What value do private operators bring to water service provision?

Agent of change, commitment mechanism and sparring partner: These are roles that private operators can take on when it comes to water provision. Olivia Jensen and Jean-Michel Herrewyn explain, in the first of a two-part series.

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In order to reap maximum benefit from the private sector's role in water provision, we must rethink existing models of public-private partnerships. Image: Pulpolux !!!, CC BY-NC 2.0

What value do private operators bring to water service provision? The usual answers are finance, technology, and managerial expertise. But these arguments are far from clear-cut; municipal finance is usually cheaper than private finance, and there are various examples of public utilities using cutting-edge technologies under highly competent management.

We look at the issue from a different angle and identify three sets of circumstances when a public-private partnership (PPP) has the most to contribute: as an agent of change when decision-makers set a policy new objective; when the government needs an effective up-front commitment mechanism; as a constructive challenge to ingrained practices.

The private operator as an agent of change

National and local policy-makers recognise the importance of providing sustainable water and sanitation services, and the issue periodically gains prominence in political agendas to culminate in new policy priorities such as reduce water wastage, expand coverage or clean up rivers.

These broad aims are fleshed out with plans and targets such as double wastewater treatment capacity, halve leaks in the network, and extend piped connections to peri-urban areas. These objectives drive progress in the sector, but they may catch municipalities and their utilities off-guard, without the human and technical resources needed to achieve the required goals.

In these cases, a PPP can provide an extremely valuable rapid injection of expertise in a specific area, like the design and operation of a wastewater reuse plant, or the creation of district metering areas as part of a leakage reduction programme. This can be done under a tightly circumscribed performance-based PPP contract. The private sector’s ability to mobilise finance and deliver assets promptly is also valuable here. A striking example is the roll-out of wastewater treatment capacity in China in the last 10 years, in which PPPs have played a significant role.

PPPs can also play a role in recasting the provision of utility services when more fundamental social and economic changes are taking place such as the transition from planned economies in central and eastern Europe or the unification of Germany. Here, PPPs can provide a way to introduce a greater emphasis on efficiency in a gradual and policy-driven way, while government capacity and trust develop simultaneously.

Utilities in emerging markets face another massive source of change; the relentless and potentially overwhelming dynamics of urbanisation. The complexity of the problem implies, in our view, strong government leadership accompanied by broad consultation. However, private operators can play a valuable role in this by piloting alternative approaches, such as decentralised service provision, while the public utility focuses on its core operations.

The private operator as a commitment mechanism

Politicians face time inconsistency problems; policies that will deliver benefits in the long-run may imply political costs in the short-run, causing politicians to abandon such policies.

An illustration: political leaders may want the utility to be financially sustainable, but this depends on people paying their bills. Disconnecting consumers who are able to pay, but do not, can be an effective way to discourage bill delinquency. Yet cutting people off for non-payment of bills will be unpopular, and households will lobby their elected representatives for leniency and exceptions. Politicians may well find it difficult to refuse such requests.

The government needs a self-commitment mechanism, much as you might ask your friends at the beginning of dinner to remind you that you are on a diet at the moment when the dessert menu appears. This is a role that a private operator is well placed to take on. The government can award a PPP contract specifying a target collection rate, while setting out safeguards to protect vulnerable consumers who can’t afford to pay, and then leave the private operator to do the unpopular job.

Focusing on these three roles for the private operator – agent of change, commitment mechanism and sparring partner – implies the need for new types of PPPs which can maximise the value of private participation.

Another example of the government’s time consistency problem is in setting tariffs. Many decision-makers subscribe to the view that raising tariffs to recover operations and maintenance costs is desirable, yet tariff increases often trigger virulent public opposition, the impact of which is difficult for politicians to withstand. However, we believe that the private operator should not have a role in tariff-setting.

Tariff-setting is an inherently political issue that implies costs for some and benefits for others. Distributional issues of this kind should, in our view, only be taken by leaders directly accountable to citizens.

The private operator as a sparring partner

In our experience, private operators are not inherently more efficient than public utilities. But public utilities are often monochrome, with deeply engrained ways of thinking about the service. Managers, even those with great technical skills, may have a narrow view of what is possible if they have spent their entire career in the same utility.

Managers in the large private water operators, on the other hand, are likely to have worked in different countries and conditions; some may have experience in other sectors. The private managers’ approaches are not necessarily superior, but they can still provide a sounding board for the public and infuse diversity into the options considered. PUB, the public water utility of Singapore, is recognised as one of the most efficient utilities in the world, but its top management recognises the value of a constructive challenger.

For PUB, PPPs are seen as a benchmark for their performance. Focusing on these three roles for the private operator – agent of change, commitment mechanism and sparring partner – implies the need for new types of PPPs which can maximise the value of private participation.

Part 2 presents some of our ideas on this topic. 

This post was originally featured on Water Policy.online and is republished with permission. Olivia Jensen is Senior Research Fellow at the Institute of Water Policy, and Jean-Michel Herrewyn is Chairman of fWE and former CEO of Veolia Water.

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