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

i CERTIFICATION 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 ii ACKNOWLEDGEMENTS 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 iii ABSTRACT 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-income group 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 iv 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 v CONTENTS CERTIFICATION i ACKNOWLEDGEMENTS ii ABSTRACT iii CONTENTS v ABBREVIATIONS vii LIST OF TABLES viii LIST OF FIGURES viii Chapter 1: INTRODUCTION 1.1 Problem statement 1.2 Research objective 1.3 Research questions 1.4 Research structure Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY .4 2.1 Water is special goods: 2.1.1 Nature of the water product and market failures in water supply: 2.1.2 Government failures in urban water supply: 2.1.3 Assessment on performance of a water utility 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 vi 3.3 Public policy in water supply sector 3.3.1 General management and guidelines 3.3.2 Water tariff in Ho Chi Minh City 3.3 Policy framework for private engagement in HCMC water supply Chapter 4: PRIVATE ENGAGEMENT IN SAIGON WATER CORPORATION 4.1 Sawaco’s history and existing situation 4.2 Equitization and impact on governmental performance 4.2.1 Sawaco parent company operation 4.2.1.1 Operational figures of Sawaco 4.2.1.2 Financial situation 4.2.1.3 Technology innovation 4.2.2 Impact of the equitization on HCMC People’s Com 4.3 Equitization and joint stock companies’ performance 4.4 Impact of the equitization on customers of the water services Chapter 5: THE RIGHT PATH FOR URBAN WATER SUPPLY IN VIETNAM 5.1 Major findings 5.2 Policy implication and recommendation 5.2.1 Recommendation for Sawaco 5.2.2 Other recommendations 5.3 Study limitation and avenues of further research REFERENCE Appendix 1: WATER SYSTEM PRIVATIZATION IN CANCÚN, MEXICO Appendix 2: NETWORK MANAGEMENT AT JSCs IN HO CHI MINH CITY Appendix 3: OPERATIONAL RESULT OF JSCs AFTER 2007 Appendix 4: SHARE OWNERSHIP IN JSCs Appendix 5: PRIVATE SECTOR PARTICIPATION IN WATER SUPPLY AND SANITATION: LESSONS LEARNED AND GUIDELINES FOR PUTTING LESSONS TO PRACTICE vii ABBREVIATIONS ADB Asian Development Bank HCMC Ho Chi Minh City HH Household JSCs Joint Stock Companies NRW Non-revenue water One Member LLC One Member Limited Liability Company PPI Private Participation in Infrastructure PPIAF Public – Private Infrastructure Advisory Facility PPP Public Private Partnership Sawaco Saigon Water Corporation SOE State-owned Enterprise WB The World Bank WS Water Supply WTP Water Treatment Plant viii 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 Figure 2.2: Positive externalities and Deadweight loss Figure 2.3: Vicious Spiral Performance Declines of Utilities 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 Chapter 1: INTRODUCTION 1.1 Problem statement Following the trend on Public-Private Partnerships (PPPs) for infrastructure, Saigon Water Corporation (Sawaco) was equitized under the issuance of decision 131/2005/QD-TTg dated 02 June 2005 by the Prime Minister and Decision 141/2005/QD-UBND instructing the socialization of water services in HCMC Sawaco who was the front-runner among water utilities in Vietnam piloted the equitization of six out of eight branches The results, however, have yet to meet the expectation, and problems arose in network management and development activities 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 As assessed by the Southeast Asia Water Utility Network, there are some successful 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 water produced 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), Trung Son area (Binh Chanh district), the Non4 Revenue Water (NRW) project and Contract for management and leakage reduction based on performance (HIDS, 2012) 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 Water is bought from Nha Be water supply company – a privatized branch of Sawaco Water is bought from Cho Lon water supply company – a privatized branch of Sawaco 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 This contract was signed with Manila water for zone 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 1.2 Research objective This study analyzes the branches’ equitization of Sawaco in order to draw a picture on lessons learnt from Sawaco for future PPP activities in Vietnam’s urban water supply It aims find out if private sector engagement solves the primary troubles of water sector like lack of finance, low effectiveness, etc Moreover, the study also scans examples of successful PPP for urban water supply in similar areas As this case is one remarkable sample of privatization, it shall be useful for other water utilities to know what the flaws are and how to deal with them 1.3 Research questions This study aims to answer the following questions: Does private participation help to solve major problems in the urban water sector in HCMC? How does private engagement influence Sawaco and the city water supply? 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, 44 Công ty Cổ Phần Cấp Nước Thủ Đức (2012), Báo Cáo Tài Chính 2011, retrieved from http://www.capnuocthuduc.vn/doc_viewer.aspx? fileName=/upload/document/Baocaot huongnien.pdf FETP (2009), Thất Bại Của Nhà Nước 10 Lê Xuân Thuyên, & Nguyễn Việt Quốc (2012), Quan Trắc Lún Nông Nguồn Dữ Liệu Bổ Sung cho Đánh Giá Tốc Độ Nước Biển Dâng Ngập Thực Tế Phạm Vi Địa Phương 11 Pindyck, R.S & Rubinfeld D L (1999), Kinh Tế Học Vi Mô, Trường Đại Học Kinh Tế Quốc Dân, NXB Thống Kê, Hà Nội 12 Thu Hong (2012) Chật Vật Phát Triển Mạng Lưới Cấp Nước Nguoi Lao Dong, pp 4–5, retrieved from http://nld.com.vn/20120411095811780p0c1002/chatvat-phat-trien-mang-luoi-cap-nuoc.htm 13 Tổng Cục Thống Kê (GSO) (2011), Kết Quả Khảo Sát Mức Sống Dân Cư Năm 2010, Nhà Xuất Bản Thống Kê 14 Tờ trình số 12771/STC-BVG ngày 24 tháng 12 năm 2009 từ Sở Tài Chính gởi Ủy Ban Nhân Dân TP HCM phương án giá nước theo lộ trình 2010 – 2013 15 Viện Nghiên Cứu Đô Thị Phát Triển Hạ Tầng (2011), Tham Vấn PPP: Kinh nghiệm quốc tế Thực tiễn Viêt Nam, Tổng Hội Xây Dựng Việt Nam 16 Viện Nghiên Cứu Phát Triển Thành Phố Hồ Chí Minh (HIDS) (2012), Cơ Chế Chính Sách Thu Hút Thành Phần Kinh Tế Tham Gia Dịch Vụ Cấp Nước Sạch Ở Tp HCM (Tài liệu báo cáo nghiệm thu – khơng thức) 17 Vũ Kim Quyến Phạm Sỹ Liêm (2009), Sự Tham Gia Tư Nhân Ngành Nước Vệ Sinh Viêt Nam, Lào Campuchia, Seawun 18 Viêt VWSA & WSP/WB (2008), Nghiên cứu Benchmarking Ngành Nước Đô Thị Nam, giai đoạn 2004 – 2007 45 19 Viêt VWSA & WSP/WB (2011), Nghiên cứu Benchmarking Ngành Nước Đô Thị Nam, giai đoạn 2008 – 2009 English 20 ADB (2008), Public-Private Partnership Handbook 21 ADB (2013), Sector Assessment (Summary): Public - Private Partnerships (pp 1–6), retrieved from http://www.adb.org/sites/default/files/44507-002-vie-ssa.pdf 22 ADB & NUS (2012), Good Practices in Urban Water Management, retrieved from http://seawun.org/uploads/reports/good-practices-urban-water-management.pdf 23 Block, J., Joel, R., & Walker, I et al (2010), TA 7091-VIE: HCM City Water Supply Project Volume 1: Final Feasibility Study Report (Vol 1), retrieved from http://www2.adb.org/Documents/RRPs/VIE/41456/41456-01-vie-oth-03.pdf 24 Bueren, M Van, & MacDonald, D H (2004), Addressing water-related externalities : Issues for consideration 25 Cat Tri (2006), Water Supply Industry to Be Equitized Saigon Giai Phong, pp 4–5, retrieved from http://www.saigongpdaily.com.vn/Business/Stock_Market/2006/3/46956/ 26 Danilenko, A., & Van den Berg, C (2010), The IBNET Water Supply and Sanitation Performance Blue Book, World Bank, doi:10.1596/978-0-8213-8582-1 27 Gunatilake, H., & Jose, M J F C.-S (2007), Privatization Revisited : Lessons from Private Sector Participation in Water Supply and Sanitation in Developing Countries, retrieved http://www.adb.org/sites/default/files/pub/2008/Wp115.pdf 28 Form Hoffer, J (2008), Presentation for Dawaco on Water Utility Institutional from 29 Idelovitch, E., & Ringskog, K (1995), Private Sector Participation in Water Supply and Sanitation in Latin America, World Bank Publications, doi:10.1596/08213-3219-8 46 30 Jooste, S F (2008), Comparing Institutional Forms for Urban Water Supply, Collaboratory for Research on Global Projects, Standford University, retrived from http://crgp.stanford.edu/publications/working_papers/S_Jooste_Inst_Forms_Urban_W ater_WP0038.pdf 31 Kessides, I N (2004), Reforming Infrastruture: Privatization, Regulation, and Competition, retrieved from http://www.rrojasdatabank.info/refor04/complete.pdf 32 Marin, P (2009), Public-Private Partnerships for Urban Water Utilities, World Bank, doi:10.1596/978-0-8213-7956-1 33 Moriarty, P., Butterworth, J & Koppen, B van (2004), Beyond Domestic: Case Studies on Poverty and Productive Uses of Water at the Household Level, IRC International Water and Sanitation Center, Delft, the Netherlands 34 Nauges, C., & Berg, C van den (2007), How “Natural” are Monopolies in the Water Supply and Sewerage Sector? Case Studies from Developing and Transition Economies, doi:10.1596/1813-9450-4137 35 Opschoor, J B H (2006), Water and Merit Goods International Environmental Agreements: Politics, Law and Economics, 6(4), 423–428, doi:10.1007/s10784-006-9018-y 36 Pacific Institute (2012), Water Fact Sheet Looks at Threats , Trends , Solutions Facts on the World ’ s Water, retrieved from http://www.pacinst.org/reports/water_fact_sheet/ 37 Pérard, E., Eni, F., & Mattei, E (2007), Private Sector Participation and Regulatory Reform in Water Supply: The Middle East and North African ( MEDA ) Experience, 1–47 38 Stiglitz, J E (2000), Economics of the Public Sector, Third Edition, Norton & Company, Inc, United States 47 39 Tynan, N., & Kinngdom, B (2005), Otipmal Size for Utilities? Returns to Scale in Water: Evidence from Benchmarking, retrieved from http://rru.worldbank.org/documents/publicpolicyjournal/283tynan.pdf 40 United Nation (2012), United Nations Global Issues - Water, retrieved from http://www.un.org/en/globalissues/water/ 41 VEI (2010), USP-Sawaco - Completion Report, Ho Chi Minh city, Vietnam 42 VEI (2008), Sawaco Institutional Arrangement, Ho Chi Minh city, Vietnam 43 Asia: Whitington, D., & Boland, J (2002), Water Tariffs and Subsidies in South Understanding the Basics Washington, D.C, retrieved from http://web.mit.edu/urbanupgrading/waterandsanitation/resources/pdf-files/WaterTariff1.pdf Interviews: Interviews with one former manager of Sawaco on 27 October 2012 on equitization process of Sawaco, November 2012 on details of the problems after equization and points of contact for further information, March 2013 and 10 March 2013 on discussions of the solutions for equitization Interviews with one current officer of Sawaco on November 2012 and March 2013 on operation of Sawaco and problems of equization process in Sawaco Interviews with Sawaco Utility Support Program resident project manager on November 2012 on Sawaco’s equitization process and recommendations of the USP 48 Appendix 1: WATER SYSTEM PRIVATIZATION IN CANCÚN, MEXICO (This Appendix is a summary from the Case “Cancún, Mexico: Water System Privatization” written by Gustavo Merino-Juárez and Carolina Gutiérrez de Taliercio, Case Program CR1400-1593.0 and CR14-00-1593.1, Kennedy School of Government.) The water, sewerage and wastewater treatment systems in Cancún and Isla Mujeres, Benito Juárez, Quintana Roo, Mexico were took over by Aguakán, a subsidiary of the construction conglomerate Grupo Mexicano de Desarrollo (Mexican Development Group, GMD) in January 1994 through a concessionaire which is the first comprehensive concession in the water and sewerage sector in Mexico This was an attempt to solve the under - performance of the current public agency responsible for the water system, the Drinking Water and Sewerage Commission (CAPA) The 30-year concession was granted to Desarrollos Hidráulicos de Cancún, S.A (DHC) who is part of GMD only four months after the privatization thought of the government There was no public bidding and the concession contract was rather general guidelines than specific rules Some of the regulations of the concessionaire, including detailed rules for regulatory units and dispute solutions, were said to be described in the annexes which were never signed or written Such a composition was excused by the insufficient level of information about the system and its future needs The contract, however, set out guidelines for concession rights, coverage and investment, operating and commercial efficiency, tariffs, and regulation CAPA remained to be the regulatory agency that reviewed tariff and monitored the performance of the concessionaire CAPA did not transform its internal structure to fit in the new role and meanwhile continued as the operator or water and sewerage systems in other municipalities in Quintana Roo After Aguakán started the take-over, the number of new connections to the water service increased to 13% per year in comparison to 9.3% when staying with CAPA Some other improvements were seen in sewerage service connection in urban zone of Cancun, 30% in 1993 to 37%, the availability of water for at least ten hours per day 49 However, in December 1994, there was the worst economic recession in decades in Mexico DHC could not get the loans from banks for investing to the infrastructure of the water system In addition, GMD was affected by the crisis, falling down in revenue that significantly lessened the ability to fulfill its commitments to DHC and consequently, Aguakán The alternative financial resource, tariff also did not work CAPA rejected to increase the tariff as long as investments and efficiency was met, leading to the major disagreement between CAPA and the concessionaire In 1995, Aguakán charged more to the hotels to cross subsidized for the other categories but faced the strong oppose of the hotels They refused to pay water bills between May and September, knowing that Aguakán was not allowed to suspend services for non-payment or late payment by the state law By the end of 1995, Aguakán had failed to meet targets for investment and efficiency in the concession contract The local authorities and private companies felt that GMD was motivated by the construction possibilities of the concession rather than the water system operation; and that Aguakán made profits in spite of problematic billing and collection The population complained about bureaucratic performance, and inconvenience of unfinished construction They were concerned about political interests regarding the concessionaire All of these had led to court confrontation of parties In 1996, Aguakán was brought to court and it resulted in the retake of company’s operation by the state administration In 1997 Aguakán resumed the concessionaire operation in Cancún and Isla Mujeres as a result of significant political pressure from federal government The concession contract was slightly adjusted in the target year (extended to 2000 rather than 1996 for water and 1998 for sewerage as original) CAPA was still the regulator and drafted a state law on tariffs, service provisions and system regulation However, in 1998 GMD faced serious financial troubles and a political scandal happened with the ex-governor of Quintanara Roo In February 1999, the state government recommended GMD to seek association with a “strategic partner” with sufficient experience In March, GMD signed a partnership contract with Azurix, an affiliate of Enron Corporation, a global energy firm based in Houston, Texas 50 Appendix 2: NETWORK MANAGEMENT AT JSCs IN HO CHI MINH CITY Source: Block et al (2010), table 2-3, pp.17 51 Appendix 3: OPERATIONAL RESULT OF JSCs AFTER 2007 Criteria Water supplied Total connections Percentage of hh with connection Total revenue Total accounting profit before tax Profit after tax Dividend Gia Dinh Water Supply JSC Water supplied Total connections Percentage of hh with connection Total revenue Total accounting profit before tax Profit after tax Dividend Water supplied Total connections Percentage of hh with connection 52 Total revenue Total accounting profit before tax Profit after tax Dividend Water supplied Total connections Percentage of hh with connection Total revenue Total accounting profit before tax Profit after tax Dividend Water supplied Total connections Percentage of hh with connection Total revenue Total accounting profit before tax Profit after tax Dividend 53 Water supplied Total connections Percentage of hh with connection Total revenue Total accounting profit before tax Profit after tax Dividend Source: Annual reports 2008, 2009, 2010 and 2011 of JSCs 54 Appendix 4: SHARE OWNERSHIP IN JSCs JSCs Ben Thanh Cho Lon Gia Dinh Nha Be Phu Hoa Tan Thu Duc Source: Annual reports 2011 of JSCs 55 Appendix 5: PRIVATE SECTOR PARTICIPATION IN WATER SUPPLY AND SANITATION: LESSONS LEARNED AND GUIDELINES FOR PUTTING LESSONS TO PRACTICE Lessons learned: Sufficient forethought, analytical work and public consultation are missed in privatization process in developing economies and that leads to the majority of failure Motivation of the government sometimes comes from the need to meet conditions for aid and debt relief rather than the merit of the reform Developing countries’ institutions in the capital market (ex: banks, stock exchanges, venture capitalists and others, a well functioning legal system and conventional standards of business behavior) are not well developed as those of developed economies This limits the business activities of the private sector as well as the supervision of the government on private sector performance The lack of competition in the market plays a more important role in defining the performance of the private sector than the ownership structure change Putting lessons to practice: General guide in engaging the private entities in the water sector comprises of the following steps: Conduct participatory assessments and rigorous demand analysis Examine the existence of an investor-friendly business, policy, and institutional environment Study pro-poor service delivery options Use a gradual and stepwise approach Broaden the information base on risks Establish an effective regulatory body 56 Tariff reforms Good relations between the governments and private operators Consider alternative reforms in the sector There is no blueprint for introducing the private sector to water supply It is necessary to analyze the context (culture, political structure, legal and regulatory framework of the localities) in order to develop the right reform Source: Gunatilake & Jose (2007) ... recommendations Source: Author 18 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 HCMC urban water supply inc luding... 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... 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