June 2001 Insights Issue #37

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Tapping the market - can private enterprise supply water to the poor?

Over 170 million people have no access to clean water in urban areas of Africa, Asia and Latin America, according to the latest WHO/UNICEF data (2000). Inefficient operation of state-owned water companies is at the root of this injustice: gross over-staffing and political interference in tariff-setting have starved utilities of the resources needed to expand piped networks to impoverished areas of southern cities.

The failure of the supply-driven approach has led to public private partnerships (PPPs) designed to shift water utilities towards a demand-driven approach. Have these changes been accompanied by improved access to clean, affordable water for the urban poor? Has PPP improved equity in urban water supply? Are the new private sector operators addressing the needs of the urban poor in practice? This issue of Insights examines the extent to which the urban poor have benefited or not from this newly emerging institutional arrangement.

The 'public' approach typically provides unclean water sporadically. It requires expensive, highly educated professionals, significant subsidies and tends to service clients on high and middle incomes whilst charging low tariffs. International financial institutions have failed to enable the public water suppliers to improve their performance, either through massive investment in engineering, or through capacity building and institutional development.

At the other extreme is an efficient, demand driven, customer-oriented approach, the 'small scale independent providers', delivering water to up to half some cities' inhabitants, with near 100 percent bill collection efficiency. Promoting local employment and servicing the poor, albeit at a price, this approach has, until recently, been ignored by water sector professionals. Lacking any regulatory oversight, however, their prices are typically 10 to 20 twenty times higher than those paid by high-income consumers connected to the network. Which of these providers are most effective at serving the poor? The starting point is to recognise the evidence suggesting that the urban poor are prepared to pay to meet their survival and convenience needs for water.

Notwithstanding the rhetoric to the contrary by some trade unions and non-governmental organisations (NGOs) moreover, initial results from larger cities indicate that the efficiency of 'privatised' water utilities has improved markedly - leakages are down and net revenue is up through improved billing and collection and reduction in personnel. Whether this is due to the alleged benefits of private sector investment or the freedom of foreign operators to manage without being beholden to employee and entrenched political interests is not yet clear.

Figure 1

Figure 1 illustrates the rate of growth of major PPPs although Figure 2 shows that for all the excitement, increases in population coverage by private operators in middle and low income countries (MLIC) are limited. This raises the suspicion that international operators, dominated by the three French utility conglomerates, Ondeo, Vivendi, and Saur may not make much of an impact beyond metropolitan cities. The impact of PPPs on the poor can be examined by three basic questions:

Figure 2

Has the extension of the network to poor communities been speeded up?

Concession contracts require private operators to meet coverage targets. But the decisions on the direction of network expansion to meet targets are usually left to the operators as regulatory bodies are usually formed after contract signing. So are poor communities given priority? Technical criteria based on cost-effectiveness in the construction of mains pipes, commercial criteria based on pressure from property developers, and political criteria based on vote-winning tactics may all conflict with social criteria based on the pressing needs of poor communities.

Is the cost of household connection affordable by the poor?

Even where operators do give priority to extending the piped network into poor communities, difficult issues arise over the financing of secondary pipelines, household connections and meter installation. Techniques are evolving to reduce the cost of connection so as to ensure affordability for all. These may take the form of tripartite arrangements whereby the public sector provides grants for the purchase of materials, community groups provide voluntary labour, and the private operator provides technical assistance. NGOs may contribute by providing crucial skills in team management and local understanding not usually found in the bureaucratic culture of public sector institutions or the techno-professional culture of private water companies.

Is the water tariff affordable by the poor?

Even where poor communities have been connected, there is no assurance that householders can afford the water charges. Many have no job security or regular income. Billing arrangements need to be shortened from the monthly norm to fit the short-term financial horizon imposed by household poverty.

Property-based tariff structures still discriminate against the poor by providing far cheaper water per litre for high-income households consuming large volumes for swimming pools and sprinkler systems. Regulatory bodies can apparently help improve the equity of PPP by introducing metering combined with increasing block tariffs (IBTs) that incorporate a low-cost 'life-line' or minimum consumption. Such reforms should positively discriminate in favour of the poor, with some cross-subsidisation from richer to poorer households. However, where the initial life-line block is greater than average monthly domestic water use by the poor (perhaps over 6m3 per household a month), middle income groups benefit the most. IBTs can also penalise poor households in multi-occupancy buildings with a single meter. A single volumetric tariff for domestic consumers with subsidies aimed at facilitating water connections rather than consumption is now being recommended.

The best private multi-national operators have increased connections to the poor where concessions are appropriately structured. In Manila 400,000 lower-income consumers and 260,000 in Buenos Aires have benefited from various approaches providing affordable connection charges. Examples include: connection fee cross subsidies in Buenos Aires, external donor support to connection costs (and bathroom construction) along with five year amortization of connection charges has been used in El Alto, and reduced connection costs through distant meter locations and the use of community labour are leading to 90 percent cost reductions in water tariffs for the poor in Manila.

This issue of Insights focuses on the three major challenges for the sector in the new millennium:

• First it is crucial to develop regulatory skills to oversee this affordable expansion. Sohail emphasises that the particular needs of the poor should be better incorporated in concession contracts. Plummer investigates the key capacity constraints facing municipalities - usually the public sector partners in PPPs. Based on two case studies in Latin America, Nickson highlights the importance of professional advisory teams for municipal authorities involved in PPPs.
• Second is the need to incorporate the skills of small-scale independent providers (see Trémolet and box on Aguateros).
• Thirdly it is important to move beyond the metropolitan capitals, to where cross-subsidies are more achievable, and address the water needs of the urban poor in the myriad of secondary towns in the south. Here Franceys stresses the importance of pro-poor incentives for public sector utilities whilst Sansom et al propose strategic marketing methods. Trémelot advocates greater flexibility in coverage targets to facilitate lower-cost solutions to address the water needs of the urban poor.