Private water operators
AquaFed is the International Federation of Private Water Operators. We represent private companies that deliver water supply or sanitation services under the direction of public authorities.
Introduction to private operators
Private operators are private companies that build, design and operate public water and wastewater systems under the control and direction of public authorities through contracts and licences. Their job is to deliver safe water and sanitation services to all water and wastewater users, who are people, businesses, institutions and the environment. Public authorities decide through the contract which areas and users are to be supplied. Private water operators have demonstrated their ability to deliver water and sanitation services to previously unserved populations, in urban, peri-urban and rural areas.
How many people do we serve?
AquaFed estimates that 10% of the current global population is served by private operators - a minor proportion of the global population.
There are over 10,000 (AquaFed’s own estimate) active Public-Private Partnership (PPP) contracts, which are quite diverse in scope and duration. The consistently high renewal rates (90%+) of outsourced private water and wastewater operations contracts year after year (Source: Global Water Intelligence, 2019) demonstrate the widespread success water and sanitation PPPs year after year.
Why do public authorities choose private operators?
Public authorities acting on behalf of the State decide whether to bring in private operators to deliver water and sanitation services, under their control, to achieve some targets.
These may be to progressively achieve parts of the Human Rights to Safe Drinking Water and Sanitation. Whilst authorities retain their sovereign duties of ensuring accessibility, quality, acceptability, affordability and availability, they chose private water operators to ensure action on these areas.
The value that private water operators add, include: international expertise, technologies, innovation, customer-centricity, and capacity to reform utilities for a better service.
Delivering the human right to water and sanitation
The key drivers for public authorities to outsource their operations is to improve their performance against the Human Rights to Safe Drinking Water and Sanitation criteria. Here are some examples of how our members have delivered and enhanced these rights:
Authorities always place this at the centre of the contractual obligations.
Case study: Dakar
For example, in Dakar and surroundings, private water operator SDE remarkably increased the coverage.
Case study: Santa Ana, Philippines
The successful ongoing PPP in Santa Ana, Philippines, demonstrates that PPPs can also be successful on a small scale. This PPP was established by the municipality with private water operator Balibago in 2008, to improve access. When the contract started there were just 335 connections, but in the first year this rose to 1,118.
- After three years, the pipe network was extended from 0 to 70.4km
- More than 1,000 people were being added to the network each year - faster than contractual obligations.
- Between 2015-2018, the number of customers rose from 7,799 to 9,604.
- All 14 barangays (districts) of Santa Ana were connected with water 100% of the time
Improving water quality
By engaging the private sector to provide the service, the public authority ensures the private party is accountable for any violations that occur within the system.
Case study: Water quality in USA
Konisky and Teodoro, in their paper ‘When Governments regulate governments’ (2015) show that water and wastewater systems managed by the private sector in the United States have considerably lower violation citations when compared to publicly run systems. This was supported by further research in 2018 by the Proceedings of the National Academy of the USA in 2018, which said ‘private ownership and purchased water source are associated with compliance’ with the Safe Drinking Water Act.
Case study: Water quality in ENGLAND
In 2014 the water companies in England carried out 3,853,350 tests. Only a tiny fraction (0.04%) of these tests failed to meet the standards in 2014. This compares very favourably to the situation before water companies became private in 1989.
Increasing water availability
For the majority of the world population, water is not delivered to homes under pressure on a 24/7 basis. When private operators are hired, they have contractual obligations to improve the continuity of supply.
Case Study: Cartagena de Indias, Colombia The PPP for the municipal water service of the city of Cartagena de Indias in Colombia started in 1995 and is delivered by a “mixed” company owned by the city (50% share), private operator AGBAR (45.9% share) and some local private shareholders (with 4.1%).
The city had significant population growth before 1995, creating serious problems for the water and sewerage systems and, by consequence, to service delivery.
The goals of the PPP contract included water supply 24/7, water quality improvement and water loss reduction. At the beginning of the contract, there were areas where households received water supply less than 8 hours a day and on average water was running at the tap for only 14 hours a day. But the rehabilitation and replacement of the existing network means supply is continuous in almost all the city (99.3% of the time on average)
A common misconception is that private water operations will undoubtedly mean higher prices and that they are a risk to water affordability. The facts tell a very different story.
Indeed, no public authority would outsource the operation of its water/sanitation services if a cheaper option with direct public management was available and credible.
In practice, price increases in case of a new PPP contract result from operational needs and new ambitions such as investment in new infrastructure and keeping the incumbent public operator would have led to higher price increases than with the PPP option.
Authorities that outsource, compare the price to the consumer between direct management and outsourcing. For example, in France the Regional Audit Chamber observed in 2017 that from 2010 to 2017, water rates could be reduced by 18.7-21% via outsourced services in the Paris region to the 4bn people living outside the historical City of Paris. Whereas inside the city, Eau de Paris took the direct management and could only reduce them by 2.6%.
The Vienna Chamber of Labour found that the private companies in England and Wales provide the most affordable prices compared to other countries in Europe. (Source: Comparison of European Water Supply and Sanitation Systems. Commissioned by Vienna Chamber of Labour (Department of Environment and Transport and Austrian Association of Cities and Towns, 2018).
In Spain, where the private sector serves 50% of the population, studies show there is no price difference according to the management scheme. In France, where private operators serve ⅔ of the population, the same was shown.
Global Water Intelligence’s (GWI) annual Global Water Tariff Survey 2019 looked at water tariffs in 558 cities across 184 countries. It found that in 2019, of the 20 cities with the highest tariffs, 14 (70%) have public operators, including the top three cities in terms of highest tariffs.
These various data sources present the reality - price rises are not linked to whether the services are private or public, but in fact a range of very many other factors, such as the need to invest in new infrastructure, better manage existing infrastructure or prepare for climate change.
What is a PPP?
A public-private partnership (PPP) is a contractual arrangement between a public agency (federal, state or local) and a private sector entity for a project or service. This contract should include a detailed description of the responsibilities, risks and benefits of both the public and private partners.
Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. Each party shares in the risks and rewards potential in the delivery of the service and/or facility.
The public authority is the “master” party to the contract and is free to fix objectives, goals and conditions. Private operators are the “servant” party which carry out the operations and advise public authorities to transfer technology and know-how to improve public water and wastewater services.
Content and Scope of PPP contracts Contracts can have a duration as short as 3 years, many have a duration of around 10 to 15 years and those that are very complex or require very high levels of investment may last for 30 years or more.
There are many thousands of contracts of this kind in force throughout the world today, with new contracts coming in to force all the time while others reach their normal conclusion.
According to the level of complexity and duration, the types of contracts are often given generic names as follows: • Technical assistance contracts • Management contracts • Delegated management, “Affermage” or lease contracts • Design build and operate contracts (with a number of different subcategories) • Concession contracts
For some of the more complex kinds of contracts it may be necessary to create one or more “special purpose companies” to hold the contract with the public authority. These are usually purely private companies, but on some occasions, they can be joint venture companies between the public authority and private operators.
Other approaches Most of the engagements between public authorities and private operators are PPPs, but there are other forms of collaboration. The three main types are: • Partial privatisation: o sale of part of the assets to a private operator o part of the capital (usually restricted to less than 50%) of a municipal or state-owned company is sold to private shareholders o a way of injecting financial capital and operation and management skills and technology into the company.
• Full privatisation: o via sale of all the infrastructure to private shareholders, transferring all the assets and the responsibility of maintaining and operating to the private sector o This model is relatively rare and has only been used in England and Wales and Chile. In both cases it enabled very significant investments to made a very quickly to meet pressing needs to improve services.
• Investor-owned utilities: o set up from the beginning as private companies with private investors. This is a model that developed in the USA.
Impacts of PPPs on pricing
The public authority has the control on the contract and therefore on the pricing policy.
A sustainable water economy requires cost recovery. Most of the fixed costs depend on external factors, not on the private water operator (labour, energy, chemicals, finance required for the construction and maintenance of the systems, etc.…).
It is very common for local authorities to make important choices about the economics of their water and sanitation services when they engage a private operator. One of these is to move from cost recovery using taxes, that are not “visible” in relation to water, to tariffs or direct charges that are “very visible” to service users.
The other is that the authority has engaged the private operator to make or facilitate extensive investment programmes that are needed to restore, extend or upgrade the infrastructure and operations. Using a private operator may even have been chosen to help them implement these decisions. The result can be that private operation “appears” to be more expensive, but in truth it is only the reflection of changes decided by the public authority and that would have occurred anyway.
For PPP contracts to be sustainable and viable, the operator has to have covered all its costs by the end of the contract from the cost recovery mechanism set up by the public authority. This can either be done by a direct fee payment from the public authority, or by retaining an agreed portion of the charges collected on behalf of the authority from the service users.
In the early stages of a medium to long term contract, it may be necessary for the operator to invest significant sums to cover the needs for capital investment (Capex) operating costs (Opex). These loans can come from several sources: • borrowing from a bank or financial institution in the form of a loan • Investment of funds (capital) from a financial investor or the operator itself • A repayable subsidy from the state or public authority • A repayable subsidy or loan from a revolving mutual fund • A non-repayable grant from a donor or the state.
There are many variations on these mechanisms, which can also be used in combination as blended finance. All of them except the last one are likely to incur financial charges and all except the last need to be repaid by the end of the contract.
Private operators and sustainable development
Private water operators through AquaFed had advocated for several years on the need to set a goal dedicated to water – Sustainable Development Goal 6.
Sustainable development is an essential part of the job of private water operators. The services they deliver have a direct impact on economic, environmental and societal progress all over the world.
Water operators provide a link between the natural and the human water cycles. They take water from nature to provide it safely to users – and they collect used water, treat it to remove pollution and return it to nature. This sustains the natural water cycle and ensures service continuity day and night all year long, even as conditions are changing constantly.
Private operators strive to support the sustainability of the communities they serve. The public authorities who employ them look to them to fulfil service delivery that is in itself sustainable. They also seek advice and actions that enhance the security and sustainability of the towns, cities and villages that they are responsible for.