the role of the private sector in providing water in

2 6 4

8 5 R O

The Role of the Private Sector in Providing Water inDeveloping Countries

GABRIEL ROTHEconomic Development Institute, The World Bank, Washington, D.C.

20433, USA

The purpose of this article is to describe the role of the private sector in the supply of water in developing countries. Inaddition to citing some of the advantages to private supply, the paper discusses some of the objections to private provision,

namely 'Natural Monopoly', 'Externalities', and the alleged inability to charge for water.It is concluded that the main obstacles to the private supply of water services are political rather than technical or financial,

and that the French Affermage system (or variations thereon) seems to be suitable for many developing countries. Therealso appears to be considerable scope, in both towns and villages, for consumer co-operatives, and for the enhancement of

water vending.

1. INTRODUCTION

Of all the public services, the provision of pipedwater is the one with which the private sector is theleast involved.

It may not be a coincidence that water is also thesector that, in many countries, seems to have thegreatest problems. A regular supply of drinkablewater is essential for survival, and yet 60% of allpersons in developing countries live without a safesupply of drinking water; 75% live without anykind of sanitation facility; and, because water isremote as well as polluted, tens of millions ofwomen and children may spend as much as threeor more hours a day fetching polluted water.

The cost in human suffering is enormous.Diarrhoea, amoebiasis, polio, typhoid and theroundworm are but a few of the.infections intro-duced or spread by insufficient and polluted watersupplies and poor sanitation. Unsafe water bringshigh infant and child mortality, and for those whosurvive irjto adulthood, poor health, loss ofproductivity and a shortened life-span. On*anaverage day in the developing world, more than

25 000 people die due to inadequate water supplyand sanitation, while millions more suffer theconsequent debilitating effects.

Despite significant efforts by the developingcountries' government, their water supplysituation. deteriorated during the 1970s. As aconsequence of poor maintenance of waterfacilities and rapid population growth, about 100million more people drank unsafe water in-1980than in 1975, and about 400 millionmore' peoplerelied on unsafe sanitation facilities in. 1983/4-than •in 1977. The incidence? of water.-related morbidityand mortality is expected to rise rapidly, unless themost strenuous efforts are made to combat this' -!

decline. It is therefore a matter of puzzlement, andconcern; that so little is being done to bring to bearon this problem an 'economic system that hasproved itself to be the most successful in meeting

.ihuraan needs for goods and services: the system of-incentives and rewards known as privateenterprise.

GabHd Roth, Civil engineer and transport economist, received his B.Sc. from Imperial College, London. Hebcurrentiy serving inthe economic Qtvelopment Institute of the World Bank, where he is writing a book on the role of private enterprise in providing publicservices in developing countries. His earlier work at the Bank included transport pricing, planning and de-regulation.

Natural Resources Forum © United Nations, New Yoik, 1985

167

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168 GABRIEL ROTH NRF VOL. 9, NO. 3,1985

2. PRIVATE SECTOR INVOLVEMENT

There are numerous examples of non-piped waterbeing distributed by private vendors, but in view ofthe 'natural monopoly' associated with the distri-bution of piped water, there do not appear to beany examples where it is supplied competitively,i.e. where consumers have a choice of suppliers.There are, however, a number of cases indeveloping countries where private firms havebeen given concessions to supply water underconditions and tariffs regulated by municipalities.There are also examples of management contracts,i.e. situations where the investments are made bypublic agencies but private firms are employed tomanage the systems. In villages, especially in theMiddle East, the Philippines and Latin America,there are examples of water co-operatives. Thereis also substantial experience of private sectorprovision of wells for agricultural irrigation. Thusthe involvement of the private sector in theprovision of water may be considered under thefollowing heads:

1) Vending of non-piped water2) Provision of piped water by:

a) Regulated monopoliesb) Management contractorsc) Rural co-operatives

3) Exploitation of ground water for irrigation

2.1 VENDING OF NON-PIPED WATER

Water vending—the sale of water by carriers—isubiquitous in developing countries, and has been

since cities existed. In many developing countriesvendors obtain water either from public pipes, ordirectly from the source. They sell either directlydoor-to-door, or through middlemen. In theirpaper on 'Water vending in Developing Countries'(Zaroff et al., 1984) Barbara Zaroff and DanielOkun give information on water vendors, and onthe consumption of vended water, all based onquestionnaire results obtained from twelvecommunities.

The price paid for vended water is typically tentimes as high as the price paid for piped water, asmay be seen from the data in Table I was collectedby the World Bank. The price of vended water inKarachi in 1979 is reported to have been 50 to 100times the government subsidized rates for pipedwater (Thobani, 1984).

There are recorded cases in which the totalamounts (in absolute terms) paid for water bythose (generally the poor) who buy from vendorsexceed the amounts paid by those who receivepiped water. For example, sixty-eight families whowere buying water in cylinders in Lima in the 1960sspent two to six times as much money for one thirdto one seventh as much water as was obtained bythose with access to piped water. When theamounts paid for water are expressed as apercentage of family income, or as minutesworked to pay for them, the greater burden borneby those without access to piped water becomeseven more striking. For example, a typical familyusing water from cylinders would have to workover seven hours to pay for water consumed in amonth, while a family enjoying piped supplywould have to work just over two hours

TABLE IPrices of Vended Water vs Piped Water

City Vended water rates(US Dollars)

Per 1000US Gals. Pern?

Metered domestic rateto customers served bythe city water system

(US Dollars)Per 1000US Gals. Perm3

DaccaKampalaIstanbul

4.20-8.405.84-14.60

3.52

1.11-2.221.55-3.86

.93

.35

.70

.35

.09

.18

.09

Source: World Bank: Water and Sewerage Sector Working Paper (1971).

NRF VOL. 9,

(Adrianzen*Although

consumers ican be circueconomical;example, aroften buy trfrom neighbusing for otfthat is unsaicharges areaccumulate'

The operrated by ojpeople of :Dominicansupply of piagency) bitfrequent efothe prolifecare inspectHealth. Thfrom privatproducts; tcharge theiso the com

Agua Pa1981 llkmfa religiouMetodistaoriented. TIwater in 5iDomingo."owned byeight true'botellonecustomer/one-time gand then 4trucks disempty onethree jugflOOOOjubut also t«of EducafThe operaexceptfrom MIduringswitch toi;

a

NRF VOL. 9, NO. 3,1985 PRIVATE SECTOR IN WATER 169

(Adrianzenefa/., 1974).Although vended water in urban areas costs

consumers more per unit than piped water, therecan be circumstances when it provides the moreeconomical solution. In Abidjan and Cotonou, forexample, and in Surabaya, low-income peopleoften buy their drinking water from vendors (orfrom neighbours with access to piped water) whileusing for other purposes water from shallow wellsthat is unsafe for drinking. In this way connectioncharges are avoided, and no big water bills areaccumulated.

The operations of water vendors may be illust-rated by one of the ten companies serving thepeople of Santo Domingo, the capital of theDominican Republic. Santo Domingo does have asupply of piped water (provided by a public sectoragency) but this supply is unreliable because offrequent electric power cuts. This has resulted inthe proliferation of private companies, all of whichare inspected and regulated by the Ministry ofHealth. The ten companies all obtain their waterfrom private sources; all purify and 'package' theirproducts; and all distributed by truck. They allcharge the maximum price set by the government,so the competition is on the basis of service.

Agua Pureza was set up as a private company in1981 llkm from Santo Domingo. Though owned bya religious organization (Iglesia EvangelicaMetodista Libre), it pays taxes and is profitoriented. The operation consists of selling purifiedwater in 5-gaIlon glass jugs to the people of SantoDomingo. The water comes from a source privatelyowned by Agua Pureza. Distribution is made byeight trucks specially designed to carry 104'botellones* (Ju£s) each, from the source to thecustomer's door. The consumers have to make aone-time purchase of a 5-gallon glass jug for $7,and then they pay $.75 for the water per jug. Thetrucks distribute the filled jugs and collect theempty ones. Average family consumption is two tothree jugs per week. Monthly sales amount to10 000 jugs. They sell water not only to householdsbut also to government institutions, e.g. Ministriesof Education, Interior and the Police Department.The operation is profitable; operating costs are lowexcepPfor the 'botellones' which are importedfrom Miami and Mexico. Sales are steady, exceptduring the rainy season, when some customersswitch to rain water.

The company employs a total staff of over 30,with 16 drivers (two per truck), 10 in bottling andpurifying operations, the rest in the office. Truckdrivers are motivated to sell water jugs, earning abasic salary plus a commission of 9 cents perbotellon delivered.

The Ministry of Health supervises hygiene andwater quality by weekly inspections. The companysubcontracts specialist services to a privatelaboratory.

2.2 PROVISION OF PIPED WATER

Despite the long history of private vending in allcountries, the provision of piped water by theprivate sector, either for irrigation or forhousehold use, has been comparatively rare. Theabsence of property rights in water, its criticalimportance in times of war, the difficulty ofcollecting payments, and the magnitude of theresources required may explain why such is thecase. There are exceptions however: in Hawaii,water has been traditionally privately owned.'andit is privately provided to this day (Hutchins,1946).

In France today much of the urban water isinvariably supplied as a local monopoly, with thetarriff being determined by a public authority. Thepublic authority (typically a municipality) oftenbuilds and operates the system with its ownresources. This is known as the regie system.However, private companies are also involved inthe supply of water. When a private sectoroperator is employed, the two most commonarrangements are the concession system and theaffermage system:

(a) In the concession system, the publicauthority contracts out to as single privateoperator both a construction and operation con-cession. The concessionnaire finances, constructsor subcontracts the construction of, and operatesat its own risk, all the facilities for the supply ofdrinking water. On termination of the concession,it must return the system to the public authority inperfect condition, which means that during the lifeof the concession it must replace worn-outequipment as well as recover its invested capital.

To realize a return on its investment, theconcessionnaire sells the water to the consumers inaccordance with its concession contract. That price


takes account of economic trends during the life ofthe concession—inflation, economies of scale,taxation, legislation etc. Therefore the concessioncontract does not specify a single price, but rathera set of rules enabling the sale price to becalculated each year.

The concession contract also fixes the level ofservice to be provided by the concessionnaire:water quality and source; quantity of water to besupplied without charge to the public authorities(standposts, sewer flush, fire-hydrants and streetcleaning); obligations and terms of connecting upconsumers etc.

To enable the amortization of the concession-naire's investment to be spread over a long period,concession contracts are generally for a long term,usually 30 years. This tends to reduce the price tothe consumer.

(b) In the affermage system, the publicauthority handles the construction of the system byitself and contracts out its operation and main-tenance, collection of charges, relations with theconsumers, to a single private operator: thefermier. This is an operating concession only.

As under the concession system, the fermierdischarges its assigned tasks to its own risk. Thismeans that it must discharge them according to itscontract and is compensated only by means of itssale of water. The contract sets the sale price.

To enable the public authority to amortize itinitial investments, the water price customarilyincludes a surcharge collected by the fermier forthe authority's account and paid over to it. Theauthority retains title to the system.

The French affermage system of privatemanagement of publicly financed facilities is stillwidely used in France. The operations ofaffermage system in a developing country can beillustrated by the case of Abidjan.

The private firm responsible for water supply toAbidjan is the Societe des Eaux de Cote d'lvoire(SODECI) (Golladay, 1983; World Bank, 1983).A counterpart is responsible for sewage disposal.Until 1967 SODECI was wholly-owned subsidiaryof a French firm, Societe d'Amenagement Urbain etRural (SAUR). Since 1967, SAUR has retainedonly 47% interest in SODECI, with the remaining53% ownership being in the Ivory Coast (49%private, 4% state). SODECI began operations inthe Ivory Coast in 1960 under a 30-year concession

contract with the government to supply water toAbidjan. In 1973, the contract was converted toaffermage and ammended to grant to SODECIresponsibility for the remainder of the country—including 122 towns and several hundred villages.

The water supply systems operated by SODECIspan a wide range of technology, from a largepiped distribution system in Abidjan to lowertechnology systems based on wells in rural areas.A unit in the Ministry of Public Works isresponsbile for planning and building all large newinvestments in water. This unit is also responsiblefor supervising SODECI. Under its contracts,SODECI is paid a fee related to the volume ofwater sold. The fee is calculated on the basis ofagreed standards for staff, equipment, energy andother inputs, plus a margin based on agreedoverheads and profits, whereas other (usuallypublic) water supply companies in West Africamostly operate at a loss. SODECI's fee is about athird of the water tariff, which is set to cover notonly operation and maintenance costs but alsodebt service.

Despite rapid expansion, water supply in theIvory Coast offers one of the highest standards inWest Africa. The system are well designed,equipped, maintained and operated. Waterquality and pressure are uniformly good.Consumption is metered and water losses are low.Several factors contribute to those good results:— The institutional separation of investmentsfrom operations makes it easier to evaluateSODECI's performance and assures governmentcontrol over the expansion of the system.— By setting water tariffs to reflect total costsfully, the Ivory Coast can finance its existingservices. Water rates are among the highest inAfrica, which means that consumers, rather thantaxpayers, pay for the service they receive. Ratesfor small quantities are low, which helps the poorto afford the water.— During the periodic traffic reviews, thegovernment can carefully scrutize SODECI'scosts; between reviews, SODECI has a strongincentive to keep down its costs.— As a private company, SODECI is free (withinthe contracted limits) to hire, fire and compensateits staff. This freedom, plus a strong emphasis ontraining (SODECI operates its own trainingcentre), enables the company to attract, train and

NRF VOL. 9,*

keep qualifieThe use of

developing coIn SantiagoGuatemala,responsible •Santiago, theaccommodatiwater whichactually ove

The EmpLTD A has fin the higVCondes'. Hconnections,almost all r«rights of tfoprovides acplanning ;maintenanocovered byMinistry ofthose of -private was1984 therefor a l-inc!

IV-z inchdiiUS $0.86 p

The ottAgua Poaprovideseast of SaRiver. TconcessioaManquehcLo Cum'EmpressCompetifcare the sadomesticper conrcza very saSantiagowells, forIt is chlenterprissible f<*maintainnection"

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keep qualified people.The use of the private sector to supply water in

developing countries is not limited to West Africa.In Santiago, Chile, and Guatemala City,Guatemala, regulated private companies areresponsible for providing some water to the city.Santiago, the capital of Chile, has the distinction ofaccommodating two separate suppliers of pipedwater which, although covering different areas,actually overlap in one zone.

The Empresa de Agua Potable Lo CastilloLTD A has provided water and sewarage servicesin the high income district of 'Comuna LOSCondes'. It started operations with only 2000connections. It now has 43 000 connections,almost all residential. Lo Castillo holds the waterrights of the source. It has a staff of 300, andprovides an integrated system which goes fromplanning and construction to supply andmaintenance. Metering services are also fullycovered by the firm. Tariffs are approved by theMinistry of Public Works, and are the same asthose of Agua Potable Manguehue, anotherprivate water enterprise in Santiago. In August1984 there was a fixed charge of US $30 a monthfor a 1-inch diameter supply, and of US $65 for all/2 inch diameter supply. The variable charge wasUS $0.86 per cubic metre.

The other supplier of water, the Empresa deAgua Potable Manquehue, established in 1981,provides drinkable water in manquehue, in theeast of Santiago, and the north of the MapochoRiver. The company obtained a 30-yearconcession to supply water to the people ofManquehue. In one zone, Parque Institutional,Lo Curro district, their services overlap with'Empresa de Agua Potable Lo Castillo Ltda.'.Competition is in terms of quality, because tariffsare the same. The Manquehue Company suppliesdomestic water to only 310 connections (8 peopleper connection on average, or 2400 users) which isa very small fraction of the total population ofSantiago (3.6 million). The water is obtained fromwells, for which the company has the water rights.It is chlorinated before pipe distribution. Theenterprise has complete autonomy being respon-sible for invoicing and collecting. It installs,maintains and reads all the meters (each con-nection is metered) in Manquehue.

Quality control for both companies is enforced

by three public agencies: Empresa Metropolitanade Obra Snaitaria (EMOS), Servido National deObras Sanitarias (SENDOS), and Servido deSanidad del Ambiente (Ministry of Health).

In Guatemala City the Compania de AguaMariscal is a fully private enterprise, which hasprovided water in the capital city for over 50 yers.Construction works, operation, equipment andthe company's maintenance are all under itscontrol, as is house metering. The charge isequivalent to US $0.20 per cubic meter for aninitial supply, and US $0.45 for any excess. Qualitycontrol is enforced by the Ministry of Health. Theenterprise shares the Guatemala City market withEmpagua, an autonomous public sector waterentity.

These examples show that private companiescan construct and/or manage urban water systemsin developing countries, with government agenciesbeing responsible for monitoring water quality andfor approving tariffs. In addition to privatecompanies operating as regulated monopolies oras management contractors, there is a third meansof providing piped water other than bygovernment monopoly: that is the rural co-operative.

The organization and operation of water co-operatives, of which there are many, can beillustrated by the Saguapac Co-operative in SantaCruz, Bolivia. Until 1979, Santa Cruz was servedby a municipal company, but in that year it wasconverted into a co-operative to overcomeinefficiencies that were blamed on governmentcontrol. Since the establishment of the co-operative, water services are reported to haveimproved significantly and are currently (1984)provided without interruption. The co-operativeprovides drinkable water to a population of350000 in the District of Santa Cruz.Neighbouring areas are served by other, smaller,co-operatives. Saguapac has a staff of 250. Someservices—e.g. pipe installations and meterreadings—are sub-contracted to private firms inorder to minimize overhead costs. Under the co-operative scheme, each household head has oneshare which provided voting power. There arecurrently 43 000 connections and the same numberof shareholders. Saguapac provides acomprehensive water service. Water is extractedfrom subterranean sources with 13 pumps. The


raw water is considered to be safe to drink, but it ischlorinated as a precautionary measure. Afterextraction, it is transported to large storage tanks,from which it is finally distributed to the urban areathrough a network of pipes owned by the co-operative. Tariffs are proposed by Saguapac buthave to be approved by a government agency. In1984 the tariff was the equivalent to US $0.035 percubic metre. In 1983 the co-operative was hit by atrebling of energy costs, and the government didnot allow it to increase its tariff sufficiently to meetthis increase. As a result, the co-operative isrunning a deficit; it has no public subsidy. It istrying to deal with the situation by negotiating forreduced energy costs and for tariff adjustments.

Water co-operatives, which are also common inArgentina and Chile, in the Philippines, and in theMiddle east, offer another route to private sectorprovision of water. They can be particularlyhelpful at the village level, where informed con-sumers, sharing common interests within smallcommunities, can take the place of the pro-fessional management that can only be afforded bylarge systems.

2.3 EXPLOITATIONOFGROUND WATER FORIRRIGATION

The extraction of water for irrigation from privatewells has been carried on from prehistoric times.More recently, World Bank staff have followedwith particular care the experience of private andpublic tubewells in India and Pakistan, of which ithas been written 'there can be no doubt that theindividually-owned private tube-wells and pump-sets played a major part in the GreenRevolution—more correctly termed the WheatRevolution—in India and Pakistan' (Carruthers etal., 1981). Experience has shown that privatewells tend to be cheaper and simpler than publicones, are better maintained, and obtain highoperating efficiency. Additionally, privateinitiatives have produced a remarkable range ofingenious inventions for the use of cheap localmaterials. For example, a bamboo tubewell hasbeen developed in Bangladesh which is so cheapthat it,can be used for small sections of land. Withthe engine and pump made mobile by beingmounted on a bullock cart, each small section canbe irrigated economically. It is not even necessary

for every farmer to own a pump; pump contractorshave emerged who will provide one for pumplesstubewells. The mobile engine technology has thefurther benefit that it can be used to powerthreshing machines and other farm equipmentafter the irrigation season (Carruthers et al., 1981).

Probably the most dramatic private sectorinvolvement in irrigation occurred in the vastIndus Valley of Pakistan in the 1970s. The area hadextensive problems of waterlogging and salinity.Beginning in the 1940s, the government ofPakistan installed over 14 000 tubewells, mainlyfor drainage, although it was believed thatimproved irrigation would be a significant by-product. When the programme was beingdeveloped, a small number of Pakistani experts,particularly Dr. Ghulam Mohammad of thePakistan Institute of Development economicsargued that public tubewells should be confined toareas where the groundwater was too salty to beused for irrigation without dilution with riverwater, and that in areas of good-quality groundwater, development should be left to private userswith the Government facilitating development byproviding electricity and cheap credit for thepurchase of pumps and motors. However, theauthorities decided to rely on public tubewells,presumably because at that time private tubewelldevelopment in the Indus Basin was insignificant.There was also a fear that the groundwater aquifercould be damaged through uncontrolled pumpageby private users.

In the event, the Indus Basin farmers preferredto have their own wells, and the performance ofthe 14 000 public tubewells was overshadowed by186 000 private smaller-capacity tubewells whichwere installed by the private sector, 90% with nosubsidy. Assessments by World Bank staff (WorldBank, 1983) concluded that private tubewells had

(a) been managed efficiently, particularly inhelping to meet peak water requirements;

(b) imposed a relatively insignificant burden onpublic resources;

(c) produced returns that were economicallyjustified, as well as bringing significant financialreturns to the farmers who benefitted;

(d) not lead to excessive exploitation of theaquifer; and

(e) provided sufficient drainage to maintainwater tables at reasonable levels.


Groundwater pumped by private tubewells nowaccounts for nearly 80% of Pakistan's total'pumpage'. The management patterns of privatetubewell users are more efficient than thoseobserved for public tubewell users, in terms ofcropping intensities, yields and usages of inputs.Although the private tubewells are mainly ownedby farmers who have access to capital, theexistence of the tubewells has brought about anactive 'water market' which enables the privatetubewell owners to make irrigation suppliesavailable to farmers who do not posses their ownwells. The operation of such markets on a country-wide basis could do much to move excess waterfrom areas of surplus to areas of shortage. Notsurprisingly, suggestions have now been made thatpublic tubewells should either be sold to owners ofadjoining lands, or transferred to local privateenterprise for their day-to-day operations andmanagement.

3. OBJECTIONS AND DIFFICULTIES

If private enterprise can supply piped water, whydoes it not do so? What are the problems? Threedifficulties are usually mentioned whenever it isproposed to supply water commercially:

a) It is uneconomic to provide more than onepipe network in any area, and that therefore watersupply is a 'natural monopoly' suitable only for thepublic sector.

b) The 'externalities' associated with water areso pronounced, that is supply cannot be left to the'whims' of the market and to decision motivated byprivate profit.

c) People are not prepared to pay for water.To what extent can these objections be met?

3.1 'NATURAL MONOPOLIES'

In order for water to be utilized by consumers, it hasto be derived from a natural source, purified andtransported to the point of consumption. Each ofthese stages in the supply chain can involve mon-opoly of supply, but need not necessarily do so.The souxce of supply, be it for a large town or for asmall village, can be from a single source or from anumber of alternative sources. In Morocco there isa parastatal national water supply company [OfficeNational d'Eaux Potable (ONEP)] which sells

water in bulk to urban distribution systems.Additionally, many of the local authorties havedeveloped their own sources of supply, so as not tobe entirely dependent on the national company.There is therefore no monopoly of supply. Citiescan be supplied from different rivers (for example,the city of Santiago is supplied from the Maipo andMapocho rivers, and also from wells), orcommunities (e.g. in Saudi Arabia) can besupplied from different desalination plants, inwhich case, again, there is no monopoly of thesource of supply. Where the source of water isunderground, and where it belongs to the owner ofthe ground above it, there is in practice nomonopoly in the water source, even if all the waterderives from one common aquifer.

The purification process is not a 'natural'monopoly, as water can be purified in larger orsmall installations, and even in the home, byboiling and filtering. There might however be scaleeconomies which would make it more economicalto purify water in large plants.

If the distribution system is by means of pipes,the economies of scale in the supply of waterthrough networks of pipes are so considerable thatthis is a textbook example of the 'naturalmonopoly'. However, where water is distributedby water vendors, or where it is carried by theconsumer from its source, as is common in manydeveloping countries, there is no naturalmonopoly even in the distribution system.

There can undoubtedly be substantial scaleeconomies in the processes of purification,desalination or fluoridation. The distributionnetwork itself is the most striking example: a five-fold increase in supply involves an average costincrease of only about 2.5 (Carruthers, 1973). Asaresult of these decreasing costs, it may be lessexpensive to have a community served by onelarge distribution network than by a number ofoverlapping ones. However, in large cities it ispossible for different districts to be supplied fromadjacent networks, as is now the case inGuatemala City and Santiago, with no substantialloss of scale economies in distribution. While thisarrangement does not give users a choice ofsupplier, the existence of separate adjacentsystems enables comparisons to be made of costsand service levels, from which consumers canbenefit.


Thus, not all the processes in the water supplychain result in 'natural monopolies', but evenwhere these do exist, or where there are scaleeconomies, there can be, as we have already seen,substantial roles for the private sector.

3.2 EXTERNALITIES

Water supply is associated with both positive andnegative externalities. On the positive side, to theextent that safe water improves health, improvedwater supply can benefit people other than thosedirectly involved in providing or receiving thewater. For example, flea-borne diseases are lesslikely to be transmitted where water for washing isreadily available. To the extent that these positiveexternalities exist, it may be said that, in theabsence of community action, too little waterwould be provided. To the extent that disease isalso spread by inadequate sewerage (e.g. surfacewaste water disposal, poorly constructed cesspoolsor latrines), there are negative externalities thatcan be addressed either by measures to discouragepollution or by additional costs of purification.

There is, however, a further externality peculiarto water supply, which is due directly to itsscarcity. Consider a city, such as Bangkok orLagos, that is built over an aquifer that can bedrawn upon from wells. If the supply of water inthe aquifer were unlimited, so that it werecompletely replenished whenever drawn upon, thedrilling of wells and subsequent pumping wouldresult in costs for well construction and forpumping, but there would be no loss of water. If,however, the quantity of water in the aquifer werenot replenished at a rate equal to that at which it isremoved, each individual drawing water wouldreduce the quantity available to others, and thiswould involve a negative externality.Furthermore, the reduction in the water levelcould bring about earth movements and causeserious foundation problems, as a fact hashappened in Mexico City and Bangkok. Oneapproach to dealing with this externality would beto prohibit the drilling of wells, or to license it, aswas the' practice in London in the middle of the19th century, and in Israel, Mexico and theBahamas today. Another approach, which isfollowed in Israel, would be to levy a charge onwater drawn from the aquifer, and to fix the price

at whatever level is necessary to maintain a desiredwater level.

It may be noted that this type of 'externality'arises from the fact that the underground waterdoes not belong to anybody, and its treatment as a'free good' results in its overuse. Similar effectshave been described in other fields: overgrazing oncommon grazing land, overfishing on the highseas, and traffic congestion in most cities. In allthese cases the absence of ownership of a scareresource results in underpricing, and in too muchof it being used, with resulting severe shortages.

Externalities in water supply are also common inrural areas. Water can be alternative uses—forindustry, irrigation, power generation, transportand domestic use, for example—and its use for onepurpose can effect other uses and other users.Water projects therefore generate more than their'fair share' of external effects. As in the case ofurban supplies, the absence of property rights inwater precludes private sector intervention andexacerbates the difficulties in the allocation of thisscarce resource. Thus, the existence ofexternalities in water supply calls for mechanisms(such as the vesting of property rights) whichwould enable more, rather than less, private sectorinvolvement.

3.3 INABILITY TO CHARGE

When water is sold in containers by privatevendors, as is common in France and throughoutthe developing world, there is no problem incharging for it: customers pay on delivery, as theydo for milk, wine or fuel oil. But where water isdelivered from pipes, the levying of paymentsimposes substantial problems—moral, political,technical and administrative.

The moral and political problems arise from thefact that some people believe that water, as aproduct of nature and a necessity of life, should befree to everyone. For this reason, many authoritiesin charge of piped water supplies are said to find itdifficult to enforce payment, or to deny water tononpayers. Even where there are no moral orphilosophical qualms, political necessities make itdifficult for governments to charge for water.Politically, it can be easier for a government todecline to provide water altogether, on the groundthat its resources are constrained, than to supply

fc-P;


water and get involved in recriminations about thecharges. Islamic law, however, explicitlyrecognizes the right to own and sell water, subjectto the injunction that the thirsty are never to bedenied drinking water, even if unable to pay(Encyclopaedia of Islam, 1983).

There are also substantial administrativedifficulties in collecting payment for water. In alarge urban area, the basic mechanics of assessingfees, collecting them, and accounting for them, areconsiderable. In some countries no attempt ismade to charge for the amount of water actuallyused, but households are billed at rates propor-tional to property values (Britain) or to thediameter of the supply pipe (Chile). In some areaswhere water is supplied for irrigation (Pakistan), itis common to tax the farmers in proportion to thevalue of the additional crops that can be grown.But, whatever the method used, there can be nodoubt that the levying of water charges on a largescale is a formidable task which requires asubstantial effort for successful implementation.

Economic efficiency requires that water becharged for in proportion to the amounts used, andat a rate just high enough to cover the costs ofreplacement. This implies that charges mustalways be levied for the costs of operating existingsystems as well for renewal or expansion costswhen these operations are undertaken. Economicefficiency does not require that all users pay thesame rate, as long as each pays at least the directcosts arising out of connection and use. There canbe a case for levying higher charges from the richthan from the poor, and more in the dry season,when water is scarce, than in the rainy season,when it is plentiful and easily replaceable.

In order to charge in proportion to the amountused, some form of metering is necessary. Theprovision and use of household water metersinvolve costs. In Asia, West Africa and LatinAmerica, where they are commonly used, theircapital cost ranges from $15 to $25. Where metersare installed, the charges for water are invariablybilled to individual households or companies.Where a village might have one standpipe servinga grdfip of people, it is not practicable to chargeindividual users by the meter and, indeed, it isdifficult to charge at all. This may explain why, insituations where villages are supplied bystandpipes, it is common for the villagers

themselves to be responsible for the maintenanceof the system. For example, Van der Laak (1969)describes a water supply system in Tanzania forwhich local people contributed their labour toconstruct the system and, additionally, the costsfor maintenance were obtained through thecultivation of one acre of cotton in a communalfield. A committee was elected to be responsiblefor implementing the system, and a scheduled dutylist of workers was agreed on. The system worked.On the other hand, in Tanzania a system in whichthe water supply system was paid for form localtaxes, but from which not all of the taxpayersbenefitted, while some non-taxpayers were servedwith water, failed.

In several regions in Kenya, villagers had notbeen paying the small monthly tax which was to beused to help operate and maintain their local watersupply system. Furthermore, frequent acts ofvandalism on taps, drainage facilities, protectivefences and so on, made it financially costly andphysically almost impossible to maintain many ofthe public standposts. To overcome this, publicstandposts in a few areas were converted to watervendor operations; a licensed vendor pays asubsidized rate for the metered standpost waterand sells it to users by the container at a slightlyhigher fee. The result of the switch to kiosks arethat vandalism has been greatly reduced, thussaving government funds for repair andreplacement costs; a small amount of revenue hasbeen generated; and the rate at which people applyfor house connections has increased. Some peoplepresumably felt that if they were going to have topay for water, it might as well be convenient water(Kia, 1981).

One of the worst features of governmentalcontrol of the water supply, evident even in acountry as progressive as the Ivory Coast, is therule that water charges have to be uniform over thewhole country. This rule results in low-costcustomers being forced to subsidize high-costones, irrespective of income. As a consequence,system expansion involves constant tensionbetween existing users (whose payments are apt toincrease as the system costs increase) and potentialnew users who not only have to contend withexisting users but also to vie against one another toobtain priority in the allocation of scarcegovernmental resources. Difficulties of this kind


are avoided when each installation is self-financing(Hanke, 1981).

Although it is not easy to charge for water,particularly for piped water, there are plenty ofexamples to show that it is practicable, and thattherefore the difficulty of charging is no reason toexclude the private sector from providing water.Indeed, even when water is supplied by the publicsector, great difficulties are encountered if water isnot charged for at rates that cover all the costs.

4. THE ROLE OF GOVERNMENT

The shortcomings in water supply—in bothquantity and quality—example, a study in Manila,the Philippines, showed that 48% of the watersupplied in 1977 was 'unaccounted for' (Kirke etal., 1984). Management in the public sector canoften be improved, but the involvement of theprivate sector can bring quicker results, and thedimensions of the problem cry out for quickresults.

Because of the universal tendency to politicizeand municipalize piped water and seweragesystems, the private sector is unlikly to financeinfrastructure in the water sector. However it canprovide management, and the French affermagesystem provides a model that can be widely copiedand developed. In this sector there is scope forpublic/private co-operation; the public sector(aided, as appropriate, by international financingagencies) provides the finance and the privatesector provides the management. The tariffs to becharged would be of critical importance. Theymight possibly be determined by a process ofbidding; certainly tariffs would have to be highenough to provide sufficient revenue to cover allcapital and operating costs.

In the provision of non-piped systems, theprivate sector can (and does) provide both vendedwater in towns and villages all over the world. Therole of government here can be confined toinspection to ensure that water sold for drinking isin fact safe to drink.

5. CONCLUSIONS

This brief review indicates that water supply,especially for drinking, is in a deplorable state inmany countries. The private sector plays a

relatively minor role in the provision of pipedwater and a significant (but unqualified) one inwater vending. In view of the experience of theprivate sector in all continents, there can be nodoubt that it is technically and financially feasibleto supply water through piped systems, and thatthe main obstacles to its participation are political.Governments which prove to be incapable ofproviding facilities for which there is evidentdemand sometimes pursue policies that make itdifficult for the private sector to provide therequired services. The situation where rich peoplereceive subsidized piped services, while the poorpay for expensive water from vendors, is likely toremain until governments allow economic marketsto work in water supply, as they already work inmany countries for the supply of food, clothing etc.

It is possible that the scope for competition inthe distribution of piped water is limited becauseof the enormous cost of providing more than onedistribution network. However, local authoritescan use competitive techniques to select monopolycontractors to provide services for a fixed numberof years, as is done in France and West Africa. Inrural areas, or in small cities, local associations orco-operatives can be formed to provide facilitiesfor which people can pay. In some situations,water vending might offer lower-cost solutionsthan piped systems; this activity deservesencouragement.

ACKNOWLEGEMENTS

Thanks are due to Saul Arlosoroff, JosephFreedom and Daniel Okun for comments on thisarticle; to all those staff members of the WorldBank, the US Agency for InternationalDevelopment, and UNDP who helped to providethe information presented therein; and to MichaelAlloy for editing. Further examples of privateprovision would be appreciated by the author.This article does not necessarily reflect the views ofthe UNDP, USAID, the World Bank, or theEconomic Development Institute.

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177

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Carruthers, I. D. and Stoner, R., (1981). Staff Working Paper No. 496. Economic Aspects; and Policy Issuesin Groundwater Development. World Bank, Washington, D.C.

Dworkin, D. M., Pillsbury, B. L. K., Thatsanatheb, T. and Satchakul, S., (1980). Project Impact EvaluationNo. 3. The Potable Water Project in Rural Thailand. US Agency for International Development.

Encyclopaedia of Islam, article on Ma1 (water). Volume 5. New edition 1983. E. J.Brill, Leiden, pp. 859-889.Golladay, F. L., (1983) Research Proposal: The Role of Private Organizations in Managing and Operating

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