Public private partnerships in urban water supply a case study in ho chi minh city

The study analyzes the effects of private sector involvement in Saigon Water Corporation Sawaco through equitization with an aim to draw a picture on lessons learnt from Sawaco for futur

I certify that this work has not been submitted and is not being currently submitted for any degrees other than the Master in Public Policy of Fulbright Economics Teaching Program, MPP4

I certify that at my best knowledge, I conducted myself in an ethical manner in all aspects of

my research and all sources used have been acknowledged in the thesis

The research does not necessarily reflect either the views of Ho Chi Minh City University of Economics or Fulbright Economics Teaching Program

Author

Ngo Minh Phuong

This thesis has found its ways with the support of many people First, I would like to express

my sincere gratefulness to Dr Huynh The Du who supervised my performing this thesis He has continuously spent his valuable time and given me helpful advice without those I would have hardly been able to finish my study Also I thank Dr Jan Hoffer for his initial guidance,literatures and review, Mr Ly Chung Dan for his professional knowledge sharing, Mr Le Huu Quang for experience and information sharing, Mr Gerard Soppe for his proof reading and contribution Last, I am very thankful for the study at Fulbright Economics Teaching program and all the teachers and friends who have made themselves available to all the academic questions and support

Ngo Minh Phuong

Ho Chi Minh City – May 2013

The study analyzes the effects of private sector involvement in Saigon Water Corporation (Sawaco) through equitization with an aim to draw a picture on lessons learnt from Sawaco for future PPP activities in Vietnam’s urban water supply Sawaco equitized six out of eight water supply branches into joint stock companies However, two years after the equitization, the People’s Committee of HCMC guided Sawaco on plan for re-buying the shares in JSCs to achieve ownership of 75% In addition, the two remaining branches were transformed to one member limited liability company Sawaco Parent Company has transformed to One Member Limited Company under parent-subsidiary company model since 01 October 2010

The privatization was one of the efforts in correcting the government failure Nevertheless, very little evidence showed the positive influence of equitization on Sawaco Except for political criteria like annual new household connections, there was no improvement observed

in NRW or financial situation On the contrary, the joint stock companies embraced the new institutional form well Yet, there is no share of responsibilities between the public (Sawaco)and private (joint stock companies) sectors In term of the population accessing the drinking water network, despite the expansion of network connection, not much attention was paid to the water provision for poor people The incentive to give connections to the low-incomegroup goes down due to commercial characteristics of the equitization process

Although the equitization has realized the policy to socialize urban water services in Vietnam

in general and in HCMC in particular as well as seeded the market orientation for the water sector, it has threatened the political priority targets and could have achieved better with forethoughts and baseline analytical work

Following the findings, generally it is vital to produce baseline analysis on the situation and prepare a favorable business and policy environment before involving the private sector.Second, a balance between commercial achievements of the private sector and societal gains is required Last, active involvement of all stakeholders is essential in the increase of transparency, accountability and efficiency

For Sawaco, it is recommended that private engagement should be bounded to non-core operation and maintenance activities of the utility Water supply affiliates need to stay with the parent utility as long as network ownership is involved, therefore efforts to gain full control over tertiary networks are necessary It may be executed through the collection of sufficient shares in JSCs or negotiation for buying back the tertiary network currently owned by JSCs Another option is to complete the equitization meaning privatization of the entire Sawaco and subsidiaries with asset ownerships in hands of the government This shall transform the corporation into an operator of the water system Last, better preparation on asset evaluation and hydraulic network separation could have helped avoiding problems.

CERTIFICATION i

ACKNOWLEDGEMENTS ii

ABSTRACT iii

CONTENTS v

ABBREVIATIONS vii

LIST OF TABLES viii

LIST OF FIGURES viii

Chapter 1: INTRODUCTION 1

1.1 Problem statement 1

1.2 Research objective 2

1.3 Research questions 2

1.4 Research structure 2

Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY 4

2.1 Water is special goods: 4

2.1.1 Nature of the water product and market failures in water supply: 4

2.1.2 Government failures in urban water supply: 7

2.1.3 Assessment on performance of a water utility 9

2.2 Public – Private Partnerships in urban water supply 10

2.2.1 Theory on PPP 10

2.2.2 Empirical findings 13

2.2.2.1 Experience in developed and developing countries 13

2.2.2.2 Case Cancún, Mexico 14

2.2.2.3 Case Manila, the Philippines 14

2.2.2.4 Experience in Vietnam 15

2.3 Research method 16

Chapter 3: WATER SUPPLY IN HO CHI MINH CITY 18

3.1 Overview on water supply activity in Ho Chi Minh City 18

3.2 Problems of water supply in Ho Chi Minh City 19

3.3 Public policy in water supply sector 20

3.3.1 General management and guidelines 20

3.3.2 Water tariff in Ho Chi Minh City 20

3.3 Policy framework for private engagement in HCMC water supply 22

Chapter 4: PRIVATE ENGAGEMENT IN SAIGON WATER CORPORATION 24

4.1 Sawaco’s history and existing situation 24

4.2 Equitization and impact on governmental performance 28

4.2.1 Sawaco parent company operation 28

4.2.1.1 Operational figures of Sawaco 28

4.2.1.2 Financial situation 31

4.2.1.3 Technology innovation 33

4.2.2 Impact of the equitization on HCMC People’s Committee 33

4.3 Equitization and joint stock companies’ performance 34

4.4 Impact of the equitization on customers of the water services 36

Chapter 5: THE RIGHT PATH FOR URBAN WATER SUPPLY IN VIETNAM 38

5.1 Major findings 38

5.2 Policy implication and recommendation 39

5.2.1 Recommendation for Sawaco 39

5.2.2 Other recommendations 41

5.3 Study limitation and avenues of further research 42

REFERENCE 43

Appendix 1: WATER SYSTEM PRIVATIZATION IN CANCÚN, MEXICO 48

Appendix 2: NETWORK MANAGEMENT AT JSCs IN HO CHI MINH CITY 50

Appendix 3: OPERATIONAL RESULT OF JSCs AFTER 2007 51

Appendix 4: SHARE OWNERSHIP IN JSCs 54

Appendix 5: PRIVATE SECTOR PARTICIPATION IN WATER SUPPLY AND SANITATION: LESSONS LEARNED AND GUIDELINES FOR PUTTING LESSONS TO PRACTICE 55

One Member LLC One Member Limited Liability Company

PPI Private Participation in Infrastructure

PPIAF Public – Private Infrastructure Advisory Facility

LIST OF TABLES

Table 2.1: PPP models in the water sector 12

Table 4.1: Equitization of Sawaco’s Subsidiaries 27

Table 4.2: Sawaco Coverage and Connections 2004 - 2010 28

Table 4.3: Sawaco NRW 2004 - 2010 29

Table 4.4: Sawaco Employees/1,000 Connections 2004 - 2010 30

Table 4.5: Sawaco Operational Figures 2004 – 2010 30

Table 4.6: Loans of Sawaco to JSCs till 31 Dec 2008 32

LIST OF FIGURES Figure 2.1: Natural Monopoly and Deadweight loss 5

Figure 2.2: Positive externalities and Deadweight loss 6

Figure 2.3: Vicious Spiral Performance Declines of Utilities 8

Figure 2.4: Thesis analysis structure 17

Figure 3.1: Urban Water Supply in HCMC 18

Figure 3.2: Average Water Tariff of HCMC 2009 – 2013 21

Figure 4.1: Corporate Chart of Sawaco 26

Figure 2.2: Key performance data of Joint stock companies 35

Equitization of Sawaco was the ultimate effort for PPPs in the Vietnam water sector after several successful attempts PPPs are understood in Vietnam as the cooperation between the governmental bodies and private enterprises in investing to the infrastructure, and delivery of public services.1As assessed by the Southeast Asia Water Utility Network, there are somesuccessful PPP models in Vietnam like Phu My Water Supply Joint Stock Company in Ba Ria – Vung Tau province, the water supply systems in Lim Town (Design-Build-Lease) and Tu Son Town (Build-Own-Operate), Bac Ninh Province In HCMC, the percentage of waterproduced by private firms in the total water production of the city increased from 0% in 1995

to 12% in 2000 and 28.9% in 2011 There are also a few attempts to incorporate private partners in the distribution work of Sai Gon Water Corporation (Sawaco) including services in Phu My Hung urban area (district 7),2 Trung Son area (Binh Chanh district),3 the Non-Revenue Water (NRW) project4and Contract for management and leakage reduction based on performance5(HIDS, 2012)

1 There is no common agreement on definition of PPP in Vietnam This explanation comes from the Decree 71/2010/QD-TTg regarding regulations for pilot investments under PPP model.

2 Water is bought from Nha Be water supply company – a privatized branch of Sawaco.

3 Water is bought from Cho Lon water supply company – a privatized branch of Sawaco.

4 This type of contract aims to encourage the private engagement in construction, management and maintenance

of the network Majority of the project finance comes from IDA credit for four-year length.

5 This contract was signed with Manila water for zone 1 of NRW project

It could be seen from the above-mentioned cases that PPPs may be effective for the water sector in Vietnam under some circumstances However, when the involvement of the private sector was enhanced to the privatization level like in Sawaco, problems arose In such case, whether PPPs can support solving the dilemma of growing demand in infrastructure and shortage of governmental funding and imbedding the professionalism, efficiency, and technology innovation of the private sector to the poor performing public utilities is still a question The troubles in the equitization process of Sawaco are worth further study in the context of Vietnam where more pilot PPP projects are promoted.

1.3 Research questions

This study aims to answer the following questions:

1 Does private participation help to solve major problems in the urban water sector in HCMC?

2 How does private engagement influence Sawaco and the city water supply?

3 What is the policy implication for private engagement in Vietnam urban water supply in the coming time?

1.4 Research structure

The study is divided into five chapters Chapter One works on policy context and reasons for

pursuing the thesis topic, followed by the research objectives Theoretical background,analysis framework and successful examples of PPPs in water companies are elaborated in

Chapter Two Chapter Three describes the overview and problems of water supply in HCMC,

the public policy for water supply and framework for private engagement in general and for

HCMC in particular Chapter Four analyzes the specific issues in the equitization process of Sawaco Last, Chapter Five presents the summary on key findings from the case study and

policy recommendation for private engagement in the urban water sector of Vietnam Also mentioned are the study limitations and avenues of further research

Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY

2.1 Water is special goods:

2.1.1 Nature of the water product and market failures in water supply:

Water is a very special product as it is essential for human live Furthermore, it is an importantinput for industry and agriculture Economically speaking, water is private goods (high rivalry due to capacity of the network and excludability from water fee) However, urban water supply has however long stayed in the government’s hands due to some market failures of its type, typically named as natural monopoly, externalities and merit good characteristics (Jooste, 2008)

Infrastructure of urban water supply requires large capital investment and economies of scale exist The four processes of water supply including capture, treatment, transportation and delivery are usually natural monopoly (Kessides, 2004) And it takes a long time for paybackmeaning that water utilities have to count on future customers for recovering cost In a study

on natural monopoly in the water supply and sewerage sector for developing and transition economies, three countries out of four, including Vietnam, have the evidence of economies of scale, implying the natural monopoly (Nauges & Berg, 2007) Also suggested by the findings

in a note of the World Bank which uses data of Africa, Indonesia, Peru, United States and Vietnam, cost per customer in small utilities may be more expensive and merging small ones into a large provider may help to reduce the operating cost (Tynan & Kinngdom, 2005) This adds barriers for the newcomers in the water supply market Consequently, it is widelyobserved that until the 1990s, not many party involved in the water business except governmental authorities

As water sector is natural monopoly, if there is no governmental interventions, the monopolist shall produce at quantity Q1 and sell at price P1, causing the deadweight loss in area ABC(Figure 2.1) To reduce the loss, the government shall control the price If it is set at P2, the quantity supply falls to Q2 leading to no deadweight loss However, the producer already makes loss at output Q2 and will leave the market In this case the government needs to subsidize in order to keep the monopolist operating The optimal output for the society shall be

at point H, quantity Q* and price P* It is no longer necessary to subsidize the producer, but the society still experiences some loss.

Figure 2.1: Natural Monopoly and Deadweight loss

Source: Author’s product adapted from Pindyck & Rubinfeld (1999)

Water supply generates both positive and negative externalities during the life cycle of the water product – extraction, storage, use, and disposal In the first stage, some negative impacts are found in the reduced flushing of floodplains, creation of sulfuric materials, reduced amenity and lost biodiversity (Bueren & MacDonald, 2004)

In the second stage (storage), people and ecosystem are negatively disturbed through constraints in fishing, agriculture and dam habitat In the usage phase, it is, however, positive with domestic use of water These externalities involve better health for users and hence the community With less sickness, people save money and more time to spend on education or generating income As consequences, their well-being increases and that improve theircontribution to the society In the long term, access to drinking water is associated with poverty reduction (Moriaty et al, 2004)

In the last phase of the cycle (disposal), externalities are confined to negative impacts comprising of algal blooms, degraded stream bank vegetation, damaged to the sea grass,

Q 2 C H

Deadweight loss

P

Q

reduced recreation, commercial fishing and amenity (Bueren & MacDonald 2004, pp.4) It also involves wastewater treatment, the treatment cost, environment impacts of effluent on water quality in the rivers.

In urban water supply, as the positive externalities are dominant, the society shall gain some benefits and obtain the inefficiency shown in shape CEF (Figure 2.2) Optimal output for the society is Q3 where the utility charge price P3 It is however far too much loss for the utility that they can hardly survive Subsidy from the government is necessary in order to maintain the operation of the monopolist

Figure 2.2: Positive externalities and Deadweight loss

Source: Author’s product adapted from Pindyck & Rubinfeld (1999)

Spreading positive externalities of drinking water consumption in the society has enforce the will of governments in equal distribution of water among different income groups (Opschoor, 2006) Government’s interventions to fix the market failures in water supply include pricingregulation The government to ensure the right of access to clean water of the population, including vulnerable groups, normally approves the water tariff This is currently the case found in developing and transitional countries (Marin, 2009) The optimal result for the utility without consideration on positive externalities is found at price P* where output level is at Q*,

deadweight loss above zero and no subsidize from the government In another way, it is recovery tariff However, to include the societal benefit, price P3and quantity Q3are required

cost-As commonly observed, the tariffs of state-owned water utilities are under priced This implies

a subsidy to customers that distorts the market incentives Tariff structure is evaluated on four basic criteria, cost recovery, economics efficiency, equity and affordability In reality, water tariff rarely satisfies all four criteria; for example, to ensure the equity and affordability for the poor, tariff must be set in the way that cannot recover cost and achieve economic efficiency (Whitington & Boland, 2002) In accordance with the work of Marin (2009), tariffs tended to increase with the introduction of PPPs, but it is not possible to conclude it as a direct result of private engagement

2.1.2 Government failures in urban water supply:

Government failures refer to the situations where interventions of the government to correct the market failures fail and result in inefficiency or other failures in the future (FETP, 2009).Stiglitz (2000) has pointed out the four main reasons for government failures consisting of limited information, limited control over private market responses, limited control over bureaucracy and limitations imposed by political processes He also mentioned the sources of public sector inefficiency as incentives and restrictions at organizational and individual levels

At organizational level, public enterprises are not motivated by profit, therefore lack the incentive to reach the optimal productivity They face a soft budget constraint and experience

an environment where little competition exists The public enterprises usually deal with political concerns Furthermore, restrictions on personnel – civil service rules make the governmental enterprises difficult in firing incompetent workers or pay them competitive salaries, procurement – costs escalate in an attempt to avoid abuses in the government’s purchase, and budgeting – it is hard to make the long-term budgeting for large capital investments, have made the chance of inefficiency escalating At individual level, besides the absence of incentives for the workers like pay or firing, the public sector also face the principal – agent problems which comprise the pursuit of bureaucratic objectives in an effort

to maximize the size of organization, and high levels of risk aversion

Governments have minimized all the market incentives for running water enterprises and thus enabled the inefficient operation of those utilities Under the regulation of the government, water is usually under-priced to ensure that poor people can afford the connections and governments subsidize to fill in financial gaps In theory, tariff structure in developing countries is designed as increasing block tariff to give cross-subsidy but in reality design is so poor resulting in the failure of cost recovery and economic efficiency objectives (Whitington

& Boland, 2002) Indirectly, the poor is subsidizing the rich and themselves through such mechanism Worse, the water utilities fail to invest in network expansion to poor area which request large investment capital (which they do not have) and bring less income Restrain in profit ratio and subsidization has made water utilities sleep for years and provide unreliable services, making customers unsatisfied It is, however, quite difficult to overcome the political barriers and align the interests of all stakeholders

Governmental inefficiencies imposed in water utilities may shift the cost curves (MC & AC)

of the utility to the right resulting in smaller volume of water produced and higher fee charged

on the customers (see Figure 2.2)

Figure 2.3: Vicious Spiral Performance Declines of Utilities

Source: Baietti et al (2006) cited in Gunatilake & Jose (2007)

2.1.3 Assessment on performance of a water utility

According to Marin (2009), to evaluate the performance of a water utility, it is most reasonable to work on four major dimensions: access, quality of service, operational efficiency, and tariff levels A water utility is analyzed on number of connections made per year, water supply continuity, water losses in production and distribution, bill collection, labor productivity and overall efficiency of specific project However, there are quite some challenges in adapting these criteria in practice such as the ambiguity of performance indicators, the multidimensional nature of performance, the influence of multiple local factors

on operating costs and wide variety of tariff structures

As for Vietnam, it is common to work on a number of criteria proposed by the World Bank(2004) in Benchmarking program for urban water supply utilities Among those, ranking is based on the three main factor including non-revenue water (NRW), number of employees per thousand connections and operational ratio

- Non-revenue water: is the difference between produced (or bought) water and billed

water to customers It is calculated under following formula

%100Pr

r BilledWate r

oducedWate NRW

Non revenue water is made of unbilled water, apparent loss and commercial loss Although there is no standard in such figure, the lower the NRW is the better performance the utility has

- Number of employees/1000 connections: presents the labor productivity, management

efficiency and level of technology applied in the work As observed and recommended by the World Bank (2004), it is considered good in the South East Asia if there are three or fewer employees per one thousand connections

- Operational ratio: is an important factor for performance evaluation, calculated as

Operationa

lExpenses Operationa

lRatio Operationa

Re

An effective utility possesses operational ratio ≤0.7 (WB & VWSA, 2004), which shows that operational expenses are smaller than operational revenue and that helps with reinvestment into the business

2.2 Public – Private Partnerships in urban water supply

2.2.1 Theory on PPP

It is traditional for water utilities to be state-owned until the new trend started in the 1980s where governments wished to reform their urban water supply and sanitation (Marin, 2009) Public- private partnership was utilized with high hope on gaining the comprehensive reform

to more market-oriented, solving the government failures in urban water supply

There are different ways to define the PPP, or privatization as called in some of the researches Although the two terms of PPP, and privatization are used interchangeably, they are slightly different in term of the obligation focus and asset ownership According to the Asian Development Bank,

“PPPs present a framework that - while engaging the private sector - acknowledge and structure the role for government in ensuring that social obligations are met and successful sector reforms and public investments achieved.”

ADB – Public-Private Partnership Handbook, 2008, pp.7.

Meanwhile,

“Privatization involves the sale of shares or ownership in a company or the sale of operating assets or services owned by the public sector”.

ADB – Public-Private Partnership Handbook, 2008, pp.8.

In a research public by the PPIAF, World Bank, the distinction is also described similarly

“Privatization involves the permanent transfer of a previously publicly owned asset to the private sector, whereas a PPP necessarily involves a continuing role for the public sector as a

“partner” in an ongoing relationship with the private sector”.

Farquharson, E et al – How to Engage with Private Sector in Public – Private Partnerships in Emerging Markets, 2011, pp.9.

Within the scope of this thesis, the concept of PPP is similar to “socialization” which has been used to name the private sector engagement in infrastructure in Vietnam (see paragraph 3.1.2); and privatization can be used to explain the so-called “equitization” in the case of Sawaco.PPPs aim at a couple of targets First, it targets to mobilize private finances in order to support the government funding in infrastructure development Second, high expectation is set on the increase of public sector performance’s efficiency or correction of public sector’s failures More expertise, commercial orientation and innovation are believed to be imbedded totransform the SOEs Furthermore, the objectives also cover the reduction of corruption, increase of transparency and accountability in a general effort to improve administration and management system of those SOEs (ADB, 2008).

There are different models of PPP in the water sector varies from the lowest level - service contracts where only operation and maintenance is shared between the public and private to the Divestiture in which private sector executes almost all of the activities (Table 2.1) In the Divestiture form, assets are sold to the private sector The private sector bears all the responsibilities on finance, operation, management and all the risks Privatization or equitization as called in Vietnam is categorized to this arrangement type

The common characteristics of a PPP in general comprise of the shares on operation, investment and finances Risks and benefits are transferred between the public and private The government faces two primary risks regarding private sector participation in the water sector including the potential low quality of services and higher tariff than that of the government In term of the private sector, risks involve commercial, financial, technical, legal and political aspects They may not generate enough profits due to the lower demand than projected, currency devaluation, or affected by the change in policies or reluctant to increase the water tariff from the government (Idelovitch & Ringskog, 1995)

Table 2.1: PPP models in the water sector

Option Setting

performance standards

Asset ownership

Capital investment

Design and build

Operation and maintenance

Commercial risk

Oversight of performance and fees

Duration (years)

service

Concession

contract

Joint venture Public Shared

Public/Private

Shared Public/Private

Shared Public/Private

Shared Public/Private

Shared Public/Private

Public Indefinite

Source: Bradford Gentry, Yale-UND Collaborative Program (1998) cited in Pérard, Eni, & Mattei (2007), table 6, pp 10.

2.2.2 Empirical findings

2.2.2.1 Experience in developed and developing countries

There is a wide range of experience regarding the participation of private sector in the world

In 1984, the United Kingdom processed the initial public offering for British Telecom successfully, and brought the private engagement to a new level, privatization The government privatized the water supply asset instead of only the operation, management and maintenance like France Many other countries have followed the trend with asset ownership staying with the Government (Gunatilake & Jose, 2007)

Another interesting model is observed in the water company Evides in the Netherlands Evides itself is a private water company with shareholders comprising of municipalities The company owns the assets, and finances the investment The service is supervised by the board

of directors who are appointed by the shareholders The water tariff is proposed by the company director and approved by the shareholders or board of directors (Hoffer, 2008) This

is a good combination of working environment, skills and motivation from the private sector and the social targets from the public sector The company shall be encouraged to maximize the performance output with more attention to the social welfare and less pressure from shareholders in term of profits

Regarding the real effects of the PPPs in developing countries, Gunatilake & Jose (2007)presented that the majority of private sector engagement in water supply services did not either create sufficient competition in the market in order to reduce the price and costs or attract a large amount of private finances and increase the coverage However, there are some successful cases providing that preconditions like strong and effective policy and institutional environment, feasibility of metering, adequate willingness to pay, cost recovery tariffs and context-specific measures exist Another study by Gassner, Popov and Pushak (2009) on electricity and water shows some outstanding results in labor productivity and operational efficiency of privatized firms in comparison to comparable SOEs

2.2.2.2 Case Cancún, Mexico

One of the most typical lessons learnt for privatization of water system is the case of Cancún, Mexico (Appendix 1) A private agency, Aguakán, was granted with the concessionaire for the water, sewerage and wastewater treatment systems in Cancún and Isla Mujeres, Benito Juárez, Quintana Roo, Mexico in January 1994 in an attempt to solve the under - performance of the current public agency responsible for the water system, CAPA However, two years after the privatization, the fact that the performance targets and investment commitment in the contract for the 30-year concession was not fulfilled, combining with major disagreement in tariff adjustment has brought both the private and public parties to a confrontation at the court This resulted in the takeover of the water system by state administration In 1997, Aguakán resumed the concessionaire operation in Cancún and Isla Mujeres as a result of significant political pressure from federal government In 1998, the mother corporation of Aguakán, GMD, faced serious financial troubles, and a political scandal happened to the ex-governor of Quintanara Roo In February 1999, the state government recommended GMD to seek association with a “strategic partner” who has sufficient experience In March, GMD signed a partnership contract with Azurix, an affiliate of Enron Corporation, a global energy firm based

in Houston, Texas

Problems were accounted for an uncompetitive and non-transparent bidding procedure, the lack of sound and specific regulations in the concession contract Furthermore, the regulatory agency, CAPA, failed to perform the management and control of the concessionaire operation The tariff was not raised because no performance improvement was observed and external factor like financial recession in Mexico exists This has blocked the sources for infrastructure investment Such a combination of internal and external influences has prevented the private sector involvement in the water sector of Cancún from optimal results This lesson should be learnt by the water utilities before privatization

2.2.2.3 Case Manila, the Philippines

In the region, the most impressive case is Manila concessions, the Philippines In 1997, two concessions were signed for water supply system in two parts of Manila city Manila Water

Company, Inc (formed by Ayala Corporation, United Utilities -United Kingdom, and Bechtel Corporation -United States) won the contract for the East of the city, serving a population of around 4 million people Maynilad Water Services, Inc (formed by Benpres Holdings of the Lopez Group of the Companies and Lyonnaise des Eaux-France) was awarded with the West concession well – developed zone of 7 million people Two companies gained different results after the first 5 years In 2003, Manila Water’s work was very profitable and many new connections were made On the contrary, Maynilad Water went bankrupt and the concession was reclaimed by the government for a rebid in 2007 Lessons learnt are summarized as extra efforts to NRW reduction, engaging the poor in the agenda, conservation and public education, transparent corporate governance (ADB and NUS, 2012).6

2.2.2.4 Experience in Vietnam

There are some successful attempts to incorporate the private sector into water sector in Vietnam Remarkable achievements in Vietnam are found in the Ba Ria – Vung Tau Water supply Joint Stock Company, and Lim Town water supply system

Ba Ria – Vung Tau Water Supply Company was transformed into One Member Liability Company in 2005 and equitized in 2007 The government currently holds 54.94% of the shares in the company According to the ranking in benchmarking 2004 -2007, Ba Ria – Vung Tau was in the first place in group A (companies with water sale > 20 million m3/year) with operational ratio of 0.5, NRW 15%, 4.1 employees/1000 connections and coverage of 99% in

2007 This is an excellent background for the privatization in 2007 as the need of investment becomes minimal and pre-conditions for success were observed Ba Ria – Vung Tau also embraced strong support from the municipality As a result, they managed to maintain the first place in the benchmarking 2007-2009 with even better figures including operational ratio of 0.44, NRW 12% and 3.4 employees/1000 connections Reasons for success comprises of the

6 A complete case was described in Chapter VI, pp 103 – 132, Good Practice in Urban Water Management, ADB and NUS 2012.

good preparation from the utility, strong support of the local authorities and favorable customer groups (a large part of clients is industries).7

The water supply system in Lim Town, Bac Ninh province followed Design-Bid-Lease model with technical assistance of the PPIAF and funds from Swiss Agency for Development and Cooperation The project commenced on 2004 as the pilot of the World Bank in engaging the private entities to the water sector in Vietnam The asset owner of the system is Bac Ninh Water Supply Company Tuan Duc Company won the bid for design, construction and operation for 10 years The system was expected to serve 10,900 people in 2006 and 14,958 people in 2025 Factors for success are listed as strong support from the Government, highinvolvement of the contractor from the beginning, high demand on water of the local citizens and willingness to pay for the service However, the asset owner lacks the incentive for much support to operators and the 10-year period is quite short to build commitment of the operator (HIDS, 2012)

As for production, some BOO and BOT water treatment plants were built In HCMC there are BOT Binh AnBOO Thu Duc, BOT Tan Hiep and BOO Kinh Dong It is too early for conclusion on the success of these plants But at the present, they are working at the maximum

of their capacity and making profits Therefore it is safe to say that production might be a potential field for the private sector involvement

2.3 Research method

Methodology applied is a case study on Sawaco equitization Data is collected from various sources such as reports of Sawaco parent company and its affiliates, reports of development agencies like the Asian Development Bank and the World Bank Furthermore, interviews with water experts from Sawaco and others are incorporated as part of the research

Water sector market failure and government failure play the key role in shaping the theoretical background for the study The study will evaluate the result of private sector involvement in the water supply of HCMC for four stakeholders including Sawaco parent company, JSCs,

7 Information collected from the company website http://www.bwaco.com.vn/ , annual reports 2010 and 2012, benchmarking 2004 – 2007 and 2008 – 2009.

Customers and the People’s Committee of HCMC For Sawaco parent company, it is intended

to evaluate if the three targets of PPP consisting of private funding mobilization, performance improvement and new technology are seen in Sawaco Assessment on Sawaco performance before and after the equitization uses criteria suggested by the World Bank in Benchmarking program for urban water supply utilities in Vietnam, combining with other specific analysis With regards to the remaining three stakeholders, context-specific criteria are adopted

Figure 2.4: Thesis analysis structure

Case study of Sawaco

Sawaco parent company

- Benchmarking criteria for operational performance evaluation

- Context - specific criteria for financial situation and technology innovation evaluation

Chapter 3: WATER SUPPLY IN HO CHI MINH CITY

3.1 Overview on water supply activity in Ho Chi Minh City

There are three main stages in

transmission/distribution and sales

deliver a small proportion of water service

to Saigon Water Corporation (Sawaco)

is 28.9% of the total (HIDS, 2012)

network is categorized in two groups, transmission network owned by Sawaco and distribution network owned by water supply (WS) joint stock companies (JSCs)

WS JSCs and one member limited liability companies (

Sawaco (see Paragraph 4.1)

water from Sawaco and sell to their customers through a small network invested from their finances (Figure 3.1) However, such networks only exist in small residential areas, industrial zones and processing zones

wells and water system scattering in the city

Chapter 3: WATER SUPPLY IN HO CHI MINH CITY

Overview on water supply activity in Ho Chi Minh City

There are three main stages in HCMC urban water supply including production,

and sales to customers Private enterprises and individual sellers deliver a small proportion of water service Majority of the water produced in the city belongs igon Water Corporation (Sawaco) The percentage of water produced by the private firms

(HIDS, 2012) In the second stage, water enters the pipeline network is categorized in two groups, transmission network owned by Sawaco and distribution network owned by water supply (WS) joint stock companies (JSCs) Sales are perf

ember limited liability companies (One Member LLC) aragraph 4.1) There are also fifty-five big customers who purchase water from Sawaco and sell to their customers through a small network invested from their

However, such networks only exist in small residential areas, industrial zones and processing zones (HIDS, 2012) Besides, it is also noted with unregistered drilled wells and water system scattering in the city Nevertheless, there is no data available on these

Figure 3.1: Urban Water Supply in HCMC

•JSCs

•Private firms:

6%

Transmi -ssion /distribu -tion

urban water supply including production,

rprises and individual sellers Majority of the water produced in the city belongs

water produced by the private firms enters the pipeline network The network is categorized in two groups, transmission network owned by Sawaco and distribution

Sales are performed by ember LLC) wholly owned by five big customers who purchase wholesalewater from Sawaco and sell to their customers through a small network invested from their

However, such networks only exist in small residential areas, industrial

Besides, it is also noted with unregistered drilled

ta available on these

Sawaco was established in 1874 and known as HCMC Water Supply Company The water

/day It went through a restructuring in 2005 and became a

/day In the city outskirt, the

Sawaco: 94%

•One member LLC Sawaco

•JSCs Private firms:

6%

Agriculture and Rural Development Department of HCMC has been carrying out a program

on Rural Water Supply which aims to get 95% of the population in rural areas with access todrinking water in the period of 2006-2010 (SNN&PTNN, 2010)

Around 69% of the water produced in the city is supplied for domestic use, 9% for administrative, 7% for industries and 15% for services Water goes into a network of approximately 3,800 kilometers of pipes with diameters larger than Φ100 The network is made of different kinds of material and years of age The majority of the old central area population, 93%, is connected to the network, while only 57% of the population in the newly formed urban districts has connection The percentage declines to 22.6% for outskirt area of HCM (HIDS, 2012)

According to the Water Supply Planning of HCMC to 2025 approved by the Prime Minister of Vietnam, it aims to provide access to tap water to the entire population, supply a person with

200 liters of water per day (compared to 120 liters/person/day currently), and reduce NRW to lower than 30% It is also necessary to install large pipelines with total length of 330 – 350 km Water treatment plants shall be upgraded to serve the increasing demand from the population

3.2 Problems of water supply in Ho Chi Minh City

The city water supply performed by Sawaco has been facing several problems which are also the common and long lasting issues of water supply in developing and transition countries.First, Sawaco has the large amount of water loss Although there have been some remarkable efforts to reduce the NRW, it is remained at around 40% for years since 2004 (see table 4.3) This results in consequences in increasing water cost despite the reducing expenses on depreciation If the NRW is maintained at such a high level, increasing water production capacity and performance efficiency will not be as much useful in reducing water cost and improving the financial situation of the company

Second, Sawaco is struggling to arrange the finance for network operation and expansion in an effort to supply water to all residents in HCMC (Block et al, 2010) The company is under pressure on increasing the drinking water coverage in the city as stated in the Urban Water

Planning decision for HCMC to 2015, 2020 and the latest to 2025 However, high NRW and low efficient operating system are contributing to hampering the finance that is necessary for target achievement of Sawaco

Last, Sawaco is judged by some water experts8to be lacked of effective management system

in order to smoothen the company’s operation The whole organization is large and layered with complicated hierarchy This not only affects the effective realization of water supply tasks but also the productivity of staff

3.3 Public policy in water supply sector

3.3.1 General management and guidelines

The water sector strategy in Vietnam stays with the Central Government whereas the realization of the strategy is implemented by the provincial/city authorities Water utilities work under the supervision and guidance of the local governmental bodies Sawaco after the restructuring in 2005 directly reports to the People’s Committee instead of the HCMC Department of Construction like in the previous time

To help with formulating the general guidelines for water utilities in Vietnam, Decree 117/2007/ND-CP dated 11 July 2007 was issued It refers to the drinking water production and supply regulations The decree states clearly that water supply is the kind of business working under supervision of the local authority to ensure rights of the supplier and customers, with special attention to the poor Third parties are encouraged to invest in the water business Furthermore, connection fee charged to the water companies instead of customers like in previous period has emphasized the importance of significant capital and full cost recovery tariff This can be seen as the push for attracting private sector participation in the water sector

3.3.2 Water tariff in Ho Chi Minh City

Framework for water tariff system in HCMC in particular and Vietnam in general is defined in chapter V of Decree 117 Based on the decree, the city People’s Committee shall approve the

8 Interviewed on 27 October 2012.

tariff proposal from Sawaco.

monopoly power of the water utility

In HCMC, the tariff had remained unchanged between the year 2005 and 2009 This implies a subsidy from government to JS

supplied water at a smaller amount than

on cost recovery tariff as vital factor for water companies, average tariff was approved to go from 4,630 VND/m3 in 2009 to 6,714 VND/m

2013 With this adjustment, cost recovery is not possible in the first two years 2010 and 2011 However, the increase in 2012 and 2013 shall be large enough to cover the cost an

compensate for the loss in 2010 and 2011

Figure 3.2

Source: Document no 12771/STC

Finance to HCM People’s Committee regarding drinking water proposal f

It can be seen that within 4 years before and after the equitization Sawaco parent company made loss due to the under

the costs In addition, since the decree 117/2007/ND

Vietnam have been required to pay for the connection fee for households which means they need to reserve quite significant finance for new connections every year The two factors make

on cost recovery tariff as vital factor for water companies, average tariff was approved to go

in 2009 to 6,714 VND/m3 in 2011 and increase 10% every year until

2013 With this adjustment, cost recovery is not possible in the first two years 2010 and 2011 However, the increase in 2012 and 2013 shall be large enough to cover the cost an

compensate for the loss in 2010 and 2011

Figure 3.2: Average Water Tariff of HCMC 2009 – 2013

: Document no 12771/STC-BVG dated 24 December 2009 from HCM Department of Finance to HCM People’s Committee regarding drinking water proposal f

It can be seen that within 4 years before and after the equitization Sawaco parent company made loss due to the under-priced tariff Consequently, the tariff had to be risen to help with the costs In addition, since the decree 117/2007/ND-CP was passed on, the water utilities in Vietnam have been required to pay for the connection fee for households which means they need to reserve quite significant finance for new connections every year The two factors make

Year

It is the intervention of the government in order to control the

had remained unchanged between the year 2005 and 2009 This implies a

The water company After lengthy discussion

on cost recovery tariff as vital factor for water companies, average tariff was approved to go

in 2011 and increase 10% every year until

2013 With this adjustment, cost recovery is not possible in the first two years 2010 and 2011 However, the increase in 2012 and 2013 shall be large enough to cover the cost and even

2013

BVG dated 24 December 2009 from HCM Department of Finance to HCM People’s Committee regarding drinking water proposal for 2010-2013

It can be seen that within 4 years before and after the equitization Sawaco parent company

priced tariff Consequently, the tariff had to be risen to help with

was passed on, the water utilities in Vietnam have been required to pay for the connection fee for households which means they need to reserve quite significant finance for new connections every year The two factors make

Average tariff including VAT (VND/m3) Water cost (VND/m3) Tariff for domestic consumption ≤ 4m3/person/month

it irresistible for HCMC to put up the water tariff The same has been observed in other water utilities in Vietnam It is expected to have the tariff reduced with involvement of the private sector However, in this case it is not cost recovery yet Therefore, it cannot be concluded thatthe water tariff in HCMC was influenced by the equitization Nevertheless, it is obviously a good condition to attract private engagement in the water sector.

As for evaluation of the new tariff, it is quite affordable for the households in HCMC For a household of four people, they will pay around VND 20,000 in 2008 and 30,000 in 2010 for water bills per month which accounts for only 0.21% and 0.25% of their monthly income respectively.9 A percentage of 2% – 3% of water payment in total income is reasonable(United Nation, 2012) However, the first block of domestic consumption of 4m3/person/month (133 liters/person/day) is slightly too much for consumption in a transition country like Vietnam Usually a person uses minimum 50 liters of water for cooking, drinking, sanitation and shower per day In developed countries, the amount of water for the same tasks varies widely from 104 liters in the Netherlands to 300 liters in the USA The consumption for

a developing/transition country is between 50 and 100 liters per person per day (Pacific Institute, 2012) It means the cross subsidized target in such an increasing block tariff cannot

be maximized and somehow the poor and the rich are paying the same Furthermore, in areas like districts Thu Duc, 9 and 12 there is a tendency that several poor households share one connection and therefore pay at higher unit prices

3.3 Policy framework for private engagement in HCMC water supply

In accordance with the trend of PPP in Vietnam, the government has established some kinds of regulations but yet to meet the demand on a sound and strong legal background for an effective business environment (ADB, 2013) There is somehow no general guideline but tailor made regulations for PPP investments Below are some regulations directly affecting the equitization of Sawaco’s six distribution branches

9 According to the household living standards survey 2010, a person in HCMC earns in average 2,191,700 VND and 2,737,000 VND per month in 2008 and 2010 respectively (GSO 2011, pp.247).

In 2005, the People’s Committee of HCMC issued the decision 141/2005/QD-UBND instructing the socialization of water services in HCMC It aims to attract private sector to involve in the water business Although there are some benefits for investors, the tariff stayed

in hand of the government Major purposes of the city authority in the so-called “socialization

of the water services in HCMC” stated as: encourage the participation of different economic sectors in water supply services to invest in water source development, network expansion, NRW reduction and service quality improvement in accordance with the strategy, and planning of HCMC It is however yet to elaborate clearly the scope of responsibilities In addition, some of the provisions are out of date and no longer fit in the new policy from the government.10

In 2007, the Government of Vietnam conducted a list of SOEs to be equitized with more than 50% of shares staying with the government in the decision 38/2007/QD-TTg and 109/2007/ND-CP Water utilities were included in the list However, no governmental regulations regarding the private sector engagement existed at that time

Decree 108/2009/ND-CP on investment in the form of BOT, BTO or BT contract and decision 71/2010/QD-TTg promulgating the regulation on pilot investment in the public-private partnership form came to force to support the management of private participation in public utilities It is however, issued after the suspension of Sawaco equitization in 2009

10 In the decision 141/2005/QD-UBND the investors have some benefits in land use fee if investing to water supply system in Nha Be, Can Gio while all investors are exempted from such fee in accordance with decree 117/2007/ND-CP

Chapter 4: PRIVATE ENGAGEMENT IN SAIGON WATER CORPORATION

4.1 Sawaco’s history and existing situation

The three main activities of Sawaco include water production, transmission/distribution and sales to customers To help with the tasks, there are eight independent water supply (WS) joint stock companies (JSCs), two WS one member limited liability companies (One Member LLCs), three member companies, two water treatment plants (WTPs) and a couple of departments (Figure 4.1) They were all once the subsidiaries of Sawaco and transformed under the guidance of the city People’s Committee The JSCs may issue shares and sell them whereas the One Member LLCs are wholly owned by Sawaco and may not issue shares.11Sawaco supplies the majority of water in HCMC The majority of raw water is treated at two surface water treatment plants namely Thu Duc and Tan Hiep, BOT Binh An WTP (from 1999) and BOO Thu Duc WTP (from 2010) Thu Duc and Tan Hiep WTPs belong to Sawaco, and work not only as water production but also as network regulators BOT Binh An was constructed by Binh An Water Supply of Malaysia, selling bulk water to Sawaco BOO Thu Duc belongs to Thu Duc Water JSC and works with capacity of 300,000 m3/day from which it supplies 22% of water for Sawaco

Treated water enters the pipeline network which is categorized into primary network (class I) with Φ≥600mm pipelines, secondary network (class II) with 350<Φ<600mm pipelines and tertiary network (class III) with 100≤≤350 mm pipelines The Water Transmission Enterprise of Sawaco manages and operates the primary (120,350 meters) and secondary networks (228,215 meters)

Six WS joint stock companies (former Sawaco subsidiaries) and two WS one member limited liability companies (Tan Hoa and Trung An) operate and maintain the tertiary pipelines and service connections JSCs are responsible for expanding the distribution network in their management areas while Sawaco is responsible for the same tasks in the other two One

11 In the Aricle 63 of Vietnam Enterprise Law 2005 explains that one member limited liability company is an enterprise owned by an individual or an organization The company owner is liable for the company debts and other obligations within the registered capital of the company