Privatisation of water supply for efficient service delivery in Nigeria

Transcription

1 Privatisation of water supply for efficient service delivery in Nigeria J. A. Adelegan Departent of Civil Engineering, University of Ibadan, Ibadan, Oyo State, Nigeria. Abstract Over the years Governent has ade appreciable investent towards developent and anageent of water for irrigation, drinking water and to a lesser extent recreation. For certain reasons, the deand for safe drinking water supply service continues to overwhel the delivery. It is against this background that the study siulates the privatisation of water supply in Nigeria with a view to iprove and expand the delivery and coverage of water services, increase the efficiency of operation and transfer of financial responsibility in the provision of water services to the private sector while allowing the a fair rate of return. The study saple cover ten Nigerian urban and sei-urban centers. Data for the study was largely obtained fro the IBRD funded project. The Discounted Cash Flow (DCF) Principles including the Net Present Value ethod, the Internal Rate of Return ethod and the Discounted Pay back Period ethod constitute our ajor odel for the study. Data analysis using coputer techniques (spreadsheet applications) gave a ean net present value, NPVK of U.S $ , a ean internal rate of return, IRR of 28.35% and a ean discounted payback period, PBP of 4 years signiffig that the return on investent in the Nigerian water supply sector is high enough to attract a private sector participant. Our results also indicates that ore of Nigerian citizenry would have access to potable water with increase in per capita per day water consuption through private sector participant.

2 1 Introduction Infrastructure fors the sinews of developent. Efficient and adequate water supply underpin a copetitive econoy and iprove peoples health. Services such as water and sanitation -often called hard infrastructure are vital for econoic growth and contribute directly to poverty reduction (DBSA [1]). No region in the world is in greater need of new investent and ore efficient operation of its infrastructure than Sub-saharan Africa. Sub-saharan Africa lags behind the rest of the world in harnessing the benefits of private participation in infiastcture, especially in the water and waste sectors. Of 1,161 private infrastructure projects concluded since 1984, Sub-saharan Africa has seen only 8, or about 7% (Kerf and Sith [2]). The ahnost universally poor quality of the regions infrastructure directly ipacts on the living standards of its people and constrains private investent in other activities. The public sector reains the doinant force in the Nigeria s econoic life, and has largely contributed to inefficient developent since the early 198s (African Review [3]). By 1986, the estiated nuber of public enterprises in Nigeria was 1,5 out of which 6 were under the Federal Governent, and the rest owned by state and local governents (Obadan [4]). These accounts for about 67 / of the Gross Doestic Product (GDP) (African Review [3]) and over 6 percent of ode sector eployent (FRN [5]). Annually the state onopolies cost over U.S $2 billion in subsidies alone. In the drinking water supply sector, over 1 urban and sei-urban water supply schees existed by 199, which were all in poor condition and deteriorating rapidly. The various state water agencies responsible for the provision of water supply services were at the lower level of developent, characterised by poor funding and organisation, under passive and inadequate legal fraework, and operating with little or no visible operational guidelines (FMWRRD [6]). The effect was the fast decline of urban/sei-urban water supply delivery which if not arrested was heading to unacceptable level of about 8 litre per capita per day. The WHO/UNICEF Water Supply and Sanitation Sector Monitoring Reports for 1996 has the water supply coverage for Nigeria as 39Y. By the late 197 s, the public enterprises accounted for one-third of all international borrowing by developing countries. This becae a ajor source of concern for the principal international lending agencies. The World Bank thus cae to see privatization as an iportant policy instruent for reducing the drag of public enterprises on national budgets. This becae evident in the bank s lending conditionality in the later part of the 198 s (World Bank [7]). Like ost other Sub-saharan African countries, Nigeria adopted the policy of privatization in 1986 as an integral part of a larger refor Structural Adjustent Prograe (SAP) propagated by the World Bank and the International Monetary Fund (IMF) as a set of conditionalities for external debt relief.

3 In this connection, the governent established a Technical Coittee for Privatisation and Coercialisation in 1988 and launched a ford privatization and coercialization prograe of state owned enterprises, which has already transferred a nuber of state-owned enterprises to private operations. However, because these privatized enterprises are ainly federal operations engaged in production, ost infrastructure agencies and all stateowned enterprises such as water authorities have been excluded (FRN [8]). Nigeria is however currently fully ebracing privatisation with the forulation of the National Privatisation Council headed by the Vice President. However, the privatisation of its water supply sector is still at the forative stage. Public-private partnerships offer uch potential in Nigeria. Hence the study is tiely and iperative as an iediate solution to increase operational efficiency and achieve institutional strengthening in its water supply services. 2 Rationale for the privatisation of water supply in Nigeria Many infrastructure services have been regarded as natural onopolies with econoies of scale and high sunk capital costs. The public perception had previously been that such services should be provided by the governent. It is now becoing recognised, however, that any services can be iproved and expanded by exposing the to copetition through private sector participation. Moreover, any services are extensively deteriorated, and their capacity is underutilised because of poor aintenance and lack of funds for operation, causing low operational efficiency and high service costs. The traditional approach of budgetary transfers has not solved these probles (FRN [8]). The inabiiity of state water authorities to generate sufficient revenues has contributed to large financial deficits. This has left ost state water authorities dependent on subventions born state governents to operate and aintain their water systes, service debt obligations, and finance new investent. The private sector participation in the arketing of water in Nigeria has now becoe a ajor phenoenon. Recently, there has been a noticeable increase in the nuber of bottled and other fors of packaged water called pure water being sold on the streets in Nigeria. It costs about 5cents per unit of 5ls and it is available throughout Nigeria. There is a proven willingness-to-pay by the poor for real services. The poor often pay a high price for a service of bad quality provided by inforal vendors. Oyelade and Duncan [9] undertook a study to ascertain the bacteriological quality and the potential health risk of drinking packaged water on sale in Lagos etropolis, Nigeria. They reported that ost (9 percent) of the sixty (6) saples analysed had colifor count well above the axiu of 1 per 1 ls recoended by the international standards for drinking water quality (WHO [1]. The study also revealed that twelve of the sixty (6) saples analyzed cae fro governent licensed factories and seven of the had faecal colifor. Faecal colifors were present in a total of thirty-eight (38) saples.

4 Confl-rnatory tests shows that they are enteric pathogenic bacteria. The study fluther shows that ost people in Lagos etropolis, Nigeria regardless of their tribe, social class or occupation consues packaged water. Most consuers are aware of the characteristics of potable water and the potential health risks associated with consuption of unhygienic water. Although ost consuers consider tap water to be of good quality they nevertheless take packaged water because coupled with its perceived potability, it is readily available and largely affordable. Hence, lack of adequate and safe water supply have ade the proinence of water borne diseases to becoe an intractable proble in Nigeria. Kajogbola [11] reported the proinence of alaria, dysentery, tuberculosis, chicken pox, easles and pneuonia as the greatest causes of general orbidity within the Ibadan region in Nigeria. The study also revealed that the leading killer diseases in the region are water borne. Sources close to the National Health Policy of the Federal Ministry of Health (FMH [12]) shows that sae orbidity and ortality pattern was also found to be applicable to the larger Nigerian society since water proble is not peculiar to a particular region but a coon feature in every counity in Nigeria. A profound change is required in the concept of water supply as a service industry. State water authorities need to operate in accordance with coercial principles and under an ubrella of adequate legislative and adinistrative autonoy arrangeents. The specific benefits of water supply privatisation follow fro the fidaental change in institutional relationship. Those benefits include increased efficiency in investent, anageent and operation. Moreover, the introduction of private sector arrangeents would benefit the Nigerian econoy by both reducing budgetary transfers to public agencies and governent budget deficits, and by aking ore efficient use of scarce resources. Furtherore, experience in reforing econoies in Latin Aerica and Eastern Europe contii the potential of infrastructure privatisation to catalyse large inflows of foreign direct invesent (FDI) (Kerf and Sith [2]). This is particularly iportant in Sub-Saharan Africa where FDI is very low. Infrastructure privatisation offer opportunities for capital arket developent and also act as potential signaling device to international investors and populace. 3 Privatisation odels and existing structure in Nigeria 3.1 Existing privatisation odels around the World Private sector participation has eight ain options, which vary in the degree of involveent of the private sector, the risk for both the public and public sector, the private operator s autonoy and responsibility, the required capital investent, the duration of the contract, and the contractual relationship with

5 [fl ({rlllll[c //1/1 1!11/1/()/11I(lllllw)ll( llf 259 the consuer. The private sector participation options ay be grouped into two distinct categories. In the first group, the ownership of the assets reains with the governent or the public sector, whereas in the second group, partial or fill ownership is transferred (peranently or teporarily) to the private sector. The fust group-public ownership-includes Service Contracts, Manageent Contracts, Lease Contracts and Concession Contracts. The second group-at least partial private ownership-includes BOOT (Build-Own-Operate-Trans fer) Contracts and its Variations such as BOT (Build-Operate-Transfer) and BOO (Build-Own-Operate), Reverse BOOT Contracts, Joint Ownership and Outright Sale. 3.2 Existing privatisation structure in Nigeria Nigeria has soe experiences with private sector participation in water supply. The use of private services has resulted fro necessity rather than deliberate policy, but has fallen short of achieving the level of copetition and efficiency possible. Several state water authorities in Nigeria has leased coputer equipent for billing and collection operations. A local data service copany provides and aintains the coputers. The coputer service has been very satisfactory. Several state water authorities in Nigeria have also tried service contracts with private f such as property valuators for billing and collection, with ixed results. In spite of the above, the Lagos State Governent is front-lining the fill privatization of water supply in Nigeria. There is an ongoing bidding for the World Bank assisted privatization of water supply schee, a private sector participation strategy being id-wifed by the State Water Corporation. The concession contract is expected to operate under a Build, Operate and Transfer Schee. It will be executed under a 23 years lease contract for the anageent and supply of water to Lagos State. 4 Methodology and estiating issues 4.1 Nature, sources and scope of data Data for the study was largely obtained fro the 1999 first quarterly report of the National Water rehabilitation Project which is IBRD fided with the objective of iproving water supply delivery by rehabilitating selected urban and sei-urban water supply schees and institutional developent. The study odel the investent into the rehabilitation project and also siulate the cost recovery pattern and the profitability index with the attendant iproved service delivery. The recoended privatization odel is a 2-years lease contract for already rehabilitated schees, in which case, there is no investent risk for private sector participant. A 2-years concession contract in the for of Build,

6 Operate and Transfer (BOT) option is also suggested to rehabilitate existing urban and sei-urban water supply schees, in which case, the private sector participant takes investent as well as full coercial risks. The study saple cover ten Nigerian urban and sei-urban centres. The ten urban and sei-urban centres were chosen to liit the scope of the work. They cover a spread of both Northern and Southern Nigeria. Data used for the study includes the recoended nuber of years for lease or concession contract, the rehabilitation investent cost, annual operation and aintenance cost in the rehabilitated systes, total nuber of systes available in each chosen state water agencies, total nuber of systes rehabilitated under the IBRD funded project in each chosen state water agencies, the population of the urban and sei-urban centers where the rehabilitated systes are sited, the pre-rehabilitation capacity of the systes, the post-rehabilitation capacity of the systes, the daily water production rate, the unaccounted-for-water, revenue collection efficiency and the recoended price of water. 4.2 Measureent of variables The variables used in the study are defined as follows: SWA is the state water agencies where the rehabilitated systes are sited; RIb,t is the rehabilitation investent cost in each chosen state water agencies in U.S $; OMcO,t is the annual operation and aintenance cost in the rehabilitated systes in U.S $; SYSavail is the total nuber of systes available in each chosen state water agencies; SYSK,b is the total nuber of systes rehabilitated under the IBRD tided project in each chosen state water agencies; POP~c~ is the population of the urban and sei-urban centers where the rehabilitated systes are sited; CAPP,,.~,~ is the pre-rehabilitation capacity of the systes in cubic etre per day; CAPPO,,.~cbis the post-rehabilitation capacity of the systes in cubic etre per day; WPR~lily is the daily water production rate in the rehabilitated systes in cubic etre per day; UWF is the unaccounted-for-water in the rehabilitated systes in percentage; RCE is the revenue collection efficiency in the rehabilitated systes in percentage; PW is the recoended price of water defined as the edian price paid per cubic eter (1, litres) in U.S $; WRE is the water revenue expected in the rehabilitated systes in U.S $; NPV~ is the net present value of the investent at the fir s cost of capital E, IRR is the internal rate of return of the investent and PBP is the payback period of the cost of investent 4.3 Model specification The Discounted Cash Flow (DCF) Principles including the Net Present Value ethod, the Internal Rate of Return ethod and the Discounted Pay back Period ethod constitute our ajor odel for the study. The Discounted Pay Back Period ethod serves as further check to have an idea of the break even point in our investent analysis.

7 Thus the Net Present Value, NPV of our investent opportunity at the fro s cost of capital K with constant cash flows that goes on for the life of the opportunity is given by NPV~ = (WRE - OMCO,,) [ 1 - ] - Rico,, [-K J@ +1K )N] (1) where (WRE - OMcO~J is the net annual cash flow, RIcO~t is the initial cash outlay and N is the life of the opportunity in years. NPVK is ofien referred to as the Present Value of Auity and the parenthesis in equation (1) is called the auity factor obtained fro standard annuity factor tables. The Internal Rate of Return, IRR is the exact DCF rate of return which the investent is expected to achieve, that is, the rate at which the NPV is zero and is given by NPV. = O = (WRE - OMCO,,) [ _l_ - _ 1 ] - RIG,, [ IRR IRR(l+ZRR )N] (2) (Luby and Jones [13]). The discounted pay back period, PBP usually expressed in years (N) is the period it takes to recover the initial cash outlay on a capital investent in present value and is given by N NPv,k( o z (WRE - OM&J ~ - RIcO,t t=l (l+ K) (3) 4.4 Epirical analysis of data The data were analyzed using coputer techniques (spreadsheet applications). The Net Present Value (NPV) was coputed using the variables in equation (1), The stereotypical cost of capital (1%) was used as the fro s cost of capital, K since the interest rate used in estiating loan repayent due World Bank is 7.5% per year (FMWRRD [6]). The Internal Rate of Return and the Discounted Pay Back Period were obtained by solving for IRR and N in equation (2) and (3) respectively using iterative technique (newton s approxiations). The Water Revenue Expected (WRE) was coputed using WW = (PW )(365 *WPR~ai1y)(l - ~W)(RCE) (4) The recoended price of water was fixed using the following criteria (a) expressing the recoended price of water as a percentage of the iniu wage of public servants and as a percentage of the per capita incoe assuing that a household has only one source of incoe (b) coparing the recoended price of water with the edian price of water in Atlica and other developing econoies (UNCHS [14]). The water consuption pattern of an average Nigerian urban and sei-urban household faily size of five (FOS [15]) is about 4.5 cubic etre per onth (Oyebande [16]). Our recoended price of water is U.S $1. per cubic eter. Hence an average household would spend about U.S $4.5 (=N=495.) on water consuption per onth which is alost equivalent to an average household electricity charge per onth.

8 )f-j? //ll// (ll //;< /11/()/71?(/1/()11 t!(ltl[l,y(,l, ill.- The iniu wage of public servants in Nigeria is about U.S $ 68. (=N=7,5.) per onth and the 1998 per capita incoe is U.S $358. (ECA [17]) hence an average household expenditure on water consuption would aounts to about 7 A of the iniu wage of public servants and 15 / of the per capita incoe. Moreover, the edian price of water in Africa and other developing econoies is U.S $.998 per cubic eter (UNCHS [14]) which is alost equivalent to our recoended price of water. 5 Result and discussion Fro Table 1 below, our ean net present value at the fro s cost of capital, NPV~ is U.S $67,224,152. which is a easure of econoic profit or excess return fro our investent. Our ean internal rate of return, RR is A which iply that our investent is generating a return uch ore higher than the fro s cost of capital, K of 1 Yo. It signi~ that our investent would generate sufficient cash flow to pay the interest on loan, repay the actual loan capital and leave a ean surplus of U.S $67,224,152. for a ean investent cost of U.S $3,53,5 over the 2 years lease or concession contract for the rehabilitated systes in each of the state water agencies. It eans that the return on investent in the Nigerian water supply sector for every U.S $ 1. is U.S $ 19. over the 2 years lease or concession contract period. Moreover, our ean discounted payback period, PBP is 3,8 years signi&ing that our break even point is 4 years eaning that our investent would pay back its outlay over a 4 year period for the rehabilitated systes in each of the state water agencies. Hence the return on investent in the Nigerian water supply sector is high enough to attract a private sector participant. On the side of efficient service delivery fro Table 1 below, the result indicate that at rehabilitation and private sector participant entry, the ean per capita per day water consuption in the chosen urban and sei-urban centers would have increased fro 34 litres to 58 litres which is close to the ean per capita per day water consuption of 7 litres used for planning purposes in the provision of the water supply and sanitation policy of the Federal Republic of Nigeria. The ean daily water production fro existing plants would have increased by Too/o with ean capacity utilization of 84 /. Unaccounted-forwater

9 n -4 cc r- t-- G Q t- Q w W) w VI w -? V). co

10 would have reduced fro over 5 A to 2 / and ean water revenue collected which could hardly eet the cost of operation and aintenance would have increased to 65 /. Hence, it is evident fro our study that ore of Nigerian citizenry would have access to potable water with increase in per capita per day water consuption through private sector participant. 6 Conclusion and policy recoendations There are a nuber of obstacles facing private participation in Nigerian water supply sector. The ain sources of capital are likely to be foreigners and ost foreigners ay be reluctant to invest. Political uncertainty is high in Nigeria, and in traditional utilities the capital costs are high, the expected lifetie of the investent is Iong, and returns will be in local rather than foreign currency. Thus investent appears quite risky, and if foreign investors are willing to invest, they ay deand a high risk preiu. Moreover, privatisation ost often lead to higher prices for basic services such as water. Hence, to attract foreign investors on acceptable ters, governent need to create a favorable cliate for business by providing acroeconoic stability, copetitive taxes, freedo to repatriate capital, and all the aspects of governance that affect willingness to invest-including contract enforceent, low corruption, and adherence to transparent rules, including for privatization (Ayogu [18]). At the sae tie, to protect against exploitation of a onopoly position, governent should develop regulations that confor to international good practice for governance and pricing. An even better way to prevent abuse of onopoly power is to perit free entry and open copetition where this is copatible with arket size and technology. In brief, governents need to enhance their credibility and the rule of the law to attract private finance and to protect property rights and the public interest. Another ajor fears about privatization concerns the potential loss of present and future eployent. Iproveents in efficiency have been leading to job losses in any parts of the world (ILO [19]). However, lack of odernization and lack of copetition ay eventually contribute to higher job losses. The long ter effects of privatization on eployent depend on whether the enabling environent exists in which they can operate efficiently. References [1] DBSA (Developent Bank of Southern Africa), Infrastructure: A Foundation for Developent-Developent Report 1998, Midrand, South Africa, [2] Kerf, M and Sith, W, Privatising Africa s Infrastructure, Proise and Challenge, World Bank Technical Paper No. 337, World Bank, Washington, D.C, 1996.

11 [3] [4] [5] [6] [7] [8] [9] [1] [11] [12] [13] [14] [15] [16] [17] [18] [19] African Review, Investent Confidence in Econoy Revives, African Review March 2, pp , London, United Kingdoq 2. Obadan, M.1, Privatisation and Coercialisation of Public Enterprises in Nigeria, NCEMA Policy Analysis Series, Vol. 1, No. 1, pp. 27-5, FRN (Federal Republic of Nigeria), Public Utilities Probles of Profitability and Efficiency, Report of the Study Group on Parastatals and Governent owned Copanies, Lagos Cabinet, Lagos, Nigeria, FMWRRD, National Water Rehabilitation Project, Quarterly Report, Q], 1999, Federal Governent of Nigeria, World Bank, Can Africa clai the 21st Century?, ADB/AERC/GCA/UNECA/World Bank Collaborating Developent Report, World Bank, Washington, D.C, 2. FRN (Federal Republic of Nigeria), Strategies for Private Provision of Ifiastructure and Urban Services, World Bank Missions Report, April 1992, World Bank, Washington, D.C, Oyelade, T and Duncan, J.K.W, Packaged water analysis and its use in Lagos, Proceedings of the 25th WEDC Conference, eds. Pickford, J.A, pp , Loughborough University, United Kingdo WHO, International Standard for Drinking Water, WHO, Geneva, Switzerland, Kajogbola, D., Sall Scale Enterprises and the Environent: A Case Study of Packaged Water Industiy in Ibadan Region, Nigeria, Nigerian Environental Study Action Tearq FMH, National Health Policy Report, Federal Ministry of Health, Nigeria, Luby, S and Jones, C, Fundaentals of Investent Appraisal, Thopson Learning, London, United Kingdo 21. UNCHS, Global Urban Indicators Database 1996, United Nations Centre for huan Settleent (UNCHS), Nairobi, Kenya, FOS, Federal Ofice of Statistics Yearbook, Federal Governent of Nigeria, Oyebande, L, Water Supply needs in the 199 s and the Strategies for satisfying the~ Water Resources Journal, Nigerian Hydrological Association, Volue 2 (2), pp , 199. ECA, Econoic Report on Africa 1999, The Challenge of Poverty Reduction and Sustainability, Econoic Coission for Africa, Addis Ababa, Ethiopia, Ayogu, M, Addressing Infrastructure Constraints, Background paper prepared for Africa in the 21s Centu~ Project, World Bank, Washington, D.C, ILO (International Labour Organisation), Lessons fro Privatisation: Latest issues in Developing and Transitional Econoies, eds. Vander, R and Gyorgy, H, ILO, Geneva, Switzerland, 1997.