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Private Sector Roles in Delivering Public Services: Policy Options

for Developing Cities

Penelope Brook

The World Bank

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Outline

Why involve the private sector? Options for private participation in

municipal services Choosing an option

Why Involve the Private Sector?

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The Problem

Chronic poor performance is the rule rather than the exception in many publicly run municipal services– many households lack good access to services

(especially the poor)– service is often of poor quality– service delivery is inefficient

Population with Access to Public Infrastructureby Income Quintile (%)

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Cost Recovery is Often Inadequate

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Traditional Solutions Often Fail

Conventional projects centered on public investments in new capacity, training, and public sector managerial reforms often seem to make little difference

More and more governments are turning to private sector participation as an alternative solution

Options for Private Participation

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Basic Options

service contract management contract lease build-operate-transfer (BOT) concession divestiture

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The Basic Options Compared

Option AssetOwnership

O&M Capitalinvestment

Commer-cial Risk

Duration

Managementcontract

public private public public 3-5 years

Lease public private public shared 8-15 years

Concession public private private private 25-30 years

BOT/BOO private / public private private private 20-30 years

Divestiture private private private private indefinite

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Service Contracts

Definition: specific tasks are contracted to the private sector, but overall utility management remains with the public sector

Typical duration: 6 months - 2 years Pros: can inject good technical expertise Cons: unlikely to improve performance

greatly where overall management is weak

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Example: Mexico City Water

Mexico City is divided into 4 zones, each allocated to a private service contractor for 10 years, beginning in 1993

Contracts are in 3 stages, and cover:– mapping the network, consumer census,

metering– regularization of billing– loss detection and reduction

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Management Contract

Definition: a private company is paid a fee to operate a set of municipal services

Typical duration: 3 to 5 years Pros: gains in managerial efficiency Cons: gains can be difficult to enforce; city

remains responsible for investment

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Example: Solid Waste Collection

Management contracts for waste collection are common

» Caracas, Seoul, Bangkok, Jakarta, Lagos

Contractors are often medium-size enterprises » 100 contractors in Lagos, 85 in Seoul

Cost savings can be significant» US data - private sector is 10-30% cheaper

» UK & Canada data - private sector is 20-40% cheaper

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Lease

Definition: a private company leases the assets of a utility, and maintains and operates them, in return for the right to revenues

Typical duration: 10 to 15 years Pros: commercial risk borne by the private

sector, giving strong performance incentives Cons: administratively demanding; government

remains responsible for investments

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Example: Water in Guinea

Guinea instituted a lease contract for water supply in Conakry and 16 other towns in 1989– benefits have included:

» a substantial increase in access to potable water

» increased connections

» progression to full cost recovery

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Guinea: Ongoing Issues

Continuing difficulties:– connection rate below expectations– high unaccounted-for water– high prices

Underlying institutional issues– problems in clearly allocating responsibilities and

risks– problems in coordinating investment and operations

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Build-Operate-Transfer

Definition: private sector develops, finances and operates bulk facilities

Typical duration: 15 to 30 years Pros: good way of getting efficient delivery of

bulk services, with private investment Cons: not a good solution if supporting

distribution systems are in bad shape, or traffic levels are uncertain

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Example: Solid Waste in Hong Kong

DBO (Design-build-operate) for refuse transfer stations and a chemical waste plant

- for waste plant, capital cost paid over 5 years in monthly installments;

DBO for landfills (including restoration and aftercare)

- capital costs paid in lumpsums at milestones

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Concession

Definition: city owns the assets, but contracts with the private sector for operations, maintenance and investment

Typical duration: 25 to 30 years Pros: potential for high efficiency in operations

and investment Cons: requires considerable commitment and

regulatory capacity

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Example: Water & Sanitation in Manila

A 25-year water and sewerage concession began in Manila in 1997

– requires increase in water connections from 65% to 100% of households within 10 years

– requires increase in sewerage connections from 8% to 83% of households within 25 years

– requires decrease of technical and commercial loss from over 60% to 25% within 25 years

– projected to involve total investments in excess of $7 billion

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Divestiture

Definition: the assets of a municipal utility are sold to the private sector

Typical duration: indefinite, but may be limited by a license

Pros: potential for high efficiency gains Cons: requires credible regulatory

framework

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Choosing an Option

Governments have multiple objectives from private sector participation:– technical and managerial expertise– improved efficiency– large-scale private investment in the sector– reduced public subsidies to the sector– making the sector more responsive to

consumers’ needs and preferences

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Mapping Options to ObjectivesObjective Technical

ExpertiseManagingExpertise

OperatingEfficiency

Investmentin Bulk

Investmentin DistributionOption

Service Contract

ManagementContract

Lease

BOT

Concession

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Some

Yes

No No No

No

No

No

Yes

No

No

Yes

Yes

Some

Yes

Some

Yes

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Mistakes are Easy

A number of African cities have begun by thinking of BOTs as a solution to perceived water supply problems, BUT:

» real danger that new supplies of water will be lost in leaky distribution systems

» danger of bankruptcy if poor collections undermine ability to meet take-or-pay obligations

In such cases, better to begin by focusing on distribution efficiency

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What Can the Municipality Get?

The preferred option of the municipality may not be the preferred option of the private sector

Options that yield higher benefits for consumers also tend to demand a higher level of government commitment, and a better prepared institutional framework

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Key Private Sector Objectives

A fair rate of return, over a period that allows the private sector to recover its investments

This requires:– a well-specified contract– consumer willingness to pay (and the ability to

enforce payment)– credible, stable regulatory arrangements– mechanisms for handling risks beyond the utility’s

control

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Mapping Options to PrerequisitesRequirement Political

CommitmentCost-coveringTariffs

RegulatoryFramework

GoodInformationOption

Service Contract

ManagementContract

Lease

BOT

Concession

Low

Moderate

Moderate

Moderate

High

Low

Moderate

High

High

High

Low Low

Low

High

High

High

Moderate

High

High

High

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Getting What You Want

If the starting conditions are not especially conducive to private investment the municipality may:– delay the transaction, and pursue institutional and

regulatory reforms first;– go ahead with the transaction, but be prepared to

pay a relatively high price; or– opt for a stepwise approach to private

participation