Global water analysis highlights PSP challenges
Lessons learned in the past few years can help private sector companies seeking long-term water and wastewater contracts avoid difficulties and manage risk.
By Pamela Wolfe
The privatisation of water and sewerage utilities is slowing down as some water companies have discovered through costly experience the difficulties in turning a profit from this sector. Many private investors consider the international water sector a safe and steady, long-term investment opportunity, but lessons learned in the past few years prove that private sector participation (PSP) in water and wastewater projects can also be extremely difficult to achieve.
Poor risk management, foreign currency losses, difficult contract renegotiations and growing political opposition to privatisation are all contributing factors.
The number of people worldwide whose services have been privatised dropped significantly for the first time since 1999, according to Dr. David Lloyd Owen, the director and chief analyst at Delphi International. The good news is that the percentage of people served by the private sector increased from 7% in 1999 to 8% in 2002. This increase resulted from major urban water concessions in Latin America and Southeast Asia that have extended water supply systems to service new customers, he reported in Masons Water Yearbook 2002-2003, published by the UK law firm Masons (Website: http://www.masons.com).
Postponement and political uncertainty explains last year's reduction rather than any turn away from the PSP model, Dr. Owen explains in the Yearbook. He cites a healthy number of PSP proposals under development in Asia, Europe and South America.
Clearly, private sector participation can improve water and sewerage services for millions of people, so how can the above challenges be resolved to benefit all stakeholders in PSP contracts?
The future scenario is alarming — the number of people without access to safe drinking water will rise from 1.4 billion in 1999 to 2.23 billion by 2025 in the absence of accelerated capital spending programmes, according to the United Nations Environment Programme (UNEP).
Private sector participation will make up some of the shortfall in costs, says Mark Lane, a partner at Masons, but probably no projects are more difficult to achieve on a PSP basis than water and wastewater projects, he explained during his presentation at Water & Wastewater Europe 2002 held last March in Nice, France. Key issues, including affordability, poor risk management, marketability of client projects, must be discussed further to remove barriers against public sector participation. What other utility besides water still faces opposition to billing for services rendered?
Understanding these barriers and potential problems is paramount given the enormous task of reaching the goals set forth last September in Johannesburg, South Africa - to reduce by half the number of people without access to water supply and sanitation by 2015.
The reference publication, the Masons Water Yearbook, provides a comprehensive, insightful analysis of this rapidly evolving sector and delves into these issues. Now in its fourth edition, this reference work is well worth the expense and space on my bookshelf given its wealth of information on water and wastewater situations and opportunities in more than 100 countries and analyses of activities of more than 80 major water companies, public and private. The Yearbook is the result of a collaborative effort between Dr. Owen and Masons, which specialises in infrastructure projects, advising clients on contractual bidding for major projects.
The global overview covers the politics of PSP and service extension, types of privatisation, risk appraisal and management, PSP potential, recent setbacks and the growing significance of two markets - industrial water outsourcing and desalination.
One observation I found surprising given the huge investment value of long-term water concessions worth hundreds of millions of dollars is: "Risk management is perhaps the most serious element of internationalising water and sewerage services, and yet it sometimes appears to be the most overlooked." In the past decade, global companies tended to seek acquisitions and contracts in countries in which they knew very little about their political and regulatory situations. Knowledge is power.
The authors also argue that contracts should be flexible to change over a 25- to 40-year contract life in response to new pressures, such as public health requirements and environmental regulations, to avoid costly and difficult renegotiations. Some 60% of 400 infrastructure concession contracts were renegotiated within three years, 85% within four years, according to World Bank research.
Water professionals interested in reading more of these instructive insights and gaining a more thorough understanding of the global water market would find this reference work quite helpful.
Pamela Wolfe, Managing Editor