How to make water and sewer companies work

Clean water and sanitation are human rights. However, the performance of water and sewer companies to fulfill this ambition varies widely: The best utilities provide a continuous supply of safe drinking water at affordable prices while reliably collecting and treating wastewater without relying on government subsidies. However, far too many companies provide water of dubious quality for only a few hours per day to some residents and leave many slum dwellers to fend for themselves. The picture for sanitation is even bleaker: Many residents are not connected to the sewer systems and instead have to rely on individual and often inadequate solutions such as septic tanks and latrines.

Water and sewer companies come in all shapes and sizes: They can be public or private or anything in between; their service area can be as large as an entire country or as small as a town; they can be in charge of only water supply or sewerage as well; they can be professionally run and efficient or riddled by cronyism and corruption; and they can be financially healthy or chronically underfunded.

Unsurprisingly, rich countries tend to have well-performing utilities, while poor countries don’t. But it is the exceptions to this rule that tell the most compelling story. These and other cases are presented in my recent book, “Water, Politics and Money: A Reality Check on Privatization.” For example, in Cambodia, one of the world’s poorest countries, the public water company of the capital, Phnom Penh Water Supply Authority, has turned from a basket case to a model company. In Uganda, the public National Water and Sewer Company underwent a similar, albeit not quite as spectacular, turnaround. In the Philippines, the two private water companies serving the capital Manila, Manila Water and Maynilad, also achieved remarkable improvements.

What do these cases have in common?

First, they underwent a complete change of their corporate culture. They are now professionally managed and each business unit was given clear targets, as well as the autonomy and the means to achieve them. Second, there is a clear focus on the customer, including surveys on customer satisfaction and management attention focused on how to remedy deficiencies. And third, there is a focus on efficiency, reducing water losses, water theft, and non-payment of water bills, as well as excessive staffing levels. This latter focus on efficiency has made it possible to keep water tariffs affordable with minimal or no reliance on subsidies. Since water supply and sewerage are natural monopolies, across the world public bodies set water tariffs on water companies, private or public. Often the government sets tariffs at a level that does not allow for cost recovery from revenues, without providing subsidies to make up for the shortfall. When water companies have strived to perform better, governments have allowed for moderate tariff increases while emphasizing the need to increase efficiency and, if need be, providing subsidies.

The investments to expand access and to improve service quality were funded differently each case: In Manila, the private companies relied on commercial loans right from the start. In much poorer Phnom Penh, the local utility initially received grants and only later loans. And in Uganda, investments were funded initially through loans, but the government later took over responsibility for the loan payments for the water company. In Manila and Phnom Penh, the water companies had become so efficient that they could fully recover their costs while keeping water affordable. In Uganda, where the efficiency improvements had not been as great, the company still had to rely on some level of government support.

During the 1990s the World Bank and the International Monetary Fund promoted the privatization of water companies as essential to improving their performance. This was in response to the dismal performance of most public water companies in developing countries at the time. Most private water companies expanded access and improved service quality, as it was the case in Manila. However, the improvements took much longer than expected, were accompanied by tariff increases, and often remained limited to accessing water supplies, consequently neglecting sanitation. Some private concessions failed because the government reneged on its obligations, for example, by not allowing contractually specified tariff increases to be implemented for political reasons. In Cochabamba, Bolivia in 2000, in what is probably the most famous case of a failed water privatization, tariff increases led to riots and the expulsion of the private company. Sixteen years later the service is still dismal and many people remain without access. The water bill of a poor family is now $8 per month, more than twice as high as the level that triggered that water riots. But people have become frustrated and have accepted the poor service and high prices. And the revolutionaries of the water war and their families were hired by the company on top of those who already worked there.

But the private sector has understood the message: All over the world  companies have withdrawn from politically risky concessions for utilities. But the private sector is still big in water, just in a different form: It moved from utilities to facilities. Companies now finance and run new desalination plants or new wastewater treatment plants under build-operate-transfer (BOT) contracts. They do not bill hundreds of thousands of customers any more, but just send one bill to the government—and that bill is usually secured by a “watertight” political risk guarantee. The more sensitive business of delivering water to customers (and of collecting their wastewater), along with maintaining an existing infrastructure that often is in poor shape due neglect, is left to the public utilities who were in charge of them before. The good news is that some of these public utilities have become more professional and more efficient.

The findings of “Water, Politics and Money” confirm what another study, Beyond Privatization, concluded more than a decade ago: “Public versus private is not the bright line that separates success from failure… Performance depends on effective staffing, consistent public support for sufficient funding, better asset management systems, performance measurements and rewards, and more stakeholder involvement and transparency.” In other words, it depends on a corporate culture and a political environment that promotes professionalism. And to do so, it cannot hurt to borrow an idea or two from the private sector—while keeping an eye on costs and listening to your customers. Ultimately, together, with appropriate public funding, this will help in fulfilling the human right to water and sanitation.