Public-Private Sectors Linkage in Water Supply Provision: Role of Civil Society Organisations in Lagos State, Nigeria

Presented by

Owolabi Ajayi
Department of Geology Obafemi Awolowo University Ile-Ife, Osun State, NIGERIA
owolabi_ajayi@yahoo.com

AT THE CONSULTATIVE FORUM ON CURRENT TRENDS IN PRIVATE SECTOR PARTICIPATION IN LAGOS WATER SUPPLY: WHAT ROLES FOR CIVIL SOCIETY ORGANISATIONS

DATE: TUESDAY 20TH OCTOBER 2004 TIME: VENUE: 10:00 AM 1:00 PM Heinrich Bll Foundation, 9b Omo Osagie Street, off Okotie Eboh Street, Southwest Ikoyi, Lagos, NIGERIA

Public-Private Sectors Linkage in Water Supply Provision: Role of Civil Society Organisations in Lagos State, Nigeria
Owolabi Ajayi Department of Geology Obafemi Awolowo University Ile-Ife, Osun State, NIGERIA owolabi_ajayi@yahoo.com

Abstract
Historically in Lagos State and throughout Nigeria, the government or public sector was solely responsible for water supply provision (WSP) to the populace. The strategy adopted was based on an almost total dependence on large scale water supply schemes which are very expensive to install and maintain. Water supply utilities owned and operated by the public sector were neither efficient in service delivery nor able to remain solvent financially.

A vast majority of the population are averse to paying the high water charges needed to keep the utilities afloat, partly due to their low-income levels. Water supply will need to be subsidised until government introduces wealth creation strategies which will enhance the willingness and ability to pay of the vast majority of the population. A subsidy can be justified on the bases that provision of potable water enhances primary health care and improves social welfare.

It is increasingly clear that government agencies alone cannot provide adequate water supply to the people, effectively, efficiently and economically, hence the need to stimulate and encourage public sector participation (PSP) in WSP. Civil Society Organisations (CSOs) including Non-Governmental Organisations (NGOs) active in the water supply sector have a role to play in strengthening the public-private sectors linkage in WSP. The CSOs can articulate the needs and concerns of the private sector, protect private sector social rights to water, and moderate the policy and programmes of the public sector-led initiatives for PSP in water supply so that the profit motive, which drives the private sector, does not override other social considerations, by excluding the vast majority of the population from access to safe water supply.

Introduction
On-going reforms by the Lagos State Government (LASG) in the water supply sector encourages Private Sector Participation (PSP) in what historically was the monopoly of a government agency, the Lagos State Water Corporation (LSWC). This is the first time that official encouragement and formal recognition is being accorded the private sector in water service provision (WSP) in Lagos State or anywhere in Nigeria (Coker 2004), although there has always been unofficial private participation in water supply delivery such as the ubiquitous water vendors using water tankers and other delivery mechanisms. The decision to embrace PSP officially in Lagos State is unique in Nigeria and reveals new opportunities and challenges for all the stakeholders in the water supply sector. 2

The public sector is hereby defined as the government and its agencies. The private sector is defined as everyone else including non-government owned companies incorporated to conduct any business, including WSP. Civil Society Organisations (CSOs) include Non-Governmental Organisations (NGOs). The various Community Development Associations (CDAs) and Community Based Organisations (CBOs) also belong in the category of CSOs. These organisations are non-profit bodies established as watchdogs of the society to moderate and influence public sector driven initiatives and programmes in order to safeguard the interest of the populace. In the absence of CSOs, there is a dichotomy between the public and private sectors. There is at best a tenuous linkage between the public and private sector characterised by frictional relationships between the two sectors. The interaction between government officials and their agencies (Public) and the populace (Private) can be facilitated by purposeful programmes of CSOs. Historically, WSP was a monopoly of government agencies with no officially sanctioned or active roles for the private sector. The water supply situation was characterised by dismal failure in performance by the public agencies to provide water for the vast majority of the population. The situation was also characterised by high inefficiency, high operating costs, and low economic and financial returns. The prevailing view then was that water is a social service to be provided at all costs regardless of financial returns (Ajayi 2003). Current thinking regards water as a resource or economic good subject to the same market mechanisms for efficient allocation as for other resources. However, the nature of water requires some special considerations, since water really has no substitute and whose provision has historically been treated as a social right (Ariyo 2004). Experience worldwide, with few exceptions, has shown that the private sector is capable of providing relatively more effective, efficient and economic water supply than the public sector, at a price which is driven by the profit motive. Water use charge, or tariff, is usually demanded by the private sector to recoup investment, operating and maintenance costs and to generate a return on investment, called profit. The tariff arrived at by market forces may not be affordable to all segments of the society. Hence there is a need to protect the interests of the poor segments of the society to allow them enjoy the benefits of WSP without jeopardising the sustainability of the water supply projects by providing a subsidy to bridge the gap between market determined tariff and socially acceptable charges for provision of water services. Whether water is regarded as a social right or as an economic good, it is imperative that a sustainable mechanism be found for WSP to all segments of the population.

Options for Water Supply Provision

The provision of water supply and sanitation usually require a service organisation or enterprise, such as LSWC, hereinafter referred to as the Utility. The public sector has tended to exercise both control and management of water service enterprises without due regard for efficiency or economy in operations and management. The public sector can control WSP through legislation without interfering in the daily operations or management of the utility. This distinction between control and management is however lost on most public officials who tend to equate control with management. Hence the reluctance to allow private sector participation in key sectors of the economy which historically have been the exclusive preserve of the public sector; such as water supply, energy and the telecommunications sector. There are two key variables which govern the operations or performance of the utility or enterprise: proprietorship and entrepreneurship; that is who owns and who manages the enterprise. Hitherto, the public sector has tended to wholly own and wholly manage the utility. PSP requires dilution of the proprietorship and management variables. Regardless of the ownership or proprietorship of the

utility, the public sector also has the responsibility of providing the enabling environment, in terms of laws and regulations, to guide the operations of the utility. Theoretically there are five possible scenarios when considering the proprietorship and entrepreneurship of the utility. Four of the options involve sole ownership or sole proprietorship of the utility by either the public or private sector, while the fifth option involves some form of dilution of the ownership or entrepreneurship or joint public sector-private sector ownership or entrepreneurship. Each of these options has its advantages and disadvantages. o o o o o Public Ownership and Public Entrepreneurship Public Ownership and Private Entrepreneurship Private Ownership and Public Entrepreneurship Private Ownership and Private Entrepreneurship Joint Public-Private Ownership and Joint Public-Private Entrepreneurship

Public Ownership and Public Entrepreneurship

Public ownership and public entrepreneurship of water utility was the norm in Lagos State and throughout Nigeria. However, this situation has not succeeded in delivering water supply efficiently and economically to the vast majority of the people. Most publicly owned and publicly managed water enterprises are characterised by weak financial capital base, poor performance, inability to raise the required funds from the capital market to pursue expansion programmes and low internally generated revenues (IGR) from consumers to finance daily operations. In short, without periodic injection of public funds, most of them are neither viable nor sustainable.

Public Ownership and Private Entrepreneurship

Public ownership and private entrepreneurship envisages close co-operation between the public and private sectors to improve the performance and sustainability of the utility without divestiture of any kind. There are several scenarios; outright concessionary arrangements in which the private sector builds, owns and operates the enterprise for a period before ownership reverts to the public sector; lease of the management of the enterprise for a certain period to the private sector; short- or long-term contracts for the management of the enterprise to the private sector, for a fee; short- or long-term contracts for specific services; or outright divestiture or sale of the enterprise, which ultimately results in change of ownership from the public to the private sector.

Private Ownership and Public Entrepreneurship

Private ownership and public entrepreneurship is not very common in practice but happens in an over-regulated society where the private enterprises are subject to extensive public control. The regulatory role of the government over the performance of enterprises can often lead to a situation whereby privately owned enterprises are essentially controlled by the public. This is common when government arbitrarily fixes prices without due consideration for market determined prices or in the absence of competition. In some cases, this situation may involve outright appropriation of the private initiative (usually couched in the public interest) and ownership is then transferred to the public domain. This situation tends to discourage PSP and private sector led initiatives.

Private Ownership and Private Entrepreneurship

Private ownership and private entrepreneurship means total privatisation of the utility. In this case, the only role of government in WSP is regulatory. Performance is entirely profit driven. Public regulatory functions may or may not be adequate to moderate the tariff charged and the consumer is wholly at the mercy of market forces. This option tends to scare most people, especially the poor in developing countries, regardless of the promise of better services because of their inability to afford the tariffs. Where there is a history of benevolent WSP then introducing this option is usually resisted most vehemently by the people and may lead to undesirable social consequences such as demonstrations and other unmanageable social upheavals.

Joint Public-Private Ownership and Joint Public-Private Entrepreneurship

The category of joint ownership and joint entrepreneurship of the water utility by both the public and private sectors is a hybrid of the four options described earlier. The degree of ownership or entrepreneurship by the private or the public, will determine which of these four options best describes the enterprise belonging to this category. The Lagos State Model as currently conceived belongs in this category as the public will be invited to own part of the enterprise through share subscription in partnership with the government. PSP in WSP will also ensure some degree of private entrepreneurship. There are challenges ahead, especially in motivating the public sector to participate as well as securing the acceptance of a sceptical populace to public sector-led initiatives. Whilst guaranteeing a measure of control over the outcome or performance of the utility, the government holds an unfair advantage in this option because it is also the regulatory agency. The tendency to squeeze the public sector in this arrangement is real.

Contending Issues in WSP

There are several contending issues in the provision of water services to the people, among which are community needs; that is what quantity and quality of water is required; the project alternatives to meet the community needs, each project alternative with its characteristic costbenefit criteria; the willingness and ability of the beneficiaries to pay for the level of service; sustainability of the chosen alternative project; and motivating PSP where PSP is deemed to be a desirable component of WSP. There are several criteria governing the sustainability of WSP, which include environmental, technological, operational and managerial; political, legal, organisational and institutional, financial and economic. Among all the various sustainability criteria for WSP, the limiting criteria are the financial and economic criteria. Often the financial and economic criteria constrain even the choice among alternative water supply projects. Problems with the other criteria can often be resolved relatively easier than problems with the financial and economic aspects of the project.

Strategies for Funding and Managing WSP

There are really three strategies for funding WSP: outright grants, outright loans, or a mix of grants and loans. The grants usually cover only infrastructural costs and may or may not include the daily operations and maintenance costs. Loans are usually obtained from commercial sources and imply additional money to be repaid, apart from the principal sum used to execute the project, called interest. In the case of outright grants nothing needs to be repaid by the beneficiaries. However, the sources of such free money actually do not exist in practice. There are always hidden costs even to

the beneficiaries of such grants for WSP in opportunity cost for other foregone social services such as expenditure on education, health, improved security and provision of roads. The more commercial is the funding mix of grants and loans (that is, the higher the loan component), the higher is the tariff required to service the financial outlay and recover the costs of the project. Costs of the project may not be related to prices paid by the consumers. Any shortfall is usually covered by the government, in the form of subsidy on the price paid by the consumer. However, the sustainability criterion requires that money be found from somewhere, whether from the public coffers or from private pockets to keep the project on track. The mechanism of funding is very important for the sustainability of the project. The beneficiarys willingness and ability to pay usually constitute limiting factors on the tariff that can be charged (or recovered). The tariff ultimately determines the sustainability or otherwise of the project. A distinction must be made between the willingness to pay and ability to pay. Both can be evaluated separately. In any case, the ability to pay is a direct function of the wealth level or poverty level of the benefiting community. Recent World Bank studies indicate that over 70% of the Nigerian populace is poor and may not be able to afford modern, expensive water service delivery systems. Unless government initiates radical economic development programmes to increase the wealth of the generality of the people (or reduce their poverty level), this situation will persist for a long time to come (Ajayi 1996). Water supply projects owned and managed by the public sector do not generate revenue streams to sustain WSP in economic and financial terms. The internally generated revenue is a small fraction of the capital outlay and can therefore not pay for adequate service delivery, capacity expansion or introduction of services in newly developed areas. The government has been the dominant financier or guarantor of funds for development in the water supply sector. It is increasingly clear that the public sector cannot provide all the funds needed to service the water supply sector. It is clear that private sector participation is required to improve the efficiency and sustainability of the water supply sector. However it is also evident that even if the private sector provides entrepreneurial input and some funding, a subsidy will still be required to provide water to the poor segment of the society, since the government advocates water for all. The major problems in water service provision can therefore summed into two: how to source start-up finance (or capital investment) and cost recovery (including level of tariff and subsidy to be provided). There are three main scenarios for managing WSP; business as usual in which the government continues to own, manage and operate the water utility as before with its inherent problems of inefficiency, poor service record and low sustainability; adopt a demand-driven approach whereby government provides water to only those communities that can afford the high tariff; or to engage the private sector in meaningful reform programmes. The present initiative of LASG implies a preference for PSP. However there is a strong need for strengthening the existing linkage between the public and private sectors. The bridge between the public and private sectors is the Civil Society Organisations (CSOs), including Non-governmental organisations (NGOs), Community Service Organisations (CSOs) and Community Development Associations (CDAs).

Role of CSOs in WSP

The CSOs and NGOs owe their origins to the need for a strong linkage between the public and private sectors especially in the provision of essential social services, such as water supply and sanitation. CSOs can eliminate the dichotomy between the public and private sectors. However the role of CSOs has neither been fully embraced or endorsed by the public; nor their activities fully appreciated by the private sector that remains unaware of the potentials of the CSOs to articulate public needs and social welfare issues. In view of the mission statements of most CSOs and their overall performance in enhancing public awareness and discourse on social welfare issues, a 6

recommendation can be made for both the public and private sectors to accord recognition and patronage to these organisations in order to strengthen the public-private sectors linkage and interactions for mutual benefit and overall social development. Can we equate the CSO with CS? In order words is the civil service organisation synonymous with the civil society itself? Put differently, do the CSOs adequately and effectively articulate CS concerns or are they just elitist groups as far removed from the private sector as most public organisations are? In whose interest are the CSOs working? Answers to these questions will undoubtedly vary depending on the performance of the individual CSO and the perception of either the public or private sectors. Regardless of the varied perceptions, the CSOs have a role to play in strengthening Public-Private Sectors Linkage. As an organised group, the CSO is better placed than private individuals to articulate and address issues of interest to both the public and the private sectors. The CSOs also need to be accepted by both the public and private sectors in order to function effectively in a mediating role between conflicting public and private interests. There is also a compelling need for the CSOs to appreciate the friction in the public-private sectors linkage and moderate such for the benefit of the populace who are the beneficiaries of the water supply programmes. Other roles envisaged for the CSOs are to mobilise the private sector to support public initiatives, monitor public expenditures, policies and programmes (the traditional watchdog role assumed by the CSOs). In addition, there is scope for education and training of the private sector on water supply issues including best practices. The CSOs can also assist the private sector in fund raising to participate meaningfully in joint public-private enterprises in the water supply sector. The CSOs should also periodically review performance in WSP and provide feedback to both the public and private on contending issues. It is suggested that the CSOs abandon advocacy either for public (government) policy and programmes as well as advocacy of private (people) social welfare needs, desires and strategies. The CSOs will be in a better position for acceptance by both the public and private sectors if by both sectors perceive them as impartial catalyst in facilitating interaction of the public and private sectors and linkage in WSP. Finally, it is suggested that the CSOs engage meaningfully in promoting the process of dialogue between the public and private sectors for the welfare of the civil society.

Conclusions and Recommendations

Historically WSP was a monopoly of government agencies with no officially sanctioned or active roles for the private sector. The water supply situation was characterised by dismal failure in performance by public agencies mandated to provide water for the vast majority of the population. The situation was also characterised by high inefficiency, high operating costs, and low economic and financial returns on investment in water supply facilities. On-going reforms by the LASG in the water supply sector encourages PSP to collaborate with LSWC. This is the first time that official encouragement and formal recognition is being accorded the private sector in WSP in Lagos State or anywhere in Nigeria. The LASG decision to embrace PSP in WSP is unique in Nigeria and reveals new opportunities and challenges for all the stakeholders in the water supply sector. In the absence of CSOs, there is a dichotomy between the public and private sectors. At best, there is a tenuous linkage between the public and private sectors often characterised by frictional relationships between the two sectors. The interaction between government officials and their agencies (Public) and the populace (Private) can be facilitated by purposeful intervention of CSOs. 7

WSP was regarded in the past as a social service to be provided at all costs regardless of financial returns. Current philosophy regards water as a resource or economic good subject to market mechanisms for efficient allocation of resources. However, the nature of water requires some special considerations, since water really has no substitute and whose provision has historically been treated as a social right. Experience worldwide, with few exceptions, has shown that the private sector is capable of providing relatively more effective, efficient and economic water supply than the public sector, at a price that is driven by the profit motive. Water tariff is usually charged by the private sector to recoup investment, operating and maintenance costs and profit. The tariff arrived at by market forces may not be affordable to all segments of the society, hence the need to protect the interests of the poor segments of the society without jeopardising the sustainability of the water supply projects by providing a subsidy to bridge the gap between market determined tariff and socially acceptable charges for the provision of water services. Whether water is regarded as a social right or as an economic good, it is imperative that a sustainable mechanism is found for WSP to all segments of the population. There are two key variables governing the entity charged with WSP: proprietorship and entrepreneurship. PSP requires dilution of the sole public proprietorship and entrepreneurship. Regardless of the ownership or proprietorship of the utility, the public sector also has the responsibility of providing the enabling environment, in terms of laws and regulations, to guide the operations of the utility. Theoretically, there are five possible scenarios when considering the proprietorship and entrepreneurship of the utility. Four of the options involve sole ownership or sole proprietorship of the utility by either the public or private sector, while the fifth option involves some form of dilution of the ownership or entrepreneurship or joint public sector-private sector ownership or entrepreneurship. Each of the options has its advantages and disadvantages. There are challenges ahead, especially in motivating the public sector to participate in WSP as well as securing the acceptance of a sceptical populace to public sector-led initiatives involving PSP. There are really three strategies for funding WSP: outright grants, outright loans or a mix of grants and loans. The more commercial is the funding mix of grants and loans (that is, the higher the loan component), the higher is the tariff required to service the financial outlay and recover the costs of the project. Costs of the project may not be related to prices paid by the consumers. The mechanism of funding is very important for the sustainability of the project. The major problems in WSP are how to fund capital investment and cost recovery (including level of tariff and subsidy to be provided). The linkage between the public and private sectors is the CSOs (including NGOs, CSOs and CDAs). CSOs can bridge the dichotomy between the public and private sectors. However, the role of CSOs has neither been fully endorsed by the public nor their activities fully appreciated by the private sector, which remains unaware of the potentials of the CSOs to articulate public needs and promote social welfare issues. As an organised group, the CSO is better placed than private individuals to articulate and address issues of interest to both the public and the private sectors. It is recommended that the government recognise, encourage and facilitate the CSOs in the PSP process for WSP.

References
Ajayi O. 1996. Environmental Management in Katsina State: Private Sector Participation and Options for Cost Recovery, In Proceedings of the Workshop on Katsina First MultiState Water Supply Project - Environmental Sanitation and Hygiene Education, Ed. F.A. Sonuga and J.O. Ajayi, Liyafa Palace Hotel, Katsina, Nov. 13, pp. 71 - 79. Ajayi J.O., Sonuga, F.A., Aliboh, O.P., and Oloke, D.A. 2003 Sustainable Potable Water Supply to Nigerians through Conjunctive Development of Surface and Groundwater Resources, In Contributions of Geosciences and Mining to National Development, Ed. A.A. Elueze, pp. 9 - 17. Ariyo A. 2004. Water and Privatisation: The Policy Issues Discussion Note for the Forum on Water and Privatisation organised by the Heinrich Bll Foundation, Lagos Office, Nigeria, May 10, 6 pp. Coker O. 2004. Global Experiences and Local Policy in Lagos Paper presented at the Forum on Water and Privatisation organised by the Heinrich Bll Foundation, Lagos Office, Nigeria, May 10, 9 pp.