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Rethinking private sector participation in the water sector

Published on: 02/12/2021

Why is private sector participation in the water sector lagging in Tanzania?

Water pump in Arusha, Tanzania

The reality of private sector participation

Private sector participation (PSP) in the provision of water and sanitation services has been on the agenda since the 1990s. While there are pockets of success, the level of private sector involvement in financing or service provision is still limited. For example, during the implementation of the first two phases of the Water Sector Development Program (WSDP) in Tanzania, private sector involvement was largely limited to the construction of water infrastructure, and a handful of Corporate Social Responsibility (CSR) efforts which are believed to be just ploys for cash. In rural areas, the majority of water schemes are still run by communities on a voluntary arrangement.

Initiatives like International Water Stewardship Programme and 2030 Water Resources Group have in recent years promoted the participation of private sector in the management of water in ‘water stressed catchments’ with some promising results but most of these initiatives are highly dependent on leading multinational companies, with very limited local ownership.

The situation regarding private sector financing is dire. A water sector status report shows that more than 85 percent of funding to the WSDP is public financing - mainly in the form of government transfers, grants, and low interest loans from bilateral and multilateral development agencies. Although there has been talk of ways to mobilise private finance through Public Private Partnerships (PPPs), nothing much has happened. According to the World Bank between 2000 and 2014 the private sector investments through PPP projects in the water sector accounted for less than one percent of the total private sector investments in water, telecommunications, energy, and transport sectors. Further, anecdotal evidence shows that blended finance initiatives like the Investing Financing Facility (IFF) are proving to be cost-effective in mobilising private finance to the sector but funding utilisation is low due to capacity and administrative issues related to public financial management. This begs the question: why is private sector participation in the water and sanitation sector lagging?

Rules allow private sector participation but…!

The good news is that the regulatory framework in Tanzania allows the private sector to operate in the water sector. In particular, the Water Supply and Sanitation Act of 2019, explicitly authorises Water Supply and Sanitation Authorities (WSSAs) and Community Based Water Supply Organisations (CBWSOs) to enter into agreement with private sector to deliver services. This is complemented by the PPP Act of 2018, which permits contracting authorities such as the Ministry of Water) to conclude PPP agreements The water sector also has an established mechanism for regulating tariffs which allows, and even encourages, the charging of full-cost recovery tariffs - a critical aspect to ensure financial feasibility of projects that involve private sector.

However, despite a conducive legal framework, the PSP in the water sector is largely through informal service providers. Most of them are individual entrepreneurs or small and medium enterprises serving less 100 households mostly in areas not connected to the distribution network of a WSSA or CBWSO. One would then ask, if the legal framework in Tanzania allows for PSP, why do we have very few formal private providers in the water sector? 

There are three possible explanations for this. 

Exclusive rights of service provision to public utilities 

First, the Water Act provides exclusive rights to WSSAs and CBWSOs as sole providers of water and sanitation services. This means that private service providers can only take part in service provision if contracted by these entities. However, most of the Key Performance Indicators (KPIs) of public utilities narrowly focus on providing basic water infrastructure and do not measure the managerial and regulatory efficiency required to provide a particular service. As a result, they do not have the incentives to partner or work with private providers to expand or improve the quality of services. 

Two tiers regulation system makes it harder 

Second, the exclusive rights of WSSAs and CBWSOs in service provision makes the regulation of private service providers in the water sector complicated. In fact, it has two tiers. First, Energy and Water Utilities Regulatory Authority (EWURA) or Rural Water Supply and Sanitation Agency (RUWASA) regulates the WSSAs and CBWSOs (respectively), who then regulate the private service providers through a PPP arrangement which also must be approved by the regulators. However, experience shows that most of the WSSAs, CBWSOs and potential private service providers do not have the capacity to effectively implement the PPP arrangement. This, coupled with the inherently high costs of regulations, limits the participation of formal private providers in the water sector. 

Lack of clear policy increases risks to private sector 

Third, while the law allows some forms of PSP, the water sector has no clear policy guidance on how to protect the interest of existing private service providers and clarify some of the contentious issues, for example on investments and profits made by private providers in areas which are not yet served by WSSA or CBWSO. In fact, because of the exclusive right to service provision, even when the WSSA or CBWSO extends services to these areas, there is no guarantee that they would enter into an agreement with existing providers because they are not regulated directly by EWURA or RUWASA. As such, the decision to enter into any form of agreement is left solely to the discretion of WSSAs and CBWSOs. Ironically, the lack of clear policy guidance on these aspects puts the existing private providers at risk of losing their investments and do not incentivise them to invest in expanding or improving the quality of the service provision, particularly in areas not served by public utilities. 

Overall, while the legal framework allows PSP in the water sector, there are limitations as to their actual involvement. It purely depends on the status and discretion of public utilities. Put simply, in the water sector the private service provider can only operate formally if they are allowed to do so by public utilities. This is different from other basic service sectors such as health and education which have clear rules and procedures for engaging private providers in service provision. In the health sector for example, there is a clear policy, legal framework, and regulations to follow if an entrepreneur wants to set up a private hospital. The same applies to the education sector if an investor wants to build a private school or university. They don’t need to get approval from a public hospital or public school to do so. Why don’t we do the same for the water sector? 

Getting the most out of the public and private sector

The fact of the matter is, in today’s mixed economies the private sector is always there, and if there are unmet needs, entrepreneurs will try to fill that gap. For them if there is money to be made, it doesn’t matter even if they operate informally. Water is a basic need and what people want is a reliable and quality service regardless of who delivers the services. Therefore, it is high time that the sector shifts the conversation from merely who owns or runs the service, to how can we ensure whoever is providing the service (public or private) can do so as efficiently and equitably as possible. 

Given that water and sanitation service provision is still predominantly in the hands of public utilities, I would argue that the most sensible thing to do is to ensure these entities operate efficiently. Put simply, this is about ensuring the WSSAs, CBWSOs or potential private service providers are doing their stuff; doing it well; doing it better every day and with ever-improving value for money; and responding well to the unexpected.

Unfortunately, we still have too many inefficiencies in the water sector to demand meaningful private sector participation. In many areas, water is poorly priced to guarantee cost recovery and there are still far too many poorly constructed water points being installed in rural areas. In urban areas, water utilities are suffering from the huge financial costs of treating and pumping up water only to see it leak back into the ground, and the lost revenues from water that could have otherwise been sold.

Tackling these issues is tricky and politics in the water sector makes it much harder. However, in a context where private sector participation hasn't gone very far, and there is no real sign anything will change soon despite some trying hard to bring that about. Besides, there doesn't seem to be any money from private sector flowing to the sector, so why bother?

I believe that if we want to make real progress in the sector, we must redefine the type and form of service provision we want, and then put mechanisms in place to ensure whoever is providing the service does so as efficiently and equitably as possible. At the end of the day, water is a basic need and what people want is a reliable and quality service regardless of who delivers the services.

Disclaimer: Lukas Kwezi currently works for the UK Foreign Commonwealth and Development Office (FCDO) as Water and Sanitation Adviser, based in Dar es Salaam. He writes blog posts in his spare time. Though he may talk about the work he does in the sector, this is neither a corporate nor a political blog and the opinions and ideas expressed here are solely his own, not those of his employer.

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