Water supply: Case for public-private partnership

Chiranjibi Nepal

I n the early 1990s, with increasing awareness of environmental degradation and widespread stress on water-related issues, the UN and the international community started to take freshwater issues seriously. In accordance with the “Dublin Principles” that emerged from the International Conference on Water and Environment in Dublin, water was recognised as an economic good (a commodity to be priced at cost of provision and value to society). Private sector participation in water services increased worldwide. But still, it only serves about five per cent of world population. At the end of the 1990s, multinationals started to revoke contracts and concessions in developing countries and are now reducing their involvement in projects that are unprofitable or risky.

Two popular models exist in the water sector: the English model of full privatisation, where ownership and management are private, and the French model (PPP model) of delegated management (lease and concession contracts), where the ownership is in public hands and the management is handled by a mix of public and private bodies. The English model is adopted mainly by England and Wales, whereas the French model has been the norm in most developed and developing countries.

Partnership between public and private sectors is a means of collaboration to coordinate and pool organisational, technical and financial resources to achieve compatible objectives. Dwindling public resources and increasing need of the citizens with regard to service delivery are the reasons for emergence of this concept. Public-private partnerships (PPPs) enable public sector to generate private funds while maintaining ownership of assets and services.Private sector’s involvement can significantly improve effectiveness and efficiency of service delivery. This came with the realisation that the government alone could not provide everything to everyone. This led it to promote private sector in areas where it is willing to cooperate for service delivery or infrastructure building. PPPs for service delivery are applicable to the most of public services such as drinking water supply, garbage collection and disposal, waste water treatment, operation of transport services, real estate development and management, education and public health.

In the context of the kind of urban services in Nepal, there is limited scope for the multinational companies (except in Water Supply Management). However, there is a high potential for local and national companies. But comprehensive national policy on public private partnership is still underdeveloped. PPP should be based on mutual prosperity and fairness and PPP policy should follow national policy for timely and cost effective development by allocating risks to the party best able to manage them and benefit from private sector’s efficiency, expertise, flexibility and innovation.But PPPs will only help if there is a good regulatory authority that can enforce policies and regulations. The issue of public-private partnership is complex, even more so in the case of municipal water supply. Hence, every law and institution that can affect PPP must be carefully examined. These include labour law, industrial enterprise act, company act, company taxation rules, environmental standards and regulatory tools, power and capacity of regulatory agencies, division of responsibilities between municipality, VDCs and Nepal government, among other related acts and policies.

The private sector seeks commitment of the political parties to PPP approach, clear definitions of scope of work, transparent tendering process, security of water supply, clear definition of responsibilities of municipalities and VDCs, an autonomous body for drinking water management and a company act for drinking water.New and effective financing mechanisms are essential for the development of water sector. New funding mechanisms should be sought that include bond financing, expanded role for urban banks in water sector, independent intermediary private sector funding through increased participation in water services with appropriate sharing of risks between contracting parties - with the banks providing guarantees for some risks as well as issue of treasury bills.

Private sector participation would be enhanced by arrangements with international agencies to protect against political risks. Availability of guarantee would be contingent upon having appropriate contractual structures for private sector participation. Private companies need to be assured return on investment, as investment in the water sector is high and irreversible. Further, there is no ‘one size fits all’ approach and the choice of a particular partnership depends on local context and feasibility. It is indispensable for governments as regulators to understand the motive of private sector for entering PPPs and have skills to manage unknown circumstances over the life of the partnership.Dr Nepal teaches Economics at TU

Source: The Himalayan Times, May 30, 2007