Water and Sanitation Program: GUIDANCE NOTE Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns The Role of the Public Sector Mouhamed Fadel Ndaw March 2016 The Water and Sanitation Program is a multi-donor partnership, part of the World Bank Group’s Water Global Practice, supporting poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. Author Mouhamed Fadel Ndaw Contact us For more information, please visit www.wsp.org The Water and Sanitation Program is a multi-donor partnership, part of the World Bank Group’s Water Global Practice, supporting poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP’s donors include Australia, Austria, Denmark, Finland, France, the Bill & Melinda Gates Foundation, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. 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WSP encourages the dissemination of its work and will normally grant permission promptly. © 2016 International Bank for Reconstruction and Development / World Bank © 2016 Water and Sanitation Program (WSP) www.wsp.org | www.worldbank.org/water SKU K8724 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns The Role of the Public Sector Mouhamed Fadel Ndaw March 2016 Contents Acknowledgments.............................................................................. v Abbreviations..................................................................................... vii Executive Summary............................................................................ix I. Introduction................................................................................ 1 II. Why Small Towns Are Important................................................ 2 III. Water Supply and Sanitation Challenges in Small Towns........ 4 IV. Potential for Private Sector Involvement................................... 5 V.  The Public Sector’s Role in Enabling Private Sector Participation............................................................. 11 VI. Lessons Learned from the Case Studies................................ 16 VII. Support to Public Institutions.................................................. 25 VIII. Support to Private Institutions................................................. 31 Appendix A: Capacity and Readiness Assessment........................ 33 Appendix B: Key Reference Sources............................................... 37 Boxes 4.1: Examples of the Importance of Demand............................. 7 4.2: Drivers for Private Participation in the WSS......................... 8 5.1: Examples of Opening the Market for Private Sector Participation in WSS......................................................... 12 5.2: Examples of Market Structuring for Private Participation in WSS............................................................................. 13 5.3: Example of the Need for Institutional Support................... 14 5.4: Example of Legal and Regulatory Frameworks.................. 15 5.5: Example of Having Access to Finance to Support Private Sector Participation............................................... 15 7.1: Example of Types of Assistance to Develop a PPP Framework in Indonesia.................................................... 27 B.1: Available References on Developing Public-Private Partnership Frameworks................................................... 37 B.2: References for Governance Assessment Literature........... 38 B.3: Example: World Bank Water Sector Reform Assistance Program, Colombia........................................................... 38 B.4: Available References on How to Support WSS Sector Reforms................................................................. 39 B.5: Case Studies.................................................................... 39 www.wsp.org iii Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Contents B.6: Example of Proposal for Regional Tariff in Colombia.......... 40 B.7: Example of a PPP Internship Program for Local Governments in the Philippines......................................... 40 B.8: Example of Designing a Capacity Building Program for Local Government....................................................... 41 B.9: Example of a Community Awareness Program in Bangladesh................................................................... 41 B.10: Example from the Finance Facility for Urban WSP in Kenya.......................................................................... 42 B.11: Example of Clustering in WSS Project in Rural and Small Towns in Benin........................................................ 42 B.12: Contracting with Small-Scale Providers............................. 43 Figures 2.1: Zipf’s Law and city development......................................... 2 4.1: How PPPs Can Help Infrastructure Provision...................... 5 7.1: Types of Support.............................................................. 25 7.2: Activities and Objectives of WSS Sector Reform Support.......................................................................26 7.3: Overview of PPP Framework Components....................... 26 7.4: Components of a Capacity Building Program for Subnational Government.................................................. 28 7.5: Activities and Topics to Raise Public Awareness of PPP Opportunities............................................................ 29 Tables 4.1: Distinctive Public Initiatives to Promote Private Participation in Water Supply and Sanitation Services......... 6 4.2: Examples of Private Sector Experience in Providing WSS Services................................................................... 10 5.1: Summary of Public Institutions’ Roles in Private Participation in WSS......................................................... 11 A.1: National Level Assessment Matrix..................................... 34 A.2: Subnational Level Assessment Matrix............................... 35 A.3: Community and Market Readiness Assessment Matrix....... 36 iv Water and Sanitation Program Acknowledgments This Guidance Note has been prepared by Mouhamed and the peer reviewers: Philippe Marin, Jane Jamieson, Fadel Ndaw, senior water and sanitation specialist at the Genevieve Connors, Christopher C. Ancheta, Sudipto Water and Sanitation Program of the World Bank’s Water Sarkar, and Rajesh K. Advani of the World Bank. Global Practice. Based on recent experiences in seven developing Contributors included John Ikeda and Joel Kolker of the ­ countries (Bangladesh, Cambodia, Colombia, Niger, World Bank; Samuel Baiya and Richard Martin, consul- the Philippines, Senegal, and Uganda), the report aims tants of the World Bank; and Peter Robinson, Tatiana at helping national and local governments in develop- Tumenggung, Richard Bramley, and Denisse Halm from ing countries and water, sanitation, and hygiene Economic Consulting Associates Ltd. professionals to better engage with the domestic ­ private ­ ­ sector in the provision of sustainable water Special thanks to William Kingdom and Jemima Sy of the and ­sanitation services in rural growth areas and small World Bank, who ensured quality assurance of the report, towns. www.wsp.org v Abbreviations BOT build–operate–transfer CBO community-based organization DPSP Domestic Private Sector Participation ECA Economic Consulting Associates ESP Empresas de Servicios Públicos GPOBA Global Partnership on Output-Based Aid IDA International Development Association MDG Millennium Development Goal NGO nongovernmental organization NWSC National Water and Sewerage Company PPP Public-private partnership WASH water, sanitation, and hygiene WSP Water and Sanitation Program WSS water supply and sanitation www.wsp.org vii Executive Summary Recent experiences have shown that domestic private sector Water Supply and Sanitation Challenges in participation is an effective and proven approach to address Small Towns and Rural Areas challenges in small towns’ water and sanitation services In rural areas, 8 out of 10 people still lack access to improved delivery. However, though domestic private sector partici- drinking water sources, with the majority living in Sub- pation has some successes and shows great promise, there Saharan Africa (319 million) and South Asia (134 million). are also many challenges, and there is still much to tackle With only 51 percent of the rural world’s population using for this to become a norm. improved sanitation facilities, rural areas lag far behind urban areas, where the access rate is 82 percent. Seven out of 10 This Guidance Note focuses on piped water schemes in people live without improved sanitation facilities, and 9 out rural and small towns where local private actors increasingly of 10 people still practicing open defecation live in rural areas. represent a significant group of stakeholders. It uses lessons learned and experiences from the selected countries: The situation in small towns can be characterized as Bangladesh, Colombia, the Philippines, and Uganda. follows: Additional insights were included from the global desk • Low densities. Land in smaller towns tends to be review and the results of completed questionnaires from significantly cheaper and is developed at lower ­ Cambodia, Niger, and Senegal. densities. Therefore, serving the consumers requires ­ greater infrastructure costs, especially in the case of individual connections. Why Small Towns Are Important • Lower incomes. Incomes increase with the size of Urban development tends to follow a hierarchical pattern the settlement because of a more competitive labor under which there are small numbers of large cities (fre- market and the higher cost of living in larger towns. ­ quently one large “primate” city), larger numbers of midsize • Lack of institutional capacity. Small towns typically settlements, and numerous small settlements. This work have not been served by national or regional water addresses the water supply and sanitation (WSS) needs of utilities. Decentralization has become increasingly the residents of small towns. Although the towns are small, widely adopted, but even if local governments at the in aggregate they nevertheless account for a substantial pro- small-town level have the power to operate a water portion of the overall urban population. utility, they lack the capital and skills. • Availability of alternative water sources. At the small- Countries tend to define the term small town differently. est level of urban settlement, residents often rely on However, in March 2000, to answer the need for a common natural water resources such as rivers, springs, or definition of a small town, a global e-conference on small- wells. Some who are better off may have their own town water supply arrived at the following definition boreholes. [Bob Roche, conference facilitator: Small Towns Water and Sanitation Electronic Conference, January 31, to Ways to Address the Problem March 10, 2000]: Some small towns have municipal or other public sector Small towns are settlements that are sufficiently large and water supply schemes in operation. Many may be working dense to benefit from the economies of scale offered by piped well and will not be considered further. water supply systems, but too small and dispersed to be effi- ciently managed by a conventional urban water utility. For those that are not working well, or where there is no They require formal management arrangements, a legal supply, the domestic private sector has emerged as a promis- basis for ownership and management, and the ability to ing partner in reducing the gaps in water and sanitation in expand services to meet the growing demand for water. rural growth areas and small towns. However, domestic pri- Small towns usually have populations between 5,000 and vate sector operators need a proper regulatory framework to 50,000 inhabitants, but can be larger or smaller. fully realize their potential, in addition to especially capable www.wsp.org ix Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Executive Summary and supportive public institutions (central governments, public sector and their roles in encouraging, developing, local governments, regulators, and public utilities). The key and implementing PPP contracts. question is how to strengthen the public sector to build a business climate in which the private sector can actively and Public views regarding the role of the private sector in pro- efficiently participate in water and sanitation service deliv- viding public services are important, but there are some key ery in small towns. This can be further broken down into factors that contribute to the growth and development of the following three questions: private participation in WSS service provision in small • What roles does the public sector need to play to towns and rural areas. efficiently engage the private sector in the water and sanitation sector in rural and small towns? Market making or market development. In many countries, • What aspects of the existing public sector institu- public service provision has been delegated to local tions need strengthening to engage domestic private ­ government. Allowing the private sector to participate in sector participation in rural and small towns to fulfill the sector introduces competition in a monopolistic ­market. public policy objectives, in particular to deliver bet- However, private participation will not flourish without a ter water and sanitation services to the poor? clear understanding by all parties of the roles and responsi- • What sector policies and institutional arrangements bilities of the actors. underpin successful promotion of private sector par- ticipation, and what are the monitoring and regula- Providing institutional support. In addition to providing tory mechanisms that have been effective in financial incentives, public institutions can encourage improving private sector provision? private participation through (a) awareness raising; ­ (b) strengthening the legal and regulatory framework; and The Private Sector’s Potential (c) capacity building. Opportunities for commercially viable private sector opera- tions arise from the following major factors: Assisting in developing and improving access to finance. • High population density and high average income of Financial institutions can be assisted to provide products residents to support the local private sector. The government may • Opportunities to reap the benefits of economies of need to provide all or a portion of the capital investment, scale and scope while the private operator provides funds for initial oper- • Potential for rapid growth ation of the system. Financial institutions can also act as a • Lack of alternative sources of water conduit for financial support provided by central govern- • Encouragement from development partners ment institutions, or development partners to the private • Inability of local governments to provide WSS sector. services after decentralization ­ • Poor maintenance of community-managed systems Provision of public goods. On occasion the private sector can- • Poor management of public sector systems not effectively participate due to a lack of a suitable operat- ing environment. In rural sanitation for example, behavior Typically, the private sector’s role is to operate the assets. change campaigns are extremely important to build Lease contracts are increasingly preferred over concession demand, but would not be carried out by any single firm, contracts that have not, in practice, resulted in private capi- due to free rider issues. tal financing investment projects. Types of Support for Public Institutions The Public Sector’s Role in Enabling Private Public institutions in many developing countries simply Sector Participation do not have the capacity to meet WSS service obligations. For the concept of public-private partnerships (PPPs) to This applies in particular to local level institutions estab- succeed, policy makers must identify the players within the lished to meet local empowerment and other attractive x Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Executive Summary decentralization goals, but without being endowed with • If agreed and deemed to be appropriate, establish- the necessary capacity and resources to carry out their ing a central PPP institution to promote and assist mandates. Support for public institutions can be provided government agencies in implementing the PPP at the national (­sector reform, PPP framework develop- framework ment and/or clustering and subsidy design), subnational • Assisting in developing and implementing a PPP level (capacity building) and community level (awareness demonstration project campaigns). • Providing ongoing support to all institutions involved National Level—WSS Sector Reform This support should be focused on achieving the following National Level—Clustering and Subsidy objectives: Design • Improving WSS sector governance by clarifying When the demand factors are not met, policy makers can roles, responsibilities, and functions of key actors take measures to improve demand conditions. These may • Improving intergovernmental communication, includ- include the following: ing accountability and reporting mechanisms • Cluster small towns with larger cities, or rural growth • Ensuring consistency with the PPP framework centers into one service area, which may be more • Ensuring consistency with decentralization policies attractive to a private operator. • Design a subsidy scheme that will ensure affordabil- All key stakeholders must be involved: these will typically ity while allowing for financial sustainability of the include relevant ministries, national and local government service provider. Subsidies can be provided as capital institutions, regulatory bodies, existing utilities and opera- subsidies to cover the connection costs or in the tors, consumer associations, relevant nongovernmental form of a tariff structure that provides a cross-­subsidy organizations (NGOs), and community leaders. The expe- between customer groups. rience of previous projects, including work done by donors or development partners, should be used to draw relevant Subnational Level—Capacity Building lessons and identify potential partners. At the subnational level, support is generally needed to introduce the following: National Level—PPP Framework Development • Concepts of PPP and private participation Policy makers should make sure that the PPP framework is • Types of PPP and the rationale for each consistent with existing legal and regulatory framework of • Opportunities for involving private operators in the WSS sector. Often, a PPP framework has “larger” public service provision, especially in WSS services sectors as its focus, such as transport and energy, rather than ­ ­ ountry, • Experiences, if any, from other sectors in the c water projects that tend to be smaller (often below legal and lessons learned thresholds of PPPs). One of the best ways to improve subnational governments’ The activities involved in developing a PPP framework may ability to implement the PPP process is to provide technical include (but should not be limited to): assistance to relevant institutions. Technical assistance may • Identifying the key government institution that will include (but not be limited to) these methods: champion and implement the PPP framework (the • Identifying key institutions to be involved in sup- “PPP champion”) port of private participation in the service (the “local • Working closely with the PPP champion to develop champion”) the PPP policy, legal framework, processes, and • Working closely with the local champion to institutional responsibilities develop a framework suitable for local conditions • Designing a PPP incentive framework that can be taking into account, if appropriate, any national included in the PPP legislation PPP policies www.wsp.org xi Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Executive Summary • Developing local PPP guidelines, such as toolkits Capacity Building and Financial Support for and monitoring tools, that can be used by local gov- Financial Institutions ernments and other institutions Local financial institutions are accustomed to providing • Assisting the local champion and other relevant loans for relatively short-term projects, and the banks institutions to implement a PPP pilot project require high levels of collateral from the borrowers. However, the WSS sector generates a stable and predictable Learning partnerships can be developed between the revenue stream that can also be taken as a form of security. i ­ dentified local champion and other institutions in the Technical assistance and training may be required to help country that have experience in implementing PPP proj- financial institutions understand the concept of revenue- ects or with international institutions with a similar based lending. background. Where financial institutions are unwilling to support private operators in the WSS sector, the possibility exists for govern- Community Level—Awareness-Raising ment or donors to provide guarantees to the lender. In addi- Program tion, public finance may also be needed to address affordability The main objective of awareness raising is to have public issues and to accompany any private investment. and community acceptance of private operators as one of the ways in which WSS services can be provided. Typical Capacity Building for Private Operators themes include (a) the importance of safe WSS services; Just as the concept of private operation of WSS services is (b) the obligation to pay for services received; (c) different new to many governments and communities, it may also be ways of providing a service. new to the private sector. There may be a need for commu- nication and training regarding the role of the private sector Support for Private Institutions in PPP and WSS projects. Policy makers must look for ways to support the needs of financial institutions and private operators and initiate Demonstration Project Development and demonstration projects. It is beneficial for public institu- Implementation tions to provide support to private financial institutions in Demonstration projects can be used to pilot private par- terms of capacity building and training, so that local finan- ticipation in the WSS sector, thereby generating support cial institutions can provide tailored products to support from stakeholders who may have initially been somewhat the local private sector. reluctant. xii Water and Sanitation Program I. Introduction The purpose of the Guidance Note is to better understand water supply service provision and sanitation for the roles and responsibilities of public institutions in creating small towns and why private sector can be a viable a better operational and investment climate for the domestic solution. private sector in such challenging “in-between” settlements • Sections 5 and 6 identify the role of public sector, such as rural growth areas and small towns. The study focuses the enabling factors, and present lessons learned on piped water schemes in rural and small towns where based on country reports from Bangladesh, local private actors increasingly represent a significant group Colombia, the Philippines, and Uganda. of stakeholders. It uses lessons learned and experiences from • Sections 7 and 8 provide guidance on how to these selected countries: Bangladesh, Colombia, the assess, identify, and develop supporting programs Philippines and Uganda. Additional insights were included for public and private institutions in water supply from the global desk review and the results of completed and sanitation (WSS), including demonstration questionnaires from Cambodia, Niger, and Senegal. projects. • Appendix A provides guiding questions that can be This Guidance Note is organized around eight sections and used to assess the capacity of relevant institutions two appendixes. and community and market readiness to implement • Section 1 is the introduction. public-private partnership (PPP) in WSS service • Sections 2, 3, and 4 provide background on the provision. importance of small towns, the challenges related to • Appendix B provides key reference sources. www.wsp.org 1 II. Why Small Towns Are Important One of the most important aspects of the rapid demographic change Figure 2.1: Zipf’s Law and city development in developing countries is increasing 100,000,000 urbanization. A consequence of this rapid urbanization has been a short- fall in service provision, of which one 10,000,000 of the most important has been water. 1,000,000 It has been observed that the size of urban areas tends to follow what is Population known as the “rank size rule,” as illus- 100,000 trated in figure 2.1. Under this phe- nomenon there are small numbers of large cities (frequently one large “pri- 10,000 mate” city), larger numbers of midsize settlements, and numerous small set- tlements1. The many smaller towns 1,000 account for a substantial proportion of the overall urban population. 0 10 100 1,000 10,000 Typically, the share of very large and Rank primate cities in the overall popula- tion of a country increases over time, Source: The evolution of Zipf ’s law indicative of city development - Yanguang Chen, Department of Geography, College of Urban and Environmental Sciences, Peking University, Beijing. but increasingly the total population of settlements further down in the urban hierarchy is growing as fast or faster. This pattern of urbanization is large enough to have differentiated commercial areas a complex interplay of factors in different locations that and middle class neighborhoods, which might be unfolds over an extended period of time. favored for exclusive provision by a network utility, while rapidly growing low-income peri-urban areas No two countries have the same definition of what is would be neglected and represent an increasing urban.2 In this regard, the following is to be noted: social problem. • There is often a vast difference in urban character • Population figures on their own do not give a suffi- between a market town of 5,000 to 10,000 inhabit- cient indication of what is urban and what is not. ants and a large town of 50,000 to 100,000 people, Factors include (a) small towns cannot be interpreted or even between a town of 10,000 and one of 20,000 purely statistically; (b) classification criteria vary; (c) to 30,000. statistical units are often not well defined or defined • In many countries, a town of 50,000 or more would differently in almost every case; and (d) official sta- be regarded as a small city, because such centers are tistical units do not correspond to a delimited area of 1 http://arxiv.org/ftp/arxiv/papers/1504/1504.04229.pdf 2 The different definitions for countries across the globe are given on the UN Department for Economic and Social Affairs (DESA) website at http://esa.un.org/unpd/wup/ DataSources/Default.aspx. 2 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Why Small Towns Are Important a particular density to suit the requirements of and farm job opportunities (with towns near cities potential private operators. becoming increasingly commuter towns). Small towns are often considered isolated settlements in This phenomenon increases the demand for services such as sparsely populated rural areas, but statistically they are clean water supplies, especially in small towns, that have much more likely to be found in in the wider catchment historically been underserved. areas of larger cities, sometimes called extended or mega- urban regions. In March 2000, to answer the need for a common defini- tion of a small town, a global e-conference on small town Urban areas are on average wealthier than rural areas, and water supply attempted to arrive at a WSS-specific universal larger cities tend to be richer than smaller towns. But evi- definition of a small town [Bob Roche, Conference facilita- dence suggests that rural areas also benefit from the process tor: Small Towns Water and Sanitation Electronic of urbanization. Multiple factors are involved: Conference - 31st January to 10th March 20003]: • Rural depopulation is often associated with the growth of commercial, mechanized farming that Small towns are settlements that are sufficiently large and supplants labor-intensive subsistence farming. dense to benefit from the economies of scale offered by piped • Remittances from urban areas to rural dwellers water supply systems, but too small and dispersed to be effi- increase disposable incomes. ciently managed by a conventional urban water utility. • Urbanization is economically dependent on linking They require formal management arrangements, a legal cities with their wider markets, with each other, and basis for ownership and management, and the ability to with their natural resource and food supply hinter- expand services to meet the growing demand for water. land, all of which implies increasingly dense road Small towns usually have populations between 5,000 and networks and wider rural accessibility to markets 50,000 inhabitants, but can be larger or smaller. 3 http://www.bvsde.paho.org/eswww/tecapropiada/otratec/otros/synthesis.pdf www.wsp.org 3 III. Water Supply and Sanitation Challenges in Small Towns The majority of the poor population lacking access to In terms of commercial economies of scale, service improved drinking water and sanitation services resides in providers are likely to be far more interested in towns rural areas and small towns. that are close to their main area of operations in large towns, towns in clusters of closely spaced small According to the latest WHO/UNICEF Joint Monitoring towns (as can happen in mining areas, for example), Program Report (2015), in rural areas, 8 out of 10 people or affluent rural market centers servicing dense net- still lack access to improved drinking water sources, and works of rural settlements. only 51 percent of the rural world’s population have • Availability of alternative water sources. At the small- improved sanitation facilities. Seven out of 10 people live est level of urban settlement residents often rely without improved sanitation facilities, and 9 out of 10 peo- on natural water resources such as rivers, springs ple still practicing open defecation live in rural areas. or wells. Some of the better-off may have their own boreholes. Frequently these water sources are unsafe The situation in small towns can be characterized as and may be a source of transmission of disease. follows: • Low densities. Land in smaller towns tends to be In summary, even if most of these settlements are large and significantly cheaper and is developed at lower ­ dense enough to call for piped water services, they may be densities. Therefore, serving consumers requires ­ too small and not dense enough to achieve significant econ- greater infrastructure costs, especially with individ- omies of scale, and are therefore less commercially viable ual connections. than urban areas. Low incomes may require financial sup- • Lower incomes. Incomes increase with the size of the port in terms of capital expenditure or poor-friendly tariffs. settlement due to a more competitive labor market and the higher cost of living in larger towns. • Lack of institutional capacity. Small towns typically Reference are not served by national or regional water utilities. WHO/UNICEF (World Health Organization/United Decentralization has become increasingly widely Nations Children’s Emergency Fund). 2015. “Progress adopted, but even if local governments at the small on Sanitation and Drinking Water.” Geneva: WHO. town level have the power to operate a water utility http://www.who.int/water_sanitation_health​ they lack the capital and skills to do so. /­publications/jmp-2015-update/en/. 4 Water and Sanitation Program IV. Potential for Private Sector Involvement Many governments and local authorities have recognized Sometimes the private sector operates as a supplier without the importance of private sector participation in the water any form of government support or engagement. More fre- supply and sanitation sector. quently, the engagement is in the form of a public-private partnership (PPP). The contribution that PPPs can make is Some small towns operate municipal or other public sector summarized in figure 4.1. water supply schemes. Many may be working well, and will not be considered further. However some may be under- Conditions Conducive to Private funded or badly managed. They may not serve all residents, Participation or may serve them so badly that they cannot be relied upon For domestic private sector operators to fully realize their as a source of water. Likewise, many community-managed potential, they need a proper framework and especially schemes have not fulfilled expectations due to poor man- capable and supportive public institutions (central govern- agement and the lack of a sustainable financial model. The ments, local governments, regulators, and public utilities). questions being considered: What role can the private sec- Such arrangements work only if there is a real partnership tor play in improving operations or extending infrastruc- between the domestic private provider and public agencies. ture in small towns? Are there models that can be applied more widely? Table 4.1 summarizes public initiatives to promote private sector participation in studied countries. It tells a rich story The domestic private sector has emerged in many develop- of the interplay of the different factors, with evident ing countries as a promising partner for addressing the chal- strengths and weaknesses across the world. The examples lenges of water and sanitation provision in rural areas and demonstrate the important role that the public sector must small towns. play if private participation is to succeed. Figure 4.1: How PPPs Can Help Infrastructure Provision What’s wrong with infrastructure? How PPPs may help Complementary actions Additional sources of Increasing fiscal Insufficient funds funding and financing resources Poor planning and Private sector analysis project selection and innovation Low coverage, low quality, low reliability Improved public sector Inefficient or Private sector experience capacity and ineffective delivery and incentives governance Inadequate Long-term investment maintenance perspective Source: PPIAF, PPP Reference Guide Version 2.0, 2014. Note: PPP = public-private partner. www.wsp.org 5 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Potential for Private Sector Involvement Table 4.1: Distinctive Public Initiatives to Promote Private Participation in Water Supply and Sanitation Services Country Notable public initiative Bangladesh Sanitation marketing. A successful water and sanitation program (WSP) that combines social and commercial marketing approaches to stimulate supply and demand for hygienic sanitation facilities for the benefit of poor consumers. Colombia Commercializing water services as a precursor to private sector participation. Municipalities are able to form public service companies, Empresas de Servicios Públicos (ESPs), to provide water services on a commercial basis. The ESPs provide an attractive entry point for the private sector. The formal public- private partnership (PPP) route, as required in other sectors in Colombia, would be far more cumbersome and inflexible. Philippines PPP education and institutional support. An internship program in the PPP center to educate local government officials from small towns on PPP structuring and negotiation. The Department of Interior and Local Government (the central government institution responsible for supporting local government units) provides water-specific capacity-building programs to prepare local government units to either establish water districts or contract private partners for water supply and sanitation (WSS) service provision. Uganda Support to small WSS operators. Umbrella organizations funded by the state but allowed to operate like responsive private sector entities provide training and backup support for domestic WSS providers. Cambodia Demand driven. Lack of government WSS service provision has led the private sector to step in and provide the much needed WSS services in small towns. The government requires private operators to obtain licenses from the relevant ministry; however, this practice has not been followed, and almost 50 percent of existing private operators do not have licenses. Niger Government reform and requirements on local government structures. In the WSS reform process, the government mandated the communes to be WSS asset owners, and to contract the operation of the assets to private operators. Senegal Supportive institutional framework. The institutional framework has been progressively restructured to provide clearer allocation of responsibilities between the institutions involved in the provision of WSS services. This in turn is expected to provide the stability and enhanced private sector confidence needed for greater private sector participation in WSS service provision. The basic requirements for domestic private sector higher average household income improves households’ ­ participation in WSS services are an acceptance that the willingness and ability to pay. Both of these factors improve private sector can have a role in the WSS sector, and that the financial performance of the private operator and hence there is evidence of demand for those services (see box 4.1 its ability to make a profit. Conversely, where towns have for examples of the importance of demand and box 4.2 low population densities and high per capita investment for examples of drivers for private participation in costs (even if these are met by the state), investors see high the WSS). risks and low returns and are unlikely to be willing to pro- vide services.3 For WSS services to be commercially viable for private ­ sector operators the following factors must be considered: Opportunities to reap the benefits of economies of scale and scope. Small rural systems far from a water source Relatively high population density and higher average income require high investment costs with limited potential of residents. High population density decreases costs to recovery. If a rural settlement is close to another for cost ­ connect households to the water supply network, and ­ one, and it is possible for the private operator to provide 3 This is a general rule based on market fundamentals. However, it does not preclude serving those with low incomes whose costs may be reduced by capital subsidies, cross- subsidization of tariffs, and similar measures. 6 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Potential for Private Sector Involvement Box 4.1: Examples of the Importance of Demand In the Philippines, the domestic private sector expressed its preference for densely populated areas that have growth potential. For example, Balibago Waterworks System stated that the criteria used to select areas to serve were (a) the availability of a water source, (b) the number of households and potential customers, (c) the growth potential, and (d) if the area were small, the potential to cluster with neighboring towns. The entrance of a well-known business venture (such as a Jollibee fast food franchise or a shopping mall) into a rural growth center is often used as an indicator that the area is growing and that the population’s economic conditions are improving. In Uganda, private operators expressed a desire to expand their business to neighboring unserved areas with evident demand, and the need to allow for these types of expansions or clusterings of small towns. In Bangladesh, the existence of alternative sources of water, such as shallow wells, has deterred private operators from providing services. In most areas, households have private shallow wells, while industrial or commercial establishments have deep wells. Neither type of customer provides the demand needed to justify piped supplies. both areas using one network, the potential for econo- Encouragement from development partners. International mies of scale will be an attractive attribute to the private donors and development partners can encourage pri- sector. vate sector participation in the WSS sector through providing grants or other funding mechanisms for PPP ­ Potential for rapid growth. Related to the previous two projects, and also through providing assistance with ­ factors, potential operators will be motivated not just ­ demonstration projects, institutional reforms and capac- by the current demand conditions but also by the ity building to government institutions and the private prospects for future growth. This scenario could take ­ sector. place through increasing access levels, greater densifica- tion, and rising incomes within the centers being Inability of local governments to provide WSS services after served, or through opportunities for successful private decentralization. Local institutions often lack the necessary operators to expand their business operations to other skills and capacity to manage water supplies and sanitation locations. services, which calls for private sector involvement to bridge the capacity gap. Availability of alternative sources of water. An important demand factor for potential operators to consider is the Poor maintenance of community-managed systems. Rural and availability of alternative sources of water, such as rivers, small town water supplies and sanitation services, managed springs, and boreholes (public and private). The poten- by users associations, are poorly managed in most develop- tial of providing water supply for a fee is low compared ing countries. In some countries, the underutilization of to free supplies from rivers, lakes, or other sources. resources has been addressed by Governments by turning to Households in areas where the free water is not safe domestic private operator models for the provision of water may limit their purchases of clean water to the volumes and sanitation services. required for drinking and cooking. Conversely, when there are few alternative sources of supply, the prospective Poor management of public sector systems. In larger operator can be sure of a secure market for a commodity ­ settlements water systems owned by the local government that is a necessity, at least up to a certainly level of or a public sector water utility often face problems consumption. of poor management and/or lack of capital. These are www.wsp.org 7 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Potential for Private Sector Involvement Box 4.2: Drivers for Private Participation in the WSS The Bangladesh Water Supply Program Project is a donor-led program to introduce private participation in WSS service provision in the small towns of Bangladesh. It includes a financing component as well as some capacity building. In Ghana until 2000, PPPs were unknown in small towns and rural areas. The World Bank funded a pilot project to demonstrate the benefits of private sector involvement in the provision of water supply services. The project started in four small towns with populations of between 5,000 and 25,000 and attracted small local water enterprises. In Cambodia, the government public utilities could not cope with the demand for water services. There are only 12 public utilities serving mostly urban areas, while in rural areas small private operators were filling in the gap and meeting the demand for water supply services. Malawi implemented a community-managed rural piped scheme that had gained a lot of recognition. However, due to poor maintenance of the network, the program deteriorated over time, and reached a point where only half of the taps were functioning. The government then decided to adopt a new approach of establishing Water User Associations to contract the maintenance of the piped network to private firms. As a first step, the User Associations are established and private operators are hired with core operational staff. Subsequently, business plans and operator performance agreements are prepared. manifested in a high level of leaks in the pipe work Management contract. The private sector takes responsibility and slow responses to burst pipes; inefficiencies in billing for part of the operations, while the government has respon- the customers and debt collection; lack of capital to sibility for system expansion and other capital works. expand coverage of network and poor water treatment Payment of the private operator is not linked to the tariff standards. revenues but is determined through a payment formula in the contract. Structuring the Role of the Private Sector There are various arrangements for participation by the pri- Example: A private company is given a fixed price, five-year vate sector, which can be summarized as follows: contract for the management of a water treatment works. Contracting out. The government contracts out services to Lease-affermage. The private sector organization is respon- the private sector for a specific package of work (e.g., cus- sible for providing agreed levels of service to customers tomer billing; specific maintenance tasks). The private sec- and working capital for repairs and rehabilitation of the tor role is limited to specific tasks and does not involve any assets. The main tasks are operation and maintenance but investment. These contracts are typically input-based and with a greater degree of autonomy than for management involve limited transfer of risks to the private contractor, if contracts, and the period of the contracts are usually lon- any. As a result they tend to bring only limited benefits. ger. In a lease-affermage, the operator gets paid through a portion (or all) of the consumers’ water accounts, which it Example: A private sector company is appointed under a collects; hence, it takes all commercial and collection risks. five-year contract to read the meters and take responsibility for notifying the customer in the case of possible disconnec- Example: A private company is appointed to take tion due to nonpayment. ­ responsibility for managing an existing water network. 8 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Potential for Private Sector Involvement Under the contract the company buys bulk water from Examples of Contracting and Supply the public sector water provider and sells it to the cus- Arrangements tomers. The operator is responsible for employing all per- Examples of domestic private sector participation in sonnel required (including, for example, plumbers, water and sanitation service provision in small towns vary accountants, and meter readers). The private operator considerably. A cross-section of examples is summarized in may receive subsidies for the extension of the network table 4.2. For Bangladesh, Colombia, the Philippines, and and other specific circumstances, but relies on customer Uganda, more detail is found in the case studies presented payments for its revenue and thereby takes the commer- in section 6. cial risk. Concessions are more typical for large urban systems, while Concession. The private sector organization is responsible full divestitures are not commonly chosen in developing for financing the investment costs of the system includ- countries. For small towns, management- and lease-type ing system expansion—and for all of the operation contracts are the most common. For example, in Senegal and maintenance—to achieve prescribed service delivery and Niger the type of contract used in rural water supply is objectives. lease-affermage, in which the operation of the systems is leased to private operators. Example: An existing network is facing capital shortages, which result in a high level of unaccounted for water, However, many variations exist. For example, in the operating deficits, and an inability to extend the net- Philippines, and to some degree in Colombia, the most work to serve a rapidly urbanizing town. Under the con- popular arrangement is a joint venture between the private cession the company agrees to provide necessary capital entity and the local government institution. In Cambodia, in return for which the public party will allow the con- two types of formal contracts were used in projects sup- cessionaire to raise tariffs subject to certain formulas ported by donor agencies: a design-build-operate contract embodied in the contract. The concession lasts 30 years, or a design-build-and-lease contract. Many hybrid schemes after which the assets are returned without charge to the are in practice, too, such as lease contracts with some pri- asset owner. vate investment, or concessions with public subsidies. Full divestiture. In addition to responsibility for service By and large, the role of the private sector is to operate the delivery, ownership of existing assets is transferred from the assets. As noted previously, lease contracts are increasingly public to the private sector. In all of the arrangements previ- preferred over concession contracts that have not, in practice, ously described, ownership of assets remains with the pub- resulted in private capital financing investment projects. The lic sector. situation in Colombia is a little different: private operators invest in the supply systems to a limited extent, but the major Example: As in the concession example, but the assets investments are financed through capital subsidies from the remain the property of the private party. government. It is only in the Philippines that the domestic private sector is providing investment capital to any signifi- Private sector supplier. The water system is developed and cant extent, albeit with the provision that assets are relin- operated by a private entity. quished at the end of the contract period. This may be due to the success of the two Manila concessions initiated in 1996, Examples: One is provision of a service by a local entrepre- which validated the private financing approach. In other neur in an informal settlement, such as a water vendor who countries, investment in water is considered to be a public sells from house to house. At the other extreme is a private responsibility, with financing provided by donors and the water system in an exclusive housing area that sources and ­ government. Water assets are owned by central or local gov- treats its own water. ernment, and investments are made by public authorities. www.wsp.org 9 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Potential for Private Sector Involvement Table 4.2: Examples of Private Sector Experience in Providing WSS Services Country Form of private participation in the WSS in small towns Bangladesh In Bangladesh, there are very few private sector WSS operators. Schemes run by nongovernmental organizations (NGOs) and community-based organizations (CBOs) are common. These are regarded as “private” because they are not public. The profit-making private sector is not common for the WSS sector. The private sector success story relates to the marketing of sanitation services by local entrepreneurs. They build latrines and provide other sanitation services. The local availability of sanitation materials and kits also facilitates self-provision of improved sanitation by households. Colombia Colombia has been committed to private provision of water services in urban areas since 1990. A flexible legal form—the public services enterprise—makes it possible for municipalities to establish commercialized water utilities that attract private capital and skills. Full-scale national PPP procedures can thereby be avoided. For private sector participation in small town WSS, the success stories relate to private sector operators in large urban areas extending their services to nearby small towns. The private sector is pushing for a system of regional tariffs, which would allow for cross-subsidization between urban areas. This would result in many more small towns being served by private operators. Philippines Among the case study countries, the Philippines has the most successful program of private participation in small town water supply. There is now a vibrant and active market for it in small towns. Key performance outcomes have been positive in terms of water service availability, drinking water quality, water pressure, per capita water availability, and operational efficiency. Private participation is mainly market driven in that the private sector actively seeks opportunities to invest. The Philippines has an established national PPP framework supported at the highest political level. Many institutional forms have emerged in the water sector, flexibility being one of the hallmarks of successful penetration of the private sector. Private companies make proposals to governments or local utilities to provide WSS services, on a joint venture or some form of PPP. Unsolicited proposals are subject to a Swiss challenge,a but once signed the contracts run for 25 years or longer. Uganda In Uganda, private water operators have played an important role in operating piped water schemes in a number of small towns. As of mid-2014, the leading 20 such operators were managing 48 town water supply systems, with a total of around 28,000 connections (including water kiosks and public stand posts) and a total population served of over one million people. The main driver of private participation is government initiative, anchored in the legal framework. The role of the private sector, however, is currently regarded by the authorities as a stopgap until the water supply systems can be taken over by the National Water and Sewerage Company. The management contracts are short (typically three years) and investment by the private sector is precluded. Cambodia Small private operators play a key role providing water supply services to small towns and rural areas in Cambodia, filling the gap between the demand for WSS services and the absence of government-supported systems. The private sector is the main driver of WSS in Cambodia. Many of the small private operators, however, are not licensed. To operate in areas not provided by government public utility, private operators must get municipal and provincial approvals before obtaining a license from the Ministry of Industry and Handicraft. Niger Government policy prescribes PPP arrangements to manage WSS assets in urban and rural areas. In urban areas, one private operator, SPEN (an asset holding company), has lease-affermage contracts. In rural areas, the municipalites are asset owners and lease the assets to various small private operators. The main driver for private participation is government reforms and initiatives. Senegal Senegal has promoted PPP in WSS sector since 1996, starting with a large PPP contract between Senegalaise des Eaux and Société Nationale des Eaux du Senegal. Since then, rural water PPPs have also been promoted and supported by the government. A new institutional framework for rural water PPPs has recently been established, where OFOR (the institution responsible for rural WSS) can contract private distribution companies to provide WSS to the communities. The main driver for private sector participation is government reforms and initiatives. A “Swiss challenge” is a form of public procurement that requires a public authority (usually an agency of government), upon which receiving an unsolicited bid for a public a.  project or services to be provided to government, to publish the bid and invite third parties to match or exceed it. Some Swiss challenges also allow the entity that submitted the unsolicited bid to match or better the best bid that comes out of the process. 10 Water and Sanitation Program V. The Public Sector’s Role in Enabling Private Sector Participation The key question for the public sector is how to build an sector participation in rural and small towns to enabling environment and a conducive business climate for ­ fulfill public policy objectives, in particular to deliver the private sector to actively and efficiently participate in ­ better water and sanitation services to the poor? water and sanitation service delivery in small towns. This can • What support can be given to private institutions to be further broken down into the following three questions: underpin successful promotion of private sector • What roles does the public sector need to play to participation? efficiently engage the private sector in the water and sanitation sector in rural and small towns? To assist in answering these questions, table 5.1 summarizes • What aspects of the existing public sector institu- ­ector typical roles of public institutions in relation to private s tions need strengthening to engage domestic private participation in the water supply and sanitation (WSS) sector. Table 5.1: Summary of Public Institutions’ Roles in Private Participation in WSS Type of institution Common roles and responsibilities National government: • Policy making. Develop policies related to water supply and sanitation. Line ministry or • Technical support. Provide capacity building to local governments. department • Financing capital investments. Provide capital investments through government budget allocation. responsible for water • Identifying projects. Identify projects that can be structured as public-private partnerships (PPPs), and sanitation or assist local governments to identify suitable projects. National government: • Develop PPP framework. Set up the PPP policy, institutional, legal, and regulatory framework (these Department or ministry are usually relevant for domestic private sector participation and larger PPP projects involving responsible for PPP foreign partners). • PPP implementation. Assist in the implementation of PPP projects, which could include project appraisals, PPP structuring and contract design, PPP procurement process, and PPP contract monitoring. • Technical support. Provide assistance to line ministries and local governments in developing projects. Local government • WSS service provision. Responsible for providing WSS services. In some cases, the local government is allowed to choose how to provide WSS services, either through an internal department (usually public works or a dedicated WSS department), or by contracting a separate entity (private or state-owned) to provide the WSS services. • Contracting agency. If the local government chooses to contract out WSS services, there may need to be contracting agency responsibile for monitoring the operator’s performance. • Asset owners. In most cases, the local government is the owner of the WSS assets. Regulator Regulatory functions can be performed by a national government agency or an independent regulator. In some countries, regulation of small town WSS is delegated to local authorities, with varying degrees of supervision from central regulatory institutions. Regulatory functions usually include the following: • Licensing. Issue licenses that allows operator to provide WSS services in the designated areas. • Tariff regulation. Regulate WSS tariffs to ensure financial sustainability of the operator while being affordable to consumers. In some cases, the regulator approves tariffs proposed by the operators; in other cases final approvals are given by the ministry. • Technical regulation. Provide guidance and technical standards to be followed by the operators. • Performance monitoring. Monitor technical, financial, and operational performance of the operators. In some cases the regulator also benchmarks the performance of the operators. • Customer protection. Provide customers with a forum or a means to be heard. Also provide awareness raising to customer about relevant WSS services. table continues next page www.wsp.org 11 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns The Public Sector’s Role in Enabling Private Sector Participation Table 5.1: (CONTINUED) WSS utility or WSS can be provided by a department within the local government, a separate utility owned by the operator municipality or central government, or by a private operator. WSS services usually include the following: • Piped or nonpiped water supply • Sewerage services, such as piped sewerage and septic tanks emptying services • Sanitation services, such as community toilets Note that few WSS utilities or private operators provide sewerage and sanitation services. The following are key factors in sup- porting the growth and development Box 5.1: Examples of Opening the Market for Private Sector of private participation in water sup- Participation in WSS ply and sanitation (WSS) service pro- In the Philippines, local government institutions choose how to provide vision in small towns and rural areas: the services either through establishing a separate corporate water • Market development utility (called water districts), using its own economic enterprise, or • Institutional support partnering or contracting with private partners. • Access to finance In Colombia, local governments can establish a separate utility that • Provision of public goods can be publicly owned, privately owned, or both. The four key action areas for public In both the Philippines and Colombia, this devolution of public service institutions to encourage private par- provision and the authority to choose the service delivery model is ticipation in WSS service provision clearly stated in the legal framework. are as follows: In some African countries, such as Uganda and Niger, the decentralization of WSS service provision has been part of the reform Market development. Private partici- of the sector. In Niger, the local government institutions are strongly pation will be ­ encouraged by two encouraged to contract private operators to operate and maintain complementary elements: (a) open- WSS systems. This is less strongly the case in Uganda, but in both ing the WSS market to private sec- countries, the legal framework clearly supports this arrangement, and tor involvement, and (b) structuring the regulatory framework allows for regulation by contract. the market in such a way that the functions, roles, and responsibilities of the private sector are clear. • Lack of capacity, ability, or willingness of the local Opening markets. In many countries, public service government institution to provide the services provision has been delegated to the local govern- • Poor performance of community-based organiza- ment, which decides how to provide these services. tions in providing services This has opened the market for private sector involve- • Tendency to operate rural water systems from the ment in WSS services, filling the gap left by poorly center, without taking local specificities into due performing national or regional WSS utilities. See consideration box 5.1 for examples of opening the market for pri- • Lack of availability of public sources of finance vate sector participation in WSS in sample countries. Structuring the market. This includes clarifying the Among the common factors that have led local gov- roles and responsibilities of each actor in the sector, ernment institutions to use private operators: including the private sector, and allowing the private 12 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns The Public Sector’s Role in Enabling Private Sector Participation sector to earn returns on its investments within a economies of scale. See box 5.2 for examples of market well-defined regulatory structure while also being structuring for private participation in WSS in sample fully accountable for end results to customers (qual- countries. ity of service). Providing institutional support. In addition to providing The degree of efficiency and responsiveness of the public financial incentives, public institutions can provide other institutions can be an important factor affecting whether forms of support to encourage private sector participa- private companies enter the market. For example drawn out tion, including the following (see also box 5.3 for government processes, such as the time required to process ­ examples of the need for institutional support in sample license applications, can discourage private participation in countries): the market. • Awareness raising. The comparative advantages of having private sector participation in the WSS sec- The dynamics of the urban hierarchy will also influence tor must be understood by the local governments the market. The proximity of small towns to one and the community. The perception that private another and of small towns and villages to larger cities entities are not appropriate to provide public ser- are important factors in structuring the market: private vices can be a major constraint to private sector par- entities might find the market more attractive if small ticipation unless tackled through communication towns close to one another are clustered to allow for campaigns. Box 5.2: Examples of Market Structuring for Private Participation in WSS In Uganda, Senegal, and Niger, there is a clear legal framework regarding the roles and responsibilities of the private sector under which operators are responsible only for the operation and maintenance of the system. Thus, private operators do not invest in construction of major new assets, and therefore do not need to find large financing sources. In Senegal, in the case of rural piped water schemes, the government creates PPP areas with a population of more than 100,000 inhabitants. These PPP opportunities are then open to public competitive tenders. In the Philippines, the PPP framework and Joint Venture Guidelines provide guidance to both government institutions and private companies on the types of partnership that are legally accepted. Although private companies are encouraged to invest in WSS systems, at the end of the contract period, the assets will be returned to the government. To allow for returns on their investments, companies usually receive long-term contracts, mostly 25 years. In terms of incentives, most countries provide some form of financial incentives to attract private operators. In Bangladesh and the Philippines, the legal framework clearly prescribes the types of financial and fiscal incentives the governments are willing to provide. This includes capital investments, guarantees, subsidies, and tax breaks. In some cases, market structuring is also tied to water resource management. In Kenya the industry is structured around water catchments to promote equitable management of water resources within the area. In Colombia there is an indirect incentive, also anchored in the legal framework, in that local governments that have corporatized their public service provision through the establishment of a separate utility may receive higher national budget allocations for WSS investments. www.wsp.org 13 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns The Public Sector’s Role in Enabling Private Sector Participation Box 5.3: Example of the Need for Institutional Support In Bangladesh, local government institutions do not fully understand opportunities for the sector of having private partners in providing WSS services. In addition, communities in general share the local government’s view that the private sector will be interested only in earning profits and not in providing public services such as WSS. These views have deterred private operators from becoming involved in WSS service provisions. In contrast, private sector participation is a well-accepted concept in the Philippines. The national government has made great efforts in promoting PPPs in all infrastructure sectors, and has created a PPP framework that includes the establishment of a PPP Center, which acts as a knowledge center. The PPP Center provides capacity building programs for local government institutions regarding the concept of PPPs; how to structure, develop, and prepare PPP projects; and how to implement and monitor PPP projects. This dissemination of knowledge has resulted in the acceptance of the PPP concept by local government institutions. In addition, the PPP Center also engages private sector actors, such as chambers of commerce, to increase PPP awareness in the private sector. These awareness raising and capacity building programs have been complemented by several successful pilot projects. They have greatly improved community understanding and belief in the benefits of private sector participation. • Local government capacity building. This is usually important in terms of setting tariffs that will cover the needed regarding structuring projects for private private sector’s costs. Having a clear tariff approval participation, selecting private partners, and manag- process, that is not politicized, is key. In addition, hav- ing projects. In addition, the capacity of private enti- ing a good regulatory framework also means that sec- ties often needs to be developed in terms of providing tor performance as a whole will be monitored. good services at a reasonable cost. Underperforming service providers (whether private • Legal and regulatory framework. A clear legal and or public institutions) can then be identified and rem- regulatory framework is very important, though edied through regulatory initiatives. ­ ultimately the effectiveness of a legal framework is dependent on the strength of law enforcement and Assisting in developing and improving access to finance. the competence of the courts. See box 5.4 for exam- Capacity building may also be required for financial insti- ples in sample countries. tutions. Access to finance is a crucial factor in the devel- opment and growth of private participation in WSS in A sound legal and regulatory framework brings significant any country. It is beneficial for public institutions to pro- benefits: vide support to private financial institutions so that they • Confidence that contract enforcement will be fair. A can provide tailored products to support the local private solid legal framework gives the private sector the sector. Public finance may also be needed to address confidence that its operations are protected by law affordability issues and to accompany any private invest- and reduces bureaucracy for the private sector. An ment. For example, for small towns or rural areas where effective institutional framework should include the community is not able to pay cost recovery tariffs to appropriate allocation of the monitoring and evalua- cover the full investment costs, the government may need tion function in the WSS sector, including clear to provide all, or a portion of, the capital investment, accountability and reporting arrangements. while the private operator provides funds for initial opera- • Confidence that commercial interests will be protected. A tion of the system. See box 5.5 for examples of having good regulatory framework will assure the ­ private sec- access to finance to support private sector participation in tor that its interests will be protected. This is especially sample countries. 14 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns The Public Sector’s Role in Enabling Private Sector Participation Box 5.4: Example of Legal and Regulatory Frameworks In Niger, Senegal, and Uganda, the legal frameworks explicitly encourage partnerships with private operators in providing WSS services, and outline how the partnership should be governed and the types of contracts that can be entered into. They clearly outline the roles and responsibilities of each party, for example, in Uganda, the local authorities remain asset owners and the private sector service providers are responsible for operating and maintaining those assets. There are, however, exceptions to this arrangement. For example, in Cambodia the lack of clear legal and regulatory framework has created opportunities for private entities.They have stepped in to invest in WSS systems and provide the services without any government technical or financial support. Since these private operators are contributing to access, they should be recognized and supported in their growth to further expand their coverage. Market development by operators has also occurred in the Philippines, albeit to a lesser degree. The comprehensive PPP framework has diminished the impact of a lack of regulatory framework Regulation by contract has been an accepted compromise. However, this PPP framework needs to be supported by capable and experienced staff and good arrangements for accountability. In the Philippines, tariff setting procedures are not restrictive, in that in most cases tariff adjustment clauses are included in the PPP contracts, monitored by the regulator. Thus, having a regulatory framework that allows private companies to earn returns on their investment, is also key to attracting private participation. Such grants or subsidies can be Box 5.5: Example of Having Access to Finance to Support channeled through local private ­ Private Sector Participation financial institutions to private ser- In Cambodia, the private sector fills the gap left by local governments, vice providers. These may, for exam- which do not have the technical or financial capacity to provide WSS ple, take the form of output-based services. One factor that allows the private sector to be able to provide grants to encourage expansion of dis- WSS services is access to finance. However, most commercial banks tribution networks to enhance access still require high collateral, which is a concern for small private firms. of poor households to clean water In Benin, the project design required the private operators to design, and improved sanitation, as has been engineer, rehabilitate, operate, and maintain systems, without done in Kenya. increasing the price of water. This included rehabilitating equipment, Provision of public goods. On occasion extending the network, installing private water connections, and the private sector cannot effectively partially financing these activities. The PPP arrangements provided participate due to a lack of a suitable a robust contractual framework and a better risk allocation among operating environment. In rural sani- the parties. For the first time in Benin, local commercial banks have tation, for example, behavior change committed to support the sector by providing debt, equity, and various campaigns are extremely important to financing instruments to the concessionaires. The financial burden on build demand, but would not be car- the public finances will be reduced, as historically the government has ried out by any single firm, due to free fully financed capital investment. rider issues. www.wsp.org 15 VI. Lessons Learned from the Case Studies Four full Country Reports from Bangladesh, Colombia, In rural areas, the Union Parishads (the lowest level of rural the Philippines and Uganda have been prepared for local government institution) usually operate and maintain this Guidance Note. They provide a more in-depth analy- the water supply system. In some rural areas, the operation sis of each of the country’s efforts and best practices in and maintenance of the piped water supply system is under- encouraging and promoting private sector participation taken by community user associations or nongovernmental in water supply and sanitation services in rural areas and organizations (NGOs). These systems are usually built as small towns. This section is an overview of how the previ- part of a development project, financed either by donor ously identified enabling factors influenced the suc- funds or central government budget allocation. cesses and failures of private sector participation in each country, and outlines the lessons learned from these Market Development experiences. In Bangladesh, water supply is seen as a service to be pro- vided by the government. Communities generally have the Bangladesh perception that private service providers are not suitable for The following paragraph is a summary of the Bangladesh water supply services, as they are profit-making entities. For Case Study Report, one of the case studies from the four this reason community-based organizations (CBOs) or user countries selected for the study. The Bangladesh Case Study associations are preferred, with the capital investments aimed to identify good practices in Bangladesh in strength- being provided by the national government. ening public institutions to effectively engage domestic pri- vate sector in providing water supply and sanitation services However, in 2005 the World Bank Bangladesh Water in rural and small towns. The report was based on a desk Supply Program Project introduced the concept of having study research, followed by a field visit to Dacca (September private operators in the WSS. Initially, the project was 2014). aimed at small towns; however, due to some difficulties in involving the Pourashavas, the project was implemented in Background rural areas instead, involving several Union Parishads. Bangladesh is one of the world’s most densely populated countries. Approximately 150 million people live in an area The concept of the project was to award contracts for the of 147,570 km2—giving a population density of 964 inhab- design, build, and operation of piped water supply schemes. itants per km2. Considering the very high population den- Initially, 50 percent of the funding for each project was to be sity, population growth, and the omnipresent poverty, the provided by the World Bank and 50 percent by a private or provision of adequate water supply and sanitation services nongovernmental investor. However, due to the lack of presents one of the largest challenges Bangladesh is cur- interest from the private investors, and possibly a lack of rently facing. (Information in this section on Bangladesh is finance, it was mostly NGOs and wealthy individuals with from ECA country study 2015a.) charitable or social motives who participated in the project. Water supply and sanitation (WSS) service provision is the Access to Finance responsibility of local government institutions. In most In spite of World Bank’s pilot project, the market for private small towns, the Pourashavas (municipalities) operate and sector participation in water supply has not yet been estab- maintain the water supply system. These systems are lished. The enabling environment—such as the legal, regu- financed and constructed by the main central government latory, and institutional frameworks—is improving, but is agencies involved in water supply and sanitation: the not yet sufficiently conducive to encourage private sector Department of Public Health and Engineering and the participation in small town water supply. Moreover, water Local Government Engineering Department. supply systems are capital-intensive investments. As a result, 16 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies not many private entities are willing to take the financing including having private partners; (b) raising community risk, especially if the government counterparts are reluctant awareness; and (c) understanding the economic characteris- to allow cost recovery tariffs. The financial risks make it dif- tics, as well as social characteristics, of water. ficult for private companies to obtain loans for the capital investment. These capacity building steps will increase communities’ willingness to pay for safe water services. Institutional Support Local government institutions are technically allowed to con- Once local government institutions gain better knowledge tract private companies to operate and maintain their sys- and understanding of the options for providing public tems, but to date this has not yet been done. Central services, including the benefits of involving the private ­ government engineers and officers are often stationed in local sector, the priority will be to develop a legal and regulatory ­ offices, which can be in the headquarters of a subdistrict framework conducive to private sector involvement and (Upazila) or in a small town governed by a Pourashava. The improving the availability of finance. engineers and officers in these local offices often provide assis- tance in terms of operating and maintaining the systems. Colombia The following paragraph is a summary of the Colombia Most sanitary equipment and sanitation service providers Case Study Report, one of the case studies from the are private entities (e.g., either a listed company or an indi- four countries selected for the study. The Colombia vidual vendor) or a community-based service provider. In Case Study aimed to identify good practices in Colombia water supply, most government institutions consider com- in strengthening public institutions to effectively engage munity user associations and NGOs to be a type of private the domestic private sector in providing water supply sector, in that they are not a government entity. Therefore, and sanitation services in rural and small towns. The many of the water supply systems operated by community report was based on a desk study, followed by a field visit user associations or NGOs are considered to be operated by to Bogota and Barranquilla (September 2014). the private sector. Background Unusually, in Bangladesh the private sector’s contribu- The Colombian Constitution establishes that public ser- tion has mainly been in the sanitation sector rather than vices are inherent to the social purpose of the govern- water supply. ment and it is therefore its duty to ensure the efficient delivery of such services to all inhabitants of the national Lessons Learned territory both in urban and rural areas. Under this During discussions with various government and nongov- framework, the State must provide financial, technical, ernment personnel in Bangladesh, many stated that there and administrative support to utilities, companies or was plenty of private sector participation in the water and municipalities providing public services. Public services sanitation sector. may be provided by the government, directly or indi- rectly, organized communities or individuals. In the Since the country is new to the concept of private sector case of indirect provision by the government, this may participation in public service provision, much ground- be done by different types of operators, including work needs to be done before public-private partnership ­ private WSS service operators as contracted by each (PPP) projects can be implemented in small towns and municipality. This constitutional mandate probably rural growth centers. explains the degree to which the private sector partici- pates in the provision of public services in Colombia. Local government institutions will benefit from capacity (Information in this section on Colombia is from ECA building in terms of (a) how to provide public services, country report 2015b.) www.wsp.org 17 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies In the 1990s Colombia introduced a policy of decentral- companies, called Empresas de Servicios Públicos (ESPs). ization together with an emphasis on the corporatiza- These are organizations established specifically for the pro- tion of public services (which are typically managed at the vision of public services and can be publicly owned, pri- municipal level) and the involvement of the private sector vately owned, or jointly owned by public and private addition, decentral- in the provision of public services. In ­ entities. ization gave municipalities the responsibility for WSS provision, with support from the central government. ESPs in most large urban centers in Colombia have been established with private capital. However, there are The key central government institution in the WSS sector few in small towns and rural areas due to low population is the Vice-Ministry of Water and Sanitation, which sits densities, which increase the cost of infrastructure under the Ministry of Housing and Territory. This Ministry and result in a high cost of supply, making these opportu- is responsible for implementing national policies, plans, and nities less attractive for private investment. Nevertheless programs in the WSS sector. The National Planning some ESPs with private shareholders have recently Department, working closely with the Ministry, sets the poli- started exploring the possibility of providing WSS ser- cies through development plans and sector-specific policies. vices in areas surrounding the large cities in which they operate. Since the passing of Law 142 in 1994, the government’s policy has been to encourage provision by specialized enti- Access to Finance ties, rather than having the municipality provide public ser- One of the key lessons learned is that it is not realistic vices directly. The option of direct provision by municipalities to expect the private sector to provide capital for large is allowed only when no other alternatives exist, and if they investments. Concession contracts in larger urban areas provide services directly they must follow strict procure- (where theoretically the population can afford higher ment rules. However, there are a number of other delivery tariffs) that were designed for the private operator to ­ models available to municipalities that fall outside public recover the costs of its upfront investment through procurement rules. Important among these is the public the tariff have almost all been renegotiated, either for- service company. mally or informally. The renegotiations suggest that it is unlikely that in practice much private capital (if any) was Regulatory responsibilities are divided primarily between ever invested. the Comisión Reguladora de Agua Potable y Saneamiento, which regulates tariffs, and the Superintendent of Public A preferred contractual arrangement is a lease/affermage Services, which monitors and enforces the performance of contract in which the bulk of upfront costs are covered by operators. the public sector. In such a contract revenues collected from customers by the private operator are used to pay a lease fee Service providers are categorized as small if they supply to the state, to cover operation and maintenance expenses, fewer than 2,500 connections and large if they supply more and to make defined investments in maintenance and than that. This is in contrast to the classification employed expansion of the system. in other jurisdictions, which focuses instead on urban ver- sus rural provision. It is worth mentioning that service cov- Additionally, large private operators are currently proposing erage in Colombia’s rural areas is far below that of urban the concept of regional tariffs to the regulator. A regional centers. The government is introducing policies to address tariff will allow an operator to charge a uniform tariff across this disparity. WSS systems that are not physically connected. This will effectively enable large urban centers to cross-subsidize Market Development small towns, such that service provision to the small towns The most common form of private participation in the would be profitable for the operator. In November 2014, WSS sector in Colombia is through public service the first proposal for regionalization of tariffs was approved 18 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies for Triple-A, the operator in the department of Atlántico circumvent public sector PPP procurement rules (which (MinVivienda 2014). The benefits of the regional approach can sometimes be restrictive, because they are not tailored are the following: to WSS service contracts). • Long-term sustainability. Users will be served by an operator that can guarantee the continuity of service Colombia has recognized the challenge of fully recovering and quality at a price that takes the economic reality water infrastructure investments from tariffs. It has con- of smaller municipalities into account. sistently set aside significant funding for WSS infrastruc- • Financial sufficiency. The regionalization of service ture and has launched a number of projects—with the provision tackles the challenge of supplying small support of such organizations as the World Bank—that municipalities, without compromising the financial contract WSS services to the private sector, paired with standing. grants to cover the bulk of the upfront investment costs. • Economies of scale. These will be realized thanks to Separate tariff methodologies have been established for the expansion of existing facilities, such as water large and small operators. The key differences between the treatment plants. two are that whereas all costs are to be paid for by users in the case of large operators, small operators normally Institutional Development receive a government contribution to cover investment Colombia has acknowledged that the WSS requires specific costs (the collected user charges cover administration and expertise that is not typically found at the municipal level. maintenance costs). It has therefore made it a policy to encourage regionaliza- tion of services by implementing Departmental Water A variety of funding channels exists for the WSS sector, Plans, which are a set of planning and interinstitutional including general budget allocations and funds that are coordination strategies that municipalities can voluntarily available for capital investments based on predefined crite- opt into. This brings a better resourced and more corporate ria. Colombia is notable for having a single cross-subsidy approach to WSS provision and ultimately makes it easier scheme that relies on the stratification of households for large private operators to expand services to small towns through the country. and rural areas. Although the concept of the Departmental Water Plan is relatively new and therefore is only just begin- In the past, little attention was given to the provision of ning to be applied, the initial indications are that this WSS services in rural areas. It remains to be seen whether approach can be very successful in encouraging private sec- there is any scope for private sector involvement in rural tor participation. areas, given that the experience to date suggests that pop- ulations are too dispersed and affordability of services is Lessons Learned too low. Colombia has made the important step of encouraging pri- vate sector operators in large urban areas. For small towns, Colombia’s record in terms of regulation and monitoring the most successful instances of private participation have is overwhelmingly positive. However, the separation of been when large water operators extend their services pro- regulatory functions and monitoring and enforcement vided in larger towns to nearby small towns. functions creates a disconnect that ultimately leads to less effective regulation and increases the risk for private Colombia has been successful in encouraging municipali- operators. ties to relinquish direct control of WSS services by making some central government funding conditional on corpora- The regulations—and to some extent the policies—need to tization and other efficiency criteria. The option of estab- cater specifically for small operators. The vast majority of lishing joint venture service providers to provide WSS operators (mostly community-based) are officially moni- services has also opened up the market in Colombia, since tored and therefore do not receive any support from central this type of arrangement allows the municipality to government. www.wsp.org 19 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies The Philippines Water supply standards are related to the type of settle- The following paragraph is a summary of the Philippines ment served. In small urban towns and rural areas, CBOs Case Study Report, one of the case studies from the four operate at Level I (stand-alone water points) and Level II countries selected for the study. The Philippines Case (piped water with communal water points). As a settle- Study aimed to identify good practices in Philippines in ment grows and becomes more urban or more densely pop- strengthening public institutions to effectively engage the ulated, communities may request their local ­ government domestic private sector in providing water supply and to provide a Level III service (piped water with private sanitation services in rural and small towns. The report connections). was based on a desk study research, followed by a field visit to Manila, Cebu Island and Bohol Island Although there are also some CBOs operating Level III (October 2014). systems (typically following community demands due to increased urbanization), in such circumstances the local Background government commonly establishes a water district, At first sight, the institutional arrangements in the and provides these services itself, or solicits a private Philippines water sector look very complicated, with over- investor-operator. laps between executive functions, regulatory functions and service provision. It might be expected that these overlaps In some cases, when a private sector entity becomes aware would be incompatible with extensive private sector partici- of a community requiring Level III service, it approaches pation, but, on the contrary, the local private sector man- the local government with an unsolicited proposal. ages to thrive in this environment because at the scale of local water service PPPs are entered into through relatively Market Development simple contracts. (Information in this section on the In the early days, the Build Operate Transfer (BOT) ­ policy Philippines is from ECA country study 2015c). The simple was the main mode of partnership between public institu- business model that has evolved has resulted in domestic tions and private entities. However, the BOT Law also pro- private entities providing 25 percent of piped water services vides for other types of PPP contractual arrangements, and (Tungpalan 2009). over the years many different types of contractual arrange- ments have been used in the WSS ­ sector. To ensure that There is no single law governing both the water supply and water supply service provisions are provided efficiently and sanitation sector, and there is no single national ­government ­ ublic, the BOT Law provides a are still affordable to the p institution that is tasked with overseeing the operation of cap on the rate of return that the private partner can earn in the sector. The Water Code of 1976 g ­ overns the water sec- an unsolicited PPP project. tor in general, but this is more ­relevant to the allocation of water resources than to water supply service provision, and One of the key success factors is that the government has does not cover sanitation. The Local Government Code of put considerable effort into market development for PPPs 1991 provides that WSS services are the responsibility of in infrastructure sectors. Examples of the market-making Local Government Units, and allows them to choose how efforts by the government include: to provide these services. • Establishment of a national PPP framework. Having a PPP legal framework provides the legal base for gov- Some local governments choose to establish water districts, ernment institutions to seek private partners to pro- which, by virtue of a special charter (Presidential Decree vide public infrastructure and services, and for 198) then become corporatized water utilities separate from private companies to seek out opportunities in those the local government. Others choose to operate and main- sectors. tain the water supply system themselves. A third category • Establishment of the PPP Center. The PPP Center, as choose to partner with private companies to provide water a one-stop shop, has improved the capacity and supply and sanitation services. capability of government institutions to implement 20 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies PPP projects, including in the WSS sector. In addi- development and having the private company as a partner. tion to the PPP Center, the Department of Interior In general, the performance of the private providers has and Local Government provides capacity-building been good. In almost all cases, although some early adjust- programs aimed at improving management of local ments were required, domestic private operators have man- government water supply systems, and contracting aged to increase access to water supply, reduce losses, and private partners for WSS service provision. improve efficiency. The vibrant and competitive market that has emerged in Institutional Support the WSS sector leads to many unsolicited proposals being The Government of the Philippines has put significant made by private companies to local governments. Private effort into developing a strong PPP framework that has companies prefer this method of selection because in most been accepted and adapted by the majority of national and cases they can negotiate directly and hence shorten the pro- local government institutions. curement process. Local governments also benefit from unsolicited proposals in that they do not have to conduct The Constitution of 1987 explicitly acknowledged the the preparatory studies required for a solicited process. private sector’s critical role in the country’s development agenda. This was followed soon after by the development However, there are downsides to this arrangement. Many and enactment of the Build Operate Transfer Law in 1990, local governments do not have the capacity to properly which aimed to mobilize the private sector to invest in evaluate the proposals, and unsolicited bids may not be at building, operating, and maintaining infrastructure proj- a competitive price. To obviate this, the BOT Law ects and other development programs that had previously requires that such bids should be subject to a Swiss chal- been the responsibility of government at national and lenge, but in practice the cost of obtaining the tender local levels. documents is often set at such a high level that poten- tial challengers do not do so. Other ways are used to In 1994, this Law was amended to include the commit- deter challengers, such as allowing only a short time for ment of the government to support the private sector by the challenger to conduct due diligence and prepare com- providing financial incentives and minimizing government parative bids. regulation. In 2010, the Aquino administration showed further commitment to the development of PPPs under the In reality, most private operators prefer a joint venture- Executive Order No. 8, which established a PPP Center, a type contract using the Local Government Code as the central government institution tasked with the role of facili- legal basis of a contract. This type of contract is pre- tating the implementation of the PPP program and the ferred by the private sector because the local government, associated PPP projects. as a partner, will have certain responsibilities, such as ­ providing land rights or rights of way, assisting in acquir- Access to Finance ing permits and licenses, and obtaining approvals from Compared to the other case study countries, the Philippines other government agencies. In addition, the approval of a has successfully created a market for private participation in joint venture arrangement using the Local Government the WSS sector in large cities, intermediate urban areas, and Code is the responsibility of the local legislative body small towns. only, in contrast to an arrangement under the BOT Law • Financial incentives. The PPP framework specifically that requires external approvals such as the local develop- identifies types of financial support that the private ment councils or even a national government oversight companies can draw upon in PPP projects. committee. • Less restrictive regulation. The lack of a central regula- tory agency in the Philippines may be seen as a nega- Some local governments also prefer to have more control tive. However the absence of such a body has not over the operation by being a shareholder in the been a major problem because most existing www.wsp.org 21 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies partnerships are regulated by contract. These can be In considering how best to encourage private sector par- formulated to meet the needs of the parties, and ticipation in small town WSS service provision, one area invariably include basic regulatory requirements, for improvement is in improving the competitiveness of such as key performance indicators and tariff adjust- the procurement process. Although the unsolicited ment processes. method of procurement is preferred by both private com- • Support from development partners. The government panies and local governments, it can be improved to has obtained both technical and financial support ensure fair competition. The current legal framework, the for private sector participation in the WSS sector. BOT Law, and the Joint Venture Guidelines require a For example, the World Bank has been working with challenge process for unsolicited proposals and for secu- the PPP Center to develop business case templates rity bids. However, there are no regulations regarding the that can be used by local governments to implement pricing of tender documents: unfortunately, the high WSS PPP projects. Another example is the Accredited pricing of the documents required to submit a bid acts as Technical Service Providers program, whereby the a constraint on free competition. World Bank assists the National Water Resources Board to approve and accredit technical and finan- In addition, local government’s ability to develop business cial experts, and creates a pool of local and interna- cases and assess proposals should be improved to ensure tional experts that can be called upon by local that the best options are chosen. governments or water districts to assist them in WSS service provision. Uganda The following paragraph is a summary of the Uganda Lessons Learned Case Study Report, one of the case studies from the four The main lesson learned is that political support is crucial in countries selected for the study. The Uganda Case Study developing a market for private sector participation. The aimed to identify good practices in Uganda in strengthen- PPP framework in the Philippines was championed by the ing public institutions to effectively engage the domestic President in 1994, and has had continued support from private sector in providing water supply and sanitation the political leaders who have followed. The government’s services in rural and small towns. The report was based on commitment to PPP and the robust structure it has set a desk study research, followed by a field visit to Kampala up to promote and facilitate PPPs have sent a strong m­ essage (August 2014). to the private companies that they will have opportunity to invest in and make reasonable returns from public infra- structure and service provision. Although the central gov- Background ernment support system has generated success stories, such Uganda is a country of 35 million people, with 20 percent as toll roads and the Metro Manila water concessions (all of of the population (around 7 million people) living in areas which have increased private sector confidence), in practice that are classified as urban. The population is projected to the local government PPP system is relatively lightly grow at 2.8 percent per year, with urban growth at 4.8 per- regulated. cent per year. (Information in this section on Uganda is from ECA country study 2015d.). The Philippines experience demonstrates that with political and technical support from the top, and a somewhat flexi- The capital, Kampala, has a population of 1.8 million. ble regulatory framework, local governments and the pri- The next six largest urban centers are one-tenth or less this vate sector can work together relatively efficiently. Most size, and there are five centers in the 60,000 to 70,000 important, the experience has shown that any partnership range. The larger urban centers are likely to have the fast- between government institutions and private companies is est growth, but the number of small towns is also set to best formed through mutual trust. grow rapidly, as are the populations within small towns. 22 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies A small town is defined as having a population between operators to do so. However, the government and NWSC do 5,000 and 25,000. not have anywhere near the financial and other resources to meet the demand. The private sector therefore has a critical Responsibility for water provision depends on the size of role to play in filling the gap in small town water supply. the town. The National Water and Sewerage Corporation (NWSC) currently has responsibility for 66 urban councils. Uganda has innovated by establishing umbrella organiza- In the smaller towns water is provided by the local admin- tions to provide support to new private operators istrative structure or by CBOs or NGOs. in small towns (e.g., when a major failure occurs). This reduces the risk of severe interruptions in water supplies. Market Development The government provides financial support to these organi- Since the year 2000 the government has permitted private zations, but they are intended to operate like private com- sector participation in the water sector. By 2001, private panies, in that they should be able to order and deliver spare water operators were already providing services in 15 urban parts quickly in the event of system failures. centers. By 2013, this number had grown to 132 centers, of which 58 were served by operators belonging to the Access to Finance Association of Private Water Operators, 53 by other opera- Funds are allocated for water and sanitation development tors, and 21 by individuals. NWSC had responsibility for under the national budget, but donor-funded activities in Kampala and 29 towns. the WSS sector play a significant role in Uganda’s efforts to develop its WSS services. Civil society organizations’ At present, there is a contract-based regulation system. (CSOs) financial contribution and investments are derived Where there is a private sector supplier, the urban councils largely from donor support, community contributions, and in turn have management contracts with the private opera- to a limited extent from income-generating activities. tors. In principle, the performance and management con- CSOs’ investments in water, sanitation, and hygiene tracts are all supervised by the Regulation Unit in the (WASH) have declined in recent years in an environment Ministry of Water and Environment, but in practice this that saw donor funding fall in general. entity cannot cope satisfactorily with the workload that this entails. Operators make their own proposals for tariffs to be charged. The Minister of Water and Environment approves Over the past 13 years, private operators have achieved tariffs and signs performance contracts with Water Supply much, including adding connections and improving reve- and Sewerage Boards and NWSC. One of the current prob- nue performance. However, technical performance varies, lems is that delays in revising tariffs are common because of with some centers having longer hours of water supply and delays in the approval process. more reliable quality than others. One of the main causes of poor performance is irregular electricity supply. Operating expenses are typically less than revenues, implying that the systems do not require recurrent subsidies. However, Institutional Development the standard of maintenance is often inadequate, which Uganda’s key legislation in the water sector is the Water Act could lead to high rehabilitation costs in the future. The of 1995. The government department responsible for urban paucity of investment is reflected in low access rates: accord- ­ and rural water supply is the Directorate of Water ing to government figures, access is around 65 percent in Development, in the Ministry of Water and Environment. small towns as compared with 77 percent in large towns. Large urban areas are supplied by the NWSC, while small towns, which are progressively being designated by the Water Lessons Learned Directorate as water authorities, either supply their own Among the case study countries, the growth in the num- water and sanitation services or contract private water ber and size of small towns is highest in Uganda. The rate www.wsp.org 23 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Lessons Learned from the Case Studies of growth in small towns is posing a major WSS challenge regulator. This will mean that the current Ministry of to the government; however, it regards the private sector Water and Environment will mainly concentrate on its interventions as a stopgap until NWSC can take over roles of policy-making and implementer of last resort of responsibility. WSS schemes. The private sector can play a significant and sustained role in providing water services in small towns, and is willing References to move into undertaking investment projects. These proj- ECA (Economic Consulting Associates). 2015a. ects could build on the experience of externally funded “Bangladesh Country Report.” In Strengthening Public output-based aid schemes to increase access to clean water Institutions in Engaging and Regulating Domestic Private in towns with existing piped supplies but limited distribu- Sector for the Provision of Water and Sanitation Services tion networks. in Rural Growth Areas and Small Towns: Best Practice Report. London: ECA. Other reforms could include extending contract duration, allowing tariffs that include a rate of return on investments, ———. 2015b. “Colombia Country Report.” In and establishing independent regulation. Operating areas Strengthening Public Institutions in Engaging and should also be clustered so that private operators can take Regulating Domestic Private Sector for the Provision of advantage of the economies of scale. In parallel, there would Water and Sanitation Services in Rural Growth Areas and be benefits in regional divisions of NWSC being formed. Small Towns: Best Practice Report. London: ECA. ———. 2015c. “The Philippines Country Report.” In Other suggestions for improvements in domestic private Strengthening Public Institutions in Engaging and participation in WSS: Regulating Domestic Private Sector for the Provision of • Improving monitoring and evaluation of private Water and Sanitation Services in Rural Growth Areas and operations (including greater use of digital systems) Small Towns: Best Practice Report. London: ECA. so that government interventions can be more pre- cisely targeted ———. 2015d. “Uganda Country Report.” In • Encouraging the establishment of asset registers and Strengthening Public Institutions in Engaging and asset management programs Regulating Domestic Private Sector for the Provision of • Increasing focused support to hygiene, sanitation, Water and Sanitation Services in Rural Growth Areas and pro-poor interventions and Small Towns: Best Practice Report. London: ECA. • Protecting water sources, to counter the tendency that has been observed in the past five years of declin- Tungpalan, Rolando. 2009. “Small Town Water Supply in ing water quality in rural and urban areas the Philippines.” Paper presented at the WSP Small Towns Workshop 2009. Vienna, Austria, June 8. http:// After years of discussion, a revised Water Act is being sub- www.wsp.org/sites/wsp.org/files/Tungpalan_-_EAP​ mitted to Parliament that will establish an independent _­Philippines.pdf. 24 Water and Sanitation Program VII. Support to Public Institutions There is no single prescription to encourage private sector and sanitation sector. This support should be focused on participation in the water supply and sanitation (WSS) sec- achieving the following objectives: tor. The case studies demonstrate that many variables should • Improving WSS sector governance by clarifying be considered in designing a support framework. These roles, responsibilities, and functions of key actors include country-specific legal and regulatory conditions, regarding the provision of WSS in small towns the capacity of the public institutions, and the readiness of • Improving intergovernmental communication, the private sector. Public views regarding the role of the pri- including accountability and reporting mechanisms vate sector in providing public services are also particularly • Ensuring consistency with the public-private part- important. nership (PPP) framework • Ensuring consistency with decentralization policies This section describes the support public institutions should provide to encourage private participation in WSS Figure 7.2 provides an example of the types of activities that service provision in rural growth areas and small towns, can be performed to achieve the above objectives. based on the assessment of enabling and demand factors and on the preliminary capacity and readiness assessment Policy makers must take into account local and national in appendix A. conditions, culture, and context. The level of decentral- ization in a country should also be considered, as it Public institutions in many developing countries simply do will affect the roles and responsibilities of public not have the capacity to meet WSS service obligations. This institutions. applies in particular to local level institutions established to meet local empowerment and other attractive decentralisation All key stakeholders must be involved: these will typically goals, but without being endowed with the necessary capacity include relevant ministries, national and local govern- and resources to carry out their mandates. Support for public ment institutions, regulatory bodies, existing utilities and institutions can be provided at the national (sector reform, PPP operators, consumer associations, relevant NGOs, and framework development and/or cluster- ing and subsidy design), subnational (capacity building) level and commu- nity level (awareness campaigns). Figure 7.1: Types of Support National WSS sector PPP framework Clustering and Figure 7.1 summarizes the types of level reform development subsidy design Demonstration project development support and identifies the level of government or community at which Subnational and implementation the support is targeted. The following Capacity building for subnational governments level subsections describe each type of sup- port in more detail. Community Awareness-raising program level National Level WSS Sector Reform The first type of support is to assist Private Capacity building for private companies and sector financial institutions the national government institutions in preparing, developing, and imple- Note: PPP = public-private partnership; WSS = water supply and sanitation. menting reform in the water supply www.wsp.org 25 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Support to Public Institutions provide a history of previous reforms, Figure 7.2: Activities and Objectives of WSS Sector Reform and document what has worked—or Support not—in the past. Identify and have Identify gaps, Recommendations discussions constraints, and In addition, governance assessment • Improve WSS with key stakeholders challenges in sector tools and guidelines are available encouraging PPP governance publicly to aid stakeholders as they • Facilitate conduct a more detailed assessment DPSP • Ensure of the country’s policy setup, legal Review relevant legal and regulatory documents consistency and regulatory frameworks, and insti- with PPP tutional arrangements. Some refer- ences to these tools and literature are Note: DPSP = domestic private sector participation; PPP = public-private partnership; WSS = water supply and sanitation. provided in appendix B. PPP Framework Development It is important to ensure that the PPP Figure 7.3: Overview of PPP Framework Components framework is consistent with existing legal and regulatory frameworks of PPP policy the WSS sector. Often, a PPP frame- Objectives, scope, implementing principles work is focused on larger sectors, such as transport and energy, rather than water, which tends to involve smaller projects (often below the legal thresh- olds of PPPs), and deals with local Processes and Public financial PPP program government departments rather than institutional responsibilities management governance state-owned companies. According to the PPIAF Public- Private Partnerships Reference Guide (2014), a PPP framework consists of the following components (as shown PPP legal framework in figure 7.3). Source: PPIAF, Public-Private Partnerships Reference Guide, 2014. Note: PPP = public-private partnership. The activities involved in developing a PPP framework may include (but should not be limited to) the follow- community leaders. The experience of previous projects, ing. (See also box 7.1 for an example including work done by donors or development partners, of types of assistance to develop a PPP framework should be used to draw relevant lessons and identify in Indonesia.) potential partners. • Identifying the key government institution that will champion and implement the PPP framework (the Existing policy documents and legislation relevant to the “PPP champion”) WSS sector should be reviewed. Previous project docu- • Working closely with the PPP champion to develop ments and reports may also provide a good background and the PPP policy, legal framework, processes, and indication of the key concerns in the sector. They may also institutional responsibilities 26 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Support to Public Institutions proximity of small towns to larger Box 7.1: Example of Types of Assistance to Develop a PPP cities may mean that WSS service Framework in Indonesia provision in the cities can be The Government of Indonesia has received various types of assistance expanded to serve neighboring small from donors and development partners in developing its national PPP towns. Another example is when framework. Examples of the assistance programs: several rural growth centers are in • Assistance to the Ministry of Finance in refining the risk close proximity to each other: clus- management framework to evaluate and provide support to PPP tering the rural growth centers into infrastructure projects. one service area may be more attrac- • The establishment of and ongoing support to the Indonesia tive to a private operator. Infrastructure Guarantee Fund. This government agency is tasked to appraise PPP infrastructure projects that require government This approach would normally be guarantees. based on demand studies under- • Assistance to the Ministry of Finance to enhance the functions of taken in the proposed areas to deter- the PPP Center/Unit (currently being tendered at the time of writing mine the technical feasibility of of this document). clustering. Can the same pipe net- • In most cases, assistance included technical aid in implementing work supply more than one area? stages of the PPP process, such as appraising PPP projects, Can water sources be shared between assessing fiscal support needs, and selecting and identifying PPP several areas? The financial feasibil- projects. ity should also be considered. Will clustering provide better economies of scale? • Design a PPP incentive framework that can be included in the PPP legislation Recommendations on clustering can be found in the Benin • If agreed and deemed to be appropriate, establish a case (see references in box B.11 of appendix B). central PPP institution to promote and assist gov- ernment in implementing the PPP framework Subsidies • Assist in developing and implementing a PPP dem- Various subsidies can be provided depending on the need onstration project and structure of the project. For example, for new sys- • Provide ongoing support to all institutions involved tems to be developed in low-income areas, it may be appropriate to provide a capital subsidy that will cover When preparing the PPP framework, specificities of small the connection costs. This type of subsidy can be pro- towns’ WSS need to be taken into account. vided in an output-based form, in that subsidy can be provided only after the outputs (e.g., number of connec- Clustering and Subsidy Design tions) are achieved. When demand factors are not met, measures can be taken to improve demand conditions. These may include (a) clus- In other cases, a tariff structure that provides a cross-­ tering service areas and (b) designing a subsidy scheme to subsidy between customer groups may be more suitable. that will ensure affordability while allowing for financial Private operators will not be interested in providing ser- sustainability of the service provider. These measures can be vices if the revenues do not cover the cost. However, cus- packaged together with other types of support. tomer affordability is also an important factor. Therefore, a cost recovery average tariff can be calculated, and Clustering the tariff structure can allow for poor households to pay The pattern of urban development has a significant less than other customer groups, such as commercial or impact on WSS service provision. For example, the industrial. www.wsp.org 27 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Support to Public Institutions Subnational Level—Capacity Building Workshops and seminars can be conducted for subnational At the subnational level, support is generally needed to governments to introduce the following: improve the capability of local government institutions, • Concepts of PPP and private participation especially in the following areas: • Types of PPP and the rationale for each • Understanding the benefits of involving private • Benefits of involving private operators in public ser- operators in public service provision, especially in vice provision, especially in WSS services WSS services • Experiences, if any, from other sectors in the coun- • Procuring and selecting the most suitable private try, and lessons learned (examples of successful partner to operate and manage the WSS system in implementation of private participation in other sec- the area tors can help enable local government buy-in for pri- • Monitoring the performance of the private vate participation in WSS services) operators • Improving understanding of the management of In terms of the PPP process, one of the best ways to improve WSS services, such as the importance of having tariff subnational governments’ understanding and ability to levels that at least cover the cost of operations implement the PPP process is to provide technical assis- tance to relevant institutions. Technical assistance can The main objective of the capacity building program is to develop the knowledge and skills of subnational govern- provide the subnational governments with an understand- ment staff through practical examples and on-the-job ing of possible choices in providing WSS services, including training. encouraging and engaging domestic private suppliers in WSS services. The technical assistance may include (but not limited to) the following: Figure 7.4 illustrates the type of activities that can be • Assisting subnational governments to identify a key ­ performed to achieve the above objectives. institution that will be involved in support of private participation in the service (the “local champion”) • Working closely with the local champion to develop a frame- work suitable for local conditions Figure 7.4: Components of a Capacity Building Program for taking into account, if appropri- Subnational Government ate, any national PPP policy • Developing local PPP guidelines, Workshops and PPP concept, types, such as toolkits and monitoring seminars rationale, and benefits tools, that can be used by local Best practices governments and other institutions • Assisting the local champion and Technical assistance PPP processes other relevant institutions to implement a PPP pilot project International experience Learning partnerships can be devel- PPP demonstration oped between the local champion Learning project development partnership and other institutions in the country and implementation that have experience in implement- Note: PPP = public-private partnership. ing PPP projects or with interna- tional institutions with a similar 28 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Support to Public Institutions background. Learning partnerships may include (but not be limited to) Figure 7.5: Activities and Topics to Raise Public Awareness of PPP Opportunities the following: • Interactive workshops and dis- Activities Topics cussions on various topics rele- Public hearings/ vant to PPP implementation Importance of having focus groups safe water supply and • Technical assistance by a sanitation services “learning partner,” which could be short-term second- Pamphlets/other ment or assignment to work printed materials Customer rights and Acceptance of PPP with the local champion obligations (including as one type of paying tariffs) service provision on implementing the pilot Video advertisement project Types of WSS service Publications regarding best practice providers, including Collaborative PPP and its opportun- and international experience can sup- activities with public ities plement the knowledge on how to health campaigns engage the private sector in WSS Note: PPP = Public-private partnership; WSS = water supply and sanitation. services. and capacity building, or part of project development sup- Community Level—Awareness-Raising Program port. It can also be incorporated as part of public health The main objective of awareness raising is to have public campaigns. It typically will have three main components: and community acceptance of private operators as one of the ways in which WSS services can be provided. An awareness-raising program conducted at an early stage of Importance of safe WSS services. In small towns and rural the project through community discussions or public areas, the community often lacks an understanding of the hearings is usually an essential part of project develop- benefits of having a safe WSS service, let alone the benefits ment. Community awareness can also be achieved through of private sector participation. It may therefore be impor- educational materials, such as pamphlets and booklets, or tant to educate the community on the health and economic mass media, such as video advertisements on television or benefits of having safe WSS services. In many cases, this can online. Whatever the chosen method, the material should be included as part of existing public health campaigns con- be simple and easy to understand. ducted by NGOs or government institutions. Figure 7.5 illustrates awareness-raising activities and sug- Obligation to pay for services received. Community members gested topics to achieve the objective of public and com- must fully understand their rights and obligations as WSS munity acceptance of private sector participation as one of customers. One of these obligations is to pay for the services the ways WSS services can be provided. they receive.4 This will lay the basis for private operations, but even if the services are provided by local government The awareness-raising program can be conducted as part of departments or water utilities, this understanding is needed a program of sector reform, PPP framework development to ensure sustainability of the service provision. 4 In certain circumstances subsidies may be provided that will exempt the poorest members from paying for their consumption, for example, if they use less than a certain quantity (usually 6 or 9 cubic meters) per month. Such subsidization does not preclude teaching the principle of payment. www.wsp.org 29 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Support to Public Institutions Different ways of providing a service. The community needs another type of WSS service provider that may be able to to understand that WSS services can be provided by differ- provide better services than other providers. ent providers, such as the local government, community- based organizations (CBOs), or by private operators. This Having community buy-in and willingness to pay for WSS instructional process establishes that private companies are services is key to successful private sector participation. 30 Water and Sanitation Program VIII. Support to Private Institutions Local financial institutions are accustomed to providing new to the private sector. Thus when the public sector loans for relatively short-term projects, and the banks advertises opportunities, the response may be inadequate require high levels of collateral from the borrowers. either because the companies bidding do not have the skills However, the WSS sector generates a stable and predictable or funds required, or because they misunderstand the nature revenue stream that can also be taken as a form of security. of the work. Technical assistance and training may be required to help financial institutions understand the concept of revenue- Some countries, therefore, may wish to institute a two- based lending. stage process. The first stage is to make a public announce- ment inviting interested companies to register for an Capacity Building for Financial Institutions opportunity. This announcement should be sufficiently Access to finance has been acknowledged as a key factor detailed for the applicants to have a clear idea of the work. facilitating more private sector participation. Without These applications should then be screened to eliminate access to finance, many domestic private operators will not those that clearly are not suitable. Following this, all suit- have enough funds from their own resources to implement able candidate companies, and their financial partners, the contract. should be invited to an interactive briefing session or workshop at which the concept and the criteria for selec- The WSS operations are long-term investments that may tion are explained in depth. This briefing should detail have high upfront capital costs. Unfortunately, financial the skills and funding required. Plenty of time should institutions typically provide loans only for shorter-term be allowed to respond to questions and enter into debate projects, and require high levels of collateral that many pri- so that all parties have a clear understanding of the way vate operators cannot provide. forward. However, WSS projects generate a stable and predictable Such briefing sessions may produce suggestions to the pub- revenue stream from user charges. Loans can be repaid from lic party that will allow it to tailor the bidding process most these revenues, but not many local financial institutions effectively to the needs of the possible bidders. understand the concept of revenue-based lending. The alternative is that funds must come from equity. This is Financial Support for Financial Institutions another major constraint that reduces the potential for the Where financial institutions are unwilling to support pri- private sector to invest and meet customer demand, while vate operators in the WSS sector, the possibility exists for also raising the financing cost and ultimately tariff levels for government agencies or donors to provide guarantees to the the population. lender. Guarantees reduce the risk to the financial institu- tion to a significant degree (depending on the type of guar- Financial institutions will typically benefit from learning antee provided). This may have the effect of permitting the about financial models suitable for lending to private opera- pool of bidding companies to be enlarged and thereby tors in the WSS sector. They may have to be convinced that increasing competition and reducing tariffs. the long-term risks are relatively minor and that an effective funding partnership can yield a steady and profitable rate of Demonstration Project Development and return. Implementation The main purpose of developing and implementing dem- Capacity Building for Private Operators onstration projects is to generate support for scale-up from Just as the concept of private operation of WSS services is stakeholders who may have initially shown reluctance. new to many governments and communities, it may also be Therefore, it is important to start by determining whether www.wsp.org 31 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Support to Private Institutions the demand criteria discussed previously have been met. offered, it may be more efficient and economical to pool the For example, when assessing and selecting the potential ser- tender process to reduce transaction costs. vice area, the area should be relatively densely populated with sufficient average income and have the potential to Long-term assistance or support can be provided for the grow. It is also important to check whether there are com- whole PPP implementation process, up to the construction peting alternative sources of water supply. These demand (if included) and operation of the system. In addition, in criteria should be included in the criteria for selecting and most cases, the public sector contracting agency will require identifying PPP projects. assistance or support in monitoring the PPP contract. Once the service area has been selected based on demand Reference criteria, a full feasibility study can be conducted, fol- PPPIRC (Public-Private Partnership in Infrastructure lowed by deciding the type of contract most suitable for Resource Center). 2014. Public-Private Partnerships the arrangement. The procurement process can be tailored Reference Guide. Washington, DC: World Bank. http:// to suit local conditions, in that small transactions may not ppp.worldbank.org/public-private-partnership/library​ require complex processes. If more than one service area is /­public-private-partnerships-reference-guide-version-20. 32 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix A Appendix A: Capacity and Readiness Assessment This section provides some guiding questions that can be • Are the institutions performing their functions? If used to assess capacity of the relevant institutions and com- they are not, what are the constraints? munity and market readiness to implement private sector • Do any national government institutions have the participation in water supply and sanitation (WSS) service knowledge, skills, and capability to implement PPP provision. The assessment is grouped into national, subna- projects? Have any PPP projects been implemented? tional, and community level assessment. • Do the national government institutions provide any form of assistance to subnational governments It is recommended that the assessment be completed as a in terms of WSS service provision? preliminary assessment before deciding and developing the • How capable are the national government institu- type of support provided to public institutions. The assess- tions in encouraging, developing and implementing ment is best accomplished in two stages: private participation in the WSS sector? • Stage 1. Gather information through publicly avail- able documents and data. Subnational Level • Stage 2. Supplement the information with discussions The subnational level assessment seeks to understand the with identified stakeholders. This stage is crucial, as dynamics of rural and urban areas, and how different levels in most cases, what happens in practice is not the of government and public institutions provide public ser- same as what was envisioned in policy documents. vices. The objective is to determine what factors influence the way public services are provided by the different levels The assessment matrices that follow indicate the type of of governments, and to understand the capacity and will- support that can be provided to help encourage private par- ingness of subnational level governments to develop private ticipation in WSS services. The assessment matrices provide participation in the WSS sector (see table A.2). a detailed list of questions to guide the analysis. Not all the questions are relevant to every situation, so the question- Key questions: naire should be used as a guide. The key questions driving • Has WSS service provision been delegated to the the assessment are listed at the start of each subsection. subnational government? • Are subnational governments allowed to contract National Level other entities to provide WSS services? The national level assessment focuses on the water supply • Do the subnational governments have the knowl- and sanitation sector and how it is organized at the national edge, skills, and capability to provide WSS services? level. It assesses the governing laws, regulations, national • Does the subnational government have the knowl- policies and targets, identification of the key players at the edge, skills, and capability to contract other entities national level, how the WSS sector is being financed, and to provide WSS services? whether a specific public-private partnership (PPP) frame- • Are the definitions of urban and rural areas clear? How work has been implemented (see table A.1). do these definitions affect public service provision? • For rural growth centers or small towns, do local Key questions: governments have the knowledge, skills, and • What is the role of the national government institu- capability to provide WSS services? Or do they rely tions in terms of WSS services? on regional or national government support? www.wsp.org 33 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix A Table A.1: National Level Assessment Matrix Topic of Stage 1: How things are meant to Stage 2: How things are working Reference to enabling assessment work in theory in practice factors Legal • Was there a reform in the WSS sector • Did the reform achieve the Legal and regulatory framework of that changed the sector significantly? intended objectives? framework WSS sector • If yes, what were the drivers for • Did the reform successfully reform? address or improve the sector? • What was the purpose of the reform? • What were the main drivers for the • What were the main changes? reform? Was there a particular • What legislation and other legal individual “champion” of the instruments emerged from the reforms? reforms? • Was there any opposition to the reform? • How was opposition handled? WSS sector • What are the short-, medium-, and • In practice, are the policies and Legal and regulatory policies and long-term goals for the WSS sector? strategic plan being implemented? framework and national targets • Is there a published national policy or • Who in practice is driving the institutional support strategic plan for water supply and implementation of the policy or sanitation? plan? • If yes, do the plans include investment • Are the targets being met? requirements in the sector? • Are the plans updated regularly? • Who is responsible for implementing the policies and plans? Institutional • Who is supposed to be doing what in • Who is actually doing what in Market making, and regulatory the WSS sector according to legislation practice? institutional support, framework of and policy documents? • Which institution is leading the and legal and regulatory WSS sector • Which ministries are responsible for water sector in practice? framework setting policies and long-term • In practice, is the institutional and objectives? regulatory framework effective? • Is there a regulator? • Are there regular water tariff • If not, who is performing the regulatory reviews and adjustments? functions? • Is the process of tariff approvals • In particular, who is designated to set and setting transparent and fair? and approve water tariffs? • Is there a formal structure for regulating sanitation? • What are the perceived main problems with the existing structures? • What are the perceived strengths? PPP framework • Is there a PPP framework in place? • What is the experience with PPP Legal and regulatory • Is there any specific legislation or so far (not just in WSS)? framework, institutional regulations for PPP? • How many PPP transactions have support • What are the incentives for PPP? there been to date? In which • Who are the key actors in PPP in the sectors? public sector? • Is the PPP framework an incentive or a hindrance? • What is the main constraint for PPPs? 34 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix A Table A.1: (continued) Topic of Stage 1: How things are meant to Stage 2: How things are working Reference to enabling assessment work in theory in practice factors Financing • How is the government budget • In practice, who allocates the Legal and regulatory framework of allocated to the different sectors? government budget? framework, access to WSS sector • Who allocates the government budget? • In practice, how are investments finance • In the WSS sector, which institution prioritized? prioritizes investments? • What are the main sources of • What tools or methods are used to funding for investments in the prioritize investment? WSS sector? • What percentage of the budget is allocated to the WSS sector on average? • Is there a WSS sector investment plan? • Is there significant donor funding available for WSS investments? Note: PPP = public-private partnership; WSS = water supply and sanitation. Table A.2: Subnational Level Assessment Matrix Topic of Stage 1: How things are meant to work Stage 2: How things are working Reference to assessment in theory in practice enabling factors Levels of • What are the levels of governments • Is there any conflict between levels of Legal and regulatory government (e.g., national, provincial or regional, government in terms of public service framework, local governments or municipalities)? provision or infrastructure investments? institutional support, • Who is supposed to do what in terms of • Who are the other key players in the market making the WSS sector at the different levels of WSS sector in the different levels of governments? government? • Is there any regional or local legislation or regulation for the WSS sector? Public service • What are the roles of each level of • Which level of government is most Legal and regulatory provision in government in terms of providing public effective in providing services? framework, subnational services? • Which level of government has the institutional support, levels • Which level of government is mandated capacity to engage with private service market making to provide water and sanitation providers? services? • What services are currently provided by • Which level of government contracts the private sector? with or engages with private service • What motivates private service providers? providers to provide public services? • What demotivates private providers? Dynamics of • What are the definitions of small towns • In practice, when do rural areas become Demand factor, the urban and rural areas in terms of small towns? What drives this process? market making, hierarchy –– Population and demography • How is the process encouraged and institutional support –– Geographical location managed by government structures? –– Economic activities • What measures are used in practice to –– Availability of infrastructure define settlements as rural or small –– Availability of public services towns? –– Proximity and connectivity to other • In practice, how do the changes affect small towns or rural areas public service provision? • How do the definitions of small urban • How do public institutions cope with towns and rural areas change over time? increasing need for public services? • What are the main drivers for change? • How well are these needs being met • How do the changes affect public and who finances the investments? service provisions? www.wsp.org 35 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix A Community and Market Readiness • Were they consulted before engaging the private entity? The community readiness assessment aims to understand • What is the community perception of private provi- community perception of private participation in providing sion of public services? public services. This assessment looks at experience with • What motivates the private entity to get involved? private participation in other sectors and how these experi- • What was perceived to be the main opportunity by ences are perceived by the community. the private entity? What are the main challenges faced by it? The market readiness assessment looks at whether or not • Was access to finance an issue for the private entity? there is a desire from the private sector to provide or get • Is there any experience with private participation in involved in public service provision. public services in other sectors? • How successful is the experience with private sector Key questions: participation? For example, is the private partner • Are communities served by private entities satisfied operating well and earning returns? Are the services with the services provided? provided satisfactory? Table A.3: Community and Market Readiness Assessment Matrix Topic of Stage 1: How things are meant to work Stage 2: How things are working Reference to assessment in theory in practice enabling factors Experience • Is there any experience in private • Is the experience perceived to be Access to with private participation in WSS or other sectors? successful? finance, demand sector • What are the contractual arrangements? • How well does the private sector factor, legal and participation • What are the roles of the private perform its functions? regulatory operator? • Was there a monitoring and evaluation framework • Who owns the assets? framework? • Who provides capital for investments? • What are the key challenges? • What drives the private participation (e.g., donor project, private sector demand, government seeking private partners)? Community • Was there any community participation • Is the community satisfied or happy with Institutional readiness in the decision to engage a private the services provided by the private support, market entity? entity? making, demand • Was there any awareness raising or • What is the general perception of having factor marketing efforts before engaging a private entities providing public private entity? services? • Were there any issues with tariffs or user fee levels? • What are the key issues about private participation perceived by the community? Market • What motivates the private sector to get • What are perceived as good Demand factors, readiness involved in public service provision? opportunities by the private sector? access to • What were the incentives to encourage • Is there a preference regarding the types finance, private participation? or size of the local areas (e.g., urban institutional • How was the contract procured versus rural, population density)? support (solicited or unsolicited)? • What are the private sector’s • Is access to finance a problem for the considerations to get involved in public private entity? service provisions? • What are the key challenges faced by the private operator? 36 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B Appendix B: Key Reference Sources Box B.1: Available References on Developing Public-Private Partnership Frameworks In developing national public-private partnership (PPP) framework, policy makers should consider account decentralization policies that delegate public service provision to subnational governments. Key aspects with regard to subnational PPP arrangements: • Knowledge, skills, and capability of subnational governments. Local level institutions were established to meet local empowerment and other attractive decentralization goals, but without being endowed with the necessary capacity and resources to carry out their mandates. • Simplified processes for local PPP projects. Local projects may not require complicated PPP processes designed for national PPP projects. • Transaction costs. These may be disproportionately high for small PPP projects, therefore, there may be a case to pool small PPP projects and gain from economies of scale by having regional PPP centers help local governments implement local PPP projects. References on Developing PPP Frameworks The online toolkit for PPP in India can provide examples and tools of how to develop a PPP framework and how to implement PPP projects in various sectors, including water supply and sanitation (WSS). See http:// toolkit​.­pppinindia.com/water-sanitation/module1-intro.php?sector_id=2. PPIAF, Public-Private Partnership Reference Guide Version 2.0, 2014, provides guidance on how to develop PPP framework on a national level. PPIAF, How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, 2011, provides guiding questions on legal and regulatory framework related to PPP. www.wsp.org 37 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B Box B.2: References for Governance Assessment Literature Copenhagen Consensus Center, “Benefits and Costs of the Governance and Institutions Targets for the Post- 2015 Development Agenda,” 2015, discusses indicators used to measure governance targets and provides lessons learned on how to improve governance and institutions. See http://www.copenhagenconsensus​ .­com/sites/default/files​/­governance_assessment_-_hilderbrand.pdf. [Mary Hilderbrand] OECD (Organisation for Economic Co-operation and Development, “Building More Effective, Accountable, and Inclusive Institutions for All, Element 6, Paper 1, 2015, provides a brief discussion on why “honest and responsive governments” is one of the most widely-cited priorities during post-2015 consultations of people from around the worldSee http://www.oecd.org/dac/_POST-2015%20effective%20and%20accountable%20 institutions.pdf. UNDP (United Nations Development Programme), Making the State Responsive: Experience with Democratic Governance Assessments, 2011, provides examples of various types of governance assessments and their application. See http://www.undp.org/content/dam/undp/documents/partners/civil_society/additional​ _­documents/Africa%20Forum%20on%20Civil%20Society%20and%20Governance%20Assessments​ Making%20the%20state%20responsive.pdf. [Edited by Göran Hydén and John Samuel] /­ World Bank, “Balance, Accountability, and Responsiveness: Lessons about Decentralization,” 1998, discusses lessons learned from decentralization and public sector reforms. See http://siteresources.worldbank.org​ INTWBIGOVANTCOR/Resources/BalanceAccountabilityandResponsiveness.pdf [Anwar Shah] /­ Box B.3: Example: World Bank Water Sector Reform Assistance Program, Colombia Project objectives: (a) support water sector reform by creating enabling environment for private sector participation in the management and operation of water utilities through assisting the implementation of pilot projects and providing financial support to ensure viability; (b) expand the coverage of water and sewerage services; and (c) facilitate access of population in low income areas to water and sewerage services. Government counterpart: Ministry of Environment, Housing and Territorial Development Project components: • Investment in water supply and sanitation work in medium-size cities and in small municipalities—provide financial support to engage private sector in several medium-size cities and small municipalities • Environmental management capacity strengthening—capacity building program with a focus on wastewater management • Development of a rural water and sanitation policy • Project management and training The project was a pilot project to test a novel approach to private sector participation in small and medium- sized cities, and was considered to be satisfactory in achieving the stated objectives. Reference For more information about this project see “Water Sector Reform Assistance Project,” http://www.worldbank​ .­org/projects​/­P065937/water-sector-reform-assistance-project?lang=en. 38 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B Box B.4: Available References on How to Support WSS Sector Reforms Many investment projects include a component to review the existing legal, regulatory and institutional framework. However, if the main focus of the project is to implement a project with private sector participation, in some cases this will be done without ensuring that the legal and regulatory framework are sound and conducive to the sustainability of private sector participation. Therefore, it is highly recommended that a thorough WSS sector reform is conducted and implemented before shifting the focus to investment project development and implementation. References World Bank, Engaging Local Private Operators in Water Supply and Sanitation Services, 2006, for experience from other countries in developing legal and regulatory framework and upstream policy work to encourage domestic private sector participation (DPSP) in the WSS sector. World Bank, Tapping the Markets: Opportunities for Domestic Investments in Water and Sanitation for the Poor, 2014, for recommendations on how to improve government policies to encourage more DPSP especially in chapter 9. See http://hdl.handle.net/10986/16538. Box B.5: Case Studies ECA (Economic Consulting Associates). 2015. “Bangladesh Country Report.” In Strengthening Public Institutions in Engaging and Regulating Domestic Private Sector for the Provision of Water and Sanitation Services in Rural Growth Areas and Small Towns: Best Practice Report. London: ECA. ———. 2015. “Colombia Country Report.” In Strengthening Public Institutions in Engaging and Regulating Domestic Private Sector for the Provision of Water and Sanitation Services in Rural Growth Areas and Small Towns: Best Practice Report. London: ECA. ———. 2015. “The Philippines Country Report.” In Strengthening Public Institutions in Engaging and Regulating Domestic Private Sector for the Provision of Water and Sanitation Services in Rural Growth Areas and Small Towns: Best Practice Report. London: ECA. ———. 2015. “Uganda Country Report.” In Strengthening Public Institutions in Engaging and Regulating Domestic Private Sector for the Provision of Water and Sanitation Services in Rural Growth Areas and Small Towns: Best Practice Report. London: ECA. www.wsp.org 39 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B Box B.6: Example of Proposal for Regional Tariff in Colombia In the northern department of Atlántico, Triple-A was established as an Empresas de Servicios Públicos (ESPs) in 1992 to operate WSS services in the urban municipality of Barranquilla. Once the operator had established itself successfully in Barranquilla, it started expanding its services to the communities in surrounding municipalities. This was carried out by using the plants employed for Barranquilla to treat larger quantities of waters to supply neighboring municipalities. The system currently supplies seven additional municipal systems besides Barranquilla. Furthermore, the operator has included two additional water supply systems that serve another seven locations. Triple-A proposed a new regional tariff that allows the firm to earn a return on a larger asset base with minimal additional risk by charging a uniform tariff across a region, even when systems are not physically connected, as is the case in Atlántico. Effectively, the regional tariff allows for cross-subsidization of poorer municipalities by large urban centers without the need of physical interconnection. Reference For more information, consult the following: ECA (Economic Consulting Associates). 2015. “Colombia Country Report.” In Strengthening Public Institutions in Engaging and Regulating Domestic Private Sector for the Provision of Water and Sanitation Services in Rural Growth Areas and Small Towns: Best Practice Report. London: ECA. Box B.7: Example of a PPP Internship Program for Local Governments in the Philippines An example of a national level institution providing capacity building to local government through a learning partnership is the Internship Program, offered by the PPP Center in the Philippines. The PPP Center is the national agency tasked with the role of facilitating the implementation of PPP programs and the projects being pursued by implementing agencies and local governments in the Philippines. As part of its function, the PPP Center offers an internship program to local government institutions, in which the local government institution can allocate staff members to work in the PPP Center office in Manila. The program provides first-hand experience on the processes undertaken by the PPP Center to develop viable PPP processes. Reference For information about the internship program and about the PPP Center, see Republic of the Philippines, “Public-Private Partnership Center,” http://ppp.gov.ph/. 40 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B Box B.8: Example of Designing a Capacity Building Program for Local Government When designing a capacity building program for local government, policy makers should include a component that explains that engaging DPSP in public service provision has benefits, but is not the only way or necessarily the best way to provide public services such as WSS. In some cases, the local government departments may be best placed to provide the services, or in other cases, community-based organizations (CBOs) are already providing satisfactory WSS services. The main development objective of improving access to safe WSS services should always be in the forefront of the assistance program. References on International Experiences World Bank. 2006. “Engaging Local Private Operators in Water Supply and Sanitation Services: Initial Lessons from Emerging Experience in Cambodia, Colombia, Paraguay, the Philippines, and Uganda.” Washington, DC: World Bank. Contains information on lessons learned. [Triche, T., Requena, S., Kariuki, M.] ———. 2014. Tapping the Markets: Opportunities for Domestic Investments in Water and Sanitation for the Poor. Washington, DC: World Bank. [Sy, Jemima; Warner, Robert; Jamieson] Reference Materials for PPP PPIAF (Public-Private Infrastructure Advisory Facility). “Knowledge Center.” Washington, DC: World Bank. http://www.ppiaf.org/page/knowledge-center. PPPIRC (Public-Private Partnership in Infrastructure Resource Center). Washington, DC: World Bank. http:// ppp.worldbank.org/public-private-partnership/. Box B.9: Example of a Community Awareness Program in Bangladesh The sanitation marketing program in Bangladesh is an example of how social and commercial marketing can stimulate supply and demand for sanitation facilities and services. The program includes a demand creation component, whereby the community was educated on the benefits of having safe sanitation practices along with sanitation product promotion. Without this demand, there would be no market for the sanitation facility providers. Reference Materials on Sanitation Marketing in Bangladesh and Elsewhere SanMark. N.d. “Sanitation Marketing in Bangladesh.” Sanitation Marketing (blog). http://www.sanitationmarketing​ .com/sanitation-marketing-blog/sanitation-marketing-in-bangladesh. World Bank. “In Bangladesh, Sanitation Marketing Helps Make Toilets More Available and Affordable,” April 8. http://www.worldbank.org/en/news/feature/2014/04/08/in-bangladesh-sanitation-marketing-helps-make​ -toilets-more-available-and-affordable. ———. 2016. “Domestic Private Sector Participation.” https://www.wsp.org/global-initiatives/DPSPI. www.wsp.org 41 Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B Box B.10: Example from the Finance Facility for Urban WSP in Kenya A finance facility for urban water service providers (WSPs) in Kenya was developed to provide an alternative source of financing for urban water and sanitation investment projects. The intention is not to replace the traditional sources of investment financing (government and development partners) but to provide a complementary additional financing option. The intended financing structure is to be a 50 percent grant from Global Partnership on Output-Based Aid (GPOBA) and a 50 percent loan from Kenyan commercial banks. The role of subsidies in improving affordability where market financing is used to pay for infrastructure is critical. This is because it may not be practical to expect full recovery of operational and capital costs in a sector that has traditionally relied on public funds to finance infrastructure. The grant is output-based and can thus be released only when the project is complete and the agreed output has been independently verified. During the construction period, therefore, the banks have to extend the full amount of the project. Commercial banks were interviewed during the facility planning process and suitable candidates identified as potential partners. The accredited banks will compete to provide credit facilities for the WSPs. Even though this project does not include an explicit capacity building component for the commercial banks, the interaction with commercial banks throughout the project has improved the participating local banks’ understanding of WSS business and the types of loans or financial products are suitable for WSS. Reference Further information on this project is available at GPOBA, “Establishing an OBA Finance Facility to Expand Water Supply and Sanitation Services in Small and Medium-Sized Towns in Kenya,” https://www.gpoba.org​ /­node/531. Box B.11: Example of Clustering in WSS Project in Rural and Small Towns in Benin The DPSP WSS project in Benin started with the selection of pilot sites, which were grouped into four clusters to reduce transaction costs. The project design required the private operators to design, engineer, rehabilitate, operate, and maintain systems, without increasing the price of water. One key lesson from the pilot project is that more ambitious clustering than what was included in the pilot project should be considered. Such clustering can be fostered in several ways: On the one hand, “market-led” clustering, whereby a single operator can win multiple contracts should be allowed (i.e., there should not be any rule stating that any operator cannot win contracts in multiple locations) and explicitly encouraged. This is likely to lead to “market consolidation,” which is already taking place for the affermage contracts and much needed in Benin, since the market probably cannot support 70 viable operators. Scaling up of the most robust operators will allow them to build technical competencies and increase their access to capital (both from their own resources and through commercial loans). This could also generate employment. However, such market consolidation should be monitored carefully so as to limit the exercise of market power by the private operators. If one private operator starts winning all contracts, for example, such a situation could be investigated to ensure that there was no wrongdoing. 42 Water and Sanitation Program Private Sector Provision of Water Supply and Sanitation Services in Rural Areas and Small Towns Appendix B On the other hand, incentives could be given to municipalities that wish to group together to let out larger contracts. For example, this could be done by making subsidies available only above a certain threshold in terms of the target number of new household connections. Such a threshold could gradually be increased to encourage letting out larger contracts to private operators and enable economies of scope and accumulation of technical expertise. Reference For more information: Migan, Sylvain Adokpo, with Tremolet Consulting. 2015. Benin: Innovative Public Private Partnerships for Rural Water Services Sustainability: A Case Study. Washington, DC: World Bank. https://wsp.org/sites/wsp.org​ /­files/publications/WSP-Benin-Innovative-Public-Private-Partnerships-Rural-Water-Services.pdf. Box B.12: Contracting with Small-Scale Providers Many PPP investment projects focus on the PPP transaction process and do not put enough emphasis in the project development and selection process. Although transaction assistance is undoubtedly required and useful, policy makers should also provide support to the public institutions on how to develop and select PPP projects, taking into account the necessary demand factors. In addition, in some cases the type of PPP contract has already been decided before the project was developed, and therefore the project development process was not done to suit the local conditions but rather to suit the types of contract selected. This situation may result in less buy-in from DPS and a less sustainable arrangement. References on Providing Project Development and PPP Transaction Assistance Delmon, Victoria Rigby. 2014. Structuring Private-Sector Participation (PSP) Contracts for Small Scale Water Projects. WSP Toolkit (May). Washington, DC: World Bank. Menzies, Iain. Public Private Partnerships for Water Guidance Note, May 2015. PPIAF (Public-Private Infrastructure Advisory Facility). 2011. How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets. Kenya. Provides guiding questions on legal and regulatory framework related to PPP. Public-Private Partnership in Infrastructure Resource Center) Washington, DC: World Bank. http://ppp​ .­worldbank.org/public-private-partnership/ppp-sector/water-sanitation/small-water-providers. Provides examples of DPSP projects in the water sector. www.wsp.org 43