“An assessment of the potential for private sector involvement in urban water supply in Ghana”

1.0 Many economists are of the view that what the private sector can do, governments should not. Hence the scope for private sector involvement either as a supplement to efforts by governments to provide potable water to consumers, such as water vending, or, as an integrated part of operations should be properly ascertained by governments in developing countries as a means of ensuring efficient and adequate supplies. 2.0 Coupled with the inability to charge economic rates for water, many water utilities in developing countries are plagued with inefficiency, poor management and low morale. Non-revenue water is so high and substantial revenue is lost through weak commercial operations in areas such as billing, illegal connections and revenue collection. Most of the revenue generated goes back into paying salaries and other recurrent expenditures and almost nothing is left for expansion and rehabilitation of systems. 3.0 Arguments for public sector provision of water supply services have included the fact that water is a natural monoply. The economies of scale involved in the distribution of water through pipes are so enormous that it is a classical example of a natural monopoly. Other negative externalities associated with the provision of this service without adequate sewerage facilities reinforce this argument. The inability to charge economic rates for water, it being a product of nature and a necessity of life, as well as the substantial technical and administrative demands that come into play in the provision of the service has discouraged the involvement of the private sector in the provision of this service. 4.0 Private sector involvement in the provision of urban water supply services can generally be categorised into the following: 1. Vending of water 2. Provision of piped water by companies that make their own investments (such as a concession arrangement) and companies that manage publicly provided investments such as leases, management contracts, and service contracts (gerance). 5.0 Provision of urban water supply in Ghana can be categorised under the formal and informal sectors. The only actor in the formal sector is the Ghana Water & Sewerage Corporation (GWSC), a state owned enterprise (SOE). The informal sector comprises mainly private water vendors, vending water through water tankers, public standpipes, domestic connections, storage tanks and portable containers. 6. 0 The GWSC has been operating for more than 25 years and operates 200 pipe borne water supply systems and about 6,000 shallow wells. Half of the systems utilize surface water flow and the other half groundwater. Total installed capacity is 500,000 m3 per day. Water supply coverage in the country is about 60%. On the average, urban water supply coverage is said to be around 90%, whilst rural water supply coverage stands at some 50%. 7. 0 Out of the ten largest systems serving the ten regional capitals, only three have been operating viably for a considerable period. Presently, a fourth system is also operating viably. These systems are Accra (ATMA), Kumasi (KMA), Sekondi-Takoradi (STMA) and Cape Coast. These systems account for over 75% of the total production. ATMA alone accounts for 50% of the entire revenue base. 8.0 The level of service has been low in several of these major systems. This has been attributed to the rapidly growing demand as a result of increased developments in the pen-urban areas, increased rural-urban migration, and also the state of GWSC systems which are old and in need of rehabilitation and expansion. Flows are intermittent and pressures low in several areas. Non revenue water in these major systems have typically been over 50% and in some systems, 65%. Extension of service mains to newly developed areas has been a major problem, arising out of inadequate funding to support such projects. 9.0 Revenue collection performance have been good from figures obtained, averaging over 90% of billing. However, not until non-revenue water is properly ascertained and reduced, such performances would not translate into any meaningful progress. Revenue performance figures would thus go up each year as a result of tariff increases and not from an increase in revenue base. A programme of metering of headworks to establish accurate production figures and of domestic consumers to reduce non-revenue water has been started. Typically, 60% of all bills sent out were based on some arbitrary figure, taken from the minimum consumption estimates. Staff cost to revenue performance has been improved over the past years from Government restructuring efforts. 10. Typically, personnel costs have averaged close to 40% of entire costs, electricity and chemicals averaging some 30% and all other costs 30%. Fuel and lubricants have averaged typically 5%, and other contractual and commodities have each averaged 10% over the period 1986 to 1991. Budgeted Cost to revenue ratio has been a staggering 250% in some nonviable systems but in some viable systems have been at the target of 60%. Generally, in non-viable systems, revenue obtained can cover production costs but will not cover distribution costs. For example in Ho and Tamale, budgeted staff cost against revenue expected were about equal. 11. GWSC’S financial problems have been attributed to the refusal of Government to approve timely tariff increases. This exacerbated the debt situation. Currency fluctuation affected the servicing of debts and escalated market prices, thus affecting production costs. To administer increased tariffs effectively meant a considerable improvement of systems to reflect in improved service delivery. Funding for such rehabilitation and expansion, totaling over 100 million dollars was provided mainly from external donors and aid agencies, with Government providing counterpart funding under its Public Investment Programme (PIP). This was expected to increase production system wide by some 20%. Without external financing, it would be virtually impossible to effect any rehabilitation and expansion. GWSC has found it difficult to maintain a sinking fund as directed in the mandate upon establishment, to finance capital development projects neither could it maintain a depreciating fund for replacement of equipment. 12. Management Consultants engaged to access GWSC performance came out with the observation that present organizational structure was adequate for the time but stressed on the cultivation of a corporate culture at all levels. 13. Existing private sector involvement in GWSC operations include the provision of such supporting services as vehicle maintenance, construction of storage reservoirs and housing units, supply of equipment and consultancy services. In the direct provision of water, operation of privatised standpipes has been implemented whereby an operator sells the water on behalf of GWSC and is paid a 20% commission. 14. Private sector involvement in provision of supplementary service has been mainly through water tanker operations. In Accra, there is an organised body of water vendors, the only such body in the country. These have recognition from GWSC and the mandate to provide the service under regulation. Typically, the consumer ends up paying 20 times what he will pay through piped water supply. However, this service is very much appreciated by consumers who would have otherwise been deprived of the commodity altogether as a result of GWSC’s difficulty to cope with demand. The demand for the service is therefore high especially in newly developing areas. 15. The environment in the country is supportive of further private sector involvement. The Governments’ drive towards improving performance of SOE’s even includes outright divestiture. The Divestiture Implementation Committee (DIG) and the State Enterprises Commission (SEC) are two bodies that have been set up to in respect to this. Within the GWSC, there is now an accommodation of this policy. 16. Outright divestiture of a sensitive service such as water supply, bearing immense political and socio-economic implications for Government will meet with some hesitation. Therefore, arrangements involving transfer of assets and shares to the private sector would not be considered favourably, even rejected. Arrangements that would secure Government retention of ownership but involvement of the private sector in specific services under contract or lease or concession arrangements would be accommodated. Arrangements where the private operator bears no commercial risk should be discouraged. 16 A two level approach to implementing these arrangements could be adopted. These would be involving the private sector in specific services on system basis or in the entire operation of a system. The first would involve leasing assets engaged in production or distribution to a private operator. It would also involve engaging the private sector in specific operations, such as commercial operations, under a service contract arrangement. The second level would involve handing over an entire system on a lease basis or operating concession to a private operator. 17. Concession arrangements would be most useful where investments for future expansion may not be forthcoming yet demand is escalating. In this case, the private operator is responsible for all major investments. However, the price of water will be expected to rise since all these costs including interest on investments and amortization of assets would be built into the tariff. Without GWSC subsidising the price of water, consumers could be at risk of higher rates, though justified. This would be pronounced in systems where operating ratio is high. The situation may be better under lease an arrangement but then GWSC would be responsible for providing all capital investments to keep the level of service delivery adequate. If these investments are not forthcoming, it could put the private operator at risk since the ability to collect revenue will decrease with decreasing service levels. A hypothetical case where a lease contractor is expected to reduce nonrevenue water to 30% and decrease overall costs by 10% is expected to earn GWSC close to I billion cedis in extra revenue. 18. Involving the private sector in commercial operations should be preceeded by the following actions: 1. All areas should be properly mapped out and customer information adequate (customer management). 2. Adequate levels of service need to be maintained as a neccessary condition for any improvement in revenue collection. It is however expected that with remuneration tied to performance, private operators would be better disposed to maximise profits thus increasing operating efficiency. Some problems faced by the SOE in discharging its commercial functions are not expected to vanish when the private sector takes over. Without adequate leverage, the private operator might find it difficult to improve the revenue base. 19. In all these arrangements, it must be realised that a balance between economic efficiency and distributional effects should be struck. If privatization only results in making consumers much worse off than before financially, and without any concrete evidence of improvement in service delivery, one cannot be satisfied with such an intervention. After all, privatisation is only one of the many ways of restructuring. 20 From the discussion, one can safely say that the environment for involving the private sector is accommodating. The mode of involvement is rather the big issue at stake. All arrangements must strike a balance between economic efficiency and distributional effects, taking into account the plight of the ordinary man in Ghana. Regulation should therefore be an important part of the process though over regulation could kill the entrepreneurial zeal. 21. A stage Wise implementation sequence could be adopted, beginning with a low degree of privatization and graduating into a higher degree over a time frame. Initial arrangements could be done on a pilot basis, with a close monitoring of developments such that lessons learnt can be fed into a refining process for subsequent arrangements. This structured learning process would be most useful, averting harmful consequences of en-masse implementation. The question of whether to start with viable or non-viable systems must be answered after careful consideration of each system, since system characteristics are so variable. Non-viable systems would definitely require cross-subsidization under concession or maybe lease arrangements to bail consumers out of exces1.0 Many economists are of the view that what the private sector can do, governments should not. Hence the scope for private sector involvement either as a supplement to efforts by governments to provide potable water to consumers, such as water vending, or, as an integrated part of operations should be properly ascertained by governments in developing countries as a means of ensuring efficient and adequate supplies. 2.0 Coupled with the inability to charge economic rates for water, many water utilities in developing countries are plagued with inefficiency, poor management and low morale. Non-revenue water is so high and substantial revenue is lost through weak commercial operations in areas such as billing, illegal connections and revenue collection. Most of the revenue generated goes back into paying salaries and other recurrent expenditures and almost nothing is left for expansion and rehabilitation of systems. 3.0 Arguments for public sector provision of water supply services have included the fact that water is a natural monoply. The economies of scale involved in the distribution of water through pipes are so enormous that it is a classical example of a natural monopoly. Other negative externalities associated with the provision of this service without adequate sewerage facilities reinforce this argument. The inability to charge economic rates for water, it being a product of nature and a necessity of life, as well as the substantial technical and administrative demands that come into play in the provision of the service has discouraged the involvement of the private sector in the provision of this service. 4.0 Private sector involvement in the provision of urban water supply services can generally be categorised into the following: 1. Vending of water 2. Provision of piped water by companies that make their own investments (such as a concession arrangement) and companies that manage publicly provided investments such as leases, management contracts, and service contracts (gerance). 5.0 Provision of urban water supply in Ghana can be categorised under the formal and informal sectors. The only actor in the formal sector is the Ghana Water & Sewerage Corporation (GWSC), a state owned enterprise (SOE). The informal sector comprises mainly private water vendors, vending water through water tankers, public standpipes, domestic connections, storage tanks and portable containers. 6. 0 The GWSC has been operating for more than 25 years and operates 200 pipe borne water supply systems and about 6,000 shallow wells. Half of the systems utilize surface water flow and the other half groundwater. Total installed capacity is 500,000 m3 per day. Water supply coverage in the country is about 60%. On the average, urban water supply coverage is said to be around 90%, whilst rural water supply coverage stands at some 50%. 7. 0 Out of the ten largest systems serving the ten regional capitals, only three have been operating viably for a considerable period. Presently, a fourth system is also operating viably. These systems are Accra (ATMA), Kumasi (KMA), Sekondi-Takoradi (STMA) and Cape Coast. These systems account for over 75% of the total production. ATMA alone accounts for 50% of the entire revenue base. 8.0 The level of service has been low in several of these major systems. This has been attributed to the rapidly growing demand as a result of increased developments in the pen-urban areas, increased rural-urban migration, and also the state of GWSC systems which are old and in need of rehabilitation and expansion. Flows are intermittent and pressures low in several areas. Non revenue water in these major systems have typically been over 50% and in some systems, 65%. Extension of service mains to newly developed areas has been a major problem, arising out of inadequate funding to support such projects. 9.0 Revenue collection performance have been good from figures obtained, averaging over 90% of billing. However, not until non-revenue water is properly ascertained and reduced, such performances would not translate into any meaningful progress. Revenue performance figures would thus go up each year as a result of tariff increases and not from an increase in revenue base. A programme of metering of headworks to establish accurate production figures and of domestic consumers to reduce non-revenue water has been started. Typically, 60% of all bills sent out were based on some arbitrary figure, taken from the minimum consumption estimates. Staff cost to revenue performance has been improved over the past years from Government restructuring efforts. 10. Typically, personnel costs have averaged close to 40% of entire costs, electricity and chemicals averaging some 30% and all other costs 30%. Fuel and lubricants have averaged typically 5%, and other contractual and commodities have each averaged 10% over the period 1986 to 1991. Budgeted Cost to revenue ratio has been a staggering 250% in some nonviable systems but in some viable systems have been at the target of 60%. Generally, in non-viable systems, revenue obtained can cover production costs but will not cover distribution costs. For example in Ho and Tamale, budgeted staff cost against revenue expected were about equal. 11. GWSC’S financial problems have been attributed to the refusal of Government to approve timely tariff increases. This exacerbated the debt situation. Currency fluctuation affected the servicing of debts and escalated market prices, thus affecting production costs. To administer increased tariffs effectively meant a considerable improvement of systems to reflect in improved service delivery. Funding for such rehabilitation and expansion, totaling over 100 million dollars was provided mainly from external donors and aid agencies, with Government providing counterpart funding under its Public Investment Programme (PIP). This was expected to increase production system wide by some 20%. Without external financing, it would be virtually impossible to effect any rehabilitation and expansion. GWSC has found it difficult to maintain a sinking fund as directed in the mandate upon establishment, to finance capital development projects neither could it maintain a depreciating fund for replacement of equipment. 12. Management Consultants engaged to access GWSC performance came out with the observation that present organizational structure was adequate for the time but stressed on the cultivation of a corporate culture at all levels. 13. Existing private sector involvement in GWSC operations include the provision of such supporting services as vehicle maintenance, construction of storage reservoirs and housing units, supply of equipment and consultancy services. In the direct provision of water, operation of privatised standpipes has been implemented whereby an operator sells the water on behalf of GWSC and is paid a 20% commission. 14. Private sector involvement in provision of supplementary service has been mainly through water tanker operations. In Accra, there is an organised body of water vendors, the only such body in the country. These have recognition from GWSC and the mandate to provide the service under regulation. Typically, the consumer ends up paying 20 times what he will pay through piped water supply. However, this service is very much appreciated by consumers who would have otherwise been deprived of the commodity altogether as a result of GWSC’s difficulty to cope with demand. The demand for the service is therefore high especially in newly developing areas. 15. The environment in the country is supportive of further private sector involvement. The Governments’ drive towards improving performance of SOE’s even includes outright divestiture. The Divestiture Implementation Committee (DIG) and the State Enterprises Commission (SEC) are two bodies that have been set up to in respect to this. Within the GWSC, there is now an accommodation of this policy. 16. Outright divestiture of a sensitive service such as water supply, bearing immense political and socio-economic implications for Government will meet with some hesitation. Therefore, arrangements involving transfer of assets and shares to the private sector would not be considered favourably, even rejected. Arrangements that would secure Government retention of ownership but involvement of the private sector in specific services under contract or lease or concession arrangements would be accommodated. Arrangements where the private operator bears no commercial risk should be discouraged. 16 A two level approach to implementing these arrangements could be adopted. These would be involving the private sector in specific services on system basis or in the entire operation of a system. The first would involve leasing assets engaged in production or distribution to a private operator. It would also involve engaging the private sector in specific operations, such as commercial operations, under a service contract arrangement. The second level would involve handing over an entire system on a lease basis or operating concession to a private operator. 17. Concession arrangements would be most useful where investments for future expansion may not be forthcoming yet demand is escalating. In this case, the private operator is responsible for all major investments. However, the price of water will be expected to rise since all these costs including interest on investments and amortization of assets would be built into the tariff. Without GWSC subsidising the price of water, consumers could be at risk of higher rates, though justified. This would be pronounced in systems where operating ratio is high. The situation may be better under lease an arrangement but then GWSC would be responsible for providing all capital investments to keep the level of service delivery adequate. If these investments are not forthcoming, it could put the private operator at risk since the ability to collect revenue will decrease with decreasing service levels. A hypothetical case where a lease contractor is expected to reduce nonrevenue water to 30% and decrease overall costs by 10% is expected to earn GWSC close to I billion cedis in extra revenue. 18. Involving the private sector in commercial operations should be preceeded by the following actions: 1. All areas should be properly mapped out and customer information adequate (customer management). 2. Adequate levels of service need to be maintained as a neccessary condition for any improvement in revenue collection. It is however expected that with remuneration tied to performance, private operators would be better disposed to maximise profits thus increasing operating efficiency. Some problems faced by the SOE in discharging its commercial functions are not expected to vanish when the private sector takes over. Without adequate leverage, the private operator might find it difficult to improve the revenue base. 19. In all these arrangements, it must be realised that a balance between economic efficiency and distributional effects should be struck. If privatization only results in making consumers much worse off than before financially, and without any concrete evidence of improvement in service delivery, one cannot be satisfied with such an intervention. After all, privatisation is only one of the many ways of restructuring. 20 From the discussion, one can safely say that the environment for involving the private sector is accommodating. The mode of involvement is rather the big issue at stake. All arrangements must strike a balance between economic efficiency and distributional effects, taking into account the plight of the ordinary man in Ghana. Regulation should therefore be an important part of the process though over regulation could kill the entrepreneurial zeal. 21. A stage Wise implementation sequence could be adopted, beginning with a low degree of privatization and graduating into a higher degree over a time frame. Initial arrangements could be done on a pilot basis, with a close monitoring of developments such that lessons learnt can be fed into a refining process for subsequent arrangements. This structured learning process would be most useful, averting harmful consequences of en-masse implementation. The question of whether to start with viable or non-viable systems must be answered after careful consideration of each system, since system characteristics are so variable. Non-viable systems would definitely require cross-subsidization under concession or maybe lease arrangements to bail consumers out of excessive rates, though justified economic rates. sive rates, though justified economic rates.

Source: KNUST