills consisted of taxes levied by basin agencies, established in the countrys five
major river basins. These basin agencies levy taxes on raw water abstraction and
wastewater discharge. They use their revenues to subsidize investments for water
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.
A Too Cozy Relationship with Politicians

The French model has been characterized by a cozy relationship between politicians and company executives. In addition, during the 1980s, cartels and suspect
accounting practices were widespread and often tolerated in the French water sector.
This was combined with occasional bribes and generous contributions to political
campaigns. Because there were only two large water companies, there was little
competition. Company executives built a close network of connections with the two
major political parties, the Conservatives and the Socialists. Water contracts were
often awarded directly without any bidding. Contract durations were long, often
spanning several decades. When the contracts did come to term, they were often
renewed without bidding.
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,
89
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.
A New Law Chastises Private Water Companies

In 1992, Parliamentary elections in France brought the Socialists a majority. As
mentioned above, the new Socialist Finance Minister, Michel Sapin, initiated an
ambitious law to prevent corruption and promote transparency in public life. The
law, prepared by the Cartel Office and passed in January 1993, was broad: It
covered the financing of political parties, real estate transactions, advertisement and
public procurement, in particular for the delegated management of public services
such as water supply and sanitation. The law obliges local governments to award
water supply and sanitation contracts competitively, and the contracts have to be
limited in time. A simple extension of a contract is now only allowed in exceptional
circumstances and for a short period. As a rule, contracts have to be bid out again
after they have expired.
The Loi Sapin was an important step in cleaning up the water business in France.
It also made the French water sector less profitable and, thus, contributed towards
pushing French water companies to expand overseas.
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)
Water use
Household size
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 %.
Eau de Paris: Underinvestment at the Expense of Future

Generations?
Eau de Paris self-finances more than 80 % of its investments. Unlike most water
utilities, it does not incur any commercial debt in the form of bank loans or bonds.
It does only incur limited debt through zero-interest loans from the Water Agency
94
Seine-Normandie, from which it also receives investment subsidies. The company is

quite profitable, with a surplus of 63 million euros in 2013, while total sales revenue
was 170 million euros. The surplus is entirely reinvested, and in contrast with
German water utilities no profits are paid out to the municipality. But there is a
catch: Investments are low, at 20 euros per inhabitant per year, standing at only a
third of the French average. Only 0.2 % of the network is renewed every year, which
is equivalent to a renewal of the entire network after 500 years if the same slow
rhythm is maintained a problem that affects many French water and sanitation
utilities, but appears to be particularly acute in Paris. Sooner or later, Eau de Paris
may be forced to incur commercial debt to maintain its assets.
The level of leakage is about half the recommended maximum threshold of 15 %
of produced water fixed in French law (dcret n 2012-97). Leakage seems low in
percentage terms, at less than 8 %, and lower than the 20 % average for France. But
this indicator is flawed. The leakage expressed as a percentage is low because the
Parisian water network is relatively short, since downtown Paris is densely settled
with multi-floor buildings. It is more appropriate to measure leakage per length of
distribution network. Using this indicator, a completely different picture emerges.
With almost 20 m3 /km of network per day, leakage in Paris is much higher than the
average in France of 3.6 m3 , and higher than in almost all other utilities covered in
this book, including the National Water and Sewer Company in Uganda, as shown in
Annex 2. The only exception is London, which has the highest leakage in England
and leakage that is only slightly higher than in Paris.
Remunicipalization in Other French Cities

The water and sewer system in most of le-de-France was not remunicipalized and
remained under private management. Prices were reduced when the concessions
were bid out anew in 2010. Nevertheless, the Paris remunicipalization sent a signal
to other French cities. During the subsequent years, 40 French cities and towns
decided to remunicipalize, including Rouen in 2011 and Brest in 2012. In Bordeaux,
a public campaign led to audits of the accounts of the private water company, as a
result of which the municipality was paid back 300 million euros. The municipality
then decided to end the contract with Suez Environnement in 2019, 3 years earlier
than was designated in the contract, even if it had to pay penalties of 5070 million
euros for the early termination. Other cities managed to negotiate substantial tariff
reductions as a condition of continuing private contracts, such as Toulouse, which
got a 25 % tariff reduction.
However, this swat of remunicipalization should be seen in the context of the 700
contracts that are bid out every year and the 4,700 public-private partnerships that
continue to exist in France for drinking water alone. Despite the remunicipalization
in Paris and in a few other cities, the private sector maintains a strong position as an
operator in the French water sector.
Conclusion
95
Marseille: More Competition Instead of Remunicipalization

In the metropolitan area of Marseille, the expiry of the water and sewer contracts in
2013 ignited a political debate. The two big French water companies had created
a joint venture, the Socit des Eaux de Marseille (SEM), whose contract had
been renewed and amended 60 times since it had first been attributed in 1942.
Under pressure from the government, the companies decided to end the Joint
Venture, which was increasingly perceived as what it was an arrangement to
avoid competition. As their first line of defense, the companies split up the booty:
Veolia took the drinking water system, while Suez was attributed the sewer system.
Surprisingly, this arrangement subsisted for two decades after the passing of the Loi
Sapin, which was supposed to increase competition in the water sector. Only when
the latest in the series of contracts expired did the water companies have to accept
that they would need to compete if they wanted to keep their contracts.
Indeed, the Greens and the Communists in the councils of the 16 municipalities in
the region asked for a remunicipalization following the example of Paris. However,
the Socialists, as the largest party, and their allies from the Conservatives decided to
continue with the model of private service provision, based on their narrow majority.
The bidding was done in four lots, one covering drinking water and three
covering sanitation in different parts of the metropolitan area, each for a duration
of 15 years and with a combined value of 3.2 billion euros. In the end, Veolia won
the water lot and two sanitation lots, but only after offering a 20 % reduction in
water prices. The sanitation lot covering Marseille city was won by its competitor
Suez, with the sanitation tariffs for all contracts remaining unchanged. 60 million
euros will be invested to upgrade the citys wastewater treatment plant to improve
bathing water quality after periods of heavy rainfall, in line with EU regulations.
Less than a year after the contracts were awarded, auditors from the regional
governments investigated the transaction. The regional prefect had asked them to
find out if the metropolitan government could not have extracted lower tariffs, a
shorter contract duration, or more investments. There were also allegations of a
conflict of interest, because one of the local councilors had also worked for Loic
Chausson, the President of the Veolia subsidiary serving Marseille and President of
the World Water Council, whose seat is in Marseille. At the time of this writing,
no result of the investigations is available. Whatever the merits of the accusations,
the episode clearly shows that the scrutiny to which water contracts in France are
subjected is more intense today than it was in the past.
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
Germany: Healthy Municipal Utilities, but with

a Quirk
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
97
98
9 Germany: Healthy Municipal Utilities, but with a Quirk
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.
Tariffs and Affordability

By law, tariffs have to cover costs, and assets are regularly maintained. Infrastructure
was initially partially financed through subsidies, but today, the renewal of assets is
financed to a large extent through retained earnings and to a lesser extent by
bank loans. Debt typically accounts for less than half the balance sheet of German
utilities, making them financially healthy with a big cushion of equity.
Water bills are affordable to the great majority of Germans. Two thirds of water
customers say that they do not even know how high their water bill is, mostly
because they are tenants of multi-apartment buildings and, thus, never receive a
water bill. For a household of two, the average water and sewer bill or the share
of the water and sewer bill allocated to the household is 34 euros per month. At a
bit more than 1 % of income, this is quite affordable to the average household. The
poorest receive welfare payments to cope with water bills, along with support for
their rental payments.
After reunification, massive subsidies were provided to East Germany to build
up its infrastructure. Wastewater treatment plants were often oversized in the
expectation that industrial estates would attract major commercial customers. These
hopes were not fulfilled. The population has declined by more than 10 % over the
last two and a half decades from 17 to 15 million, leaving municipalities with heavy
expenditures for maintenance and debt service. As a result of overinvestment and
population decline, water and sewer tariffs in East Germany are much higher than
in West Germany. For example, in the state of Brandenburg, a monthly water and
sewer bill is 45 euros on average, compared to only 26 euros in Bavaria.
Cross-Border-Leases: Selling German Sewers to Help

Americans Save Taxes
A not-so-bright spot in the German water sector are so-called cross-border-leases,
a financing scheme designed by American lawyers and German bankers with the
objective of saving taxes. Largely without the knowledge of the respective American
Cross-Border-Leases: Selling German Sewers to Help Americans Save Taxes
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.
Is the German Water Business Profitable to Its Municipal

Owners?
In German cities, there is a tradition of cross-subsidies from profitable municipal
services to public transport and public swimming pools to keep bus and metro
fares, as well as entrance fees to pools, low. The most profitable municipal services,
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.
Competition in Water Supply?

The late 1990s were a time when competition, having brought about lower prices
in telecommunications, was introduced into the energy sector in Germany, just
like in many other countries. In this context, the water and sanitation sector was
perceived as less dynamic, inefficient and lagging behind. In 2000, a study for the
Federal Ministry for Economic Affairs by the late Professor Hans-Jrgen Evers,
an economist from the Technical University in Berlin, recommended introducing
competition between neighboring water utilities to reduce these inefficiencies. The
German water utilities, their influential associations and the Federal Environmental
Office shot back in unison: They alleged that the proposal would undermine drinking
water quality and cause damage to the environment. This triggered a discussion in
the German Parliament, the Bundestag, about the modernization of the water sector.
It was one of the very few cases when the federal government got involved more
actively in water, treading on territory that is under the exclusive responsibility of
local governments under the supervision of the German states, the Lnder.
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.
The Regulators Push Water Prices Down

Tariff regulation is far less developed in Germany than, for example, in the United
Kingdom. There is no national regulator, such as Ofwat in England and Wales, the
Scottish water regulator or the National Water Observatory in France. Most German
water utilities are not subject to price regulation that even remotely resembles the
scrutiny to which utilities in England, Wales and Scotland are subjected.
German water utilities set their water tariffs based on state laws that require them
to fully recover their costs. However, until recently, no one had pushed them to
reduce their costs and pass the benefits on to their customers. As mentioned above,
given that multi-utilities that provide water and energy do not publish the costs of
water supply separately, it is impossible for outsiders to assess the rate of return
earned on their water business. What is clear is that the overall profits of the multiutilities were very comfortable for many years.
These comfortable times began to change when, in 2006, the Ministry of
Economy in the state of Hesse decided to look more closely at the level of water
Utilities Fight Back in Their Own Way
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.
Utilities Fight Back in Their Own Way

Beyond this specific case, the method used by state regulators to decide whether
tariffs are too high has been criticized. They look at the costs and decide which
ones are beyond the control of utilities, such as the quality of raw water, the
density of settlements, or the difference in altitude between the water source and
the city. If they find that after taking into account these differences, tariffs are above
average in some cities, they order tariffs to be reduced. Regulators are not obliged
to verify whether utilities can still cover their costs after the price reductions. This
approach triggered complaints by some utilities that the action of the regulators
was in contradiction with the legal requirement for full cost recovery. Some utilities
have gone beyond complaints: They have used a legal trick to escape the recent
efforts at price regulation. They transformed themselves from private law companies
back to public law companies, which are not subject to price regulation by the state
governments according to German law.
104
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
Berlin: Privatized to Fill State Coffers,

Remunicipalized at the States Expense
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?

When the Berlin wall came down, the water and sewerage utilities from the Eastern
and Western halves of the city were merged, forming the largest water and sewerage
utility in Germany. During the 1990s, massive investments were undertaken to
modernize the water and wastewater network and plants in East Berlin, where water
had been virtually free. Tariffs were adjusted to the levels in the West, and were
subsequently further increased by a substantial amount to finance the investments
needed to modernize the waterworks for the whole city, East Berlin in particular.
Between 1992 and 1999, tariffs increased by 150 %. This was not met with any
complaints.

105
106
10 Berlin: Privatized to Fill State Coffers, Remunicipalized at the States Expense
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
Privatization Design: Institutional Acrobatics

The Berlin privatization did not follow a clear Master Plan carried out from point A
to point Z. Instead, the privatization concept had to be adjusted several times to take
into account political opposition and legal objections. The result was a complicated
exercise in institutional acrobatics.
The consultant hired by the Berlin Senate initially suggested a full privatization
of Berlinwasser, along the same lines as Bewag and Gasag, but this was not feasible.
In Germany, sewer services are free of value added tax, but only if they are provided
by a public law entity. If BWB had been transformed into a private law entity, a
necessary step before a sale, sewer tariffs would have increased because they would
have become taxable, and the city-state would have been obliged by law to take over
any employees who did not wish to work for the new company, a situation it was
keen to avoid.
Legally, BWB would remain a public entity fully owned by the city-state. But this
was not the end of the privatization. The consultants were tasked with finding out
how a fully publicly owned company could still be sold to raise revenues for the city
and be fully under private management. The consultant came up with a solution: A
new entity was created, the Berlinwasser Holding Company. The Holding Company
was to be a mixed company, 49.9 % privately owned and 50.1 % publicly owned.
The majority public ownership of the Holding Company was to assuage opposition
from unions, while in reality, the private shareholders would be allowed to run the
company. A separate contract brought the BWB management under the control of
the Holding Company. The private owners thus could manage BWB, although it
remained an entirely public entity. The Holding Company would also fully own the
subsidiaries that had been created to win contracts in other sectors and cities. This
structure would place these business lines in legally separate companies under the
roof of the Holding Company.
Furthermore, a clause in the contract provided incentives to increase the efficiency of the company: For whatever efficiency improvements were achieved, the
owners would have been allowed to keep the profits resulting from them for 3 years.
After that, tariffs were to be reduced in line with the reduced costs. Tariffs were to
be set based on a rate of return 2 % above 10-year government bonds. The contracts
that fixed all this were to remain confidential. When this clause later became public,
it was highly controversial. After all, the Senate guaranteed a rate of return to a
private company. And it had an incentive to do so, because it wanted to make the sale
attractive enough to generate maximum revenues to the city state. If such concerns
were voiced internally at that time, they were not heeded. In July 1998, the Senate
adopted the new structure consisting of the mixed public-private Holding Company
and its public subsidiary BWB, with 49.9 % of the shares in the Holding Company
to be sold to a strategic investor.
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.
Selection of the Company

The Berlin Senate had always had an eye on RWE and Vivendi as potential buyers
of Berlinwasser. Allianz Finance, a subsidiary of the largest German insurance
company, was also brought into the consortium as a financial investor with a
minority stake.
In early 1999, an international call for bids was launched with the assistance
of the investment bank Merrill Lynch. Three consortia were prequalified, led by
Vivendi-RWE, Suez and the infamous Enron from the U.S., which went bankrupt
2 years later after a major scandal that involved hiding billions of dollars in debt
from failed deals and projects from its shareholders and lenders. Eurawasser, the
German subsidiary of Suez, had teamed up with two almost problematic partners:
the Berliner Bankgesellschaft, a bank owned by the city-state which would itself
be engulfed in a major scandal 2 years later, and Mannesmann Arcor, a mechanical
engineering and telecommunications firm with no experience in water which would
be bought by Vodafone and broken up only a year later. The Suez-led consortium
submitted a higher sales price than the consortium led by Vivendi. But it was not
selected, because Vivendi and RWE were considered to have offered the most
advantageous bid and because Suez offered a different privatization model. In June
1999, the contract was awarded to the consortium of RWE, Vivendi and Allianz.
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
Private Management and Rising Opposition
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.
Private Management and Rising Opposition

After the 2002 elections for the Berlin State Parliament, the coalition between
Christian Democrats and Social Democrats ended. Instead, the leftist PDS formed a
coalition government with the Social Democrats. Harald Wolf, a leftist and staunch
critic of the privatization, took over the Economy Ministry. In that function, he also
became the Chairman of the Berlinwasser Supervisory Board. The tables had turned,
and one could have expected that Berlinwasser would have been remunicipalized at
that time. But, surprisingly, the structure of the company was left untouched.
In 2004, the contractual grace period for tariff increases expired. The Berlin
government played a conflicting double role at that moment: It was the majority
owner of Berlinwasser, but it was also in charge of protecting the water customers
in its function as a regulator, approving requests for tariff increases. The government
decided in favor of its ownership role: In 2004, it approved a 15 % tariff increase,
followed by another 5 % increase the following year.
The Citizens Rise Up

The tariff increases, coupled with the lack of transparency about the privatization
contract, pushed an initially small group of citizens into action. In 2006, about 30
activists formed the Berliner Wassertisch (Berlin Water Table). This group led by
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.
The Cartel Office Joins the Fray

Bowing under that pressure, Harald Wolf asked the Federal Cartel Office to review
whether the water prices in Berlin were abusive. This was quite a strange move. The
Chairman of the Supervisory Board of a company wanted to lower the companys
prices, but was unable to do so by himself. He thus asked the Cartel Office to review
the prices against the will of the management of the company. In late 2011, the
Cartel Office took up the case. It compared the tariffs with those of other large cities
in Germany and ruled that they were too high and had to be lowered. In June 2012,
the Cartel Office ordered water tariffs to be reduced by 17 % until 2015. Water
tariffs were thus reduced in steps, beginning with a first step in 2013 and followed
by a second in 2014.
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,
The Impact of Privatization
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.

What was the impact of the 14 years of private management of Berlinwasser in
terms of tariffs, employment, efficiency and service quality? And what was its fiscal
impact? Did the city-state actually benefit from the privatization? And did corporate
governance improve?
Tariffs Increase, but Mostly Before Privatization

The Wassertisch argues that tariffs increased more under private management than
under public management. As shown in Fig. 10.1, this assertion is wrong. Water
tariffs in West Berlin had been below the West German average when the wall came
down. They then more than doubled between 1991 and 1997 under public ownership
and management from the equivalent of 0.78 euros to 1.76 euros, exceeding the
German average in 1997, 2 years before privatization. From then on, tariffs remained
frozen at 1.76 euros until 2003, as stipulated in the privatization contract that froze
tariffs for the first 5 years of the contract. Then, they increased by 23 % to 2.16
euros up through 2006. This increase was much lower than the doubling of tariffs
during the 1990s. Beginning in January 2007, tariffs were gradually reduced by
6 % until 2013 when the remunicipalization process was completed. Overall, tariffs
increased by 89 % between 1992 and 2013, from 1.07 euros to 2.03 euros. During
the same period, the average water tariff of utilities who were members of the
industry association BDEW increased by 65 %, from 1.18 to 1.95 euros. Inflation
during this period was 44% water tariffs thus increased faster than inflation, a
phenomenon that is partly due to reduced water consumption. As shown in Chap.
9, the reduction of per capita water use partially compensates the effect of higher
tariffs on water bills, so that the inflation-adjusted water bills of German households
have remained largely stable.
A typical water bill for an average household of 1.7 members at the water tariff
peak in Berlin in 2006 was 11.25 euros (14.63 dollars) per month, as shown in
Table 10.1. With a median household income of 1,582 euros (2,057 dollars), a
typical water bill amounted to 0.7 % of median household income. At much less
than the international rule of thumb of 3 % for the affordability of water bills, water
tariffs in Berlin remain affordable.
112

250.0
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
Water tariff Germany
Water tariff Berlin
Inflation
Fig. 10.1 Water tariffs in Berlin and Germany 19922013

Table 10.1 Water tariff, water bill and median household income in Berlin (without sanitation)
Residential water tariff (house connections)
Water use
Household size
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
2.81
115
1.7
14.63
2,057
0.7 %
Source: Authors calculations based on annual report of Berliner Wasserbetriebe 2012
Who Gained More: The State or the Investors?

Tomas Rudek from the Berliner Wassertisch says that, between 1999 and 2007,
the city-state got 423.5 million euros of the Berlinwasser profits, while the private
partners got the lions share with 949.9 million euros. The higher share received
by the private owners is apparently confirmed by a study commissioned by Sarah
Wagenknecht, a leftist member of the European Parliament, which showed that,
between 1999 and 2003, the city-state received only 133 million euros, while the
private owners received 366 million euros. In a study commissioned by Veolia and
RWE, the consulting firm WIK used a different approach: it also included revenues
from corporate income taxes, a groundwater abstraction fee and a wastewater
discharge fee in its figures, all of which the state levies on the water utility. Thus,
the total amount the public sector received between 1999 and 2008 was 1.44 billion
euros, compared to 692 million euros received by the private owners. The citystate of Berlin thus actually received more than twice as much from the privatized
company than the private owners received.
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.
Higher Productivity, Conflicting Figures on Operating Costs

Critics also argue that 2,000 jobs were lost because of privatization. However,
as pointed out above, all public entities in Berlin were heavily overstaffed in the
early 1990s. Steps to reduce overstaffing at other state-owned enterprises were
more drastic. At BWB, the number of employees was reduced from 6,200 to
5,000 in 10 years through normal fluctuation and regular retirement. There is also
disagreement about whether the company became more efficient or not. According
to the Wassertisch, operating costs increased from 253 million in 1996 to 303
million in 2006. The consulting firm WIK, however, says they decreased from 330
million in 1999 to 240 million in 2007. These second figures seem more plausible,
since the downward trend corresponds to the reduction in employees during the
same period.
Table 10.2 shows that BWBs performance indicators in terms of labor productivity and leakage are good and excellent, respectively, compared to good practice.
Transparency and Management Improved

Moreover, the private management refocused the company on its core business of
providing water and sewer services. Against the wishes of the politicians in the
Table 10.2 Performance
indicators for Berlinwasser
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 %
114
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
Civil Society and the EU Concession Directive:

David Beats Goliath, Using a Few Tricks
In September 2013, more than 1.8 million signatures were submitted to EU

governments under the first successful European Citizens Initiative. Under the
slogan Right2Water, its promoters accused the European Commission of trying
to force water privatization through the backdoor. The anger had been provoked
by a Concession Directive prepared under the auspices of EU Competition
Commissioner Michel Barnier. Barnier had pushed the Directive, despite the
European Parliament having declared in 2010 that it was not necessary. What was
Barnier up to? Being a conservative politician from France, Barnier certainly fit the
profile of the usual suspect when it came to the promotion of water privatization
after all, the French water companies had been the keenest players in global water
privatization.
What Is the Concession Directive and Why Was It

Introduced?
Actually private water companies already were a fact of life in most EU countries
when the new Concession Directive was proposed. All water companies in England
are private, about 75 % in France and almost half in Spain. The capitals of Bulgaria,
the Czech Republic, Estonia, Hungary and Romania are supplied by private water
companies. The Berlin water privatization preceded the Concession Directive, and
shares of the two largest water companies in Greece have been traded on the stock
exchange for many years. Private water companies also operate in smaller cities
Poland and Portugal. In Ireland and the Netherlands utilities are publicly managed,
but private companies operate treatment plants. In fact, the Concession Directive
covers all kinds of public services, including public transport, toll roads, ports,
energy and solid waste management. The Commission proposed the Directive,
because the national laws for the award of concessions were quite different from
one another, and some countries had awarded concessions without any specific legal
115
116
11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .
framework for concessions. Awarding concession contracts on the basis of public

procurement law that is used to procure goods and works is not optimal, because
of the long duration of concessions that often require changes. The Directive would
clarify when changes to the contracts are allowed, and when they were so important
that a new award procedure would be needed an important issue given the long
history of controversial renegotiations of concession contracts.
Opposition from Germany

But not everybody was convinced. The German Association of Energy and Water
BDEW, a trade association, had argued in February 2012 that the Directive was
not necessary. It said that its analysis had shown that the legal framework for
the award of concessions in Germany was sufficient. The German association
of municipal utilities VKU and the Upper House of the German Parliament, the
Bundesrat, also declared their opposition to the Directive, saying that it infringed on
the constitutionally guaranteed autonomy of German municipalities. Nevertheless,
Philip Roesler, the liberal Federal German Minister of Economy at the time,
supported the Directive in Brussels.
The European Citizens Initiative Right2Water

The authors of the European Citizens Initiative Right2Water, a committee consisting of representatives of European civil service trade unions, argued from a
different angle, focusing only on the inclusion of drinking water supply in the
Directive which, according to them, was driven by a desire to liberalize the EU
water market. The authors of the initiative had deftly combined the opposition
to liberalization of the water market with other demands that enjoyed widespread
public support. The citizens initiative first asked that the human right to water
and sanitation be realized for all citizens of the EU. It ended by urging the EU
to increase efforts to achieve universal access to water and sanitation globally. The
demand to stop liberalization of the EU water market was tucked in between the
two other sentences. While not stating it explicitly, the authors of the initiative
implied that the human right to water could only be achieved if water utilities were
in public hands, and that that right would be violated if water supply was privatized.
This interpretation is not shared by United Nations Special Representative on the
Human Right to Water Catarina Albuquerque. She says that states do have an
obligation to fulfill the human right to water and sanitation, but that the decision as
to whether they will reach this objective through direct public provision or through
the delegation of water and sewer services to private companies must be left to them.
But these nuances were lost in the fray. The promoters of the initiative were against
water privatization.
A TV Documentary Stirs Up Public Sentiment
117
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.
A TV Documentary Stirs Up Public Sentiment

This only changed when, in December 2012, the German TV magazine Monitor
aired a documentary on the Commissions plans. It called the directive the project
of the century, with the aim to privatize water supply all over Europe. A public
good would become an object of speculation and companies would make billions
of Euros. Multinational companies had fought, said the documentary, for years
to get the Directive passed. It showed angry citizens in Pacos de Ferreira, a small
town in Portugal that had privatized its water system. The protesters said that prices
had increased by more than 400 % and that they were not even allowed to drink
water from public fountains any more. What the documentary did not say was that,
prior to the award of a 35-year concession for water and sewerage to the Spanish
company AGS in 2004, water tariffs in Pacos de Ferreira had been much lower
than the Portuguese average. The infrastructure had been neglected and was in bad
shape when it was handed over to the private company. In order to renovate the
infrastructure, water tariffs would have had to go up under public management as
well. In 2011, the average water bill was 17 euros per month, the second-highest
level in Portugal. While still clearly below the 5 % threshold for affordability, this
was still a heavy burden on the towns citizens, who went out every month to voice
their discontent. It certainly made an impression on TV.
The documentary went on to show an EU paper naming Portuguese and Greek
water companies that were slated for privatization. The EU concession directive,
the documentary continued, would be the big breakthrough for privatizing water
in the entire EU. The magazine then quoted a paper by the University of Barcelona
118
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.
A Public Relations Disaster for the European Commission

The journalists then interviewed Barnier, caught seemingly unprepared standing
behind a desk in his Brussels office. He first denied that the directive would force
any municipality to privatize its water supply an assertion on his part that was
not true. Then, he backtracked when the journalist confronted him with a list of
members of a steering committee that, according to the magazine, advised the EU
on its water policy. The documentary only listed the committee members who came
from large corporations, almost a dozen names, some of whom were representatives
of big water companies, including a representative of Suez Environnement. Barnier,
enervated, first said the steering group only dealt with water quality. When read the
names of the private companies, he claimed that he had not personally participated
in the selection of the groups members. He then conceded, after a furtive look at the
list, that the composition of the group should have been more balanced. Little did
it matter that half of the groups members were representatives of local and national
governments, other public institutions and academia, or that a representative of the
Worldwide Fund for Nature was on the committee. Little did it also matter that
the steering group was set up to advise on the European Innovation Partnership for
Water, not on the concession directive, nor on water quality. Barnier looked like a
fool who had been caught lying. It was the beginning of a public relations disaster
for the Commissioner.
Before the documentary aired, the Citizens Initiative had made little headway.
But from then on, the number of signatures multiplied in Germany. Monitor and
Barnier had given a huge boost to the initiative, the former intentionally, the latter
unintentionally.
A Powerful Mixture of Fear and Brussels-Bashing

The Commission still denied the accusations that it was forcing privatization
through the backdoor, saying that the directive was designed to promote competition
for all public services and that it did not oblige local authorities to privatize their
water supply.
A Modified Directive Is Passed
119
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.
Water Is Taken Out of the Concession Directive

The Commission had softened the proposal somewhat, but the protests did not
subside. It was a case of too little, too late. Christian Ude, the popular mayor of
Munich and President of the German Association of Cities, publicly criticized the
Directive in April 2013. Shortly afterwards, Chancellor Merkel finally weighed in
against the inclusion of water in the Directive at a congress of German mayors.
Barnier then backpedaled and took water entirely out of the Directive in June 2013.
David had won against Goliath.
A Modified Directive Is Passed

In January 2014 the European Parliament, which had denied the need for the
Directive 4 years earlier, passed a modified version of the Directive. It praised
the Directive because it ensures best value for money by introducing new award
criteria that place more emphasis on environmental considerations, social aspects
and innovation, and because it provided greater opportunities for small and medium
120
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
The United States: Public Water in a Capitalist

Country
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
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12 The United States: Public Water in a Capitalist Country
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.
Reluctance to Increase Tariffs

Water tariffs in the U.S. are affordable, amounting on average to 1.1 % of household
income. In most U.S. states, there are no constraints on water tariffs for publicly
owned utilities. Local governments can set the tariffs of their utilities as they see
fit without the need to gain approval from state regulators. Despite this, most local
governments are reluctant to increase tariffs, in an effort not to please voters. This
is a main reason why funds available for investment are insufficient. The situation is
somewhat different for some larger utilities who tap into the bond market to finance
their investments. Financial covenants included in the bonds, as well as the scrutiny
from credit rating agencies, often force them to increase tariffs.
The Water Privatization Wave Hits the United States
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.
Friends and Foes of Federal Financing

In the United States, the federal government provides some subsidies for capital
expenditure, but these are subject to controversy. Republicans generally disapprove
of federal meddling in state and local affairs, and water supply is a local affair.
Republicans also loathe subsidies. Democrats are not as distrustful of federal
interventions if such interventions support broader objectives such as environmental
protection. This tension is visible in the history of federal financial support for water
utilities. Federal subsidies were first introduced with the Water Pollution Control
Act of 1948 and were expanded substantially through the Clean Water Act of
1972, which foresaw massive grants for local utilities to build wastewater treatment
plants. Republicans in Congress tried to trim down and eliminate these subsidies in
1987 through the Water Quality Act, which established State Revolving Funds, thus
introducing loans to local utilities instead of the grants provided previously. State
Revolving Funds issue tax-exempt municipal bonds in the capital market backed
up by federal funds. Publicly owned water utilities can thus obtain loans at lower
interest rates than private companies. For smaller systems, there has been significant
grant funding of capital expenditure. But by far, most public drinking water and
sanitation investments in the U.S. are financed by state and local governments:
Congressional appropriations of 1.4 billion dollars per year account for only about
5 % of annual investments of about 30 billion, which are mostly financed by utility
revenues and commercial loans and bonds.

The United States did not escape the global wave of water privatization wave in
the 1990s. Some cities thought that involving the private sector would not just help
their utilities become better, but that, by handing over responsibility for financing
and operating their water infrastructure, it would also allow them to save money.
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Enter the Foreign Companies

This push for privatization was not spearheaded by U.S. companies, but by the two
large French water companies, Veolia and Suez, as well as the German energy
giant RWE, which was trying to diversify into the water sector. A 1997 change
in the U.S. tax code facilitated water privatization. It made bonds used by private
companies to finance their investments tax-exempt in the same way that municipal
bonds are tax-exempt. The only condition was that the companies did not own
the infrastructure. The change did not apply to existing investor-owned utilities,
but it opened a window for public-private partnerships in which assets remain
publicly owned despite the private sector providing services and financing. Foreign
companies took notice and entered the U.S. water market. Suez Environnement
bought United Water, and Veolia Environnement set up its own subsidiary, Veolia
United States. In 2001, RWE, which had bought the British water company Thames
Water, also bought American Water. The U.S. subsidiaries of the French water
companies and American Water now tried to win French-style concession contracts
to run the entire water systems of large cities.
United Water managed to get hold of what seemed like the juiciest bit by winning
a 20-year contract in 1998 to operate the water system of the city of Atlanta
through a very low bid. It was the largest water privatization in U.S. history, and
the rhetoric matched it. United Water promised to cut Atlantas water costs in half,
although the infrastructure had been neglected for years and was in a deplorable
state. Atlanta for us will be a reference worldwide, Suezs CEO Grard Mestrallet
said at the time, a kind of showcase. Two years later, the U.S. Conference of
Mayors bestowed Atlanta and United Water with its Outstanding Achievement
Award, remarking that the deal exemplifies the type of corporate citizenship that
makes cities stronger and healthier. But the showcase declared by the CEO of Suez
unraveled quickly. The city terminated the deal in 2002, less than 4 years after
it had been signed. A Federal Court had ordered massive investments to comply
with environmental standards that had not been foreseen in the original contract. In
addition, there were many complaints about quality-of-service and mismanagement.
Water often had to be boiled due to insufficient water pressure, and it ran a rusty
brown color.
In 2004, Suez-owned United Water and Veolia competed to run the water and
wastewater system of New Orleans. But the city rejected both offers amid citizen
protests arguing that Veolias previous operation of the citys wastewater system
was marred by numerous environmental violations, mechanical failures, and lack
of regard for the maintenance and long-term needs of the system.
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
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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.
Private Equity Firms to the Rescue?

To fill the gap in infrastructure funding, United Water has teamed up with a Wall
Street private equity firm. This new idea is, in fact, another variation of the
concession contract: A private company receives a 40-year concession for a citys
water and sewer system, and commits itself to invest and modernize the citys
infrastructure.
In 2012, United Water and the private equity firm Kohlberg Kravis Roberts
signed a concession for the water and sewer system of Bayonne, New Jersey, a
city with 62,000 inhabitants. The city and its small municipal utility with just 33
employees were reeling under heavy debt. The utilitys revenues declined after the
closure of a large U.S. Army base in 1999 and after a deal to develop the area of
the former base into housing fell flat. The big plus for the municipality was that the
private joint venture took over more than half of the citys debt, a total of 130 million
dollars. After the deal, the credit rating of the city was upgraded from negative
to stable. However, everything comes at a price, and private equity firms are no
charities.
According to Bertrand Camus, CEO of United Water, our commitment to
funding improvements in the water and wastewater system is critical to keeping
rates stable. The common definition of the term stable is unchanged. But
United Water obviously has a different understanding of the term: The rate schedule
included in the agreement foresees an immediate 8.5 % rate increase (the first
rate increase since 2006), followed by annual increases beginning in 2016 that
are reportedly between 2.5 % and 4.5 %. Whatever undisclosed efficiency gains
the private Joint Venture will introduce, the improved efficiency clearly does not
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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.
Private Companies Serving Public Utilities

Today, private water companies in the U.S. mostly thrive in niches. In their traditional regulated market, they own mostly small water utilities. But in their new
unregulated market, they provide specific services for publicly owned utilities.
In this market segment, more than 1,300 municipalities and counties in 43 states
contract with private companies to provide selected water or wastewater services,
often for wastewater treatment plants.
New York City

An example where they serve an entire public utility to improve its efficiency is
New York City. In order to understand how the private sector became involved, it is
useful to look back at the history of water in the city.
44 Years to Build a Tunnel

The tunnel that supplies Manhattan with drinking water is buried deeper below the
surface than the Empire State Building extends above it. It is 4 m wide and was
built when the United States joined the First World War. The water flows from the
Catskill and Delaware reservoirs in Upstate New York by gravity and then rises
through large shafts to the surface without any need for pumping. The system is an
engineering marvel. But it has a catch: For almost a century, there was no backup
water supply system for New York City. The giant underground gates controlling
the flow in the tunnel had not been closed for decades. They are so degraded that
engineers fear the gates would not open again once closed, shutting off the citys
water supply. In the meantime, the old tunnel loses huge amounts of water through
leaks. The only way to inspect and repair the tunnel was to drill a parallel tunnel
into the bedrock below the city at a cost of 6 billion dollars. The construction of
New York City
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.
Keeping the Money from the Hands of the Politicians

New York City actually had to take some unusual steps to raise the funds needed for
the replacement tunnel. When the first phase of the tunnel was built in the 1970s, the
city was in a deep crisis and on the brink of bankruptcy. In order to raise the funds to
maintain and improve the citys water and sewer infrastructure, the citys legislature
passed the Water Finance Authority Act of 1984. It stripped the city of the right to
issue and collect water bills, and gave this right exclusively to the newly established
Authority. The Authority in turn raised bonds in the capital market. Its revenues
were to be used, by law, first to serve the Authoritys debt. This arrangement ensured
a good credit rating, enabling the Authority to raise debt at lower interest rates than
the bankrupt city government. Only once these financing costs were covered was the
Authority allowed to transfer funds to the city to pay for salaries and other operating
costs of the water system. In parallel, under a 40-year agreement, the Authority
leased assets from the city. The arrangement alleviated the financing troubles of the
water system and was a major step forward. But it did not solve the citys water
woes completely.
The Federal Government Orders More Investments

The city also had other troubles related to water and money: In the 1990s, federal
regulators imposed an environmental program aimed at improving drinking water
quality in the oldest of the three systems supplying water to the city. During the
August 2003 power blackout, untreated sewage was discharged into the East River
when emergency generators failed to operate. After this incident, the environmental
program imposed by federal regulators was extended to wastewater treatment,
pushing costs up further. In the wake of a multi-billion dollar investment program,
water tariffs in New York doubled between 2003 and 2011. The average monthly
water and sewer bill of a single family soared above 75 dollars. Many New Yorkers
are tenants and never see a water bill. Compared to sky-high rents of which
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Table 12.1 Water tariffs,
water use and affordability in
New York City

Water use
Average household size
Median net household income
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
1.66
319
2.6
41.29
4,659
0.9 %
Source: Authors calculations based on figures from the

NYC Department of Environmental Protection
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.
DC Water: A Public Utility Turnaround

In the late 1980s and early 1990s, the water and sewer system of the U.S. capital
had been in shambles. The system was operated by a municipal department that was
prone to the many woes of the city administration at the time. The drinking water
DC Water: A Public Utility Turnaround
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
Asia and Africa: Three Successful Utility

Turnarounds, Public and Private
Chapter 13
The Philippines: A Delayed Privatization

Success Story in Manila
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.

In his speeches, President Ramos highlighted the fact that more than half the water
in the network was lost and service quality was poor. The President instructed his
Minister of Public Works, Gregorio Vigilar, to bring a Water Crisis Act through
Congress. The Act was passed and gave extraordinary powers to the government,
including the possibility of sending civil servants into early retirement and awarding
Buenos Aires-style private concessions.
President Ramos was a keen supporter of privatization. He had previously pushed
through the privatization of the electricity sector, which had earned him praise
because a power crisis had been resolved by investments in new private power
plants. Now, he wanted to repeat the success in Manila for the water supply.
The governments approach was prudent. As Mark Dumol, a former civil servant,
describes in his diary, the government initially received several unsolicited bids.
But unlike in Indonesia, where the government had accepted unsolicited bids for
the water supply of the capital Jakarta, the Filipino government refused to accept
them. Instead, it insisted on an open bidding process in which the winner would be
selected, just as in Buenos Aires, based on the lowest water tariff offered.

135
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13 The Philippines: A Delayed Privatization Success Story in Manila
Making the Concession Attractive

In theory, this approach should have lowered water prices. In practice, the government increased water tariffs before privatization by 38 %, above the inflation rate,
which was 8 % per year at the time. It chose an opportune time for the move: The
increase was announced during the visit of the Mexican singer Thalia who was
tremendously popular in the Philippines. As predicted, almost nobody noticed the
increase and there were no protests.
Professional advisers provide advice on almost every large water privatization.
Usually, consulting firms offer counsel on financial, legal and technical matters.
In the case of Manila, the key financial advice for the transaction came not from
consulting firms, but from the World Banks IFC. While leaving open the option of
lending to the private companies at a later date, the IFC, thus, played a different role
than it had in Buenos Aires, where it had not been involved in selecting the private
company.
Before bidding started, the government made a second move beyond the tariff
increase to make the concession more attractive. The public water utility, the
Metropolitan Waterworks and Sewerage System (MWSS), had been one of the
most overstaffed utilities in Asia, with four times the number of employees per
connection than the water utility of Singapore. Using the upcoming privatization
as a justification, the government reduced the number of staff significantly through
measures negotiated with the labor unions. This would not have been possible under
normal conditions: The Water Crisis Act exempted the management and employees
of the company from the usual civil service rules. It also allowed for mobilizing
considerable government funding to compensate staff who would lose their jobs. As
such, it was essential that the government seek the support of the unions for their
plan. It even took them to Buenos Aires so that they could talk to the unions there.
In the end, the union approved the plan. Employees were offered a generous early
retirement deal, which 30 % of all employees accepted. The substantial reduction in
overstaffing enabled bidders to offer lower water tariffs to customers.
The government had taken and implemented two difficult decisions before
privatization: tariffs had been increased and the overstaffing of the utility had been
reduced. The concessions were now attractive and the bidders could come.
Splitting the Service Area in Two Halves

The government also made another unusual decision: It decided to split the city into
two service areas, following the example of Paris. The two concessions could not be
awarded to the same company, meaning that the performance of the two concession
holders could be compared. Another motive was that, should one of the companies
go bankrupt, the other company could be asked to take over the entire city. The staff,
assets and debts of the existing public company was split in two, in a cumbersome
process with controversial merits.
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.
The Bidding War

Companies had to be joint ventures between an experienced international water
company and a Filipino company. Four joint ventures were prequalified, led by
four international companies: The two French water giants were competing with
each other this time. The two other competitors were Anglian Water from the UK,
and a newly formed company baptized International Water. International Water
consisted of the construction giant Bechtel from the US and the water company
United Utilities from the UK. United Utilities was the successor of North West
Water, after that water company had been merged with a power utility. The local
partners of the four international firms were four big construction companies owned
by influential families: the Ayala Corporation, Benpres Holding owned by the Lopez
family, Aboitiz Equity Ventures and the Metro Pacific Corporation.
Each of these joint ventures was allowed to place two bids, one for each
concession area. The bid for East Manila was to be opened first; the winning
company would not be eligible for West Manila. Bids were opened in public in
the presence of the media, with the figures from each bid projected on a screen.
The lowest bidder for the East zone was Manila Water, consisting of the Ayala
Corporation and International Water. It offered tariffs that were one fourth the
amount of the previous tariffs! The participants were in awe. The tariff was so low
that the bidder was asked if his bid had been serious or if the company had made a
mistake.
The lowest bid for the West zone, after excluding the bid by Manila Water, was
submitted by Maynilad, consisting of Lyonnaise des Eaux and Benpres Holding. It
was twice as high as the bid for the East zone, but still 55 % below the previous
tariff level and lower than the tariffs prior to the increase during the timely visit of
the singer Thalia.
Bidders fell over themselves, doing so despite the massive investments required.
The bidders had to reach universal access after only 10 years. They did not receive
any subsidies, and they had to pay off the legacy debt. Ayala had apparently been
desperate to win the contract in the East Zone, which included the business heart of
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.
Private Management: A Tale of Two Concessions

Shortly after the concession contracts were signed, a first risk materialized one
that apparently few had expected: the East Asian crisis erupted, sending the Filipino
peso into a free fall, halving its value. Remarkably, IFC, the international financial
advisor, had not accounted for any foreign exchange variations in the contracts, and
the private companies, in their rush to gain contracts, had foolishly not challenged
this omission. The two private water companies had to cut down on investments. The
concessions were off to a bad start, but the two companies dealt with the situation
differently. Maynilad in West Manila failed, while Manila Water in the East was
successful. What explains these differences?
Maynilad had placed a much higher bid than Manila Water. Also, it worked
in the Western zone, which the IFC had expected to be more attractive in terms
of returns and costs. Therefore, the Western zone had been allocated 80 % of the
foreign currency legacy debt. With the devaluation of the peso, these costs soared
in local currency. Maynilad cut down on investments, as its French and Filipino
owners refused to inject more equity. Banks were not willing to lend during the
crisis to a company that did not put its own money where its mouth was. Moreover,
the local personnel that Benpres had sent to manage the company had no experience
in the water sector, and soon, a rift occurred between them and the old employees.
Maynilad eventually managed to make some investments and expand access, but the
achievements remained far short of the targets. After many years during which the
company struggled, it declared bankruptcy. In 2006, it was sold to a consortium that
included Metro Pacific Investments Corporation, one of the Filipino partners who
were among the losers of the 1997 tender.
Manila Water, the concession holder in East Manila, was more successful.
To some extent, it had been lucky. Its half of the metropolitan area turned out
Impact: Increased Access, Improved Efficiency and Customer Satisfaction
139
to be economically more attractive than expected, and it had to shoulder only

20 % of the legacy debt. But the company was also smarter. It borrowed small
amounts in local currency to finance investments quickly, gaining the trust of
local banks during the crisis, which allowed it gradually to borrow more. It also
empowered its employees to seek the best ways to cut water losses, which were
extremely high. Under an approach called territory management, the evaluation
and compensation of employees was linked to their performance. Each of the 400
territory managers within Manila Water was responsible for about 8,000 customers.
A territory manager is accountable for clearly defined outputs: amount of water sold,
amount of water billed, bill collections, customer service and non-revenue water.
Territory managers are expected to regularly walk the line and to communicate
with community leaders. A hotline having been established, territory managers
are also expected to monitor complaints closely and determine whether or not they
have been resolved.
Impact: Increased Access, Improved Efficiency and Customer

Satisfaction
The approach worked well. Manila Water more than doubled the population served,
going from 3 million in 1997 to 6.1 million. It increased the share of customers
with continuous water supply from 26 % to more than 98 %. It also reduced water
losses and theft from 63 to 16 % in 2009, and then to 11 % in 2013. The percentage
of people judging Manila Waters performance as very good increased from 28
to 93 %, according to surveys conducted by the University of the Philippines.
The success was largely attributable to the Filipino partner, the Ayala Corporation.
International Water the Bechtel & United Utilities subsidiary that later took over
the water supply in Cochabamba sold its stake to Ayala after a few years with little
apparent impact from the international partners (Table 13.1).
In West Manila, the oldest part of the city with the oldest pipe network,
results were eventually turning positive, especially concerning access. According
to Maynilad, access expanded from 58 % in 1997 to 84 % in 2002. The share of
Table 13.1 Performance of Manila Water before and after privatization

Access
Population served
Customer satisfaction
Continuity of supply
Labor productivity
Non-revenue water
Million
Staff/1,000 connections
Source: Manila Water annual report 2013
1997
49 %
3.0
28 %
26 %
9.8
63 %
2013
94 %
6.1
93 %
98 %
1.4
11 %
140
customers that enjoys 24-h water supply increased from 32 % in 2007 to 71 % in

early 2011. But non-revenue water actually increased from 64 % in 1997 to 69 % in
2002, compared to a target of 30 %. By 2011, it had been reduced to 47 %, a level
that is still unacceptably high.
Tariffs Go Down and Up, but Remain Affordable

Tariffs in Manila had initially gone down substantially as part of the bidding for the
concessions, helping politicians to score points with the public. But the low tariffs
were short-lived. The Board of MWSS, which continued to own the infrastructure
after the privatization, approves tariff adjustments on the basis of the concession
contracts. In addition to the indexing of tariffs to inflation, in 2002, regulators
allowed a tripling of water tariffs, raising them well above the pre-privatization
level. It was only this tariff increase that allowed the massive investments to take off,
in turn creating the improvements in access and service quality over the following
years.
Nevertheless, tariffs remain affordable. The average tariff for all customer groups
in East Manila is 32 pesos/m3 (71 cents/m3 ), less than half the water tariff in
Singapore. The residential tariff is less than half as much at 32 cents/m3 . A
residential bill in East Manila for a consumption of 30 cubic meters per month,
including all charges and taxes, is 395 pesos (9.60 dollars), about 2 % of median
household income. Tariff revenues cover the full cost of water distribution, including
asset replacement, interest on debt, and profit an unusual achievement in any
developing country (Table 13.2).
Did the Winning Companies Submit Dive Bids?

It remains a matter of debate as to whether some companies deliberately submitted
low dive bids in the expectation of renegotiating the terms later on. The bid by
Manila Water was clearly based on unrealistic assumptions: Its financial model
assumed an unrealistic increase in water demand, a rapid reduction in water losses
and very low financing costs. Manila Water took a big risk in order to win. It
Table 13.2 Residential
water tariffs, water use and
affordability in East Manila

Water use
Household size
Median net HH income (estimate)
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.32
200
5
9.60
509
1.9 %
Source: Calculation based on Manila Water annual report 2013
Conclusion
141
either completely overestimated its capacity to achieve rapid improvements, or it

was confident that it would be able to change the contract after it had won or
perhaps it was driven by a combination of both. The other bidders submitted much
higher bids, but even these proved to be too optimistic.
Box 13.1: Working with Communities in the Slums of Manila

Providing access to water for all is a moral imperative and an obligation in
terms of fulfilling the human right to water. However, in practice, this is a
considerable challenge in slums where residents typically live on illegally
occupied land so that utilities are not allowed to provide residents with house
connections. Furthermore, utilities are concerned that the low per capita water
consumption in slums means that revenues are below costs, that the poor may
not pay their bills, or that they will steal water. In Manila, this dilemma was
resolved through cross-subsidies from commercial as well as high-volume
residential users, and through an innovative partnership between the private
water utilities and community groups.
An example is the slum Happyland, where social workers from the NGO
Streams of Knowledge helped the community to organize itself through
elected leaders. The community leaders had the trust of the community and
of the social workers. The NGO then approached the utility and asked it to
provide water not to every shack, but to faucets at the entrance of every alley.
Residents would then distribute the water with hose pipes and pay dues to their
community coordinators. These would pay the NGO, which in turn would pay
the utility bill. The NGO would also pay the community coordinator a modest
salary for her or his services. Fees were set at such a level that there would
end up being a small surplus that could be used to finance small works that
benefit the community. The arrangement worked well. Residents paid their
water fees, water theft remained limited. Most importantly, monthly water
expenditures of the poor were cut to a fourth of their previous level when
they had to pay exorbitant prices to water vendors, while service improved
greatly. The key element that had been missing before to solve the puzzle of
water supply in slums was provided by the NGO: Trust. The public-private
partnership of the Manila concessions was thus extended to become a publicprivate-community partnership that served and included the poor.
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
Uganda: A Public Utility Turnaround, Triggered

by Pressure to Privatize
The turnaround of NWSC, the National Water and Sewerage Corporation of

Uganda, is a textbook case of how a failing water utility was transformed into a
performing company. Over a period of 5 years, from 1998 to 2003, costs were
slashed, efficiency was increased, hierarchies were made flatter, service quality
improved, and a loss-making company in one of the poorest countries in the world
moved into the profit zone without even increasing its tariffs. This was achieved
to a large extent through the efforts of a visionary leader, William Muhairwe, who
applied modern business management techniques to shake up a sclerotic government
agency.
Or so goes the story that has been told time and again at water conferences around
the world. The actual story of the turnaround of NWSC is more nuanced.
Before the Turnaround

NWSC, which in the 1990s had a service area comprising the capital city of
Kampala and about ten other cities and towns in Uganda, is usually described as
having been in total disarray in the mid-1990s. Indeed, many things were wrong at
the company.
The Heritage of Idi Amin and Milton Obote

The entire country had been devastated by two tragic episodes in its history: the
dictatorship of Idi Amin during the 1970s and a Civil War in the southern parts of
the country, known as the Ugandan Bush War, during the first half of the 1980s,
during the Presidency of Milton Obote. After rebels captured the capital and made

143
144
14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize
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.
National Water and Sewer Company (NWSC) in the 1990s: A

Basket Case?
Against all odds, Onek aimed at making NWSC a leading water utility in Africa, and
he brought major improvements to the utility. After Museveni became President in
1986, donors flocked back to Uganda, providing substantial funding for investment
and training. Brand new water treatment plants were built, in particular for Kampala,
drawing water from nearby Lake Victoria. Old and deficient waterworks were
redesigned and rebuilt, such as in the town of Mbale next to the Kenyan border. The
internal systems of the company were modernized, introducing for the first time a
digital geographical information system (GIS) to map the companys customers.
Many middle level managers received postgraduate degrees with scholarships
financed by donors. Consultants introduced area business plans with the aim of
providing more autonomy to mid-level managers. Furthermore, NWSC became a
truly national utility, expanding from the countrys three largest cities, Kampala,
Entebbe and Jinja, to serve a total of ten cities and towns.
But there were still major deficiencies in the organization in 1998. The utility had
failed to keep pace with urban growth in its efforts to extend access. In Kampala,
there was an imbalance between greatly enhanced water treatment capacity and
water connections, which lagged behind. The Corporation billed only half the
water it produced, and of the amount billed, it collected only 60 %. It had far
too many staff for a company of its size. Staff costs accounted for 64 % of the
total operating cost. Its debt was too high, since the government on-lent the loans
it had contracted from international financial institutions to NWSC. And despite
the efforts to decentralize decision-making, the senior management did not really
empower mid-level managers, maintaining the highly centralized decision-making
so characteristic of many utilities in developing countries. As Muhairwe would
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 World Bank Pushes for Privatization

In this situation, the World Bank pushed for public sector reform, including the
privatization of state-owned enterprises in all sectors. NWSC was not financially
attractive enough to be completely sold or to be bid out as a concession contract,
as had been the case in Buenos Aires or Manila. This is why the government and
the World Bank opted for a different approach. Private sector participation would
only be introduced in Kampala, accounting for about two thirds of the customers,
and it would be limited to specific activities where the utility had weaknesses:
metering, billing and collection. In November 1997, NWSC, still under the helm
of Engineer Onek, signed a 3-year management contract with H.P. Gauff Ingenieure
from Germany for these services in Kampala.
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
Checkers program to monitor

performance through
undisclosed visits
Raving water fans to further improve customer service;

government provides debt relief in anticipation of bond issue
Targets of 200609 performance contract missed; government
cancels plans to issue corporate bonds
Muhairwes contract ends and is not renewed
Mugisha appointed as new managing director
Preparation of a bill to create the Uganda Water and Sewerage Regulatory Authority
Internally Delegated Area Management Contracts (IDAMCs)

to give even more autonomy to local managers
Stretch out program to flatten

hierarchies
One-minute management
program to provide incentives
for individuals
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
Source: Authors compilation
2011
2013
2014
2010
2008
2004
2005
2003
2001
2002
1999
2000
Time frame
1994
1995
1998
Table 14.1 Key events in the evolution of NWSC
Second private management contract in

Kampala
First private management contract in

Kampala
Role of the private sector

World Bank pushes for privatization
146
The Turnaround
147
NWSC could improve its performance without private sector participation, or in

other words, that there was a viable public sector alternative to privatization.
Making Customers Pay Their Bills

On William Muhairwes first day at his new job, he was locked out of his office by
the tax authorities, who had sealed the companys doors because of unpaid value
added taxes. Reeling under its debt and saddled with high costs, the company had
also not paid its electric bills, and the electric company threatened to cut off the
power to the treatment plants and pumps. Muhairwe met with the Secretary of the
Treasury and pointed out that government customers were not paying their water
bills to NWSC either. This paved the way for an arrangement under which the
government allocated sufficient budget to public agencies such as hospitals and
schools to pay their water bills, and the respective arrears were ultimately settled.
This arrangement made it much easier for NWSC to increase its collection
efficiency during this period. But the company also managed to increase the
collections from residential customers. In Kampala, this was done with the help
of the management contractor Gauff. Collection efficiency increased from 60 % to
96 % during Muhairwes first 100 days as Managing Director, and to the pride of
NWSC, the achievements in the areas under their direct management fully matched
or even surpassed those of the private company in Kampala.
Cutting the Number of Employees by Half

In the late 1990s, all public companies in Uganda were under pressure to become
more efficient as part of World Bank-sponsored reforms of the public sector. The
shadow of privatization brought constant pressure to the utility, pushing it to
modernize its management approaches to prove that the public utility could perform
better than private companies.
To address the excessive staffing at NWSC, the government offered severance
payments to employees who were willing to leave the civil service. These were
financed by the proceeds of the privatization of state-owned companies, such as
the telecommunications company. Under different circumstances, a state-owned
enterprise would not have been able to lay off staff. But with the support of the
government, NWSC was able to reduce the number of its employees by half, from
almost 1,800 in 1999 to less than 900 4 years later. Part of this reduction was
achieved by contracting out certain activities, such as vehicle repair and security
services. Salaries for remaining employees were increased significantly, but even
after these increases, labor costs were lower than before due to the staff reductions.
This had a significant positive impact on the companys finances. The number of
staff per 1,000 connections decreased from 35 in 1998 to 9 6 years later, a result of
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.
Changing the Corporate Culture and Focusing on Customers

Despite all the achievements of NWSC prior to 1998, according to Muhairwe, the
greatest obstacle to turning around the company was the work culture and mindset of
its employees at all levels. More than 10 years after the end of the tragic period under
Idi Amin and Milton Obote, many employees still displayed the same behavior
as described above. As he recalls, coming late, shabbiness, drunkenness, rumour
mongering and gossiping, ethnic-based cliques, godfathering, insubordination and
absenteeism ( : : : ) were the order of the day. In order to break this work culture,
Muhairwe and his management team identified eight targets to be achieved by the
end of the 100 days program, such as the reduction of response time to leaks and
bursts and the bill collection ratio. Managers of each geographical area and their
staff were asked to set themselves monthly targets. The areas competed against
each other to see who could best achieve the targets. At the end of each month,
a ceremony, complete with music, dancing and bull roasting, was held to celebrate
the achievements of the best area. This indeed motivated the employees and changed
the spirit throughout the company.
The 100 days program was followed by a concerted effort to improve customer
service, an area where NWSC had been weak. This included regular customer
surveys, from which weaknesses would be identified, as well as measures to remedy
those weaknesses. Furthermore, help desks and service centers, previously unknown
in the company, were created. The same principles of empowering employees,
celebrating success and devolving authority to local managers were successfully
applied during this and subsequent phases of the Turnaround of NWSC.
Box 14.1: Customer Satisfaction Surveys in Uganda

The widespread customer satisfaction surveys have proven to be one of the
most effective features of NWSCs Turnaround. They cover questions such as
water reliability, water pressure, water quality, timely and accurate water bills,
responsiveness in resolving complaints, responsiveness in carrying out new
connections, customer care, and the convenience of the bill payment process.
The outcomes of these surveys are mixed. In the 20092010 survey, some
customers complained about low water pressure, muddy water during the
(continued)
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.
Performance Contracts Between the Government and NWSC

In 2000, Parliament passed the NWSC Act, which introduced 3-year-performance
contracts between NWSC and the Government. NWSC was the first company
in Uganda to be given the privilege of benefitting from such a contract. The
performance contracts were inspired by the management contracts made with
private companies, such as the one in effect at the time with Gauff for water supply
in Kampala. While new for Uganda, they were not a new idea in Africa: Many
Francophone countries use such performance contracts (contrats-plan) to set and
monitor targets for public enterprises. What was new was how the performance
contract was translated with the company. Continuing the spirit of competition
between areas that had been introduced during the 100 days program, NWSC used
Area Performance Contracts between the Head Office and the assorted areas to
break down the objectives from the performance contract for each individual area.
In order to encourage management to achieve the targets, an incentive element
of 25 % of the annual basic salary of the Directors was introduced, depending on
the fulfillment of the contract. Each year, the Board decides what kind of bonuses
management will receive. Crucially, employees also receive incentive payments
if their areas achieve the performance targets set out in the internal contracts.
Just as in Manila, the company gave more autonomy to regional managers who
were held accountable through internal performance contracts, introduced in 2000
and subsequently refined. Hierarchies were flattened and staff was given more
opportunities to be involved in what was called the stretch out programme.
150
Creating a New Corporate Culture

A key element of the managerial changes introduced by Muhairwe was to make
hierarchies flatter and to grant more decision-making power to area managers
within the company. This was first done through so-called Area Performance
Contracts, and then through Internally Delegated Area Management Contracts
(IDAMCs). The concept behind the contracts was the same and was inspired by
the existing arrangement in the Ugandan water sector. As mentioned above, the
government signed triannual performance contracts with NWSC. The company, in
turn, had signed a management contract with a private company for one of its largest
service areas, the capital Kampala. This contract foresaw bonuses for increased
performance, while giving the management contractor autonomy in its decisions as
to how to reach the targets. Why not emulate the spirit of these contracts to shape the
relations between other areas within the company, many of them located in remote
areas of the country, and the company headquarters? The simple idea was to reward
success, both in monetary terms and by publicly celebrating achievements, but also
to hold managers accountable for failure. Both ideas were apparently new to the
public sector in Uganda. The corporate culture of the company had been one of
extreme centralization, in which top managers in Kampala made trivial decisions
about the purchase of spare parts or the repair of a vehicle. This was now about to
change.
The first Area Performance Contracts were signed in 2000, in parallel with
the First Performance Contract with the government, and the first IDAMCs were
signed in 2003, mirroring the duration of the Second Performance Contract with the
government. Following the advice of Richard Franceys, a British specialist on water
utility management in developing countries, the initial very legalistic draft contracts
were simplified and written in a clear, practicable way that was easily understandable for area managers. The contracts initially met with some resistance, because
as a last resort Area Managers faced penalties for consistent underachievement,
including the possibility of demotion and even dismissal. Targets were negotiated
between headquarters and area managers. Managers and employees would receive
individual bonuses for the achievement of performance targets, initially equivalent
to 25 % of their basic salary. Crucially, the Uganda Public Employees Union
(UPEU) was involved in designing the contracts, and its endorsement was important
in gaining employee buy-in for the reforms. To attenuate fears of abuse, an outside
arbitrator was named to make a final decision in the case of disputes between
Areas and Headquarters about whether the targets had been achieved or not. The
first Area Performance Contracts were signed in two pilot areas, Kasese and Fort
Portal, both under the same manager, an enthusiastic supporter of the new idea.
Furthermore, the German development cooperation supported investments in these
two areas and assisted in the preparation of Business Plans for them. To the surprise
of Muhairwe, the initial reservations were quickly overcome. Only 2 months after
the first contracts had been signed, all other areas except Kampala, which was still
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
Table 14.2 First performance contract (20002003): targets and achievements

Staff productivity
(staff/1000 connections)
Proportion of inactive
accounts (%)
Collection ratio (%)
Metering efficiency (%)
Operating surplus
(million Ugandan shillings
per month)
Base value (2000)

43
18
Target value (2003)

35
10
Actual (2003)
39
11
26
15
21
89
85
250
92
97
1090
95
95
670
Source: William Muhairwe: making public enterprises work, 2009
disappointed by the event, which he found neither impressive nor instructive as

far as the challenges facing NWSC were concerned. Instead, he wandered into
a bookshop and bought a book by Robert Slater on the famous General Electric
manager Jack Welch. In this book, Welch argues that the traditional control-type
management stifles employee motivation and initiative. He advocated abolishing
the boss element, to be replaced with flat hierarchies, direct communication and
participation by employees. The book struck a chord with Muhairwe, who decided
to become a Jack Welch disciple in Uganda. He convinced the Board and Senior
Managers of NWSC to introduce Jack Welchs stretching concept to the company.
In particular, he asked one of his trusted area managers whether he would implement
the concept in his area by asking his employees to make suggestions as to how
to improve performance beyond the targets in the performance contracts. After
some hesitation, the manager accepted and convinced first his middle managers,
and then his employees. Subsequently, ideas were generated in a workshop. The
3-day workshop was held in a Spartan environment attended by senior managers
from headquarters and employees alike, without ties and where everybody called
each other by their first names, something unheard of previously. After the first
workshop, other areas were quickly asked to set out their own visions and targets in
similar workshops.
The performance contracts include six performance indicators, as shown below.
In the first performance contract, all indicator values improved, but only one out
of six targets was reached. The targets for the reduction of non-revenue water and
inactive accounts, as well as those for the increase of metering efficiency and the
operating surplus, were not reached (Table 14.2).
In the meantime, the management contract with the private company Gauff
had been renegotiated by Muhairwe, strengthening the rights of NWSC. When
the contract expired in June 2001, there was disagreement as to its impact. Gauff
claimed success, while NWSC said it had failed. The contract was not renewed,
but the government still under pressure from donors to introduce private sector
participation in the water sector decided to bid out another management contract
for Kampala. The second management contract started in February 2002. It was
The Turnaround
153
Table 14.3 Second performance contract (20032006): targets and achievements

Indicators
Staff productivity
(staff/1000 connections)
Proportion of inactive
accounts (%)
Collection ratio (%)
Metering efficiency (%)
Operating surplus (million
Ugandan shilling per
month)
Base value (2003)

39
11
Target value (2006)

36
8
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).
Increasing the Customer Base

The number of connections more than tripled from 51,000 in 1998 to more than
181,000 in 2006. This increased the revenue base of the company, spreading the cost
of its existing water treatment infrastructure and its labor costs to a larger customer
base. Donor financing helped in achieving this increase, but there are two other
factors as well. First, connection fees were drastically reduced. In 1999, they stood at
400,000 shillings (274 dollars), so that some households could not afford to connect
to the network even if pipes had been laid in their street. The connection fee was
now reduced to only 25,000 shillings (17 dollars), and the paperwork for processing
connection requests was simplified.
154
Reaping the Rewards

As a result of all the above changes, the financial performance of the company
improved substantially. Notably, this was achieved without any tariff increase.
There were only inflation adjustments and a 10 % increase to compensate the
utility for a reduction in connection fees. It was a major achievement in a difficult
environment, and it did not go unnoticed. The company was showered with awards,
including being named Employer of the Year 2003 for Ethics and Corporate Social
Responsibility in a survey audited by the international consulting firm Ernst &
Young. It also received a Golden Award for Management Excellence in June 2004
and was named Employer of the Year 2004 for Productivity and Performance
Management.
Muhairwe presented the success story of turning around NWSC at numerous
international venues, beginning with the World Bank Water Week in Washington,
DC, in 2003. In the subsequent years, the eloquent speaker continued to be invited
regularly to both African and international conferences, becoming a celebrity in the
world of international water. In 2006, emboldened by the companys success and the
praise it had received, Muhairwe went beyond his predecessors vision and vowed
to make NWSC one of the leading water utilities in the world.
After the Turnaround

Management Fads Galore
But there was, perhaps, also a downside to the successful approaches introduced
by Muhairwe. With his boundless energy, he kept introducing new management
concepts. Every time Muhairwe travelled abroad, as he himself writes, he made
it a habit to visit the management sections of book stores. Inevitably, he found
a new book that inspired him, and every time, he made it an obligation for his
managers to read the book, to talk about it, to implement its lessons and to make
their own subordinates do the same. After the Stretching Program inspired by
Jack Welch in 2002, the One Minute Manager by Kenneth Blanchard and Spencer
Johnson was introduced in 2003. Then came the Checkers program, a tool to
improve performance monitoring by using unannounced and undisclosed visits
by employees and customers, inspired by the experience of a German car rental
company managed by a friend of Muhairwe in 2005. In 2008, Raving Water Fans
was introduced, aimed at improving customer service and based on the Raving
Fans! concept by Kenneth Blanchard and Sheldon Bowles that emphasizes the
3Ds: Decide what you want, Discover what the customer wants and Deliver plus
1 % of what the customer expects. When the Managing Director introduced one of
these new concepts, all senior managers were asked to make a presentation about
their understanding of the concept to their staff. Copies of the books were distributed
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.
The Government Provides Debt Relief

As per its statute, NWSC must operate on a commercial basis. For many years,
the government thus on-lent international loans it had received to the company.
However, the company was increasingly unable to service this debt. Muhairwe
argued at a meeting in Paris in December 2006 that full cost recovery in developing
countries was a myth, and that tariffs would have to go up beyond the ability of
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.
Doubts on the Accuracy of Figures

There were also doubts as to whether the figures documenting the achievements of
NWSC were accurate, given the lack of an independent regulatory agency in the
water sector to verify them. While the companys financial statements were audited
by the Auditor General, there was no audit of technical indicators. As shown in Box
14.2, there are a number of dry zones in Kampala. These areas were counted as
new connections, despite the fact that they never actually received any water.
Box 14.2: Dry Zones No Water in Jinja Kaloli

When Sunday was a young girl, her family built a house in Jinja Kaloli, a
hilly area in the Wakisu District outside of Kampala that was rapidly being
built up. Since there was no piped water in the area, the family had to buy
water in jerrycans. This imposed a heavy burden on the budget of the poor
family, especially during the dry season, when prices for water skyrocketed. A
year after the house was built in 2003, National Water announced that the area
would be connected to the water network. Sundays family paid a connection
fee and the area was connected to the network. However, the taps in the higherlying areas of the neighborhood remained dry. Ten years later, Jinja Kaloli
still hadnt received water, although its inhabitants were counted as having
received access to drinking water in NWSCs statistics.
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
Table 14.4 Performance of

NWSC before and after the
turnaround
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.
Are Water Bills Still Affordable?

As mentioned earlier, water tariffs in Uganda are high compared to other developing
countries. A typical residential water bill for a household with a house connection is
about 5 dollars per month, which amounts to more than 4 % of the median household
income, as shown in Table 14.5. Water tariffs charged at stand posts with pre-paid
meters in slums are about a third lower and consumption is lower, so that monthly
water expenditures are rather in the range of 2 dollars per month for slum residents,
which is still high compared to their meagre income.
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
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.76
44
5
5.05
116
4.3 %
Source: Calculated based on NWSC annual report
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
Cambodia: A Public Utility Turnaround, Ending

with Privatization
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.
Before the Turnaround

This scene took place at the beginning of what is probably the most remarkable
turnaround of a public water utility in a developing country. Cambodia had been
heavily bombed during the Vietnam War, which had been followed by the terrible
reign of the Khmer Rouge, who had killed a fourth of the countrys population
through murder and starvation. The cities were all evacuated in an effort to turn
the country into a peasant society. After the fall of the Khmer Rouge, the country
remained politically isolated under Vietnamese occupation, desperately poor and
cut off from outside help, because the United Nations still recognized the exiled
Khmer Rouge as the legitimate government of the country. This ended only after
peace negotiations and free elections in 1993, which opened Cambodia to Western
tourism, trade and foreign aid.
At that time, Phnom Penhs water supply was a shambles. Eighty percent of the
population did not have access to piped water supply. Those who had a tap in their
home or yard received water for only a few hours per day, and what they received
was undrinkable. Pressure was so low that, for the few buildings that had more than
one floor, the water did not reach the first floor. Eighty percent of the water produced
was not even billed due to illegal connections and leaks. Half of those who received
bills did not bother to pay them. Workers were underpaid and demoralized. Some
were corrupt and helped customers get illegal connections and avoid paying bills.
The utility was effectively bankrupt.
161
162
15 Cambodia: A Public Utility Turnaround, Ending with Privatization
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.
Laying the Foundations of Success by Gaining Trust

After having cleaned the corruption out of the house, he worked to gain the trust of
the remaining staff. Promotions were based on merit, and a fair system of incentive
payments was introduced. Over the years, this created a culture of loyalty and pride
among employees.
The General Manager then worked to gain the trust of the customers. Having
honest employees was an essential precondition for becoming credible with the
public. Fighting against illegal connections was another part of it. As soon as
people realized that the utility staff and its management were honest, they started
to report illegal connections and make other complaints. The utility staff followed
up on complaints something that people were not used to. A proper system for
registering complaints and following up on them was an essential, inexpensive step
in improving the internal work culture of the utility as well as its relationship with
customers.
Ek Sonn Chan had thus improved the internal work culture of the water utility a
crucial point that would help the utility to make and maintain substantial efficiency
gains in the following years, and which would allow for the next important step:
making heavy investments in expanding infrastructure.
The billing and collection system was also changed completely. Previously,
bills were issued by utility staff going door to door. The same staff also collected
bills. Accounting was manual and faulty. Now, payment was only accepted at
the offices of the utility that processed payments, using a computer system. The
modernization in terms of technology was accompanied, crucially, by changes in
the way employees were managed. Water meter readers were carefully monitored.
Their performance was assessed and they received bonuses or penalties, depending
on whether they reached or failed to reach pre-set targets. The system achieved a
high accuracy of meter reading.
The Turnaround
163
Creation of an Autonomous Utility

Still, substantial problems remained. For one thing, salaries continued to be low.
Tariff revenues went to the municipalitys account, so any additional revenues
collected were not available to provide higher salaries to employees or to accomplish
other tasks, like buying spare parts. Despite the increased motivation, it was difficult
to retain qualified staff within the existing institutional set-up, where water services
were provided by a department of the municipality. The utility was not even allowed
to recruit its own staff. This had to be done through the municipality, which
had its own criteria for selecting employees that were not necessarily based on
qualifications.
Donors thus insisted that an autonomous public utility should be created with its
own legal status and separate finances. This was achieved in 1996, 3 years after
Ek Sonn Chan took over, when the government issued a decree that separated
the Phnom Penh Water Supply Authority (PPWSA) from the municipality. The
newly created utility was supervised by a Board consisting of representatives of
Ministries after all, Phnom Penh was the capital of the country a member
representing the municipality, an independent director and a staff representative.
Increasing Tariffs, Especially for High-Volume Users

A year later, the water tariff was increased and the tariff structure was modified.
Previously, tariffs were linear, meaning that the tariff was the same per unit of
water consumed, and actual consumption was estimated based on the number of
people living in a house, since there were no meters. Now that all connections
were metered, the utility introduced an increasing-block tariff. The lowest block
of the residential tariff was 20 % higher than the old tariff, but the second block
was 148 % higher, and higher blocks were even more expensive. The tariff increase
had to be approved by the line Minister in charge, as well as by the Prime Minister.
The additional revenues allowed the General Manager to increase the salaries of
his employees and to ensure that needed repairs would be undertaken to maintain
good service quality. If PPWSA had remained a department of the municipality, the
revenues could have been siphoned off for other expenses and would not have been
reserved for water supply.
Expanding the Network the Right Way

When Ek Sonn Chan took over, a Master Plan to expand the water network had been
completed with assistance from France and Japan. The Master Plan, covering the
period 19932010, was an excellent blueprint. Nevertheless, Ek Sonn Chan actually
held back on the expansion of the water network until PPWSA was reformed and
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.
Impact: Spectacular Results

Ek Sonn Chan remained at the helm of the Phnom Penh water utility for nearly two
decades, making sure that the principles and work ethic he had introduced to the
company remained in place. The results have been impressive: The customer base
multiplied by nine, reaching over 90 % of residents. Service quality improved, going
from an intermittent to a continuous supply of safe drinking water at good pressure.
Nearly all bills are being collected and non-revenue water has been reduced to the
remarkably low level of 6 %. The director says he drinks the tap water without
boiling. He has challenged his customers: If you get stomachache after drinking
the tap water, I will pay you compensation. One should perhaps know, in regard to
this challenge, that it is not customary for Cambodians to drink untreated tap water
anyway, meaning that Ek Sonn Chan was not taking so great a risk when he made his
bet. Still, no one turned up at his office asking for compensation. The achievements
of PPWSA are summarized in Table 15.1.
Water losses are now only 6 %. 99.9 % of customers pay their bills on time.
New employees were only hired when needed to replace staff that retired or left the
Table 15.1 Performance of
PPWSA before and after the
turnaround
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 %
Sources: Michel Vermersch (2010) and PPWSA annual

report 2012
Impact: Spectacular Results
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.
Box 15.1: Finding Out Who Is Truly in Need of Subsidized Water

A key challenge for utilities in poor countries is how to reach slum dwellers
who are not legally allowed to have their own water connections, because
they do not own the land they live on. PPWSA has tried various approaches to
reach slum dwellers, some more successful than others. At the beginning,
the utility tried to sell water in bulk to community representatives who
would then sell water to slum residents in their neighborhood. Many of
the community representatives turned out to be corrupt: They sold water at
tariffs that were much higher than those agreed upon, pocketing the profits.
After several years of experimentation, the utility helped to gradually set up
a different system: With outside help, community groups were elected that
were representative of slum residents, while a unit was set up in the utility
that was dedicated to working only with the community groups. Usually,
utility employees have technical and commercial skills, but are not trained in
community development. The new unit, staffed with social workers, filled this
gap. At the same time, slum residents gradually received land titles, making
them eligible to receive water connections.
One of the tasks of the community groups was to decide who were the
poorest in each community. Those who were considered to be the poorest
slum residents were allowed to pay their connection fees in installments,
the number of installments being determined by the degree of poverty. No
one, even the poorest, was completely exempt from the connection fees.
Many slum residents who were not classified as the being among the poorest
had to pay the full connection fee up-front, despite their still undeniably
considerable hardships. Keeping the utility financially healthy was considered
the prime objective, and in order not to jeopardize that objective, only a few
exceptions were made. Mechanisms were set up to ensure that community
groups worked in a transparent way, so that they could be held accountable
for their work. For example, the lists of those eligible for reduced connection
fees were made public, both inside the communities and on the website of the
utility.
Thanks to the efficiency improvements achieved by PPWSA, the utility is

profitable while still offering low residential water tariffs that are affordable to its
customers at an average of 1.8 % of household income, as shown in Table 15.2.
166
Table 15.2 Water tariffs, water use and affordability in Phnom Penh
Water use
Household size
Affordability
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
0.18
120
5
3.24
181
1.8 %
Source: Authors calculations based on PPWSA annual report 2012

Interestingly, the Phnom Penh success story was not widely known, even in
professional circles, before the early 2000s. At that time, the accepted wisdom was
that there had not been any turnaround of a public utility in developing countries.
Supporters of public management, such as the trade-union affiliated think tank
PSIRU, claimed that such successful turnarounds had occurred, but the examples
they quoted, such as Hyderabad in India or Tegucigalpa in Honduras, turned out to
be less than ideal. The Phnom Penh turnaround, although quite advanced, remained
unnoticed by the world.
From Obscurity to Fame

That changed in 2004 when PPWSA received the Asian Development Bank
Water Prize for dramatically overhauling Phnom Penhs water supply system and
demonstrating leadership and innovation in project financing and governance. This
was followed by a firework of awards, such as the Ramon Magsaysay Award for
Government Service in 2006 and the Stockholm Industry Water Award from the
Stockholm International Water Institute in 2010.
Privatization Through the Stock Exchange

In April 2012, the government partly privatized PPWSA, although it was recognized
as one of the best publicly owned water utilities in the developing world. This was
done without any external pressure from the World Bank or the IMF. Only 2 months
later, Ek Sonn Chan was replaced by the manager of a private company that had
previously managed the water supply of the coastal tourist city of Sihanoukville. Ek
Sonn Chan declined to comment about his removal when asked by the press. Shortly
afterwards, he became Under-Secretary in charge of water. He thus was in charge of
supervising not only PPWSA, but the entire water sector in Cambodia.
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
Utility Turnarounds Compared: The

Importance of Corporate Culture and Financing
How do the three successful turnarounds of water utilities in developing and

emerging countries compared in the preceding chapters PPWSA in Cambodia,
NWSC in Uganda and Manila Water in the Philippines compare with each
other? What are some common traits and what are important differences in the
circumstances the utilities faced, and in how the turnarounds were achieved?
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
16 Utility Turnarounds Compared: The Importance of Corporate Culture. . .
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 %
Source: Utility reports and national statistics
NWSC
70 %.
85 %
n.a.
171
Similarities in Changes of Corporate Culture

All three utilities achieved a change in corporate culture, giving more autonomy to
local managers, penalizing misbehavior and corruption, while providing incentives
to good performers.
Manila Water empowered its employees to seek the best ways to cut water losses
under a territory management approach, linking the evaluation and compensation
of employees to their performance. Territory managers are expected to communicate
with community leaders, to monitor complaints closely and determine whether or
not they have been resolved. NWSC gave more autonomy to its area managers
through internal management contracts. It made hierarchies flatter and improved
communications, following the example set out by the General Electric manager
Jack Welch. It provided both group and individual incentives in monetary terms
and through ceremonies, complete with music, dancing and bull roasting. It even
went so far as to control performance through undisclosed visits. At PPWSA, the
performance of meter readers was assessed. They received bonuses or penalties,
depending on whether they reached or failed to reach pre-set targets. The system
achieved a high accuracy of meter reading. A proper system for registering complaints and following up on them was established. The utility was also successful in
working with poor local communities in slums.
Both the leaders involved in the turnarounds and observers say that the changes
in corporate culture were either the key element or an important element in the
turnarounds. The type of change is similar and simple: delegating responsibility to
lower levels, while penalizing wrongdoing and rewarding performance.
Differences in the Sequence of Reforms

All three turnarounds took a long time around a decade. The three paths to achieve
the turnarounds were quite different in terms of ownership, tariff increases and
financing. Manila Water was a private utility turnaround, financed first by equity
capital, then gradually more and more by commercial loans. Tariffs were first
reduced. They were only increased 5 years after the concession award, triggering
the achievements after considerable delay. Loans could not have been accessed
without private capital, tariff increases and the efficiency gains achieved during
privatization.
NWSC was a public utility turnaround spurred by the threat of privatization,
financed by loans from foreign development agencies. Tariff increases and institutional reforms had been completed before the turnaround. NWSC started by borrowing loans and then wanted to move on to corporate bonds. It abandoned this move
after the financial crisis. The government forgave its debt, so that its investments are
now financed through subsidies, which may not be sustainable in the long run.
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.
Table 16.2 Efficiency of Manila Water, PPWSA and NWSC compared

Labor productivity
Non-revenue water
Non-revenue water
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 %
Source: Authors calculation from utility reports
Since sewerage is only available to 8 % of NWSC customers, the responsibility for sewerage
alone cannot fully explain this discrepancy.
173
Table 16.3 Salaries and benefits of utilities compared to income levels

GDP/capita/year
Household size
GDP/household/year
GDP/household/month
Average utility salary and benefits/month
Ratio salary and benefits to GDP per
household
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
Source: Authors calculation from national statistics and utility reports

Table 16.4 Cost and profit comparison between Manila Water, NWSC and PPWSA (USD per
connection, 2012)
Depreciation
Salaries and benefits
Power
Other non-salary operating costs
Interest payments
Total costs
Profit
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

Residential water use
Household size
Water bill
Median net household income
Affordability of water bill
USD/m3
Liter/capita/day
Persons
USD/month
USD/month
% of income
Phnom
Penh
0.18
120
5
3.24
181
1.8 %
Source: Authors calculation
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
Conclusion: It Is Not About Public or Private
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.
What Has Changed over the Last 25 Years?

This book has compared changes in the organization and performance of water and
sewer utilities over a period of 25 years (19892014). Some of these changes are so
recent that the jury is still out on their impact, such as the public-private partnership
in New York City. In other countries, changes have remained superficial: in Egypt,
179
180
17 Conclusion: It Is Not About Public or Private
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).
The Impact of Privatization and Remunicipalization

To assess the impact of privatization, remunicipalization and the turnaround of
public utilities, I asked six questions throughout the book:
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?
Did the efficiency of service provision increase or decrease, as measured by water
losses, labor productivity and operating costs?
Did subsidies and taxes increase or decrease, and by how much?
Did corporate governance, the corporate culture of the utility and management
styles deteriorate or improve?
In all cases from developing and emerging countries, access to water supply
increased substantially, Access to sewerage also increased, albeit more slowly. It
remains a matter of debate as to whether access increased more quickly under private or public management. In no developing or emerging country has privatization
reduced access to water as the result of utilities cutting off the water supply of the
poor who are unable to pay their bills. In England water cut-offs for non-payment
were banned by law in 1999. This widespread fear associated with privatization
ultimately proved to be unfounded. In most cases tariffs remained within the limits
of affordability, as measured by the rule that water expenditures should not exceed
three percent of income. Among the cases covered in this book, there are only
two exceptions, none of which is a privatization: in Uganda and Bolivia, the tariffs
charged by the publicly owned and managed water utilities exceed the threshold of
affordability.
The Impact of Privatization and Remunicipalization
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
2. No single privatization, turnaround or remunicipalization has happened as

planned. Unforeseen events abound and have had a significant impact on
outcomes.
3. Someone always pays for water and sewer services. If water users do not pay
through tariffs, taxpayers pay for them today or, when states get into more debt,
in the future.
4. You get what you pay for. If neither water users nor states pay for water, access
to tap water and sewers remains low and service quality poor.
5. Leadership, good management, professionalism and honesty can make a huge
difference in any country or city, whether rich or poor, if changes in behavior
spread to an entire utility over time, changing its corporate culture.
Turning a water and sewer utility around is not an easy task. It has costs, entails
risks and takes time. There is no one way to achieve a turnaround: it can work with
or without bringing the private sector on board. The worst thing that could happen to
a water and sewer utility that fails to deliver services to the people, however, is not
a sin of commission, but a sin of omission: it is to leave a utility in the trap of poor
performance in which so many in developing and emerging countries, unfortunately,
are caught.
Annex 1: Management Modes, Subsidies, Water

Use, Bills, and Affordability in Selected Cities
Cairo
London Paris
Berlin
New
York
City
Current
management
Public
Private
Public
Public
Mixed Mixed
Private Public
Public
Management
in 2000
Public
Private
Private Private Public Public
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 %
Source: Authors calculations based on utility data and national statistics

M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9
185
Annex 2: Nonrevenue Water in Selected Cities

According to Different Indicators
Water production (million m3 /day)

Nonrevenue water (million m3 /day)
Nonrevenue water (%)
Water network length (km)
Population served (million)
Total water use (million m3 /day)
Total water use (liter/capita/day)
Network length (m/inhabitant)
Nonrevenue water (m3 /km of
network/day)
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
Source: Authors calculations based on utility data

Nonrevenue water (NRW) is a technical term that includes leakage (technically called real losses)
as well as meter under-registration and water theft (technically called apparent losses). In the
cities and countries listed here, except for Uganda and perhaps Phnom Penh, NRW is almost the
same as leakage. The table shows that expressing nonrevenue water as a share of water produced,
as it is often done, is misleading. For example, New York City seems to have very low losses
of 4 % only. Actually, water use in New York City is more than twice as high as in other cities
listed. Therefore, expressed in the more appropriate format of cubic meter/km of network/day,
leakage in New York City is rather average at more than 13 m3 /km/day. Uganda appears to have
much higher water losses at 33 %, but these have to be seen in the context of very low water
consumption. At 15.5 m3 /km/day, nonrevenue water in Ugandan cities is only slightly higher than
in New York City. Leakage excluding water theft and under-registration may well be lower. The
density of settlements also plays a role: In relatively densely settled inner Paris, the service area of
Eau de Paris, the network length per inhabitant is less than a third than in Berlin and only a fifth of
Greater London, where the service area includes suburbs. In percentage terms, Paris has a level of
nonrevenue water that is very low at 7 %, but it actually has a higher level of leakage than Ugandan
cities (19.5 compared to 15.5 m3 /km/day)
Note that the figures for total water consumption per capita shown in this table are higher than
the figures for residential water consumption per capita shown in Annex 1 for the purpose
of calculating the affordability of residential water bills, because total water consumption also
includes water consumption by offices and small commerce

187
Annex 3: Overview of Privatizations, Public

Turnarounds, and Remunicipalizations
in This Book
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
New York City

Washington, DC
Manila
Countrywide
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
Annex 4: Chronology of Key Events Covered

in the Book
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
Annex 4: Chronology of Key Events Covered in the Book
(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
Annex 5: Glossary of Technical Terms
Arbitration A procedure to settle commercial disputes in a binding way without

resorting to the judicial system, with the aim to ensure a high degree of
competence and a relatively speedy outcome. A specific form of arbitration
relevant for water privatization is between states and investors, which is typically
carried out by the International Center for the Settlement of Investment Disputes
(ICSID) of the World Bank Group.
Bond (Finance) A financial instrument issued by a national government (government bond), a local government (municipal bond), or a company (corporate
bond) that mobilizes financial resources for a certain period until the bond
matures, during which interest is paid. Bonds are typically bought by institutional
investors.
Build-Operate-Transfer (BOT) Contract A concession contract for the financing, construction, and operation of a new plant under which no revenue is
collected directly from subscribers.
Collection Efficiency A measure of the efficiency in the collection of bills, defined
as bills collected divided by bills issued. Ideally, collection efficiency is 100 %.
Concession (Infrastructure) A contract between a public entity that owns the
infrastructure and a company to provide a public service, under which the
company operates and finances infrastructure and collects revenue.
Cross-Border Lease A contract between a private trust in one country that buys
infrastructure in another country and a public entity that leases back and operates
the infrastructure without any infrastructure financing with the purpose to reduce
the taxes levied on the private investors.
Debt-Equity Ratio The ratio between the debt and the equity of a company.
Depreciation (Accounting) The allocation of the cost of assets to periods in which
the assets are used. For example, if a pump station costs 1 million dollars and is
used over 10 years, the depreciation shown in the annual income statement as
cost will be one hundred thousand dollars per year.

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
Performance-Based Contract A contract where the management of infrastructure

remains with a publicly owned utility, while specific services are provided by
a private company against a remuneration that is at least partly based on the
performance improvements achieved.
Performance Contract A contract between a government and a public enterprise
that specifies the rights and obligations of both parties, including the achievement
of performance targets.
Private Equity Firm A firm that manages funds of wealthy investors and invests
it for them by directly buying shares in companies that are not traded on a stock
exchange.
Privatization In the broad sense of the word used in this book, any form of publicprivate partnership. In the narrow sense of the word, the sale of public enterprises
to the private sector (divestiture).
Public-Private Partnership (PPP) Any contract between a public entity and a
company under which the company provides infrastructure-related services for
a fixed duration. The services can be very different depending on the type of
contract, such as a concession, a lease, a cross-border lease, a management
contract, or a performance-based contract.
Public Service A service provided by a government, or by a company on behalf of
a government, for all regardless of income.
Public Utility A public or private entity that provides a public service such as water
supply or sewerage.
Regulation (Infrastructure) Any form of public control exerted on a public or
private infrastructure provider, concerning its environmental impact, its health
impact, its service quality, or its economic activities.
Regulatory Agency A public entity that enjoys a degree of autonomy from the
government, in order to avoid political interference, and that is entrusted by law
with the regulation of a specific activity.
Tariff (Utilities) The price charged by a utility for its product. In the USA and the
UK, the term water rate is more common, while in Ireland the term water
charge is used. In international comparisons, the terms water tariff and water
price are more common. The various terms are used interchangeably. This book
uses the term water tariff.
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
published in December 2005. Information on the development of SEMAPA after

the Water War was collected from the Bolivian press, the websites of SEMAPA,
the Misicuni Company, and the Inter-American Development Bank.
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.
7. The United Kingdom

The history of water privatization in England was compiled from various papers.
The paper Water Privatisation in England and Wales by Peter Martin from
the consulting firm Black and Veatch written around 2012 gives a good brief
overview. It is complemented by the analysis of numerous reports by the water
regulator Ofwat. Two poignant pro-privatization perspectives are found in Water
and Wastewater Privatization in England and Wales: An Advocates Perspective
by Elizabeth Brubaker, Executive Director of the Canadian NGO Environment
Probe, and in the article Private Passions published in The Economist of July
17, 2003. Critical analyses of the English water privatization include UK Water
privatisation a briefing, published in February 2001 by Emanuele Lobina and
David Hall from the Public Services International Research Unit (PSIRU) at the
University of Greenwich; Sale of the century: the privatisation scam by James
Meek of The Guardian of August 22, 2014; Former regulator attacks water firms
over windfall profits and high prices by Simon Bowers of The Guardian on July 17,
2013; The Boiling Point published by Asit Biswas, published in The European of
September 25, 2013; and The water industry is burying a leaking pipes scandal
by Fred Pearce in The Guardian of May 8, 2012. The story of the Tideway project
is based to a large extent on the article Tideway project runs up against reality
published in the July 2014 issue of Global Water Intelligence.
The story of the transformation of Green Wales from the private company Hyder
to the not-for-profit entity today is briefly recounted by the water finance consultant
David Lloyd Owen in The Sound of Thirst, Why urban water for all is essential,
achievable and affordable, 2012, pp. 402404. It is also covered by Robin de la
Motte, a research fellow at the Public Services International Research Unit, Business
School, University of Greenwich in the Cardiff case study, 2005, which is part of
the Water Time research project supported by the European Commission. Important
details about the transformation have been taken from the published letters by Lord
Nolan to the Director General of Ofwat on November 3, 2000 and March 7, 2001,
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
presentation by Alain Tiret from the Fdration Professionnelle des Entreprises de

lEau in 2008. The report of the French Audit Office was published in 2003 by the
Cour des Comptes under the title La gestion des services publics de leau et de
lassainissement.
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
legung der Teilprivatisierungsvertrge bei den Berliner Wasserbetrieben and the

sources quoted there and from articles in the Berlin newspaper Der Tagesspiegel.
11. Civil Society and the EU Concession Directive

This chapter is based on various sources including information from the Website
www.Right2Water.eu, media reports from tagesschau.de, and a press release by the
German Water and Energy Association BDEW Gestaltungsfreiheit erhalten of
February 7, 2012. The reports by the TV magazine Monitor of December 13,
2012 and March 14, 2013 were accessed on the website of the German TV station
ARD. Water tariffs in Portugal are from a report by the Portuguese water regulatory
agency ERSAR quoted in the Portuguese newspaper Expresso of September 26,
2012. The study by the University of Barcelona is by Germ Bel, Xavier Fageda,
and Mildred E. Warner and is entitled Is Private Production of Public Services
Cheaper Than Public Production? A Meta-Regression Analysis of Solid Waste
and Water Services. It was published in 2010 in the Journal of Policy Analysis
and Management, Vol. 29, No. 3, pp. 553577. The list of members of steering
group of the European Innovation Partnership for Water was retrieved from the
EU commissions website on August 14, 2014. The document Directive of the
European Parliament and of the Council on the award of Concession Contracts
Frequently Asked Questions, posted as a press release dated January 15, 2014,
on the website of the European Union, was helpful in analyzing the content of the
Directive.
12. The United States

The story of the New York City water tunnels is taken from the article Unearthing
Manhattans new water source by Daniel Geiger in Crains of July 21, 2013, the
article After Decades, a Water Tunnel Can Now Serve All of Manhattan in the
New York Times by Matt Flegenheimer of October 16, 2013 and other sources. The
NYC PPP experience is based on reports in the business magazine Global Water
Intelligence, a blog by Tom Robbins entitled Water, Water, Everywhere in Mayoral
Race in the Village Voice of September 1, 2009 and on official reports by New
York City, such as DEP Launches Program To Improve Services, Lower Costs and
Maintain Status as Nations Best Water Utility for Future Generations, November
7, 2011. NYC water tariffs are taken from New York City Water Boards Rates and
Regulations as well as New York City DEP: FY 2014 Water Rate Proposal to the
New York City Water Board, April 5, 2013.
The Atlanta case is described in Faulty Pipes: Why Public Funding not
Privatizations is the Answer for U.S. water systems, published by Food and
Water Watch in 2006. The Felton case is described in the article How Felton,
204
Annex 6: Sources
Calif., Achieved Water Independence, published by Tara Lohan in YES! Magazine,

May 27, 2010. The Atlanta and Felton privatizations are also described in Public
Citizen: Waves of regret (2005) and in Craig Anthony (Tony) Arnold: Water
Privatization Trends in the United States: Human Rights, National Security, and
Public Stewardship, William and Mary Environmental Law and Policy Review 785
(2009), which also describes the impact of the change of the 1997 tax regime on
water privatization in the USA. The massive losses sustained by RWE through its
US adventure are analyzed by Frank Hofmann in RWE The Takeover and Resale
of American Water (2012).
The turnaround of DC Water is based on the analysis of the utilitys 2013 Annual
Report, including the historical figures in the reports statistical section; conversations with Alex McPhail, a former member of the utilitys Board; the well-written
and well-documented Wikipedia article Lead contamination in Washington, DC
drinking water; and my own experience as a resident of Washington, DC, from
1997 to 2009.
The information on financing of water infrastructure from various sources is
taken from the 2006 Community Water System Survey of the US Environmental
Protection Agency. The deteriorating state of infrastructure in the USA is documented in the 2013 Water and Wastewater Report Cards of the American Society of
Civil Engineers (ASCE).
13. The Philippines

The prelude to the privatization is recounted by Mark Dumol, a senior civil servant
who was in charge of the privatization, in The Manila Water Concession. A Key
Government Officials Diary of the Worlds Largest Water Privatization published
by the World Bank in 2000. Critiques of the privatization and its impact include Roel
Landing, a former Manila correspondent of the Financial Times, in Loaves, fishes
and dirty dishes published in The Water Barons how a few powerful companies
are privatizing our water by the Center for Public Integrity published in 2003; Jude
Esguerra, former Head of the Economics Research Department at the Institute for
Popular Democracy, in New Rules, New Roles: Does PSP Benefit the Poor? The
Corporate Muddle of Manilas Water Concessions also published by WaterAid
in 2003; and a publication by the Freedom from Debt Coalition of March 2009
entitled Recalibrating the Meter. An excellent detailed analysis of the comparative
performance of the two concessions has been written by Xun Wu and Nepomuceno
A. Malaluan in A Tale of Two Concessionaires: A Natural Experiment of Water
Privatisation in Metro Manila, published in 2008 in Urban Studies 45 (1): 207229.
The improvements of access to water in the slums of Manila have been described
by Petr Matous in The making and unmaking of community-based water supplies
in Manila, published in Development in Practice, Volume 23, Issue 2, 2013, pp.
217231, and a presentation by Elsa Mejia in Small-Scale Water Providers: The
business of filling the gap for water provision at the 2009 World Water Week
Annex 6: Sources
205
in Stockholm. The analysis of the more recent developments is based mainly on

information from the websites of Manila Water and Maynilad, including their
Annual Reports, as well as the article Regulation and corporate innovation: The
case of Manila Water by Perry Rivera published in Transforming the World of
Water, a publication summarizing the presentations at the Global Water Summit
2010 in Paris.
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
Social, Economics, and Management Sciences Department of AgroParisTech who

has done primary, yet unpublished research about the turnaround of NWSC.
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
Technical Note on the Water Bill Affordability Calculations

Various chapters contain tables that show the share of water bills in the median
household income (affordability). In these calculations, water bills are estimated
based on the average residential water consumption in the respective city and the
residential water tariff in place at the time of writing. The median household income
estimates are based, to the extent possible, on official statistical data about the
median household income in the respective cities. If such data are not available,
the median household income has been calculated based on the per capita gross
domestic product and the average household size in the respective country making
various adjustments, such as an estimate of the share of net household income
in GDP (5565 %), a factor to take into account higher incomes in capital cities
compared to the national average (if applicable), and an estimate of the ratio between
median and average income (usually 0.6), since the median income is systematically
below the average income.
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
Australia, 68, 168

Austria, 99, 104, 117
Avrillier, Raymond, 89, 92
Awards, 153
Ayala, 137, 139
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
Index
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
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
211
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
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
Index
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
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
213
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
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
Index
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
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

Water Politics and Money

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Water Politics and Money

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Manuel Schiffler

Water, Politics and Money

Water, Politics and Money

ISBN 978-3-319-16691-9 (eBook)

Library of Congress Control Number: 2015936038

To Susanne, with Love.

Statement on the Use of Proceeds

The international nongovernmental organization WaterAid works to transform the

Latin America: Two Aborted Privatizations and One

Bolivia: The Cochabamba Water War and Its Aftermath . . . . . . . . . . . . .

After the Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Cuba: Water Privatization in a Socialist Country . .. . . . . . . . . . . . . . . . . . . .

Argentina: A Flagship Privatization and Its Demise . . . . . . . . . . . . . . . . . . .

The Middle East: Reform Deadlock,

Egypt: Kafka on the Nile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Impact: Disappointing Results . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Jordan: Private Plants, Public Utilities . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Europe and North America: Private and Public

The United Kingdom: A Natural Experiment Between

A First Transformation Attempt Foiled by the Regulator . . . . . . . . . . . . . . .

France: An Improved Partnership in the Motherland

10 Berlin: Privatized to Fill State Coffers, Remunicipalized

11 Civil Society and the EU Concession Directive: David

12 The United States: Public Water in a Capitalist Country .. . . . . . . . . . . . .

Asia and Africa: Three Successful Utility

13 The Philippines: A Delayed Privatization Success Story in Manila .. .

14 Uganda: A Public Utility Turnaround, Triggered

15 Cambodia: A Public Utility Turnaround, Ending with Privatization.

Creation of an Autonomous Utility . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

16 Utility Turnarounds Compared: The Importance

17 Conclusion: It Is Not About Public or Private . . . . . .. . . . . . . . . . . . . . . . . . . .

Annex 1: Management Modes, Subsidies, Water Use, Bills,

About the Author

The Tragedy of Utilities in Developing and Emerging

The Water Privatization Wave of the 1990s

The Water Privatization Wave of the 1990s

The Many Faces of Privately Managed Services

The Many Faces of Privately Managed Services

privatization, separate from the utility as a whole, is now an increasingly common

The Extent of Water Privatization and Private Financing:

Investment Financing in Water Supply and Sanitation

Investment Financing in Water Supply and Sanitation

Developed Countries: Investment Financing Through Revenues

Developing and Emerging Countries: Investment Financing

Foreign Aid: An Overestimated Source of Financing

Utility Turnarounds: How to Assess Their Success

Governments of developing countries have different policies for passing foreign

Private Financing: Making Sense of the Figures

Utility Turnarounds: How to Assess Their Success

How to Avoid Comparing Apples with Oranges

event whose impact is assessed, be it privatization, remunicipalization, or sector

Latin America: Two Aborted

Bolivia: The Cochabamba Water War

Before the Privatization

2 Bolivia: The Cochabamba Water War and Its Aftermath

Ambitious Targets, High Returns and High Risks

Before the Privatization

A First Failed Attempt: The World Bank and the Government

2 Bolivia: The Cochabamba Water War and Its Aftermath

The Second Attempt: Enter Bechtel

Increased Tariffs, Disputed Figures

2 Bolivia: The Cochabamba Water War and Its Aftermath

Leasing the Rain?

The Water War