The Anatomy of a Deal
A Close Look at the World
Bank's Plans to
Privatize Ghana's Water System
Multinational Monitor, September
Having successfully pushed developing
countries to sell off most of their government-owned enterprises,
the World Bank is now urging poor countries to privatize basic
Although water delivery is assumed as
a public responsibility in much of the industrialized world-80
percent of the water works in the United States are publicly owned
and operated-the Bank is aggressively pushing privatization of
water systems in the Third World.
Citizen movements across the planet are
rising to challenge the World Bank and corporate schemes to wrest
control of now-public water systems. One the hottest flashpoints
in the conflict between the people and the Water Barons is in
There, the National Coalition Against
the Privatization of Water (NCAP of Water) is aggressively opposing
a Bank-advocated privatization scheme that would lease out the
country's urban water systems for a song. The scheme was hatched
in 1995, and may be implemented next year, unless NCAP of Water
can thwart it.
An International Fact-Finding Mission
recently visited Ghana to assess the privatization proposal. It
was able to interview all of the players in the privatization
debate, including key officials from the World Bank and within
the Ghanaian government, as well as to access many of the most
important consultant reports and documents surrounding the privatization
proposal. The fact-finding mission's investigation offers a unique
glimpse at the legal framework and contract issues surrounding
the effort to lease out the country's water system - the anatomy
of a deal.
BEHIND THE DEAL
All parties to the conflict in Ghana agree
the present water-delivery system is abysmal. One-third of urban
consumers are not connected to the piped water system. Many of
those who are connected to the pipe system receive sporadic service-as
infrequent as once every two, three or four weeks.
In response to the failures of the state-run
system, Ghana decided to pursue water privatization in 1995. The
decision came at a meeting at which a consultant presented a range
of options for reforming the water service. Virtually all options
involved some version of privatization; the notion of reforming
the utility while keeping it in the public sector was effectively
ruled out from the beginning. The meeting was not known to the
public. Nongovernmental organizations (NGOs) were excluded, with
the exception of two international NGOs.
Since 1995, the privatization proposal
has gone through various iterations. Parliament has been consulted,
but has not yet voted on the proposal.
The World Bank and various foreign donors
have funded an array of consultant reports to suggest how the
privatization process should be carried out.
Although final details remain to be hammered
out, the framework of the proposal now appears set.
The government calls Ghana's current privatization
proposal "private sector participation" (PSP). It is
a 10-year lease arrangement rather than a full sell-off of the
country's water system. Under the PSP, the government will retain
control of two aspects of the water system that have no prospect
of paying for themselves-the country's extremely rudimentary sewage
system and the rural water supply. The urban water supply systems
will be grouped together into two geographically defined business
units, with roughly half of the country's urban consumers in each
A group of prequalified bidders-all foreign,
and including global giants such as Suez and Vivendi-will bid
to operate the business units. The Ghanaian government will pick
two, one for each business unit.
The lease operators' duties will be to
provide water supply, rehabilitate and renew pipes, maintain assets,
bill and collect, and make new connections. The operators are
each expected to invest $70 million over the 10-year life of the
Responsibility for expansion of the system
remains with the government. Pipe extension is expensive, and
there is no realistic scenario in which tariff revenues might
cover the cost of expansion. There is thus a need for external
financing, and the government anticipates relying on donor funds
-in many cases, available only to public recipients-to pay for
the costs of pipe expansion.
In preparation for privatization, the
government moved to adopt a policy of achieving cost recovery,
in which water tariffs are priced sufficient to meet operations
and maintenance costs, without any public subsidy to keep prices
in check. This, even though systems in the United States, among
other industrialized countries, routinely rely on support from
general tax revenues. While some government officials and the
World Bank suggest that cost recovery is a valuable policy objective
in its own right, the move to achieve cost recovery has proceeded
in tandem with evolution of the PSP proposal.
Cost recovery is viewed as a prerequisite
to attracting private operators. According a 1998 report from
Louis Berger, S. A., a consulting group which analyzed the Ghanaian
water system, "In the context of leasing contracts under
PSP, a tariff level that covers at least operating and maintenance
costs as well as the financial costs related to any capital expenditures
made by the private sector is necessary to attract private operators
since it represents the break-even point for these contracts."
In particular, private operators do not want to be dependent on
government subsidies for revenues to cover their fees and profits.
Compounding the rate hikes, the privatization
scheme calls for the inclusion of an "automatic tariff adjustment"-
with rates rising automatically to offset inflation and, most
importantly, currency devaluations. That makes sense from the
viewpoint of the foreign operators-they will want to maintain
constant profits in dollar-denominated terms, not in cedis, the
local currency. But Ghanaian consumers' cedi income does not go
up just because the value of the cedi declines. Assuming future
devaluations, Ghanaian consumers will find themselves paying a
higher and higher proportion of their income to the water company.
The government will pay the lessees a
fee for system operation. This fee will include costs incurred
by the lessee, including a rate of return on investment.
The fee will be adjusted to reflect the
degree to which the lessee meets or exceeds reductions in "non-revenue
water" -water that is either lost to physical leaks, or delivered
to consumers but not paid for.
The fee will be further adjusted to reflect
the degree to which the lessee meets performance targets related
to: residual chlorine (20 percent), non-revenue water (10 percent),
availability (30 percent), metering rate (10 percent) and customer
complaints (30 percent).
The lessee will post a performance bond,
which will presumably be forfeitable upon mis-, mal- or non-feasance
by the lessee.
PAYMENT AND INVESTMENT
Through reimbursement of indexed operating
and maintenance expenses, the lessee will be reimbursed for the
basic costs of running the water system. A 2001 Information Memorandum
for donors to the project-prepared by consultants Stone &
Webster and the most detailed public description of the contract
framework-suggests there will be reimbursement for "prudently
incurred" costs. This reimbursement provision provides an
incentive to the lessees to pad costs, to engage in transfer pricing
(buying products from the home country or other subsidiaries or
related companies at inflated prices) and generally to be insufficiently
disciplined in economizing in expenses accrued.
This danger does not mean the reimbursement
provision is improper; but the danger must be acknowledged and
addressed. It is unclear what, if any, safeguards will be built
into the contract to prevent such actions. It is unclear what
agency would have the capacity to review expenditures by the lessees.
The duty presumably will rest first with the Ghana Water Company
(GWC), and perhaps also with the Public Utilities Regulatory Commission
(PURC), in case of request for tariff increase. At present, the
GWC does have considerable knowledge and expertise on the costs
of operations and management. However, much or most of that expertise
will be transferred to the lessees. After the lease, the GWC will
run a skeleton operation of 80, which among other responsibilities,
will be obligated to oversee the expansion of the piped system.
It is very difficult to see how the GWC will maintain capacity
to scrutinize the expenditures of the lessees.
On the flip side, the required investment
by the lessees is relatively riskless.
Although a condition of entering into
the lease arrangement is that the lessees must each provide $70
million in investment capital over 10 years, this is not the sort
of investment made by an entrepreneur. Indeed, it may be viewed
as more of a loan to the business unit. Under the terms of the
contract, each lessee will be paid a specified return on investment
(with the exact level to be determined by bid), as well as compensated
for the depreciated value of their investment.
THE NONREVENUE WATER ISSUE
The contract provides an incentive to
the lessees to reduce non-revenue water. Non-revenue water is
an umbrella term that refers both to water that is physically
lost through leakage and to water that is not paid for, due to
unauthorized connections, nonpayment of bills or other reasons.
Overall system loss of non-revenue water
is unknown, but generally estimated on the order of 50-55 percent
of overall production. The Berger Report estimates approximately
30 percent losses due to nonpayment, and 25 percent to physical
From an accounting point of view, nonrevenue
water due to nonpayment and nonrevenue water due to physical leaks
are equivalent. However, they are not equally important in terms
of service delivery; nonpayment water at least reaches a consumer,
leaked water is simply wasted, with no consumer benefits.
It is likely that the "low-hanging
fruit" in reducing nonrevenue water will relate to nonpayment
rather than leaked water. If this is correct, then-at least to
the extent there are built-in incentives to reduce expenses-the
lessee incentive will be to reduce nonpayment water.
There are some apparently easy means to
reduce nonrevenue water. The Berger Report estimates that half
of all nonpayment water is consumed by government agencies that
are either not billed, or simply do not pay their bills. These
are large water users, and a lessee with authority to cut off
agencies for nonpayment is likely to be able to quickly reduce
Forcing government agencies to pay for
water may reduce wastage and improve the water system's balance
sheet. Indeed, this could easily be accomplished by the GWC, if
there was political will to do so. However, payment from non-paying
government agencies simply constitutes an intragovernmental reallocation
of resources, leaving the government no better or worse off than
it was initially.
THE FEE SCHEME
Each lessee's fee will be adjusted, beginning
in year four, based on the extent to which it satisfies the performance
criteria. Performance will be measured in comparison to the early
years of the contract, since baseline data do not now exist.
This may give the lessees an incentive
to underperform in the early years of the contract, to lower the
Another problem relates to the establishment
of baseline data, and monitoring of performance indicators during
the term of the contract. The lessees will have responsibility
for determining baseline data and for reporting performance data
during the term of the contract. The lessees will also have responsibilities
to report information to the PURC, in matters covered by PURC
The global experience with self-reporting
is quite poor, and there is reason to be skeptical of PURC's and
GWC's capacity to scrutinize the self-reported data.
It is easy to imagine manipulation of
almost all of the data relevant to the performance standards.
In particular, data on water availability and customer complaints-
making up more than half of the weighting for the performance
multiplier-would be very susceptible to manipulation.
Improper reporting could completely undermine
the beneficial intent of the performance criteria in the payment
formula, enabling the lessees to be paid for targets not achieved.
The lease arrangement specifies the lessees
will take out a performance bond, which would be forfeited in
event of lessee failure. Inclusion of the performance bond in
the lease is an important mechanism of ensuring operator accountability.
However, the import of this mechanism
of accountability is dependent on the terms of the bond. Important
* Is the bond partially forfeitable, or
only fully forfeitable?
* What are the standards for forfeiture?
* Who makes the determination of forfeiture?
According to what rules?
This information is not in the public
domain. It is not clear to what extent these details have been
considered by policymakers in Ghana. Asked, neither government
officials, including the Water Sector Restructuring Secretariat
(the agency overseeing water privatization), nor World Bank staff
indicated knowing the details, or even having given it much thought.
Whether there are other protections included
in the contract, and on what terms, is also not in the public
domain. Key questions requiring detailed public review and debate
before any hand over of authority to the lessees could be responsibly
* What provisions exist related to potential
lessee breach of contract?
* What provisions exist for damages and
penalties against the lessees? What are the standards for imposing
these penalties? Who makes such a determination?
* What are the conditions under which
the government can terminate the contract? And what obligations
does the government owe a lessee in the event of termination?
These last questions are particularly
vital. Multinational operators generally seek assurances that
contracts will remain in place, and not be subject to political
reconsideration. However, such measures may provide one-sided
assurances to private operators who may be able to demand large
exit payments from governments, even in the event of poor performance.
EXPANDED SERVICE FOR WHOM?
In the PSP proposal, responsibility for
expansion of the piped system rests with the government and the
Given the enormous need for expansion-approximately
one-third of households in the urban areas covered by the PSP
proposal do not have piped connections-and given the oft-stated
premise of the PSP that the public water sector in Ghana is unreformable
and congenitally unable to provide quality service, it may seem
strange to leave expansion responsibilities to the GWC.
However, all parties agree that the system
itself will not generate revenues to pay for expansion, and that
the only viable source of external funding is donor support. Donor
support is generally more available for government-controlled
projects, and so GWC is left with expansion responsibility.
A consultant to the government, W.S. Atkins,
estimated the overall expense of rehabilitation, renewal, improvement
and extension of the system as approximately $1.25 billion.
At a November 2000 donors' conference,
donors - including the World Bank and donor agencies from the
United Kingdom, France Japan, Denmark, Germany and the European
Union-suggested they were prepared to provide approximately $400
million over a 5-10 year period These funds will mostly be in
the form of concessional (low or no interest) loans, but except
for some small grant monies, they will need to be paid back.
The donors indicated a variety of funding
preferences Most prioritize expansion, some rehabilitation.
Some of the donor money might therefore
be allocated to the lessees for renewal and rehabilitation, through
mechanisms that may not yet be determined. Determining the mechanism
in advance of entering into the contract is vital It would run
against the logic of the deal for the lessees to get a return
on the donor investment, but there are no clear safeguards to
prevent this. One possible means to avoid such an outcome would
be to set aside revenues generated as a result of investments,
at least in part, to repay donor loans. In the 2001 Information
Memorandum, it appears that the lessees would have first claim
on these revenues.
GWC's skeletal staff will be responsible
for allocating these monies for expansion projects. They will
rely on private contractors for the physical work of installing
pipes and extending the system. Whether the lessees may bid as
contractors is not apparent, and should be clarified.
Because the lessees will have the duty
to service new customers connected to the pipe system, it is unavoidable
that they will seek to be involved in the decision on where to
expand the pipe system, and pacing of new installation.
Lessee involvement in planning of the
expansion and more generally in the determination of use of donor
funds raises important concerns about prioritization in investment:
What communities will be served? Which consumers will benefit?
The public health, human rights and social
equity imperative is to provide service to those unserved and
underserved, with priority given to low-income consumers.
This imperative may not match with the
lessees' interests, however.
Because the lessees will have an interest
in maximizing volume of water delivered and revenue generated,
they will tend to prioritize upper-income and industrial consumers
over lower-income consumers who will be lower-volume users.
This structural problem of lessee bias
against low-income consumers is worsened by the investment prioritization
proposed for the PSP and included in the 2001 Information Memorandum.
A prioritization exercise undertaken by
W.S. Atkins and reported in the 2001 Information Memorandum assigns
weights to different factors in determining investment priorities.
Economic merit (meaning the extent to which investments generate
new revenues) received the heaviest weighting, weighted as two
times as important as the other service criteria factors combined
(An advisory committee had recommended
including public health considerations as a criterion, but because
"sufficient system level health data was not available,"
public health considerations were excluded from the prioritization
exercise. It is unclear whether this data problem has been or
will be remedied in time to incorporate health considerations
into investment priorities.)
The overall formula is weighted heavily
toward investments that will increase volume as distinct from
increasing the number of connected consumers. Furthermore, the
formula will favor expansion and renewal in areas closer to already
serviced areas (a category heavily skewed to upper-income communities),
where investment costs for extension will be lower.
Thus the investment priorities will work
strongly to favor expansion and rehabilitation for upper-income
and industrial users, and as a disincentive for expanding the
system to reach low-volume, low-income consumers.
MIA: POOR CONSUMER PROTECTIONS
The 2001 Information Memorandum includes
boilerplate language that "a major impetus for the PSP is
to improve the utility's ability to consistently provide water
of good quality to the largest number of citizens"-with the
caveat that this should occur "while moving toward full cost
recovery." It adds, "the Government of Ghana felt strongly
that LICs [low-income consumers], together with other consumers,
needed to reap social, economic and health benefits from the PSP
process. The World Bank, DfID [the UK aid agency], and other donors
likely to invest in the sector have reinforced this as a priority.
Bidders will therefore need to demonstrate their ability to serve
At a minimum, it would be important to
include clear contractual obligations and performance targets
related to providing expanded access and improved service to low-income
consumers. The government has plans to establish an Urban Low
Income Group Water Unit that would have oversight of the contractual
provisions related to service of low-income consumers, though
the exact role of this unit is unclear.
However, the 2001 Information Memorandum
actually suggests that the lessees will not be expected to take
any measures to improve access and service for low-income consumers:
"It is fair that the operator will need to devote considerable
time in the early stage of a contract to rehabilitation of an
existing system and other priorities rather than expansion to
Instead, low-income consumers are expected
to continue to rely on status quo arrangements, specifically to
continue reliance on tanker-supplied water.
Urban consumers who are not connected
to the piped system, or those who receive irregular supply, are
forced to rely on private water suppliers. These suppliers procure
their water from the GWC, and then sell at prices five to 10 times
the rate for piped water-meaning the poorest Ghanaians pay much
more for drinking water than those who are better off. Women and
children are mostly responsible for purchasing water, and may
carry buckets as far as a mile on a daily basis. Poor families
may spend as much as 20 percent of their income on clean water
from the tankers.
The 2001 Information Memorandum contains
general language on the obligation assumed from the GWC to work
with private tankers, and perhaps to take measures such as providing
the tankers with more geographically diverse access to water supplies
(so as to reduce transportation expenses). "In the case of
Ghana, an indigenous system already exist[s] for reaching LICs
outside the network so the Lease does not attempt to displace
local private providers," the 2001 Information Memorandum
However, the existing tanker system is
plagued by price gouging and market failures. Some of the worst
abuses could be easily remedied by regulation or contractual terms
between the water supplier and the tankers that implemented price
controls. Either of these approaches will require cooperation
from the lessees. Astonishingly, there is no evidence that such
terms are contemplated for the contract.
Also apparently given short shrift in
the leasing arrangement is the tariff rate for lower-income consumers.
Ghana currently maintains a lifeline tariff,
so that the first small quantity of water used by consumers is
provided at a much lower rate than larger volumes. The government
is debating whether to continue with this bloc tariff arrangement.
While the existence of the lifeline tariff
is mentioned in the 2001 Information Memorandum, and while the
lessees will be required to charge whatever rates the PURC establishes,
it is notable that there seem to be no contractual obligations
for the lessee regarding provision to lifeline consumers.
This contractual hole may be important
for several reasons.
First, lifeline service is an absolutely
vital element in ensuring the broadest access to piped water and
promoting service to the poor. Because it is the contract terms
above all that determine the lessees' obligations, such a fundamental
component of the water system-if the government wishes to maintain
it-should be included as a contractual responsibility to eliminate
any uncertainty and to emphasize the government's priority for
relying on the lifeline to expand access.
Second, enshrining the lifeline in the
contract would remove it from political pressures from the lessees.
The lessees may have financial interest in eliminating the lifeline,
lessening its subsidy component or moving from a bloc tariff arrangement.
To the extent that a highly discounted, bloc tariff lifeline reduces
revenues, it may harm the lessees' interests. Once implanted into
Ghanaian society, the lessees will be powerful political and economic
actors, certainly the most powerful force operating in the regulatory
arena. If the lifeline tariff is not established as a contractual
obligation, it is easy to image the lessees working to roll it
Third, the lower revenue stream from lifeline
consumers, and the fact that their tariffs will not cover the
marginal cost of servicing them, will give the lessees a disincentive
to service these lower-income consumers. Absent countervailing
provisions embedded in the contract, the lessees are likely to
make servicing lifeline consumers a low priority, and particularly
to disfavor new connections for lifeline consumers as against
higher volume consumers.
Fourth, and for the same reasons that
the lessees have a disincentive to service lower-income consumers,
they will have a strong incentive to disconnect non-paying lifeline
consumers. Money losers even when paying their bills, the lessees
will have an incentive to eliminate lifeline consumers from their
It is striking that completely absent
from the performance multiplier, or other portions of the contract
arrangement that are public, is any incentive to expand access.
If expanding access is in fact a primary
goal of the PSP, and a fundamental public health and human rights
imperative, it is inexplicable that there are no contractual incentives
to achieve this goal, that this goal does not appear as a contractual
obligation, and that no measures are included to offset the apparent
contractual incentives to disfavor lifeline, low-income consumers.
The full report of the International Fact-Finding
Mission on which this article is based is available at: <www.citizen.org/documents/factfindingmissionGhana.pdf.
Robert Weissman was a member of the fact-finding mission.
Monetary Fund (IMF) & World Bank,