WATER P-NOTES ISSUE 45 AprIl 2010 55276 Using a Private Operator to Establish a Corporatized Public Water Utility The Management Contract for Johannesburg Water I n post-apartheid Johannesburg, South Africa, structure and lack of reliable data was such that the city water authority had fallen into disarray (a other PPP options were deemed too risky. As such, common situation with urban services). In 2001, they were often introduced as a first step in the a Public-Private Partnership (PPP) emerged as a way reform, before a second, wider-scope PPP contract to bring new expertise and efficiency to the delivery could be implemented. of public utility services, where a five-year manage- The management contract for water supply ment contract successfully restored services, built and sanitation services in Johannesburg, South local capacity, and helped put Johannesburg Water Africa presents an entirely different perspective. on a solid footing. The municipal government implemented the PPP as an interim measure, part of a program specifically designed to improve the efficiency of municipal Management contracts for public services.While an experienced international improving the performance of operator was brought in, the aim of the PPP was not water utilities to transfer management to a private concessionaire for the long run. Instead, the goal was to establish Since the 1990s, many governments in the develop- a viable, corporatized public water utility by lever- ing world have experimented with to public-private aging the expertise of an experienced private opera- partnerships (PPPs) as a way to improve the quality tor for a number of years. and sustainability of their water supply and sanitation services. Different contractual schemes were used, with varying levels of risk and responsibility passed to The Challenges and the private partner. While concessions transferred the Opportunities in Johannesburg most responsibilities, management contracts stood at the lower end of the spectrum, involving a three- to The end of apartheid in South Africa ushered in five-year term, no private investment, and payment of enormous changes. The new metropolitan munici- the private partner through an annual fee based, in pality of Johannesburg was created out of several part, on performance. former municipalities, and the full incorporation of As a lighter approach for private sector involve- the townships. This represented a major adminis- ment, management contracts have been mostly trative reorganization, meaning in the case of the used for situations where the deterioration of infra- water and sanitation services combining multiple This note reports key messages from "Using a Private Operator to Establish a Corporatized Public Water Utility" by Philippe Marin, Jean-Pierre Mas, and Ian Palmer, published by the World Bank in June 2009. It is part of a broader study aimed at assessing the overall performance of Public-Private Partnerships (PPPs) for urban water and sanitation utilities in developing countries. Readers may download the com- plete paper from www.worldbank.org. WATER P-NOTES departments operating without cohesion into one contractual targets every year, with clear improve- single utility company. ments in customer service, environmental compli- ance, bill collection and cost efficiency. Creating such a utility was not easy. The frag- mentation of responsibility within the municipal- The private operator was also instrumental ity had created a bureaucratic culture with little in carrying out a complete financial turnaround, accountability for results. Employee motivation was in partnership with the city's authorities, restoring weak. Capital investment projects ran into ongoing the utility to financial equilibrium by 2006 (see delays and cost overruns, and operational prob- Figure 1). After being virtually bankrupt when the lems of the sewerage system had become a grow- management contract had started, the municipal ing environmental concern. Furthermore, the water utility was back to financial heath in 2005, turn- and sanitation services were essentially bankrupt by ing out a small profit. This was achieved without 2000, and there was widespread frustration in the any employees layoffs. In the best illustration of its population with the poor quality of customer service. positive impact, the National Benchmarking Initia- tive ranked Johannesburg Water as the best metro- Faced with these challenges, the new municipal- politan water and sanitation utility in the country in ity decided to enlist private help to create a more both 2005 and 2006. business-oriented utility, named Johannesburg Water. This company would be owned completely by the Although, public-private partnerships in water city government, but fully corporatized and operating have been controversial in South Africa, there is under private law. Moreover, it needed to be made widespread agreement among stakeholders that financially viable without big tariff increases that Johannesburg Water benefited from the five-year the population would resist-meaning that significant management contract--a perception confirmed by operational efficiency gains had to be achieved. all those interviewed as part of this study. Beyond improving performance, the foreign operator was After an international competitive tender, the also praised for facilitating the training and promo- five-year management contract was awarded to a consortium led by Suez, which initiated operations in early 2001 as Johannesburg Water Management (JOWAM). When the private operator left at the Figure 1. Benchmarking Results for end of the contract (in June 2006) the water utility's Metropolitan Water Utilities in South management returned to public hands. This review Africa, 2005 and 2006 confirmed that the management contract fully met its goal--to improve operational performance and 50 establish a viable, corporatized public water util- 45 Total Score (maximum = 50) ity. This positive experience suggest a new way of 40 looking at management contracts--as auxiliary in a 35 public sector reform--and should be useful to other 30 25 developing countries looking for options to improve 20 their water and sanitation services. 15 10 5 What was achieved under the 0 Johannesburg 05 Cape Town 05 Cape Town 06 Johannesburg 06 Ethekwini 06 Ekurhuleni 05 Ethekwini 05 Ekurhuleni 06 Mandela 05 Mandela 06 Tshwane 05 Tshwane 06 management contract An independent international consulting firm was recruited during the contract to collect reliable infor- mation on multiple performance indicators of JW. Overall Performance (Metros) This allows carrying out an objective evaluation of Access DWQ Effluent the performance of the private operator under the Assets Finance management contract. The analysis shows that it's Source: SALGA, Department of Water Affairs, and Water Research performance was satisfactory. The private operator Commission 2007. achieved more than 90 percent compliance with 2 ISSUE 45 · APRIL 2010 tion of a large group of black managers and pro- tives who supported corporatization reform. fessionals, who were well equipped to run the utility The parties built a relationship of trust, essential by the end of the contract. for dealing with new developments during the contract. · There was a strong focus on developing human Why was the management resources. The private operator sent a large contract in Johannesburg so number of expatriates during the first year of successful? the contract to ensure a rapid transfer of know- how, and a competent management team from Several aspects stand out in the design and imple- the city was gradually trained and installed in mentation of this PPP: positions of responsibility. The private operator also built ownership of the reform among the · A high level of political commitment to the utility's employees so that they would actively public-private partnership from the start. The support its efforts to improve performance. municipal government was strongly committed to Much of the progress achieved was because the turning around the water and sanitation services. utility's employees were treated as assets and There was a strong ownership of the choice partners in the ongoing reform. made to bring an experienced private opera- tor to help for a few years under a manage- Other factors enhanced success: while the ment contract--a decision made entirely by the municipal water and sanitation departments were elected municipal government, without donors' not functioning well at the start of the management conditionality for accessing external funding. contract, neither were they dysfunctional, as was often the case with management contracts imple- · The management contract in Johannesburg had mented in other (and often less developed) coun- a single clear objective--to establish a viable, tries. In addition, the infrastructure was generally in corporatized public water utility with well-defined satisfactory condition. This allowed the private oper- performance targets. It was not designed as a ator to focus on improving the management of staff catchall with multiple unrealistic targets. and assets, and develop a new corporate vision of · The municipality was able to adopt a flex- efficiency and customer orientation. ible approach to measuring the year-by-year impact of the private operator. Where a reliable baseline is lacking, assessment of an opera- Looking forward: Using tor's performance becomes difficult, and this management contracts to help often leads to distrust and conflict. This issue was approached with notable pragmatism in corporatize public utilities Johannesburg. The contract's first year was The study focused on the performance of the man- dedicated to establishing a reliable baseline agement contract, and did not review the evolution and performance monitoring system so that of Johannesburg Water after the end of the contract progress could be reliably measured, against and its transfer to public management in 2007. increasingly stringent targets, in later years. This Maintaining the gains achieved by the management solution required both sufficient trust between contract shall largely depend on the utility's ability to the partners and the presence of a reputable keep talented staff, and the city's continued ability to independent auditor. focus on financial viability while refraining from inter- · Both partners were committed to success and ference in operational management. This is always a worked well together. The private operator challenge under direct public management. proved ready to devote substantial resources to The Johannesburg experience holds a major making the contract work (probably in the hope lesson for water practitioners. Public and private of developing future contracts). Meanwhile, management of water utilities have commonly been the city authorities didn't interfere in the utility's viewed as two antagonistic approaches: a govern- day-to-day management. They also appointed ment's choice between keeping its water utility under as JOWAM's counterparts competent execu- public management or bringing in a private opera- 3 WATER P-NOTES tor from outside to take over control. Experience in of water and sanitation services--runs contrary Johannesburg suggests that this is only a mispercep- to some accepted dogmas. Actually, it does not tion and is largely unfounded: the PPP succeeded even matter whether the external partner is publicly in establishing a viable, corporatized public utility. or privately owned, as long as it is a competent The private sector came in support--and not to operator and the management contract establishes replace--the public sector. clear objectives and fosters financial performance and accountability. The clear strategic direction embedded in the contract, which reflected solid public policy choices The Johannesburg experience is worth consid- by the municipal authorities, probably played a ering by governments that have made the strategic major role in ensuring collaboration from most decision of corporatizing their water utility and stakeholders. This new approach for management keeping it under public management over the long contracts--as instruments to support public sec- term, but are not necessarily against leveraging tor reforms instead of as a first step of the process outside help from a professional operator for a few of transferring to a private operator the provision years. The Water Sector Board Practitioner Notes (P-Notes) series is published by the Water Sector Board of the Sustainable Development Network of the Water World Bank Group. P-Notes are available online at www.worldbank. Sector org/water. P-Notes are a synopsis of larger World Bank documents in Board the water sector. 4 THE WORLD BANK | 1818 H Street, NW | Washington, DC 20433 www.worldbank.org/water | whelpdesk@worldbank.org