The case of privatisation in Tanzania can be seen as an example of how international vendors should not enter a developing market. The following article is based on the World Bank white paper: A case study of Public-Private Partnerships in Water Supply and Sewerage Services in Dar Es Salaam.
Located on the eastern coast of Africa, the United Republic of Tanzania, including the former Tanganyika on the mainland, and the semi-autonomous islands of Pemba and Zanzibar, has a population of 40 million. It is one of the world's poorest countries. During the 1990's the government embarked on a liberalization program that included the restructuring of state-owned enterprises, private participation in infrastructure services and the divestiture of about 350 parastatal entities.
By the late 1990's, the country was driven by chronic water shortages in Dar es Salaam and other parts of the country, the poor and declining quality of services and the mounting backlog of unserved households. Mounting pressure to improve water supply and sanitation services caused the government to mount a significant effort to reform the policy environment and create an institutional framework that would promote greater accountability.
In 1997, the Dar es Salaam Water and Sewerage Authority (DAWASA) was created to develop and operate the water supply and sewerage services in the metropolitan area of Dar es Salaam, Kibaha and Bagamoyo. Funding for maintenance and repairs had been inadequate for some years and the infrastructure that DAWASA took over was in need of rehabilitation.
In 2002, because of leaks, non-metered connections and illegal usage, most of the water produced was lost. Service was available for only a few hours and a few days per week in most areas. The water that did reach consumers often was not safe for drinking. A large percentage of households bought water from neighbors, tankers or other vendors, for which they paid rates that were considerably higher than the DAWASA tariff.
Low salaries made it difficult for DAWASA to hire and retain qualified staff. Less than 10% of the urban population was connected to a sewerage system. Another 20%, mostly in the middle and upper-income brackets, used septic tanks and the remainder depended on pit latrines. Most wastewater treatment facilities were not functioning and pit emptying services were inadequate. The city suffered periodic outbreaks of cholera and other water-borne diseases.
Private sector participation
Following six years of negotiations with private companies and two failed bidding processes, and against the advice of the World Bank, in July 2002 the Parastatal Sector Reform Commission issued a third request for bids for a PPP lease contract to run the city's water. With Northumbrian Water Group having already dropped out at the second bidding process, Saur Internationale and Vivendi Environnement (which became Veolia Environnement in 2003) also dropped out shortly before the third request for bids having had their requests for amendments to the contract dismissed.
That left Biwater Gauff Tanzania Limited (BGT) as the sole bidder – a company which had never fully met the qualification criteria. BGT was a joint venture between UK based Biwater International and German engineering firm, HP Gauff Ingenieure in which Biwater held an 80% interest and Gauff held 20%.
While the World Bank project team expressed concern about the financial soundness of BGT's proposal and its ability to meet performance expectations, and doubts had been cast by the transaction advisor, the World Bank issued no-objection to the award of the contract. BGT and a Tanzanian investor, Super Doll Trailer Manufacture Company Limited (STM), subsequently created the operating company, City Water Services Limited (CWS) in which BGT owned 51% (the minimum required of the bidder) and Super Doll, 49%. CWS was then engaged under a lease contract with the Dar es Salaam Water and Sewerage Authority (DAWASA) to provide water supply and sewerage services in Tanzania's largest city.
Under the contract CWS was obliged to provide water supply and sewerage services and maintain assets within its specified Operator's Area. DAWASA remained responsible for funding and implementing capital investments. The project was mainly financed through external loans, with CWS contributing $8.5 million.
CWS' priorities were two-fold. Firstly it needed to increase revenue. Secondly it needed to renovate the city's infrastructure and reduce water loses from the estimated 70% to 44% in the first three years. With tariff increases for existing customers not considered viable, the company's goal was to reduce the amount of unaccounted water, connect new customers to the network and to rehabilitate existing accounts with wayward customers.
With around half of its customers thought to be non-paying, the company set about introducing a new customer database and new billing software. The database of customers that CWS inherited included 115,000 registered accounts, but many were moribund or duplicates that had been set up to avoid payment of arrears. It was estimated that only 22,000 to 25,000 were active and potentially billable. It was also well-known that there were thousands of illegal connections that were not on the database. However, matching customer reference numbers with connections proved harder than had been envisaged and only limited progress was made in cleaning up the customer database.
The billing software system was not completed until March 2005 and even then fell significantly short of requirements and was subsequently replaced. Further to the software fiasco, under a Procurement of Goods (POG) sub contract the company was required to purchase some 170,000 water meters. During the first year of the contract CWS imported around 19,000 meters, which it had purchased from Biwater South Africa. Less than 2500 of these meters were installed that year.
The company's average monthly collections in 2004/05 reached just 52% of projections and were 21% lower than DAWASA's had been in 2002/03. By May 2005 Government arrears for water and sewerage services amounted to US $1.5 million. However, CWS could not take advantage of the government's guarantee to pay, because many bills were disputed and could not be verified.
Down the drain
The company broke a number of the obligations it made under the lease contract. It did not pay the Rental Fee to DAWASA regularly, periodically withheld Lessor Tariff collections to pay its own operating costs and failed to deposit First Time Connection Tariffs into the account for that program. By March 2005 its accumulated losses amounted to around US$ 12.3 million and a mediator had been engaged to assist the parties revise the contract.
As the negotiations continued, it became clear that while the government and DAWASA were willing to accommodate most of CWS' proposals, they would not extend the Lease Contract for an additional five years unless CWS' collection performance improved. The company insisted on the extension but refused to commit to higher collection targets and a compromise could not be reached.
In May 2005 DAWASA served a notice of termination of the contract. Fearing that CWS was financially unable to continue to operate and that interruption of services was imminent, DAWASA asked CWS to cooperate with a speedy transition. However, CWS would not agree to the termination of the contract. In the face of declining public support for private participation and with elections looming, the Minister of Water decided to end the stalemate. In less than two years the contract had collapsed with the dramatic expulsion of its expatriate managers from the country. Two international arbitration tribunals ensued.
Lessons for Future Privatisation
Following the departure of the private operator in June 2005, a public corporation, the Dares Salaam Water and Sewerage Company (DAWASCO) took over operation of the services and encountered many of the same constraints that CWS had. Despite new financial injections and an increase in the Operator's Tariff in 2006/07, its financial performance was unsatisfactory and, during the first two years, operational results were poor. After five years, operational performance had improved but further progress was still needed.
The history of the sector reforms and lease contracts for water supply and sewerage in Dar es Salaam provides a number of lessons that could be useful for policy makers and professionals who are planning such interventions.
Consultation with Potential Customers and Services for the Poor
• The effective management of kiosks and the connection of poor households requires special attention during the turnaround of a water utility when the focus of management is on system wide rehabilitation, reduction of water losses and overall commercial performance.
• Proven experience in introducing culture change and using performance incentives and other controls to eliminate illicit behaviors and improve efficiency should be a pre-requisite for managers (whether public or private) who are hired to turn around a non-performing water supply and sewerage utility.
• The completion of a comprehensive customer survey and introduction of billing and collection systems that enable management to control rent-seeking behaviors are high-priority elements of a strategy to improve the performance of water utilities and cannot be neglected.
Tariff Setting Framework
• The regulatory framework and the chosen management model should be mutually consistent. Independent regulation can be consistent with the lease contract model if the regulator recognizes the lease contract as an essential element of the regulatory framework and endorses the tariff adjustment and other regulatory provisions of the contract. Including a pre-specified methodology for revising tariffs that the Regulator endorses might also reduce the regulatory risks.
• Many regulatory and PPP experts believe that in a lease contract framework the regulator should set or approve the overall Customer Tariff but not the Operator Tariff which should be set by agreement between the asset holding company (lessor) and the operator (lessee). This is consistent with the principle of the operator's being subsidiary to the asset holder.
Monitoring the Operator's Performance
• The performance of water and sewerage services is not likely to improve in the absence of rigorous data reporting and effective information management systems that are used to enforce performance standards and guide management decisions.
• Audits and impact surveys should be designed to produce meaningful data and analysis that can be used by managers and planners. When a national statistics service conducts impact surveys, the participation of an experienced water supply professional would enhance the quality of the results and help to build local capacity.
The case raises compelling questions about the preparation of the public-private partnership (PPP), the selection process, the allocation of risks in the contract, expectations regarding financial viability and service improvements, the effectiveness of the public public partnership that has existed since the private operator departed, and how to structure institutional relationships to ensure accountability. It also provides an opportunity to evaluate how customers, especially the poor, were affected.
Author's note: This article was taken from the World Bank white paper: A case study of Public-Private Partnerships in Water Supply and Sewerage Services in Dar Es Salaam. This was written and researched by Thelma Triche and managed and supervised by Mukami Kariuki and Midori Makino. The full white paper is available online at www.worldbank.org/water.