Providing safe water for developing countries is a task so complex that neither the public nor private sector can achieve it alone, argues Daniel Hulls of Cambridge Economic Policy Associates.

It is almost too obvious to state, but we must continually remind ourselves of the facts: there is a pressing need to improve access to clean water services in developing countries. More than 1.1 billion, or one-sixth of the world’s population, do not have access to safe drinking water. The impact of this on health, well-being and productivity is dramatic. Over 2.2 million people die each year from diseases directly related to drinking contaminated water.

But the price tag for tackling these problems is much greater than the amount currently spent by governments, donors and the private sector combined. The World Bank estimates that the cost of achieving the Millennium Development Goal of halving the number of people without access to improved drinking water by 2015 is $380 billion. What’s more, this investment needs to be focused on the least well off if the targets are to be achieved.

The 2015 target was recently reaffirmed at Johannesburg. But how are developing countries to be helped to meet it? Who is going to manage and deliver improved services? And, crucially, who is going to pay for them?

The answer, according to many in the international finance community, lies in large-scale private sector participation. At one end of the spectrum French style “affermage” contracts involve the private sector agreeing with a government to develop and manage services for periods of between 3-10 years – funded from government borrowing. At the other end, closer to full privatisation, is the “concession” approach. This involves the private sector agreeing to lease, manage and finance the entire water system for a period of up to 25 years. At the end of the contract, responsibility for managing the assets reverts to the government, unless the contract is renewed.

In the 1990s donors have sought to push governments as far as possible towards the concession model. But concession models do not appear to be working in water, not least in attracting private finance.

There is no prospect of the private sector investing in anything like the scale required to deliver the Millennium target.

On top of this, both opponents and proponents of private sector participation highlight a series of other shortcomings. If users are charged at the level necessary to cover the full costs of investment this often makes the improved services unaffordable for the poor. Major projects rarely take sufficient account of what local communities want, or their ability and willingness to pay. The perceived reliance on large water companies and high cost network-based solutions is inappropriate for large segments of the population, who live on the edges of towns or in rural areas.

These problems inevitably fuel criticism from those who oppose any form of private sector participation. They point to the 2002 UN agreement which states that water is a human right, and argue passionately that it should be financed, controlled and managed by the public sector and provided free to all. Yet if everyone is to have access to safe water this, in many cases, is not a realistic option.

The hard reality is that governments in the developing world cannot afford the huge investments needed to meet the targets. Current donor contributions will not fill the financing gap either. In any event expenditure on water services must compete for scarce resources with equally vital public services such as education and health.

Even if it were possible to mobilise the funds, the management track record of public utilities in developing countries is poor. It is particularly bad when it comes to serving the needs of the less well off. More fundamentally, as William Cosgrove of the World Water Council comments, the real effect of municipal water systems that do not charge enough to cover their costs has been “to give subsidies to the middle class and wealthy, along with many working class families... leaving millions of poor urban dwellers without water supply”. Without municipal connections or easy access to wells, the poor are often forced to pay independent vendors who resell water. The Water Council reports that the “poor often pay more than ten times as much for water than the rich and get poor quality to boot”.

The lessons are clear. Water should be priced to recover the full costs of the service for those able to pay. But transparent, targeted subsidies (funded by donor grants) should be provided for the poor. Paradoxically, it is essential for developing countries to price water so that it covers its costs – otherwise they will not be able to invest to provide the poor with safe water at lower costs than they currently pay.

Reconciling the weaknesses of exclusively public or private sector models requires new partnership approaches, in different shapes and sizes. In many cases the partners will be NGOs or the local private sector, as well as (or in some cases instead of) international companies.

Whichever partners are involved, success depends on meeting five challenging conditions. First, the community must be involved at the outset. If local people are to meet the costs of improved service (in whole or in part) they must be involved in decisions about the level of service that they want and are able and willing to pay for. Achieving connections for all should be the long-term objective. But lower cost options may be required, at least in the short term. These could include shared connections or low cost networks (which do not supply directly into the home) or regulated supply through independent local vendors.

Whatever the size of the project it is clear that independent NGOs have a particularly important role to play. The NGO Dustha Shasthya Kendra (DSK) in Dhaka has negotiated with the water authority to locate at least 90 community water points in slum areas, providing improved water to more than 8000 poor households. Before a site is built, the community signs an agreement with DSK that covers its obligations to run the site and the charge made to recover the costs of the water, maintenance and capital costs. Users pay more than they would to the water authority, but only a third of the rate charged by independent local water vendors (Source ADB, 2002).

Second, donors must increase their commitment to provide grant funding and to focus it on the poor. Where the cost implies user charges that are unaffordable for the poorest, mechanisms for grants to provide affordable access must be included in investment plans. Supporting community or household connection costs is one approach. Lifeline tariffs that guarantee low prices for essential consumption is another.

Third, new partnerships need to address real and perceived concerns about private sector profit motives. Not-for-profit or mutual company structures offer a public interest alternative to traditional company structures. Profits go back to improving services or reducing user charges rather than to shareholders. However, not-for-profit mutual structures must be subject to proper commercial disciplines if they are to attract the large-scale finance required.

Fourth, to secure private finance for major projects, lenders will require the involvement of international water companies in delivery. Moving away from concession models towards the less risky French-style management contracts should achieve this. The international water companies have indicated their interest in an expanded service provision role where they take cost over-run and performance risk.

Fifth, large amounts of finance must be raised. Arguably the most appropriate way of achieving this is to issue utility bonds to local and international investors. Raising long-term finance for water investment from local savings in local currency is particularly attractive since it avoids many of the problems associated with foreign currency borrowing. However local savings will not be sufficient to finance the investments needed to meet the targets, so international borrowing will also be necessary. But both require donor support if they are to happen.

It is imperative that the international community delivers on targets that it reaffirmed at Johannesburg. Models that rely exclusively on either the public sector or the private sector will rarely succeed. The challenge is to find new partnerships that release the huge investments needed and that benefit those who currently have no access to or who cannot afford safe water.

Daniel Hulls is a Director of Cambridge Economic Policy Associates, which advises the public and private sectors in the developing and developed worlds on the appropriate role of the private sector and private capital in economic development and the provision of public services. www.cepa.co.uk

Image: Collecting water in Malawi © Mikkel Ostergaard / Panos Pictures