Getting the Incentives Right - Incorporating Strategies for Improving Services to Low-Income Consumers within PSP Water Sector Contracts - Inception Phase

Abstract

Many developing countries are turning to the private sector to provide water supply and sanitation services to urban consumers as a means to improve efficiency and increase investment in the sector. However, involving the private sector has proved contentious and there is concern that these contracts do not adequately address the needs of low income groups (LIGs) within the urban and peri-urban areas. Experience has shown that many private operators have been unable or unwilling to improve or expand services to LIGs. The underlying assumption is that the private sector has little incentive to extend services to low-income areas due to a variety of issues.

This report presents the findings from the inception phase of the DFID funded project \"Getting the Incentives Right: Incorporating Strategies for Improving Services to Low-Income Consumers within PSP Water Sector Contracts\". This phase examined the issues and constraints that prevent Low Income Groups (LIGs) being served under PSP frameworks.

Part 1 of the report examines the background to the issue, looking at the social context (section 3), the types of PSP contracts typically used (section 4) and the typical water sources used by people in LIGs (section 5). A key issue is the lack of understanding of poverty and the current conditions in LIGs. The nature of poverty in these areas is very complex, and attention must be given to accurate analysis of the LIGs if appropriate interventions are to be designed. The complexity of the poverty in many LIGs makes it very difficult to come up with a clear and accurate contract definition for these groups. A framework has been developed to help understand how certain environmental, community, household and individual criteria affect delivery of water services.

Recent trends have been away from large -scale urban PSP under traditional contract modes to newer forms. Key aspects of this include phasing in of Operator responsibility and risk, contracting on a more local level and more emphasis on local partners and solutions.

Part 2 examines the main constraints to serving LIGs and suggests possible areas of intervention. It is important to consider the whole water sector restructuring process and not look narrowly at PSP contracts only. Many of the constraints relate to overall policy decisions made at the early stages of the process. The discussion on the constraints has been split into 5 sections - Legal and Regulatory, Economic and Commercial, Technical, PSP Process and Community Education. The key constraints that have been identified are:

  • Lack of involvement of LIGs at an early stage to gain an understanding of poverty issues
  • Inadequate understanding of poverty issues
  • Lack of good quality information on existing situation to measure baseline and set realistic targets. Includes both social condition and technical condition of assets
  • The operator is reluctant to expand into areas where payment culture is uncertain
  • The legal system does not support pro-poor agenda - LIGs not recognised
  • Legal standards (service levels, technology and workmanship) prevent innovative low cost methods being used
  • Weak regulatory capacity makes it difficult to regulate social issues
  • The physical location of many LIGs makes service more expensive
  • Connection fees and tariffs are high, particularly in relation to incomes
  • The cost of supplying LIGs is comparatively more, and consumption is less
  • Specific risks to serving LIGs, including: low collection rates; low consumption rates; increased safety risk; and increased vandalism and hence increased maintenance costs
  • Exclusivity limits options to serve LIGs
  • No consideration of 'software' (e.g. hygiene education)
  • Tendering process does not allow for consideration of LIG issues
  • No obligation to serve LIGs specifically set out in the contract
  • Inadequate attention given to community liaison and education, as it requires proportionally more investment than other consumers

The key areas to focus any interventions on are:

  • Make allowance for substantial surveys of LIGs at early stage of reform
  • Better studies of Ability and Willingness to pay on LIGs will help reduce risk of non-payment
  • Allow involvement of SSSPs in providing services
  • Develop locally appropriate standards tailored to work with LIGs
  • Promotion of a variety of service levels and low cost technology
  • Better targeted subsidies (and possible use of Output Based Aid - OBA)
  • Promote flexible methods of payments in terms of timing, location and method of payment
  • Establish a unit (in government and utility) focusing on needs of LIGs
  • Contract to have a specific focus on LIGs - with separate targets
  • Allow more time to focus on LIG issues in preparation of tender package and in assessing tenders and awarding contract
  • A stronger focus on customer liaison and education

Part 3 briefly explains how future phases of the project will examine these issues and develop possible interventions, by looking at case studies in Ghana, Tanzania and Malawi. It is hoped to develop a 'toolbox' of practical interventions and contractual mechanisms that provide incentives for private operators to improve water supply services to low income groups.

Citation

WS Atkins International; Stone and Webster Consultants. Getting the Incentives Right - Incorporating Strategies for Improving Services to Low-Income Consumers within PSP Water Sector Contracts - Inception Phase. (2003)

Getting the Incentives Right - Incorporating Strategies for Improving Services to Low-Income Consumers within PSP Water Sector Contracts - Inception Phase

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