The most pertinent driving force behind municipal water management – forcing it to the top of the infrastructure agenda - is the pressure from global population growth. To achieve 2015 international development targets, an additional 2.2 billion people world-wide will need access to sanitation and 1.5 billion to water supply.

Moreover, the traditional state-owned and operated water and waste water bodies are finding it more difficult to meet increasingly rigorous environmental standards, as well as projected demand growth.

Global population growth is forecast to increase by 1.1 per cent per annum until 2050. This figure, however, can conceal the heterogeneous picture that appears when the figures are analysed by region. Between 1990-2000 population grew by only 1 per cent in Europe but by 27 per cent in Africa, 15.8 per cent in Asia, 17.7 per cent in Latin America, 15.4 per cent in Oceania and 9.9 per cent in North America. The result is a squeeze on all water resources - especially in areas where infrastructure is deficient or lacking.

The recent wave in private sector participation (PSP) has seen infrastructure projects world-wide, particularly within the transport sector, receive the necessary investments to modernise and increase capacity. For the municipal water sector, PSP could supply a much-needed breathing space - in terms of capital – and a practical way to achieve development targets.

Private sector involvement in municipal water management is not new. Western European countries have upgraded and expanded their capacity using private-sector partners, a trend that has expanded beyond the European continent. Outside Western Europe, water management and investments in water and sewerage treatment plants have usually been provided, and paid for, by the public sector. Only recently has the private sector stepped-up to compete with public provision.

As European markets reach a greater maturity, companies have started to look towards developing countries, which are under significant pressure to supply water and sewerage services to increasing populations – and particularly urban populations. Between 1984 and 1990, only eight private sector contracts were in operation amongst the developing countries with a combined value of US$279 million.

The next seven years saw investment in 97 projects with a combined value of US$25 billion. As Table 1 illustrates two regions have dominated:

- Latin America & the Caribbean

- East Asia and the Pacific

Together these regions account for almost 73 per cent of the overall number of projects with private sector participation and 81 per cent if the contract value is considered.

Table 1. Private Sector Participation in the Global Water Industry 1990-1997

Significant disparities appear when the distribution of these projects is considered throughout the water management spectrum. A large proportion of this contract value is related to full water and sewerage service provision, or just to clean water activities. Advances in sewerage treatment privatisation has been slower, primarily because it requires a much higher level of investment to modernise the neglected sewerage infrastructure in place in most developing countries.

Table 2. Private sector water and sewerage projects by activity, 1990-1997

The role for the private sector within municipal water management is still expected to grow substantially. Public-sector providers supply as much as 90 per cent of the urban population around the globe. Lehman Brothers estimates suggest that only 6.3 per cent of the global population currently has a private water supplier and only 3.9 per cent has a private waste water supplier. These numbers however, mask significant variations amongst regions; the following table reveals a large variation in overall private sector participation by region.

Variations amongst countries are also considerable. Within Latin America, for example, in Chile and Argentina private sector participation lies well beyond the regional average of 17 per cent. A list of the countries with the highest level of PSP is presented below.

Table 3. Estimated PSP in the Water Sector, selected countries (2001)

Evidence suggests that there is a lot of room for private sector participation at the municipal water management level. The further development and ultimate success of public-private-partnerships in the sector will depend highly on the ability of the players to understand the current market structure and the options for partnerships available. Moreover, it is paramount that they select the alternative that is best suited for the particular circumstances.

Who is who?

The two French utilities are global market leaders by far, supplying populations in excess of 100 million (See Chart 1). Lehman Brother’s estimates suggest that Vivendi Environment leads Suez in terms of overall revenue but that Suez is the market leader in terms of population served. Combined, they have a 37 per cent share of the global market. In terms of turnover, the other leading operators are RWE (Thames) SABEST, United Utilities, Severn Trent, awg and SAUR (Bouygues). Estimates suggest that RWE will have a 12 per cent share following its proposed acquisition of American Water Works. Some companies are regionally focused and others global; some operate predominantly under one model of service provision, others operate across both competitive and highly regulated monopoly models of service provision. All have very different growth and risk profiles.

Understanding the sector

Currently there are two distinct models of service provision, each requiring very different levels of capital commitment and each operating under different regulatory frameworks. Most water related projects are project or contract based. Usually, companies pay an up-front or annual fee, or buy the shares belonging to the municipal authority to have the right to use the existing assets with a varying degree of capital expenditure needed in each case.

The first model is the franchising model used typically in France and water industries across the rest of the world. It is based on a competitive contracting-out regime. This scheme involves the periodic auction of the right to operate water and/or sewerage services through a variety of different contracts ranging from a simple management style contract through to a full utility concession

Under the franchising arrangement, companies manage a portfolio of localised contracts on a regional basis, which vary considerably in duration, risk and scope of service provision, with each form requiring very different levels of capital commitment. These contracts allow competitive pressure to be introduced into the provision of water services through periodic tenders for the contract. This system encourages the operator to maximise its income through efficiencies, maximisation of the usage of existing assets and extensions to service coverage. The threat of being de-selected acts as a performance incentive and in the case of long-term operating concessions, the separation of entire operations from asset ownership overcomes the potential risk of loss of economies of scale and scope, and allows the financing of existing assets to be performed separately.

Contracts vary considerably according to the degree of capital commitment. Service contracts have the lowest degree of capital commitment since they function as an outsourcing of services. The following list represents the types of contracts ranked from lowest to highest capital expenditure needed by the private sector:

- Service Contracts;

- Management (Operations & Maintenance) contracts;

- Leasing;

- BOOT Concession Contracts;

- Full Operating Concession.

A summary of the different allocation of responsibilities for each of the two contractual schemes is presented in Table 4.

Table 4. Summary Characteristics of Different Contractual Arrangements

The second model is the full asset sale model that has been adopted in England and Wales and also in parts of Latin America and the US and the Czech Republic. This scheme involves full-scale privatisation of water and waste-water related assets. As the private partner becomes the owner and operator of all the assets it depends less (relative to the franchising alternative) on the structure and terms of the contract. Thus, the contract takes the form of an operating licence with clauses that set targets and limits in order to protect customers.

Under the asset sale model, the only contract signed between the public and private sectors is a share buy-sell contract whereby the private-sector company owns the assets and the operating licence necessary to provide the service. In doing so, the company contracts the obligation to abide by a national or municipal level regulator and certain regulatory conditions. The asset sale model can therefore be compared with an indefinite concession, the difference being that competition is not introduced through periodic auctions of the concession but by an independent regulator and efficiency-driven tariff formulas. Under this scheme, ownership, investment, operation and tariff collection are the responsibilities of the private company with retail customers and direct customers, rather than the municipality. Associated regulatory risk is relatively high although construction risk can be somewhat lower if there are associated protections in the regulatory licences.

The full asset sale model has two possible shortcomings; firstly it involves the outright sale of the utility’s assets to the private sector which can be politically contentious, and secondly it depends on the establishment of a regulatory framework applicable to all water companies at a national level which, although desirable, might prove difficult in practice.

In some countries, notably the US, service provision is through a mixture of invest own (?) utilities and governmental outsourcing of contracts. To date most forms of private provision have taken the form of concessions. In general, it is reasonable to expect the majority of the water and sewerage projects to be structured legally as concessions. Concession contracts do not represent the sale of assets, which generally makes them politically more appealing than asset sale models. Governments will usually prefer the contractual arrangement that carries less political risk, and hence, is easier to sell to the electorate. This could explain the disproportionate distribution between projects’ contractual structure, shown in Table 5.

Table 5. Private sector participation by type of project, 1990-1997

Where are we going?

Lehman Brothers have used detailed country and regional analysis to calculate growth estimates to 2015 for water and sewerage services. Estimates suggest that the global market addressable by the private sector will experience growth of 10.3 per cent. In the medium term, the global market addressable by the private sector will grow at an average annual rate of 9.3 per cent for water services and 11.5 for sewerage services.

Regional forecasts reflect a range of factors, notably the current degree of private sector participation, population growth and urbanisation. Further growth is forecasted to be higher in sewerage services, at present driven largely by a smaller addressable market by the private sector.

The forces driving extra investment in the water sector are expected to continue. This trend, combined with the differing degree of development amongst the different regions, will determine the growth trends for each region. In Europe service enhancement and extension, added to increasing enforcement on the common legal and competitive framework set by the EU, represent the main drivers of growth. Indeed, Europe will remain the largest market addressed by private companies, but given its mature state relative to other regions it will also be the slowest growing region globally with a forecasted growth rate of 4.7 per cent for Western Europe to 2015.

South-East Asia has also received a substantial degree of attention from private investors and has almost caught-up with Western Europe investment benchmarks. Growth forecasts for annual averages to 2015 are 11.2 per cent for water and 20.9 per cent for sewerage, reflecting the high population growth expected during this period in the region. Lehman Brothers suggest that even this will lead to service coverage of 14 per cent for water and 10 per cent for sewerage on 2015.

In North America, change is being driven by the highly fragmented nature of the industry and the need to invest in heavily ageing infrastructure. For the US in particular, these conditions translate into an expected annual average growth rate of 10.8 per cent to 2015. The major movements will probably come from further non-regulated municipal outsourcing opportunities for private companies, with the regulated asset owned water utilities continuing to show mid-to single digit growth at best. A large variance in growth between water and waste-water services is expected.

In Latin America and Asia, privatisations are taking off at an unprecedented scale, as a tool for developing the infrastructure needed for economic development. In the rest of the developing world, namely Africa and the Middle East, the main driver is simply the need to get a reliable water supply and a safe sewerage system to yet unconnected communities.

Table 6 presents a global overview of the growth estimates for PSP relative to the size of the population covered.

Table 6. Current and Potential Markets Addressable by the Private Sector

Lehman Brothers also developed an approach based on enterprise value, per capita transaction and trading multiples to estimate the current and potential size of the global water and waste water market. The results point to a current enterprise value of Euro 137 billion for the private share. By 2015 it estimates that this may have trebled to Euro 427 billion.

Developing and upgrading the required infrastructure in the water and wastewater sectors is of paramount importance, at a time when as many as 2.2 million people die each year in developing countries from diseases associated with the lack of safe drinking water and inadequate sanitation. This situation is exacerbated by significant population growth and tighter environmental regulation adding further pressure to the already over-stretched infrastructure. As such, governments, developers and financiers must explore and develop all available options to improve water-related infrastructure while at the same time achieving sustainable development targets. With this in mind, it appears that PSP, although not the answer to all water-related investment shortages worldwide, has a key role to play for the future.IJ