Private Sector Performance Contracting in the Water Sector
(11/04, En) See also Environment and Natural Resources
Water systems in Latin America are inefficient, in part because of very low relative investment, and in part because of the lack of availability of necessary management tools. One way to ad-dress both of these issues at the same time is the performance financing of micro-metering by private sector companies. This case study is written to highlight the counter-intuitive fact that the great inefficiencies in Latin American water systems offer strong opportunities for public/private risk sharing.
Unaccounted for water (UAW) in Latin American urban water systems is a serious management issue, and a potential business opportunity. Most systems average between 50% and 60% UAW, while some systems reach levels as high as 80%. Typically smaller municipalities, in the ranges of 10,000 to 50,000 inhabitants have greater incidences of UAW than their larger neighbors.
In terms of cause, studies have shown that on average 50% of this loss is oweing to old pipes and connections, and another 50% is oweing to a lack of local metering. Investing in meters is both costly, but can be made attractive to both private business and public utilities because of the out-sized returns that can be realized by both parties through eficiency gains.
Brazil has begun to experiment with such contracts. While results are in the early stages, per-formance contracting of micro-metering shows great promise. Sabesp, the water company for the city of São Paulo, is finalizing an initial foray in this area. Over the last three years, under a per-formance contract this large utility has generated explicit new revenues of 36.7 million Reais per year. This translates into 90,800 new water connections, or the ability to operate and maintain roughly 242,000 existing connections.
This model can be extended to other municipalities in Brazil, and throughout Latin America. In addition, there is reason to believe that the model could be extended to two additional areas that have to do with performance and efficiency improvement, pipes and connections (40% of capital investments in Latin American water systems), and energy (proportion of operating costs from 23% to 55%).
This working paper is being published with the sole objective of contributing to the debate on a topic of importance to the region, and to elicit comments and suggestions from interested parties. This paper has not gone through the Department's peer review process or undergone consideration by the SDS Management Team. As such, it does not reflect the official position of the Inter-American Development Bank.
Last updated: 05/08/07
