80651 handshakeIFC’s quarterly journal on public-private partnerships In this issue Trends: 10 years of private-sector participation in water Interview: Mozambique’s “industry behind the tap” Feature: Irrigating Brazil’s semi-arid northeast Meeting the challenges of water scarcity and distribution through PPPs Issue #1 | March 2011 | ifc.org/ppp handshake IFC’s quarterly journal on public-private partnerships in partnership with IFC Advisory Services in Australia From IFC Public-Private Partnerships Austria 2121 Pennsylvania Avenue, NW Brazil Washington, D.C. 20433, USA Canada Phone: 202 458 5326/7 Catalonia (Spain) Web: ifc.org/ppp Flanders (Belgium) IFC is in the business of improving people’s lives. Editorial France It’s not always easy to remember this in the intricate details and complicated logistics of the transactions we advise. Only by Tanya Scobie Oliveira Ireland humanizing each initiative can we be reminded of our mission. That’s where Handshake comes in. Alison Buckholtz Italy Handshake’s goal is to show how public-private partnerships can bring practical, innovative solutions to complex global Japan Art & Design problems like water scarcity, climate change, access to quality healthcare, the complications of urban development, and Kuwait countless others. Jeanine Delay Netherlands Victoria Adams-Kotsch Norway We hope these stories will help stimulate discussion on how we can all help implement sustainable solutions, and we look forward to your feedback. Sweden Disclaimer Switzerland IFC, a member of the World Bank Group, creates United Kingdom opportunity for people to escape poverty and Laurence Carter, Director United States improve their lives. We foster sustainable economic IFC Advisory Services in Public-Private Partnerships Public-Private Infrastructure Advisory Facility (PPIAF) growth in developing countries by supporting private sector development, mobilizing private Global Partnership for Output-Based Aid (GPOBA) capital, and providing advisory and risk mitigation As I was reading my two girls The Water Hole, a rather unusually insightful children’s book, a particular bit of reptilian Private Infrastructure Development Group (PIDG) services to businesses and governments. This dialogue made us laugh and think. Nine tortoises are lumbering around an ever-diminishing water hole, looking for a drink, African Development Bank when one says, “Okay, which of you wise guys hid all the water?” Predictably, the ending is a happy one—the tortoises’ prob- journal was commissioned by IFC through its Advisory Services in Public-Private Partnerships Asian Development Bank lem is solved simply when the rains come and the water hole is filled. If only life imitated art. department, which helps governments improve Brazilian Development Bank (BNDES) access to basic public services through public- Handshake, the new quarterly journal from IFC Advisory Services in Public-Private Partnerships, addresses complex real-world Caribbean Development Bank problems that are not quite so easily solved. Our first issue, “Tapped Out,” explores the pragmatic and innovative solutions private partnerships in infrastructure, health and education. Central American Bank for Economic Integration that the public and private sectors create together to tackle the challenge of water scarcity and distribution. European Investment Bank The conclusions and judgments contained in this Future issues of Handshake will address a wide range of sectors and themes. Throughout, we will give our readers insight into European Bank for Reconstruction and Development report should not be attributed to, and do not our world—the emerging markets—with readable news and analysis, relatable challenges and solutions, and replicable necessarily represent the views of, IFC or its Board Inter-American Development Bank transaction structures that examine the real people behind the projects: those who benefit and those whose handshakes seal the of Directors or the World Bank or its Executive Infrastructure Consortium for Africa deal. Directors, or the countries they represent. IFC and Islamic Development Bank the World Bank do not guarantee the accuracy Your thoughts, suggestions, and contributions will enrich this conversation. Please email your feedback to handshake@ifc.org. of the data in this publication and accept no responsibility for any consequences of their use. 2 | handshake, march 2011 Tanya Scobie Oliveira, Editor Cover photo © Claudia Dewald/istockphoto In this issue 18 28 1 2 3 4 5 SMALL-SCALE WATER Columns Features PERSPECTIVE 6 7 8 9 PPPs in practice Insights & opinions Small-scale water infrastructure Water, water everywhere | 04 program: Uganda | 18 COMPASS Contributors Partner spotlight GPOBA | 21 Surveying the PPP landscape Lessons from the field 10 years of water PPPs | 08 Jane Jamieson (1) Advisory Services in Public-Private Partnerships is a Senior Infrastructure Specialist on second- department for Brazil. Private small-water supply MYTHBUSTERS ment to IFC from the U.K. Department for systems | 23 Tomas Anker (6) Challenging accepted truths International Development (DFID). is an Associate Investment Officer at IFC’s Private-private partnerships 5 common misconceptions Edouard Perard (2) Advisory Services in Public-Private Partnerships WaterHealth International | 24 about water | 13 is the Regional Coordinator for South Asia at the department based in Brazil. INTERVIEW Public-Private Infrastructure Advisory Facility Clive Harris (7) MONEY TALKS (PPIAF) at the World Bank. The industry behind the tap | 26 is Manager of the World Bank Institute’s Public- Financing and funding PPPs Nico Saporiti (3) Private Partnerships practice. IRRIGATION The death of PFI credits | 25 is a water engineer and Investment Officer in Jeff Delmon (8) IFC’s Advisory Services in Public-Private PPPs in practice LEGALEASE Partnerships department based in Serbia. is a Senior Infrastructure Specialist in the Finan- Pontal: Irrigation in northeast Brazil | 34 Law and legislation, decoded cial Solutions Unit of the Finance, Economics Ella Lazarte (4) Partner spotlight Legal and regulatory issues in PPPs | 41 and Urban department and the Global Expert is a Water and Sanitation Specialist at the World InfraCo & PIDG | 38 Team on PPPs at the World Bank. Bank’s Water and Sanitation Program (WSP), Master Class BOOKSHELF | 42 based in Mozambique. Victoria Delmon (9) Recommended reading PPPs in irrigation eLearning | 39 is a Senior Counsel in the World Bank Legal Vice Mauricio Portugal Ribeiro (5) Presidency. Private-private partnerships THE LAST WORD | 44 is a Senior Investment Officer and Head of IFC’s Jain Irrigation | 40 Parting thoughts on this issue 2 | handshake, march 2011 |3 PERSPECTIVE Photo © Woody Collins W since 1990*. Although price increases are often ater, water everywhere/Nor used as an argument against PPPs in the water any drop to drink,” wrote sector, this is not necessarily borne out by the Samuel Taylor Coleridge in facts. In a sample of 1,200 water and energy utili- “The Rime of the Ancient ties in 71 developing and transition countries, no Mariner.” In this 1798 poem, sailors blame the systematic change in residential prices occurred as Mariner for the torment of their thirst. Today a result of PPPs**. millions of people around the world face the pros- pect of “nor any drop to drink”—or to irrigate Both PPPs and the companies that operate them their land or feed their animals—and it’s our have evolved to meet the needs of people in the lifestyle that is to blame. most affected areas. The nature of these partner- ships varies widely and builds on the private The facts are stark: Water scarcity affects one in sector’s ability to improve quality and efficiency three people in the world, forcing people to rely and to extend access—as well as the government’s on unsafe sources of drinking water and limit- capacity to raise finance and subsidize expansion Water scarcity affects one in three ing agricultural production. And yet there is the to the poor. In 2010, IFC supported the govern- absurd paradox that millions who lack access to ment of Uganda in successfully bidding out the people in the world, forcing people water live in areas where there is plenty of rainfall expansion and management of water services for to rely on unsafe sources of drinking or freshwater. In other cases, much of this pre- the town of Busembatia to the domestic private water and limiting agricultural cious commodity—for example, an estimated 50 sector. The traditional transaction advice provided percent of water used for agriculture—is wasted. by IFC was complemented by a range of activities production. And yet there is the Improving the way we conserve, manage, and that addressed some of the key challenges faced absurd paradox... By Jane Jamieson deliver water is fundamental to solving the water by the domestic private sector, such as access to crisis. The private sector has a critical leadership credit. This project will help the government role in this. facilitate the management of water PPP contracts by developing a generic management contract Water & the private sector * Marin, P., Public-Private Partnerships for Urban Water, water Water Utilities: A Review of Experience in Developing The private sector has made significant and lasting Countries (Washington, D.C.: The International Bank for contributions to the delivery of reliable, safe water Reconstruction and Development/The World Bank, 2009). worldwide. By 2007, private water operators were ** Gassner, K., Popov, A., and Pushak, N., Does Pri- delivering services to around 160 million people vate Sector Participation Improve Performance in Electricity everywhere in emerging markets. These PPPs have delivered and Water Distribution? (Washington, D.C.: The Interna- water access to an estimated 24 million people tional Bank for Reconstruction and Development/The World Bank, 2009). 4 | handshake, march 2011 |5 PERSPECTIVE Fast FaCts for use on privately-managed piped water systems that will ensure consistency in contract administration and management. the amount of water on Earth Part of the solution is also to strengthen the existing operator’s abil- 326,000,000 ity to expand the availability of safe, clean water at affordable prices. In Kenya, 30 community water providers are accessing finance and TRILLION GALLONS improving services through an innovative partnership with K-Rep Bank. Today K-Rep Bank has disbursed over $1 million to commu- nity groups, benefitting nearly 40,000 people. This project brought less than together a partnership of development organizations committed of the water on 1% Earth is drinkable to expanding services to the poor: WSP, PPIAF, and GPOBA. The project relied on each organization’s ability to provide technical as- sistance and finance. the average American uses GALLONS of water per day 176 New approaches for agriculture 5 the average African uses GALLONS of water per day For the private sector to have a role in solving the water crisis, it of global water must play a stronger role in agricultural water management. Here 70% uses are devoted to agriculture at IFC, we saw firsthand the success of this approach. Throughout the 1990s, citrus farming in the Guerdane district of Morocco was APA Nova provides water to the Municipality of Bucharest in Romania under a PPP. becoming increasingly unsustainable. The area’s 600 citrus farmers Photo courtesy of APA Nova. are used to were dependent on rapidly falling groundwater and facing increas- 2,900 produce a pair ing pumping costs as the water table fell by two to three meters per GALLONS of blue jeans year. are used to 1,857 produce one To address this chronic overexploitation, in 2004 the government of “The polarization of debate between public and private is unhelpful and GALLONS pound of beef Morocco, supported by IFC, implemented the world’s first public- lumps together two very diverse sets of actors and agencies on both sides. are used to private partnership in the irrigation sector to attract private invest- 55 produce one ment to construct a new irrigation network that would deliver water Each circumstance should be looked at individually and a suitable pro-poor, GALLONS pound of oranges from an existing dam. We are also supporting the government of affordable,and sustainable solution found to fit each context. The decision- Brazil to develop a PPP to foster agricultural development in arid making process should be transparent and consultative, involving all relevant water scarcity affects 1 in 3 people globally and underdeveloped areas of Pontal. parties, to determine how these services will be provided and managed to commonly agreed standards.” of people on Earth These non-traditional models of PPPs for domestic and agricultural 46% don’t have water piped to their homes water use are crucial to supporting the development of the water sector in many other developing countries. If well-designed, and WaterAid International Policy Statement on Private Sector Participation in Water implemented by strong and committed public and private partners, 3,575,000 people die each year from these partnerships can have a significant and lasting impact—so that “Nor any drop to drink” may one day echo only in the realm of 6 | handshake, march water-related 2011 diseases poetry.  |7 COMPASS 10 P rivate-sector participation in of private water projects by number in low and water by number of projects has middle-income countries. Most of these projects expanded threefold during the were potable water and sewage treatment plants last decade. With an average of (278 since 2000), and were usually implemented 50 projects and $2 to $3 billion under BOT agreements (about 200 of them). In years investment commitments per addition, a certain number of water supply con- year, 535 water projects benefitting from pri- cessions were signed every year (22 in total since vate participation have reached financial closure 2000). By comparison, other countries in the East during the last ten years. Commitments to water Asia and Pacific region signed 22 projects with a of projects with private participation totaled about total investment of $9.5 billion. $34 billion in that same period of time. The opening of China to private participation in During the last decade, more than water infrastructure and its emergence as the first water water PPP market among low- and middle-in- 55 percent of water PPPs were come countries was certainly one of the most im- signed by private firms originating portant changes of the decade. With 309 projects from low- and middle-income and $8.2 billion in investments over the last ten countries. PPPs years, China alone accounted for 58 percent of all private water projects by number and 23 percent by investment. In 2009, the last year for which Latin America was the second most active region data is available, China accounted for 80 percent in terms of number of PPPs in water: 113 proj- By Edouard Perard 8 | handshake, march 2011 |9 Photo © Anatoliy Rakhimbayev/World Bank COMPASS The opening of China to private participation in water infrastructure and its emergence as the first water PPP market among low- and middle- Percentage of new water projects located in China income countries was one of the most important changes of the decade. 90% 80% In addition to the shift in terms of geographical eral and the scale of South-South water PPPs in 70% destination of water PPP projects toward China, particular, since they consider only larger-scale the geographical origin of private water operators private operations. Private operators also include 60% has evolved during the last decade. Some multina- small and medium-size distribution companies as 50% tionals from high-income countries have progres- well as informal operators that cover low-income 40% sively withdrawn from water PPP projects in urban areas. The size of operation and the fact low- and middle- income countries to refocus on that some operators belong to the informal econ- 30% high-income countries and on less risky engineer- omy make it difficult to document the situation. 20% ing, procurement and construction contracts. However, a World Bank report found 10,000 10% small-scale service providers in a limited sample This resulted in notable changes. During the last of 49 countries (Kariuki and Schwartz, 2005) 0% decade, more than 55 percent of water PPPs were and an International Institute for Environment 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 signed by private firms originating from low- and and Development study estimated that the global middle-income countries. This trend accelerated number may exceed one million (McGranahan ects involving investments of $9.7 billion in 17 and were implemented through management during the second half of the last decade, with and Owen, 2006). countries over the last decade. The PPP activity and lease contracts (27), concession (nine) and more than 60 percent of new PPPs implemented was concentrated in the first half of the decade divestiture (four). by private operators solely from low-and middle- Looking ahead, China is expected to remain with the second half counting three times fewer income countries. A high proportion of South- proportionally an important destination for PPPs implemented than the first one. Most proj- PPP activity was relatively less important in the South water PPP projects (59 percent by number) water PPP projects. Nevertheless, several external ects were located in Brazil, Colombia, Chile, and three remaining regions: Middle East and North were for treatment plants in China (174 projects). factors, like the long-term impact of the global Mexico, which implemented 45, 29, 12, and 9 Africa, Sub-Saharan Africa and South Asia. In the However, China was not the only destination for financial crisis, or a policy change towards PPPs, projects respectively. In this region, most projects Middle East and North Africa, 16 projects involv- private operators from low- and middle-income remain difficult to evaluate. The market share of were water supply concessions (79), followed by ing $3.3 billion in investment reached financial countries. An important share of these South- new entrants will depend partially on the strategy water and wastewater treatment plants BOTs closure; most of them were located in Algeria (13) South projects (23 percent by number) were for adopted by multinationals from high-income (17). and were BOTs for desalination treatment plants water utilities in Latin America (68 projects). countries. In the meantime, small-scale private (nine). Sub-Saharan Africa had 15 projects involv- Most of the South-South water PPP projects operators will continue to play a critical role in Europe and Central Asia were also active in ing investments of $180 million in 13 countries; involved intra-regional or domestic private water delivery for poor people.  implementing new water PPP projects during the majority were water utility management con- operators; inter-regional South-South water PPP the last decade: 14 countries signed 44 projects tracts (nine). South Asia had 12 projects involving projects remain rare. involving $3.1 billion in investment. Eighteen investments of $378 million; all of them were All calculations are based on data from the PPI of them were located in the Russian Federation. located in India. Eight were for water utilities These figures almost certainly understate the real Database (World Bank and PPIAF): Most of these projects were for water utilities (40) and four for treatment plants. scale of private sector service provision in gen- ppi.worldbank.org. 10 | handshake, march 2011 | 11 MYTHBUSTERS 5 common Photo © Ianus misconceptions about water By Nico Saporiti 1. Water is a public good… In its natural state, water rains from the sky (at least in wet countries), flows from place to place supplying lakes and rivers, and gathers underground below private and public land. Water resources are indeed a public good. However, Water: Price it right, use it well governments need to protect public water resources from over-exploitation (such as users living upstream leaving no water for those living downstream) The OECD Environmental Outlook to 2030 has identified water as one of the and waste (users making an inefficient use of the scarce resource). They do this four critical environmental priorities for the coming two decades. Based on by tightly controlling the right to use water resources for commercial, pub- current trends, 47 percent of the world’s population will live in areas of high lic, and private purposes, through the issuance of a limited number of water water stress in 2030, and the United Nation’s Millennium Development abstraction rights. Any entity that is granted a “water abstraction right” has Goals on water and sanitation will not be met. private property over the volume of water that it is allowed to collect from the public water resource. The water rights of users of water that do not provide a public service (such as bottling companies, farmers, or industries) are subordi- nated to those of the entities that provide a public service (such as the munici- pal water supply). 12 | handshake, march 2011 | 13 MYTHBUSTERS 2. ...therefore it should be 3. The best system is public… 4. PPPs invariably result in higher 5. A water sector PPP free no, private… no, a PPP! tariffs is the privatization Drinking water is scarce and essential to Municipal water systems are natural monopolies Public water service providers are liable to political consider- of water life. Therefore the argument is often heard because constructing multiple networks of under- ations, which in almost all cases favor the minimization of wa- A PPP is not a privatization. that it should be available at no cost. ground pipes to compete with each other is not ter tariffs to the large mass of the existing users. If public fund- Privatizations typically involve the Food is also equally scarce and essential economically feasible. Unfortunately monopolies are ing is not available for new investments (for example, to expand sale of publicly-owned assets or to life, but one rarely hears the argument rarely efficient, effective, or responsive to custom- service to the poor, who are not connected to the network) or goods to private investors. This that it should be free. In fact, if farms ers. In the absence of competition, monopolies can to maintain the service, the infrastructure and service quality has occurred in the water sector were owned by the state, one could expect charge higher prices in pursuit of greater profits and deteriorates. Public-private partnerships are often introduced only in a few cases, notably (and inefficient production, waste, and food be unresponsive to the end-users. Public-private as a last-minute measure to remedy unsustainable economic with a degree of success) in the shortages (or high prices). Whenever a partnerships in the water sector should logically be and technical situations. For example, private investors are re- U.K. and in Chile. In the water public good is scarce, making it free takes vulnerable to the disadvantages of monopolies. quested to inject fresh capital for new investments under tightly sector, however, when a PPP is away any incentive to eliminate waste and controlled contractual or regulatory tariff frameworks. implemented, the water resources to increase supply. Prices signal the utility, The only alternative to competition is regulation: to invariably remain a public good value, and scarcity of all goods, and make enforce through contracts the users’ rights to water The evolution of tariffs resulting from the introduction of the that is never alienated. Public possible their efficient allocation. services of a certain quality level, at a competitive PPP depends in large part on the technical and economic situ- authorities seek to conserve and price. The ideal structure should not present con- ation at the point when the PPP takes over the water service protect through regulation con- To eliminate waste of water resources, flicts of interest: the water service provision function infrastructure, and on the level of public financial support. The tract supervision.  the price of water rights should be estab- should be unconnected to the (public) regulatory efficiencies produced by the private investors can bridge the lished through the interaction of supply function, and from the (public) function of setting gap to cover operating costs and help finance new investments, and demand. To ensure that municipal the levels of service. In practice however, this often resulting in stable and sometimes decreasing tariffs. There is a water supply systems are financially and makes the communication among the private service growing body of evidence suggesting that private participation technically sustainable, the average price provider, its public regulator, and government very in the water sector does improve efficiency and increase cover- for drinking water supplies should cover difficult. The relationship is conflicted, making for age. While price increases are often held up as an argument the full cost of clean water abstraction, an ineffective system. Hence, one of the critical ad- against PPPs in the water sector, this is not necessarily borne treatment, and transport. Governments vantages of a public-private partnership. By virtue of out by evidence. Research by the Public Private Infrastructure can easily set up cross-subsidy systems to their economic and operational bond, the public and Advisory Facility (PPIAF) found that in a sample of 1,200 ensure that even the lowest income groups private sector reach a common understanding of the water and energy utilities in 71 developing and transition coun- can afford an acceptable level of consump- technical, economic, and social challenges involved tries, there was no systematic change in residential prices as a tion. in providing sustainable water services. result of PPPs. 14 | handshake, march 2011 | 15 Photo © IFC FEATURE Small-scale water ppps IN PRACTICE Photo © Jamie Wallace I n small towns and rural areas of (SSIP) Water Program in 2007. A set of pilot Small-scale Uganda, where 90 percent of the transactions was implemented to modify the population lives, water shortages are flawed contractual arrangements in use, improve part of daily life. In these areas, 60 the capacity of the key stakeholders, and model percent of the population lacks access strategies to access financing. water to safe water, and waterborne diseases and infant mortality are widespread. Seeking support Improved access and use of safe water and sanitation facilities are among Uganda’s government had implemented PPPs in the country’s key priorities. To achieve this goal, peri-urban and rural areas since 2001 and estab- infrastructure the government decided to decentralize rural lished management contracts with private opera- water supply delivery. tors in more than 70 small towns. However, these contractual arrangements were generally weak and To help Uganda achieve greater efficiency and plagued with capacity challenges, both at the na- program: Uganda improve access to water through public-private tional and regional level. Three program compo- partnerships, IFC signed a mandate to implement nents were in need of support: transaction advice, the Uganda Small-Scale Infrastructure Provider public sector capacity, and access to finance. IFC 18 | handshake, march 2011 | 19 PARTNER SPOTLIGHT also addressed financing constraints and devel- The road ahead oped a training program based on the proposed generic management contract to address weak- Ultimately, Busembatia’s five-year management nesses in the area of contract administration contract was awarded to Trandint Limited, which among public sector stockholders. Elements satisfied the technical requirement, secured a of sustainability were built in throughout key financing arrangement with lenders, and offered activities of the program to ensure continuity. the lowest total bid price of $270,000—below the GPOBA But first it was important to conduct due dili- available subsidy of $300,000 allocated by The gence in ten small towns, uncovering contracts Global Partnership on Output-Based Aid of short duration and varying performance (GPOBA). The new operator agreed to install indicators. At that point, a generic contract 400 new connections during the first two years was proposed with a minimum term of five and avoid increasing tariffs for the duration of the years, appealing to both private operators and five-year management contract. lenders. Throughout the process, the advisory work was The Global Partnership on Output-Based Aid (GPOBA) is a partnership of The geography of the areas in need was a supported by the Austrian Development Agency. donors and international organizations working together to support output- significant area of research. Clustering towns GPOBA provided funding for capital investment based aid (OBA) approaches. within close proximity to one another allowed costs to support the private operator. Among the for larger contracts that capture economies expected results of this arrangement: OBA is an innovative approach to increasing access to basic services—such of scale, specifically on human resources and as infrastructure, healthcare, and education—for the poor in developing capital investments. However, since funding 66 Residents of Busembatia will enjoy expanded countries. It is used in cases where poor people are being excluded from ba- was secured for only one of the ten towns, this access to water at the same tariffs until 2015. sic services because they cannot afford to pay the full cost of user fees, such approach was abandoned. A bidding process as connection fees. This supports PPP projects because OBA helps ensure was ultimately implemented solely for the town 66 Four hundred new water connections will be the viability of a PPP by absorbing the cost of access to a particular public of Busembatia. installed. service for the target population.  In the past, private operators in Uganda raised 66 DFCU Bank, a Ugandan commercial bank, financing by using overdraft facilities provided loaned approximately $100,000 to the win- by the banks or secured loans using other exist- ning bidder for the Busembatia contract. GPOBA recently launched OBA Data, the first online database of OBA ing business, so improving access to financing 66 Seventy representatives from local authorities projects around the world. This puts access to comprehensive and in- was a priority. IFC identified alternative mod- participated in two IFC-designed training depth data on the universe of OBA projects at the fingertips of develop- els with greater potential for success, including programs for public sector stakeholders. ment practitioners. The interactive tool offers advanced search features leveraging its relationship with local banks, for easy access to OBA project profiles worldwide; interactive maps for which presented financial institutions for the 66 USAID is using IFC’s relationship with lo- easy identification of OBA projects; and custom reports, charts, and first time with a viable business model for small cal banks as a model for developing a risk- tables on project design features and performance.  Download the town water operators. sharing product for banks to lend to private eBook, OBA Data: A Brief Introduction (gpoba.org) to learn more. operators.  20 | handshake, march 2011 | 21 LESSONS from the FIELD Photo © GPOBA Private small water supply systems By Ella Lazarte Emerging lessons on sustainability show that del- tionality and assessment of business profit- egated management of small piped water supply ability.  Furthermore, there is a need for busi- systems—mostly in the form of PPPs—is steadily ness plans to help further establish financial taking root.  There are encouraging results, such viability of water systems.  as increases in coverage and revenues in Mozam- bique and Uganda, which have led to the model’s 66 No financing, no PPP.  Rehabilitation and rapid growth. Twenty-five percent of small piped extension investment needs remain unfunded schemes in 10 of the 17 participating countries in in many cases. Blending public and private the Water and Sanitation Program’s recent work- sources of financing (such as grants and com- mercial loans) to water operators presents Maji Ni Maisha: Innovative finance for shops held in Maputo, Mozambique, are already an opportunity to tackle this issue.  A good under delegated management.  In some countries, community water schemes in Kenya such as Niger and Benin, numbers reach 50 per- example is the Kenya microfinance/OBA cent.  Our top five lessons learned included: project.  An innovative GPOBA project is increasing access to clean and reliable water 66 Lack of regulation puts PPPs at risk. Regu- for rural communities in Kenya, using a blend of commercial finance and an 66 A professional water service makes a happy lation remains the weakest link in the delegat- output-based subsidy. The project is helping small community-based water customer.  Experience of private-sector ed management environment.  Challenges are providers access the finance they need to improve existing water systems and providers demonstrated the benefits of a more also significant in the areas of  funding and connect poor households to a piped water supply. professional management to improve water data collection.  service quality, such as an increase of over 300 This project shows that investing in community water projects can be viable percent in-house connections in the small 66 Business development services contribute for commercial banks. Following a successful initial pilot, the program is piped systems under PPP management in to sustainable service delivery, with pro- being expanded nationally and will target over 165,000 beneficiaries in 55 Mozambique.   viders offering benefits to both contracting communities.  authorities and operators.  The experience in 66 A sustainable PPP is more than a signed Mali of STEFI operators providing technical contract.  We need to strike a finer balance and financial audit services on a cost recovery between specificity and simplicity in contracts basis illustrates this promise.  and adequate diagnostics of technical func- 22 | handshake, march 2011 | 23 money talks I know, I know: this inaugural column should follow the theme of the Private-private partnerships The death of PFI credits by Jeff Delmon edition—water. I should write about water finance. Maybe looking at results-based internal transfers. Or how to use government budget, donor grants and IFI funding to encourage development goals which fit so well with PPPs, like the recent work in Indonesia and Honduras, and using those future transfers to secure debt. Then again, I could talk about using secure revenue streams from water to access cheaper and longer debt, like the water revenue securitizations (if I can still use this word in polite company) that used to be so popular in the U.K. These of course foreshadowed the new French practice of securing bond issuances with Dailly assignments of gov- ernment payment obligations. But let’s come back to these topics in future editions. Today, I want to talk about the death of PFI credits. As we know, PPPs can be a very attractive option for those concerned with the efficient management of the government balance sheet, for long-term Photo © Acumen Fund supply of national infrastructure. But line ministries and local governments may be less convinced by PPPs. After all, PPPs cut into budget allocations, and the efficiencies available through PPPs often do not translate into larger budget allocations for the line ministry or local government. So ministries of finance institute PFI (private finance initiative) credits or similar mecha- nisms. Exhibit A: India’s viability gap fund (VGF), which (maybe due to its evocative name) has successfully inspired VGFs in a number of other WaterHealth International (WHI), based in India, offers customers safe, countries. affordable drinking water by developing and marketing community-owned, decentralized water purification and disinfection systems and services to These extra-budgetary sweeteners encourage line ministries and local underserved villages. It has helped reduce the spread of waterborne diseases governments to adopt the procurement method with the most benefits for and has sparked a new sector for delivering clean water in India. the nation, where the government’s planning and budget process does not create enough of an incentive. The U.K., however, has put the PFI credit WHI’s technology for purifying bacterial contamination in collected surface out to pasture. Maybe local governments and their ministries have been water was developed after a waterborne cholera epidemic in 1993 killed evangelized, no longer needing encouragement to use PPPs when merited. 10,000 people—in just one month. Each WHI system has the capacity to Maybe the new Infrastructure U.K. is meant to create political incentives to serve 2,500 to 5,000 people a day. Water is sold for less than $.01 per liter. make procurement decisions based on value for money (VfM). I hope they are right. But it would be a shame if the U.K. lost some of its infrastructure An initial investment from the Acumen Fund in 2004 helped the company dynamism for the small price of PFI credits. Babies and bathwater – do launch its first community water system in India. Because of WHI’s sig- we have to throw out one with the other? See, we’re back to talking about Source: nificant impact on rural health, IFC has made three separate investments in water again. And in both cases, sometimes we need to be reminded of what IFC and Acumen WHI since 2009, totaling over $20 million. Now, WHI has more than 300 we already know.  project materials water systems. About 250,000 people purchase safe water regularly.  24 | handshake, march 2011 | 25 interview The industry behind the tap Nelson Beete has been the chairman of FIPAG (Fundo de Investimento e Patrimonio do Abastecimento de Agua) since its founding in 1998. FIPAG is the public asset holding company for water infrastructure for the ma- jor cities of Mozambique. In 1999 FIPAG entered into a PPP arrangement with Aguas de Mozambique (AdeM), a consortium of water operators and Mozambican investors. This included a lease for the capital city, Maputo, and a management contract for the four cities of Beira, Quelimane, Nam- pula, and Pemba. Renegotiations followed the departure of international partner SAUR, and in 2010 FIPAG purchased the shares in AdeM of the remaining international partner Agua de Portugal (AdeP). IFC has been advising FIPAG on options for private sector participation across the urban water sector in Mozambique. 26 | handshake, march 2011 | 27 interview How did you get your start working What’s your experience been imple- that is quite deteriorated, your first objective is at the facts. We were not discussing perceptions. to keep it running. That’s where the focus is. But Plus, AdeP wanted to sell, we wanted to buy. In in the water sector? menting a PPP? What’s worked once it’s running, what’s next? Our contract was fact, because of the positive tone of the discus- well? not written properly, to allow for change as time sions between ourselves and AdeP, now we are I have an engineering background and am a civil went by. even friends, more friends than we were before, engineer by training. Even before I went to uni- In developing countries, there is a school of just because of how the whole thing went. We are versity I was already working in the water sector. I thought that involving the private sector in such a I also learned that a service contract is easier to still corresponding because there are things to deal grew up in the water sector, first as a draftsman in basic service like water is controversial. But water maintain than a lease contract. Lease contracts, with, like providing additional documents, and public works, and then as a medium-level techni- can be a business. Water can be managed pro- which we had in the beginning, are very difficult it’s just so smooth. It’s unbelievable. I pick up the cian, building a dam in paddy fields for rice. I fessionally. There is an industry behind the tap to manage because of division of responsibility phone and they try to resolve the issue. It’s amaz- went to work for a utility in 1983. that you have at home. What is important is the with respect to maintenance and repair. It’s very ing, when compared to any other negotiation. So arrangement. It should be made in such a man- difficult to define where the maintenance starts this makes me very happy. In 1995 I did a Master’s degree in engineering ner that the service will be efficient and that the and ends and where repair starts and ends. I be- and when I returned here, this project, called the water will reach as many people as possible. That lieve that a service contract is much easier because National Water Development Project, was start- should be the goal of any PPP. there is no such grey area. “Water can be managed professionally... What is important is the “We had to manage expectations: Keep the politicians informed, arrangement. It should be made in such a manner that the service keep the public informed. Even when there are problems, we had will be efficient and that the water will reach as many people as to say immediately how we are going to solve it.” possible.” ing. I was appointed the project leader. This was You terminated your lease early and PPPs in water can be quite contro- Looking back to our first transaction, we expected the project that determined the reforms in water that the private sector would come in and solve bought the shares back. This versial, as you said, but in and created the government agencies. We had all anything. Our expectation was that we do noth- termination process can be very Mozambique it hasn’t been as that in place and had to sign the credit agreement ing and the private sector does everything. But controversial. How have you with the World Bank to implement the reforms. then we had to renegotiate the contract and the acrimonious but in your case it’s Our organization only existed on paper at that been good all around. How were managed the relationship with all second contract was quite restrictive. With the time. There were no board members. I was the second contract, we tried to resolve the problems you able to achieve that? your stakeholders? first employee and my first task was structuring we had at hand at that moment. It is difficult in the credit agreement with the World Bank. I’ve a 15-year contract to foresee what will happen in First, there was political will for this to take I must confess that it went very well. Subjective been here from the very beginning. Now at the year 10. My view is that those contracts need to place. So even when we were facing problems, issues and emotions were put aside during the dis- head office, we have grown to 77 employees. be written in a manner that’s flexible, that you can the government was always behind it. That was cussion and ultimate termination. We just looked adjust as time goes by. When you have a system very important. Second, we spent a lot of money 28 | handshake, march 2011 | 29 interview leading public consultations, where we explained You brought private-sector Most here have a fixed and a variable part of their to get the service in an efficient manner and that to different stakeholders what we were doing from salary. Now we don’t have to argue with people meets our consumers’ expectations. That’s how approaches into your own the very beginning. We did this particularly with about whether or not they have to work. From we should look at it. That’s how the private sector local authorities and the workers, and had lots of organization, and the quality is time to time we just do performance assessments does business, especially in a competitive market. open discussions where people voiced concerns. quite high. It’s clearly a successful and if you did very well, you get 100 percent Water is a very localized business, so you have to For instance, the workers were afraid of losing approach. of your salary; if not, you get part of it. So our have the right local experts, and make sure that their jobs. The local authorities were concerned employees are very focused on meeting targets, business is carried out in a manner that fits well about the tariffs and whether or not it would get From an HR perspective, you have to define roles and we provide assistance for them to do this. within our environment and our society. After 10 out of control. Others would say, “Why bring in no matter what; people need to be held account- They never throw problems back to us. Those not years, we now have the experience, know-how, someone who wants to make a profit? It’s such able and be rewarded when they perform. Our performing, we simply replace them. and qualified staff. But you cannot do it without a basic service.” So we listed all those concerns operation started because the government wanted top international resources. It is impossible. How and answered them. We explained that the tariff to increase water coverage from 40 to 60 percent. If you were the consultant on you combine all those things is the challenge. would be set by an independent regulator, for We had a retreat with all the directors and they example. We explained that sometimes the profit someone else’s project, how would With these elements in place we can meet our were showing an increase of one to two percent the private sector makes is lower than having a per annum, and we had to increase the coverage you advise them on a PPP primary goals of managing expectations, keeping system badly managed. So we tried to address all by 20 percent in five years. At one or two percent transaction? people informed, and delivering resources.  the concerns. per annum, we would never get there. So we thought about how to go about this. One thing If I were a consultant going to a country, rather We had to manage expectations: Keep the politi- we found was that we had too many performance than introducing the PPP model up front, I’d cians informed, keep the public informed. Even indicators, like 30. That’s too many. The managers try to work it backwards and ask what we need when there are problems, we had to say immedi- were confused. So then we tried to find the key to do to deliver the service in the most efficient ately how we are going to solve it. Local authori- indicators to track the business and got down to manner. We would definitely end up with some ties need to know that although we are bringing seven. sort of PPP, either through technical assistance in the private sector, we will not get results over- or a service contract. You have to concentrate on night. Looking back, it was a good thing to spend For those meeting their targets, we started to pro- your core business. You have to find partners. You resources and time managing expectations, trying vide incentives. This is how our [private sector] will end up with some sort of PPP, also combined to keep the key stakeholders informed about approach got started. Before that time, we used with some public-public partnership, but keep the everything that was taking place. to have lots of complaints about our commercial solution open from the start. I’d also stress that software; the problems were not fixed in time. PPPs are not a panacea for everything. Once we Once we set the targets and provided the incen- get the principles right, we could find the label. tives, all of a sudden there were no more problems This is how I would conduct a discussion if I were Photo © PBS NewsHour “You have to define roles no with the software. Because employees had a clear a consultant. matter what; people need to target and incentives, they managed to have a di- be held accountable and be rect relationship with the supplier, they fixed the What do you see next for Maputo? problem, and were no longer throwing problems rewarded when they perform.” back to us. We have to put the consumers first. We have to ask what is the arrangement that would enable us 30 | handshake, march 2011 | 31 Photo © Anna Lucia Horta/IFC 32 | handshake, march 2011 | 33 FEATURE irrigation ppps IN PRACTICE Photo © Anna Lucia Horta/IFC B razil is famous around the world for A sector in search of its lush Amazon rain forest, but the country is also home to the dry, des- self-improvement ert region of the northeast. Because of the climate, the area was sparsely Pontal represents an evolution in the way Brazil’s populated and economically underdeveloped until government handles its irrigation business. Many the mid-20th century, when a public irrigation believe the country’s current model is inefficient program began. This involved the construction for two main reasons: (1) the occupation rate of and operation of the irrigation infrastructure by the land in public irrigation projects is much low- the public sector, which was also responsible for er than expected (generally less than 50 percent), the settlement of farmers through the distribution undermining the potential development effects of irrigated lands. This public irrigation program of these projects; and (2) political pressure. The followed three stages. Between 1960 and 1970, water tariffs are initially set at a subsidized level projects were intended for the local population. to attract farmers to the projects, and they are From the 1980s to the mid-1990s, irrigation proj- supposed to grow over time to reach an adequate ects incorporated participation of small agribusi- level that covers at least operation and mainte- nesses in predefined percentages. Beginning in the nance costs. Unfortunately, most of the farmers mid-1990s, the objective was to reach financial attracted to these projects lack the ability to pay emancipation of these perimeters and transfer ir- water tariffs, and for this reason delinquency rates rigation to the private sector. are high. With high delinquency rates, irrigation projects need governmental financial support (i.e., Pontal is a new initiative in which private infra- subsidies) to cover operating expenses, and usually structure development companies can engage in lack resources to cover maintenance expenses. By Mauricio Portugal Ribeiro & Tomas Anker Maintenance and construction work is frequently a long-term concession to build and operate an Pontal: Irrigation in irrigation infrastructure in Brazil’s fast-growing delayed, construction costs are high compared to agribusiness sector. Pontal is a unique opportunity private sector efforts, and the water supply is un- for agribusiness investors to position themselves reliable, since funds are not always available when in a region with advantageous conditions for fruit maintenance is needed. northeast Brazil production—especially due to the country’s cli- mate, water availability, and established logistical Despite all these issues, the promise of irrigation channels for export. projects continues to attract investment. A World 34 | handshake, march 2011 | 35 ppps IN PRACTICE agricultural risk will be assumed completely by construction of the common infrastructure of the the agribusiness company selected to be the con- whole area. The government was prepared to pay cessionaire, and risk will not be shared with the a maximum of $150 million in periodic payments government. over the 25-year period of the contract. The Pontal region has an established logistics The concession contract grants the Pontal SPC infrastructure for exports, including three port absolute freedom in the selection of crops. alternatives and highways in adequate condition. However, it requires the agribusiness company to In addition, Petrolina’s airport, approximately initiate the agricultural development of the overall 40 kilometers from Pontal, already handles cargo Pontal area. In fact, the government intends to planes shipping fruit to other continents. allocate at least 25 percent of the irrigable land to small farmers, and the agribusiness company will The project involves two activities: be responsible for promoting a professional and Photo © Anna Lucia Horta/IFC entrepreneurial occupation of these lands by the 66 The operation and maintenance of the com- selected small farmers. mon irrigation infrastructure, in line with rational use of water resources. The winning bidder 66 The occupation and development of irri- gable land, in line with rational use of soil The bid for Pontal was held in September 2010 in resources. a public session held at Bovespa (São Paulo Stock Exchange). Tetto SPE, a Brazilian company, was The concessionaire will also have the right to the winning bidder, requesting the integration of expand the provision of irrigation services. 51 percent of the total irrigable land and a total government payment of $119 million. With demonstrated soil fertility and the logistics Bank study on the social and economic develop- The promise of Pontal in place, Pontal’s goal was to attract a private ment impact of irrigation projects in Brazil’s semi- The agriculture company that will take part in investor (or a consortia of private investors) with arid region clearly shows that irrigation projects, if According to the existing technical studies, some Pontal’s efforts will be committed to exploring proven financial capacity. Prequalified investors developed under sustainable and entrepreneurial of the crops likely to succeed in Pontal include several sources of income: organic powder milk were required to have minimum net worth of $54 standards, can promote development. Positive banana, melon, papaya, pineapple, grape and for export; bovine and cattle genetic material for million, which was deemed sufficient to guarantee impacts include the reduction of regional immi- mango; other crops, such as tomatoes, dendê, milk production; pisciculture; and coconut. The the ability to capitalize the Pontal Special Purpose gration, job creation, generation of income, and orange, and sugar cane could be adapted to the company will provide all the necessary technical Company (SPC) with a minimum equity capital increase in GDP and urban development. Over- region with some restrictions related to scale. A assistance and input, as well as the 50 initial milk- of $18 million. all, Brazil’s government understands that project separate study vouches for the feasibility of citrus producing cows, to the selected small farmers. It management and implementation by private production in the region, and counts on areas will also guarantee the purchase of their produc- While the government had already invested ap- partners combines efficiency gains inherent to the outside Pontal to achieve the scale required that tion. As financial emancipation of the irrigation proximately $140 million in the development private sector and assures social and economic would justify the expense of a crushing plant in sector approaches, so does a better livelihood for of the project infrastructure, an additional $54 development. the region. Regardless of the crop chosen, the farmers.  million investment was required to complete the 36 | handshake, march 2011 | 37 partner spotlight master class The irrigation sector plays a crucial role in food production, but there have eLearning By Clive Harris PPPs in irrigation been ongoing difficulties raising financing and sustaining the productiv- ity of investments. In particular, maintenance has been a serious problem: cost recovery in the sector has been too low even to recover operation and maintenance fees. Traditional irrigation plans have been founded on massive public programs, many of which have been abandoned after a prolonged Infraco & period of neglect. There is a growing interest in using PPPs to provide more efficient and sustainable irrigation infrastructure and services. To assist practitioners in PIDG understanding some of the key issues on irrigation PPPs, WBI launched “Public-Private Partnerships in Irrigation Management,” an e-learning course, in July 2010.  This short course is a part of the WBI core learning program, “Climate Change Adaptation for Managing Agricultural Water.” It aims to improve our understanding of how some fundamental water management challenges can be addressed through private sector participation, a relatively new concept in agricultural water management in most countries. The de- velopment goal is to foster sustainable agriculture water services to farmers, an even more crucial goal in light of changing climate conditions. In 2008, a successful pilot irrigation PPP brought together small farmers and commercial farmers in Chanyanya, Zambia. Building on that founda- The three 30-minute e-modules help break through the jargon and myths tion, InfraCo Africa is scaling up to cover much of the Kafue district. The around PPPs, especially irrigation water management.  The goal is to projects provide farmers with access to year-round irrigation with centralized understand the core features, the differences between various PPP models, management to create a sustainable commercial farming operation. and how a well-designed PPP can help overcome common problems with government-provided irrigation services. The e-learning draws on case stud- InfraCo Africa aims to stimulate greater private investment in African infra- ies and walks learners through the stages of developing a PPP transaction, structure development by acting as a principal project developer, focusing on from engaging with stakeholders to designing regulatory and monitoring lower income countries and funding early stage, high risk initiatives. It takes arrangements. The e-learning course is available on WBI’s website (wbi. an equity stake in the project and makes decisions that will lead to a socially worldbank.org) under Learning  Learning Products  Climate Change responsible and successful construction and operation. InfraCo Africa is Adaptation for Managing Agricultural Water. funded by PIDG (Private Infrastructure Development Group). PIDG is a coalition of donors mobilizing private sector investment to assist developing WBI also held an e-conference on PPPs in irrigation on the Global PPP countries to provide infrastructure vital to boost economic development and Network (pppnetwork.info).  To view this, go to the Network, join if you combat poverty.  are not a member, and view under Exchange E-conferences. To learn more about WBI’s work on PPP capacity building go to wbi.world- bank.org and look for public-private partnerships under WBI Topics.  38 | handshake, march 2011 | 39 Legalease Legal & regulatory Private-private partnerships issues in PPPs Photo © Matt Jacoby By Victoria Delmon The PPPI Resource Center (worldbank.org/ppp) has been developed by the World Bank to provide guidance and materials on the legal, contractual, and regulatory issues around PPPs. It includes check- Ever visit a farm without access to irrigation? When a New York Times re- lists and risk matrices as well as sample laws and regulations, terms of reference for consultants, and porter recently traveled to a rural region in western India, he saw what hap- sample agreements and contracts. pens to land lacking this basic technology: its families live from crop cycle to crop cycle. There is no way to depend on a steady livelihood—or the next Are you researching models of water PPP network contracts in Africa? We can help. The World Bank meal. This is how the vast majority of India’s farmers live. has developed and applied successfully in Francophone Africa over the past few years a hybrid conces- sion-affermage contract for water networks. You can find an explanation of the hybrid structure in Jain Irrigation Systems Ltd., a pioneer in the field of micro-irrigation sys- English and French, together with the text of the agreements, summaries, and annotations in French, tems, is changing that. Jain’s drip irrigation technology uses a series of per- on the PPPI Resource Center web site. If performance-based contracts are your primary focus, you forated tubes that deliver water directly to crops, reducing losses to evapora- can also find summaries and annotations of sample performance-based contracts and operation and tion and weeds. According to Anil Jain, managing director of Jain Irrigation, maintenance contracts for water networks. the company recognized that when working with small farmers it would need to do more than just sell technology. “They’ve been used to thinking: In several Latin American countries, as well as Spain, joint ventures have gained popularity in the water ‘more fertilizer, more output’ or ‘more water, more output,’” Jain said of sector. The PPPI Resource Center has extensive archives on these ventures. You can access explana- the farmers. Pitching the drip irrigation over the traditional flood irrigation tory notes as well as links to the legal frameworks behind them. Countries covered include Argentina, required convincing farmers of the value of the up-front investment. Brazil, Colombia, Costa Rica, El Salvador, and Spain. Their hard work paid off. Jain’s drip irrigation has allowed 25,000 small Project-financed BOT initiatives, as well as design, build, and operate contracts, can open up addition- farmers in India to increase annual individual farm income by up to $1,000 al sources of funding for new water and wastewater treatment plants. Sample agreements in this arena per year, and has led to savings in water usage equal to the annual water can be found on the PPPI Resource Center. consumption of more than 10 million households. As the New York Times commented, “It almost sounds too good to be true: a technology that The PPP in Infrastructure Resource Center for Contracts, Laws and Regulation (PPIRC)—formerly cheaply improves crop yields, reduces water use and allows the monsoon to the Infrastructure and Law website—is designed for task team leaders and other operational staff of replenish groundwater aquifers. Let’s hope it isn’t.” the World Bank group working on the planning, design, and structuring of infrastructure projects, especially those involving the private sector. Resources on the web site address contractual and legal Jain Irrigation was the recipient of the 2010 IFC Client Leadership Award issues associated with infrastructure reform and PPP projects, and provide practical guidance notes and Sources: for its inclusive approach to sustainable agriculture. IFC and ClimateWire checklists.  40 | handshake, march 2011 | 41 Bookshelf Deep Water: The Epic Struggle The Financing of Water over Dams, Displaced People and Infrastructure: A Review of the Environment Case Studies Jacques Leslie (Picador, 2006) Chris Head (World Bank, 2006) Kariba: The Struggle with the River God Public-Private Partnerships Guiding Principles for Successful Frank Clements for Urban Water Utilities Reform of Urban Water Supply (Kessinger Publishing, 2007) Philippe Marin and Sanitation Sectors (IBRD/The World Bank, Does Private Sector Alain R. Locussol and Matar Fall 2009) Participation Improve A Guide to Guidance: (World Bank PNote, Issue 31, Performance in Electricity Sourcebook for PPPs Output-Based Aid: Lessons 2009) and Water Distribution? (European PPP Expertise Centre, Learned and Best Practices Katharina Gassner, Alexander 2010) Yogita Mumssen, Lars Popov, Nataliya Pushak Output-Based Aid in Water and Johannes, Geeta Kumar (IBRD/The World Bank, 2009) Sanitation: The Experience So Far (World Bank, 2010) Guidebook on Promoting Good Geeta Kumar and Josses Mugabi Governance in Public-Private Public and Private (OBApproaches 36, October 2010) Partnerships Water: The Epic Participation in the Water (United Nations, 2008) Struggle for Wealth, and Wastewater Sector Output-Based Aid for Power and Civilization X Cledan Mandri-Perrott Sustainable Sanitation Steven Solomon (IWA Publishing, 2009) Toolkit for Public Private Part- (Harper Collins, 2010) Sophie Trémolet and nership in Urban Water Supply International Project Barbara Evans (OBA Working for Maharashtra Finance and PPPs Paper No. 10, Jeffrey Delmon and (Asian Development Bank, 2009) September 2010) Water: Our Thirsty World Victoria Rrigby Delmon (National Geographic, (Wolters Kluwer Law & Pricing Water Resources and Wa- April 2010) Business, 2011) Water Operators from Emerging ter and Sanitation Services Markets: New Players for Public- Charting Our Water (OECD Publishing, 2010) Future: Economic Private Partnerships Frameworks for Informed Philippe Marin, Ada Karina Izagu- Innovative Financing Mechanisms Decision Making irre, Alexander Daridenko for the Water Sector (2030 Water Resources (World Bank, 2010) The Water Hole, Graeme Base (Puffin Books, 2004) Group, 2009) (OECD Publishing, 2010) SmartLesson in Water Public- For Want of a Drink: A Special Private Partnerships Report on Water (IFC, forthcoming) (The Economist, May 20, 2010) 42 | handshake, march 2011 | 43 Photo © Pipowitz a case of pollution by a (public) water company capital investments, but ... that had been discharging untreated sewage and hazardous waste in the Bay of Naples. Have limited ability to promote the aware- ness among public consumers of the often Misunderstanding and strong opinions are not intangible or delayed (long-term) environ- limited to Italy. Regardless of location, govern- mental benefits brought by expensive capital ment officials wishing to implement a water PPP investments in waste water treatment, leakage must begin with realistic expectations. Here are a reduction, or drainage management. The last word few: 66 Private investors have a strong profit incen- tive to introduce operational and investment Private investors cannot miraculously break the economic balance in play among tariff revenue, operating costs, subsidies, and cash available for investments. It is unreasonable to expect By Nico Saporiti The intake of the Villoresi irrigation canal is a monumen- efficiencies, but ... private operators to transform, in a few years, a Operational efficiencies cause a redistribu- loss-making, subsidy-dependent water company tal structure of classical beauty: it tames the blue waters of tion of economic benefits, from the sources incapable of maintaining its asset base. It is even the River Ticino, just below the outlet of Lake Maggiore, of waste (overstaffed workforce, suppliers and more outrageous to expect them to transform into and quenches the thirst of 85,000 hectares of otherwise contractors, water thieves, corrupt staff) to a profit-making making company capable of fi- dry land to the north of Milan. consumers (reduction in tariffs) and to inves- nancing new investments, without a tariff increase tors (profits and dividends). The beneficiaries to reward the capital investment or a capital grant This imposing project was designed, financed, and built of the status quo, in the broader sense, will to subsidize tariff levels. entirely with private capital between 1877 and 1890. A 90-year concession was granted by the King of Italy only lose out from the transition to a PPP model. Operational efficiencies typically offset only Perhaps most important is that private-sector 15 days after receiving the investment proposal from the a portion of the economic burden on the participation and investment in the water sector is original investors. The original structure of the concession end consumers of the transition from heavily not a substitute for sector reform and regulatory contract included the option for the water off-takers to subsidized operations, to a full-cost recovery oversight, which is invariably a prerogative of the buy out the concession. This option was called in 1918 model. government. For the private investor to pro- when the farmers formed a consortium of water users and duce strong results, its public sector counterpart, took over the concession and the infrastructure. 66 Private investors can mobilize a significant the regulator, needs to be equally empowered. amount of private capital to fund new invest- Local sensitivities and the specific technical and With such a head start in the development of water sec- ments, but ... economic conditions of each operation require tor PPPs, one would imagine that in Italy such contracts careful and continuous adaptation. This is the would be widespread and well known. In fact, the oppo- They expect those investments to generate a lesson from the 120-year-old Villoresi irrigation site is true, and the political debate around the meaning of positive economic return, and generally have canal, which was successfully designed, financed, private sector participation in water services is as heated, much higher return expectations (i.e., capital constructed, and operated for many years by pri- alive, and confused as ever. A leading national newspaper costs) than the public sources of funding. vate investors, and is now successfully owned and printed, in the same edition, one article broadly support- 66 Private investors are more efficient in select- operated by a consortium of public entities.  ive of a popular movement against private involvement in water service providers, and another article denouncing ing and implementing (on time, on budget) 44 | handshake, march 2011 | 45 To receive further issues, subscribe at: ifc.org/ppp Connect with us: facebook.com/ifcinfrastructure scribd.com/ifcppp handshake@ifc.org ifc.org/ppp