Joint memorandum submitted by United Utilities
plc (UU) and Manila Water Company (MWC)
1. INTRODUCTION
1.1 We are writing on behalf of United Utilities
plc (UU) and Manila Water Company (MWC), in which UU has a shareholding.
UU is a FTSE 100 company which owns and operates water, sewerage
and energy networks in the UK and provides water and sanitation
services in the Philippines, Australia and Central Europe. MWC
serves 5.3 million people in Manila, many of whom belong to low-income
communities who did not have access to clean and affordable water
supply before the private sector became involved in 1997.
1.2 This submission describes the achievements
of MWC to date, and its aspirations for the future. We also consider
the contribution the private sector can make to the achievement
of Millennium Development Goal 7, and the constraints on that
contribution. We do not address the role of DFID in achieving
Goal 7, because we do not feel competent to do so.
1.3 UU has recently joined Partners for
Water and Sanitation (PAWS), which is a UK initiative involving
government, the third sector and private sector organisations
in a partnership to assist developing countries. The PAWS approach
identifies UK industry experts to share skills and experiences
with communities in Africa to provide water and sanitation. Staff
from UU have been assisting the Ministry of Water in Ethiopia
to scope initiatives in priority areas, such as leakage control.
This has involved visits to Ethiopia and email support from the
UK. Further activities are planned.
1.4 UU Has also supported the charity Water
Aid since it was established by the UK water industry in 1981.
Water Aid has grown to become one of the most respected international
NGOs dealing solely with water, sanitation and hygiene issues.
UU supports Water Aid through employee events and fundraising,
a monthly payroll draw and appeals to customers, and raises over
£1 million pa for the charity.
2. MANILA WATER
COMPANY
2.1 In 1997, the Philippine Government privatised
the Metropolitan Waterworks and Sewerage System, a public utility
engaged in the provision of water supply, sewerage and sanitation
services for Metro Manila's nearly 10 million population. The
International Finance Corporation played a key advisory role in
this undertaking and described it as the "biggest water privatisation
in the world".
2.2 The involvement of the private sector
entailed auctioning two 25-year concessions through competitive
bidding, and giving the winning bidders the responsibility to
handle water treatment, distribution, bill collection, facility
improvement and overall management. Strong private sector interest
was shown by the participation of major players in the global
water industry (Companie Generale des Eaux, Lyonnaise des Eaux,
Anglian and United Utilities) as well as leading Philippine conglomerates
(Ayala Corporation, Metro Pacific Corporation, Aboitiz Corporation,
and Benpres Holdings).
2.3 The winning consortia were Manila Water
Company (MWC) for the East zone of Manila and Maynilad Water Services
(MWS) for the West zone. Ayala Corporation and UU have been the
principal shareholders in MWC, and Benpres Holdings and Lyonnaise
des Eaux have been the principal shareholders in MWS.
2.4 Since 1997, MWC has:
— improved 24 hour water availability
from 26% to over 95%;
— reduced leakage from 63% to 35%;
— provided 850,000 of the urban poor
with a piped water supply for the first time, at a price which
is less than 10% of the price of vended water;
— doubled the number of sewerage connections;
— increased productivity by at least
60%;
— won an Asian CSR award for its HR
practices;
— increased revenue by 600%; and
— had a successful flotation on the
local Stock Exchange, which benefited employees, almost all of
whom own MWC shares.
The average domestic tariff in peso/m3 has increased
in real terms by about 15% over the decade since MWC was formed.
Most strikingly of all the Department of Health
has estimated that the improvement in the water supply in the
East zone has reduced infant mortality by 36% during this period.
2.5 By way of contrast MWS has gone bankrupt,
and maybe taken over by MWC. It should, however, be noted that
all of the debt of the parent utility was transferred to MWS,
which created unforeseen problems in the 1997 East Asian financial
crisis.
2.6 The next major challenge for MWC is
to improve sewerage and sanitation services. So far about 200,000
people have benefited from sanitation projects. MWC's goal is
to extend sewerage coverage from 10% to 30% of households by 2010,
with funding from the World Bank.
2.7 According to the Asian Development Bank1
the Philippines is on target to meet the Millennium Development
Goal for urban and rural sanitation but is not on target for urban
and rural water supply. The challenge for urban water supply is
the projected increase in population from 30 million in 1990 to
67 million in 2015. The report1 also notes that there is great
scope for small, local private sector entrepreneurs to provide
a range of water and sanitation services, in addition to the potential
role of large private companies such as Ayala Corporation and
United Utilities.
3. PRIVATE SECTOR
INVOLVEMENT
3.1 The private sector can be involved in
water and sanitation in a variety of ways. The World Bank2 has
set out the options as follows, with progressively increasing
degrees of private sector involvement:
(i) management or service contract (eg
USA)
(iii) concession (eg Philippines)
(iv) build—operate—transfer (eg
Australia)
(v) privatisation (eg England and Wales)
The degree of responsibility and risk transferred
to the private sector can therefore vary widely depending on local
circumstances.
3.2 A recent World Bank3 study reviewed
the successes and failures of private sector involvement in utilities.
The study concludes that "effective regulation" is the
most critical enabling condition for getting utility reform right.
The report argues that the widespread dissatisfaction with privatised
utilities in developing countries "is not due to their ownership
structure, but rather to the weakness of institutions charged
with regulating them". The report concludes that both public
and private investment is needed to achieve the Millennium Development
Goals, and that the recent decline in private investment needs
to be reversed. The report recommends concessions and leases (rather
than privatisation) for the water sector. It also recommends "unbundling"
of natural monopoly activities from potentially competitive activities,
which applies to energy far more than it does to water.
3.3 Effective regulation is a necessary
but not sufficient condition for successful private sector involvement.
Regulation in Manila has been effective, in part because disputes
between the regulator and a concessionaire are resolved using
international arbitration. The regulator has permitted price increases
to enable MWC to fund the service improvements listed above. Nevertheless,
MWS operating within the same regulatory regime has gone bankrupt.
It therefore follows that effective termination mechanisms need
to be designed for private sector involvement, such as the special
administration regime in England and Wales.
3.4 There have been fewer opportunities
for water companies to be involved in transition and developing
countries than was anticipated in the 1990s. This is in part due
to public resistance to private sector involvement in water and
energy, as set out by Hall, Lobina and de la Motte4. The authors
note that trade unions have often, but not always, been leaders
of such resistance.
3.5 In addition, the large private water
companies that began investing in developing countries in the
1990s have typically retrenched. This is because the available
returns often fail to compensate for the level of political and
regulatory risk. One way forward is for an organisation such as
the World Bank to fund investment and bear political and regulatory
risk, leaving private sector companies to bear the operational
risk.
3.6 Private sector involvement is no panacea
and was oversold in the 1990s. Nevertheless, in the words of the
World Bank3 "There is compelling evidence that restructuring
and privatisation, when designed and implemented well, can significantly
improve infrastructure performance". MWC provides an
example of more reliable water supplies, reduced leakage, improved
water quality, improved access to water and greater efficiency,
achieved in part through access to new sources of management and
finance.
3.7 The challenge of Millennium Development
Goal 7 is huge. Large private companies can play a part, but without
significant changes in the way in which development funding is
channelled and projects organised this will not be on a significant
scale. This contribution will in any event be modest in the poorest
countries and in rural areas where western style infrastructure
is likely to be unsustainable and unaffordable. Nevertheless,
the experience of MWC demonstrates that the private sector can
help to transform water and sanitation services, including for
the urban poor. It is to be hoped that the public and private
sectors can work in partnership to achieve similar transformations
in other cities in the developing world.
REFERENCES
1. Asian Development Bank, "Asia Water
Watch 2015", 2006.
2. The World Bank, "Selecting an option
for private sector participation", 1997.
3. The World Bank, "Reforming infrastructure—privatisation,
regulation and competition", 2004.
4. Hall, Lobina and de la Motte, "Public
resistance to privatisation in water and energy", Development
in practice, Volume 15, June 2005.
Clive Elphick Virgilio Rivera
Group Policy Director Group Regulation
Director
United Utilities plc Manila Water Company
September 2006
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