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Toolkit: Approaches to Private Participation in Water Services

Toolkit: Approaches to Private Participation in Water Services. Module 4 Setting Upstream Policy. Introduction: Navigating through this E-Learning Module. E-learning design: davidstiggers@comcast.net. Elements of the Toolkit. 1 ConsideringPrivate Participation. 2 Planning the Process.

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Toolkit: Approaches to Private Participation in Water Services

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  1. Toolkit: Approaches to Private Participation in Water Services Module 4 Setting Upstream Policy

  2. Introduction: Navigating through this E-Learning Module E-learning design: davidstiggers@comcast.net

  3. Elements of the Toolkit 1 ConsideringPrivate Participation 2 Planning the Process 9 Selecting an Operator TOOLKIT Appendix A Examples of PP Arrangements 8 Designing Legal Instruments 3 Involving Stakeholders Appendix B Policy Simulation Model 4 Setting Upstream Policy 7 Developing Institutions 5 Standards, Tariffs, Subsidy, Financials 6 Responsibilities & Risks Additional Material CD-ROM

  4. Module 4 General Outline of Toolkit 1 ConsideringPrivate Participation 2 Planning the Process 9 Selecting an Operator TOOLKIT Appendix A Examples of PP Arrangements 8 Designing Legal Instruments 3 Involving Stakeholders Appendix B Policy Simulation Model Module 4 Setting Upstream Policy 4 Setting Upstream Policy 7 Developing Institutions 5 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements 6 Responsibilities & Risks Additional Material CD-ROM

  5. What are the Responsibilities of other levels of Government? How do we DEFINE an appropriate Market structure for the Water Sector? Management Contract for How do we IDENTIFY the level of Government to be responsible for water services? Jordan Valley Authority, Irrigation Water Supply, may be the first of its kind. COMPETITION – how can we establish it? Module 4 - What will we learn?

  6. ALLOCATE Responsibilities to different levels of Government DETERMINE Market Structure ESTABLISH Competition Rules Module 4 Setting Upstream Policy • SETTING UPSTREAM POLICY • In this Module we look at the issues that Governments need to address to set Policy upstream from the design of the Private Participation Arrangement • This involves three broad topics • These steps do not need to be considered in sequence, as the results are often examined simultaneously as the reform strategy develops Identify the Reform Leader (Module 2) Introduce Private Participation

  7. 3 Steps - ALLOCATE Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 1 – Examining existing “The first step is to identify current responsibilities of each level of Government, the legal and constitutional basis for these, and to identify any unclear areas” • In many countries, responsibilities for water services are spread between two or three levels of government. For Example • Federal states, like India, the constitution may assign roles to regional or state government, with some responsibility with central government • Local governments may be involved in reform at national level • Even in non-federal states the division of responsibility may not be clear • Example: Jamaica – service provision is at national level, with small systems and standpipe payments at local level. However, legal and financial relationships between utility and local government is not clearly defined. [See also Brazil case study] • “Systems can work well with distributed responsibilities, but introduction of private • participation has to be done with care so as the change in roles does not cause • conflict.” 3 Steps - ALLOCATE Responsibilities to different levels of Government

  8. Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities at different Government Levels “Dividing up the responsibilities for water services is a three step process, ………” “,……… then we need to set up the legal & institutional framework” • CREATE LEGAL INSTRUMENTS • These have to : • Be clear • Allocate appropriate responsibilities • Allocate adequate powers to each level of Government Note: This subject is covered in Module 8 • In this section we look at a three step ALLOCATION process: • Current legal responsibilities and institutions • Decide which level of Government to be responsible for water services • Decide level of Government responsible for issues such as tariff setting, quality and managing water resources. Create legal instruments that allow this to happen, and adequate power to each level of Government ALLOCATE (In 3 Steps) Responsibilities to different levels of Government

  9. ALLOCATE (In 3 Steps) Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Example: Question of Responsibility in Brazil Allocate Responsibilities Step 1 – Examining existing “The first step is to identify current responsibilities of each level of Government, the legal and constitutional basis for these, and to identify any unclear areas” 3 Steps - ALLOCATE Responsibilities to different levels of Government

  10. 3 Steps - ALLOCATE Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 2 – Choose Level “ Generally the tier of Government ( local, provincial or federal) responsible for water delivery should also be the Contracting Authority with the Private Operator” • Although the tier of government responsible for water services should generally be the Contracting Authority, many factors influence the choice of tier: • Need for collective choice mechanism: in order to set an equitable service level and tariff, best if control is at a local level, representing the area of service. • Different capacities at different levels of government: Provision of water services needs specialized technical and commercial skills that may be in short supply, and perhaps only available at national level. • Economies of scale: It may be more efficient to have a single service provider serving several towns and villages rather than a number of smaller providers. • Dilemma of regional water storage and transmission networks: These may cut across several local areas. It may be possible to separate regional transmission systems from local distribution systems.

  11. ALLOCATE (In 3 Steps) Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Example: Economy of Scale -Small towns in France Allocate Responsibilities Step 2 – Choose Level “ Generally the tier of Government ( local, provincial or federal) responsible for water delivery should also be the Contracting Authority with the Private Operator”

  12. Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Step 3a DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Step 3b ESTABLISH Regulatory regimes and institutions Allocate Responsibilities Step 3 – ‘External’ issues “ Institutions and rules need to be set up to monitor performance, regulate contract obligations, set tariffs and regulation and compliance with relevant laws and codes (e.g. environmental , water resources etc.)” ALLOCATE(In 3 Steps) Responsibilities to different levels of Government

  13. 3 Steps - ALLOCATE Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 3a – Monitoring/Tariffs “ Central Government can monitor contract performance and set tariffs. Difficulties may arise when Municipalities or states take on this responsibility” • In the case of municipalities or states there are three options for allocating responsibility for monitoring operator performance and adjusting tariff and quality controls: • Assign functions to the level of Government where services are provided: • Example: municipal contract supervision units for municipal contracts • Establish a National Regulator: • Even if services are provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls. • Spread functions among various levels of Government: • The level to depend on who is best to perform particular functions.

  14. Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Step 3b ESTABLISH Regulatory regimes and institutions Allocate Responsibilities Step 3 – ‘External’ issues “ Institutions and rules need to be set up to monitor performance, regulate contract obligations, set tariffs and regulation and compliance with relevant laws and codes (e.g. environmental , water resources etc.)” ALLOCATE(In 3 Steps) Responsibilities to different levels of Government

  15. 3 Steps - ALLOCATE Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements LOCAL or NATIONAL REGULATION? THE ISSUES: Local Governments: Close to customer. If acts as both contracting authority and regulator avoids coordination problems. Local decision makers may have less capacity and knowledge of comparative data National Regulators: Has capacity and experience to act for all service providers in the country. Example: OFWAT in England & Wales  There may be coordination problems. Local government may feel national regulators infringe on their power. Some countries had problems where powers duplicated at national and local level. Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 3b – Regulators “ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs. There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?

  16. 3 Steps - ALLOCATE Responsibilities to different levels of Government National or Local Regulation: A compromise? Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 3b – Regulators “ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs. There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?

  17. 3 Steps - ALLOCATE Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 3b – Regulators “ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs. • There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level? • Different mechanisms and Regulators for different tasks. Some of the key tasks include: • Contract monitoring & tariff setting • Example: municipal contract supervision units for municipal contracts • Environmental protection: • It is possible for services to be provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls.

  18. LOCAL or NATIONAL REGULATION?: • ENVIRONMENT PROTECTION & WATER RESOURCE MANAGEMENT • Rules on Environmental Protection and Water Resource Management are particularly important to a private operator, since governments tend to be stricter with private operators than with Government utilities on compliance with environmental standards. • Poor overall water resource management may bring additional costs • Example: Illegal groundwater abstractions may deplete resources so much that the Operator has to develop new sources to meet obligations • Example: Upstream discharges may pollute and increase treatment costs, when increased discharge rules would be more effective • New regulatory arrangements need to be in place before Private participation. A dedicated Water Resource institution is best the arbitrate between competing water users. The Model of River Basin Agencies, originated in France, is finding increasing favor throughout the world, where typically they represent the interests of all water users, and are financed through charges on abstraction and discharge. 3 Steps - ALLOCATE Responsibilities to different levels of Government Step 1. EXAMINE Responsibilities under current law & institutional arrangements Step 2. DECIDE Which level of Government should be responsible for water service provision Step 3 DECIDE Which levels of Government responsible for tariff setting , environmental issues etc. Allocate Responsibilities Step 3b – Regulators “ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs. • There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level? • Different mechanisms and Regulators for different tasks. Some of the key tasks include: • Contract monitoring & tariff setting • Example: municipal contract supervision units for municipal contracts • Environmental protection: • It is possible for services to be provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls. • Water resource management: • The level to depend on who is best to perform particular functions.

  19. DETERMINE Market Structure Horizontal Structure Interaction between providers at the same level on the value chain Vertical Structure Interaction between providers at different levels on the value chain Cross Sector Structure Limits on ownership or other affiliations between water utilities and companies in other sectors DetermineMarket Structure • Once Market Structure has been chosen, Government will have to decide what areas of privatization will be sought, and in what sequence: • Example: If an existing utility is divided into a bulk supply company and a distribution company, should private participation be invited in both parts? • Existing Market Structure is maintained in many cases, in order to minimize disruption and transition costs. However it may be better to consider a range of market options (as described in this section) • It is better to make any changes before introduction of Private Participation “ Market Structure refers to the number of service providers and their responsibilities. There are three main market structure models

  20. DETERMINE Market Structure Horizontal Structure Interaction between providers at the same level on the value chain Market Structure:Horizontal “ Horizontal structures relate to service areas – and this section looks at decisions on selecting service areas” • HORIZONTAL STRUCTURE • Deciding on Service Areas • The options range from having a single provider responsible for the whole country, to allowing every town and village to have its own provider, and, in between, various groupings of rural and city areas. • Various issues are considered: • Environmental and Technical factors • Impact on Service Efficiency • Administrative boundaries & collective choice • Financial attractiveness and capacity • Transaction Costs Horizontal Structure Interaction between providers at the same level on the value chain Vertical Structure Interaction between providers at different levels on the value chain Cross Sector Structure Limits on ownership or other affiliations between water utilities and companies in other sectors

  21. ENVIRONMENTAL & TECHNICAL FACTORS: • Configuration of Existing Networks • Least Cost technical solutions to improve supply BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Horizontal Structure:Environmental & Technical Single Utility? When areas are served by a single network (like Capital City and Villages C & D in the example) there may be an argument for a single utility covering this area ‘Technical & Environmental coordination can either be by awarding all responsibility to a single entity, or by ensuring adequate contracts or rules related to coordination’ Least - Cost Technical Options? If the best technical and financial scheme involves a scheme serving several areas, there may be an argument for a single provider serving the whole area

  22. ENVIRONMENTAL & TECHNICAL FACTORS: • Configuration of Existing Networks • Least Cost technical solutions to improve supply • Water Resources issue BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Horizontal Structure:Environmental & Technical Common resource? If areas compete for the same resource (for example abstracting from the same reservoir as Capital City and Provincial Center) it may make sense to have a single provider to resolve conflict ‘Technical & Environmental coordination can either be by awarding all responsibility to a single entity, or by ensuring adequate contracts or rules related to coordination’

  23. BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Horizontal Structure:Service Efficiency “Empirical research shows economies of scale in water services” Economies of Scale? As more customers are added to the service, generally the unit cost drops. This can be important in small towns and villages that lack the scale to employ specialist managers and staff There are limits to this. Utilities that are too large become difficult to manage

  24. BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Horizontal Structure:Administrative boundaries “Aspects of water services provided by a network are the same for most customers ” Collective Choice? Customers need a collective way to decide on key service issues. Using local government boundaries can give a democratic voice in this matter However, technical considerations may dictate a larger service area, and then some way of coordinating responses between administrative areas is a good idea

  25. BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Horizontal Structure: Financial Attractiveness & Capacity “Grouping areas together may increase the financial attractiveness” Financially Attractive? Operators, particularly the large international companies, may have large fixed marketing costs. This gives a preference for the larger projects where these costs can be absorbed. However once established in a large urban center, there may be scope for further expansion to surrounding towns, peri–urban, and rural areas, to benefit from efficiency of private participation. Grouping poor areas, or less developed areas, with wealthy ones is a way to attract private operators to serve poorer areas, allowing cross subsidization, and meeting social goals. Care must be taken to ensure that the overall project is still attractive to the Operators.

  26. BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Horizontal Structure:Transaction Costs “The costs of changing market structure can be substantial” • Transaction costs need to be included in any Trade-off analysis between alternative options. • Aggregation or disaggregation may require transfer of assets, liabilities and staff. • To carry out these transfers an inventory of assets is needed, and technical issues need to be addressed • Example: It may be technically difficult (and costly) to completely separate two systems previously joined, and physical transfers (each with a transaction cost) will still have to be carried out for each area

  27. BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Benefits & Costs Increasing Size & Scope Bulk Supply Horizontal Structure:Transaction Costs “The costs of changing market structure can be substantial”

  28. National Utility: Ghana Metropolitan Utility: Manila Metropolitan Utility Buenos Aires Small towns: Franchising Examples Horizontal Structure:Common Issues “National Utilities – Metropolitan Utilities – Rural Areas” • This section gives access to additional information on common issues: • Pros & cons of a National Utility • Considerations in the case of a Metropolitan or Municipal Utility • Ensuring service provisions in rural service areas & small towns

  29. DETERMINE Market Structure Vertical Structure Interaction between providers at different levels on the value chain Market Structure:Vertical “ Vertical structure relates to the provision of water services from Source to Tap and beyond. There is the possibility of unbundling these water service components” Horizontal Structure Interaction between providers at the same level on the value chain Vertical Structure Interaction between providers at different levels on the value chain Cross Sector Structure Limits on ownership or other affiliations between water utilities and companies in other sectors

  30. Water Abstraction Transport Treatment Distribution Customers Collection Treatment Disposal Discharge Sludge Treated Water Vertical Market Structure:The Value Chain “The various Water Services components can be shown as items on a Value Chain” ‘Unbundling’ ‘Unbundling’ is the where items on the value chain are given to separate service providers. More typical in the electricity sector, but still feasible in the water sector

  31. Unbundling – An Example: • If responsibility for serving Capital City is separated from responsibility for supplying Villages C & D, issues of vertical separation follow. • One option would be to separate reservoir and pipelines from distribution services, resulting in 4 separate providers: • 1 Bulk Supply Business: Reservoir and pipelines • 3 Distribution businesses: Capital City, Villages C& D • Of course, this is only one option. BOUNDARY Reservoir Village F Provincial Center Transmission Pipe Village A Village C Transmission Village E Town Capital City Village B Village D Treatment Plant BOUNDARY RIVER Secondary Town Bulk Supply Vertical Structure:Unbundling “Unbundling , or vertical separation, has to be done with care related to the horizontal structure issues as well as the value chain ” • VERTICAL SEPARATION IN THE WATER SECTOR • Here are four typical examples of ‘unbundling’ used in the water sector: • Wastewater separated from Water Supply. • Bulk Water Production & Treatment separated from Water Distribution. • Wastewater Treatment & Discharge separated from Collection • Water Transmission separated from Distribution

  32. Vertical Structure:Unbundling Issues “When deciding whether to vertically separate services, consider several issues: ” • The current structure of the sector • How to ensure quality of service • Planning investment • Where new investment or management is needed • Taking advantage of scale and scope • Managing payment risk • Managing scarce water resources • Promoting decentralized decision making “The issues and solutions will be specific to the particular case ”

  33. More Detailed Analysis of Unbundling Issues Example: Senegal Sewage & Water Unbundling Vertical Structure:Unbundling Issues “When deciding whether to vertically separate services, consider several issues: ” • The current structure of the sector • How to ensure quality of service • Planning investment • Where new investment or management is needed • Taking advantage of scale and scope • Managing payment risk • Managing scarce water resources • Promoting decentralized decision making “The issues and solutions will be specific to the particular case ”

  34. DETERMINE Market Structure Cross Sector Structure Limits on ownership or other affiliations between water utilities and companies in other sectors Market Structure:Cross Sector “ It is possible for water services to be provided jointly with other utility services (for example power or gas). The issue is whether they should be separated or combined” Horizontal Structure Interaction between providers at the same level on the value chain Vertical Structure Interaction between providers at different levels on the value chain Cross Sector Structure Limits on ownership or other affiliations between water utilities and companies in other sectors

  35. Market Structure:Cross Sector - benefits “ Grouping services can offer benefits…….” • Possible benefits of grouping services together include: • Economies of scope • Reducing payment risk • Financial sustainability and cross subsidy

  36. More Detailed Analysis of Cross Sector Benefits Example: Gabon & Morocco Market Structure:Cross Sector - Benefits “ Grouping services can offer benefits…….” • Possible benefits of grouping services together include: • Economies of scope • Reducing payment risk • Financial sustainability and cross subsidy

  37. Market Structure:Cross Sector - Disadvantages “ ……Grouping services can also pose disadvantages” • Possible disadvantages of grouping services together include: • Problems in cost allocation and tariff setting • Competitive distortions • Loss of management focus

  38. More Detailed Analysis of Cross Sector Disadvantages Market Structure:Cross Sector - Disadvantages “ ……Grouping services can also pose disadvantages” • Possible disadvantages of grouping services together include: • Problems in cost allocation and tariff setting • Competitive distortions • Loss of management focus

  39. ESTABLISH Competition Rules Competition for the Market Competition via Capital Markets Competition in the Market Establish Competition Rules “ Market structure is likely to evolve based on the rules established for competition as defined at the time of the Transaction”

  40. ESTABLISH Competition Rules Competition for the Market Competition:For the Market “ Competition for the Market consists of re-bidding private sector contracts at regular intervals” • Issues: • Rebidding is an efficient way of maintaining competitive pressure to provide high quality service at reasonable price: because the contractor risks losing the contract at the next bid stage • Typically long term contracts (up to 50 years): necessary for the contract to mimic competition – such as price controls, based on competitive comparisons • Should firms be encouraged to bid for several projects? •  Firms can bid for several contracts; increase demand, spread overhead cost and benefit from economies of scale If firms are allowed to expand without limits, it may develop into a monopoly, making difficult for new entrants at re-bid stage. The issue of maintaining competition may limit the number of contracts an operator may be allowed to win, to prevent a monopoly. Example: Metro Manila – operators were not allowed to win both of the two Concessions for this major urban area In most developing countries, however, it may be necessary to allow operator to develop their demand base to gain economies of scale. This was the case in France where consolidation has happened over several years, reducing competition Competition for the Market Competition via Capital Markets Competition in the Market

  41. ESTABLISH Competition Rules Competition via Capital Markets Competition:via Capital Markets “ Competition via Capital Markets occurs when Operators can purchase their competitors through buying shares on the Financial Markets, or through mergers” • Issues: • Threat of Purchase: maintains competitive pressure on Operators, and an incentive to maintain the company’s financial health • When does this occur?: when company’s shares can be bought and sold ( often for service providers, more restricted for asset owning companies • Mergers & Acquisitions: Governments may want to restrict mergers and acquisition, as this would have similar issues to allowing a company to win multiple contracts, including difficulties of establishing competitive service benchmarks • Example: Mergers have been prevented in the UK water Services market to ensure sufficient Operators remain for comparative competition [SeeBox 4.9] Competition for the Market Competition via Capital Markets Competition in the Market

  42. ESTABLISH Competition Rules Competition via Capital Markets Example: UK Capital Market Competition:via Capital Markets “ Competition via Capital Markets occurs when Operators can purchase their competitors through buying shares on the Financial Markets, or through mergers” • Issues: • Threat of Purchase: maintains competitive pressure on Operators, and an incentive to maintain the company’s financial health • When does this occur?: when company’s shares can be bought and sold ( often for service providers, more restricted for asset owning companies • Mergers & Acquisitions: Governments may want to restrict mergers and acquisition, as this would have similar issues to allowing a company to win multiple contracts, including difficulties of establishing competitive service benchmarks • Example: Mergers have been prevented in the UK water Services market to ensure sufficient Operators remain for comparative competition [SeeBox 4.9] Competition for the Market Competition via Capital Markets Competition in the Market

  43. ESTABLISH Competition Rules Competition in the Market Competition:In the Market “ Competition in the Market is when Operators are free to enter and offer services in a Market. More usual in consumer goods market, more difficult to organize in Water Services market” ALTERNATIVE PROVIDERS Exclusivity may prevent small-scale alternative providers from offering services in areas unlikely to be connected. Small scale Alternative Providers may be able to expand service coverage, with provision of bulk supply arrangements by the Operator. • Exclusivity Issues: Often Exclusivity given to Operators, it limits competition, but may be needed to make the contract economic.  Liked by Operators - Protects Operator from competition and some uncertainty of future demand. Prevents inefficient duplication of pipe networks. Helps preserve cross subsidies (since high paying customers cannot change providers) • Customers may benefit from more liberal entry policies. • May prevent small scale Alternative Providers from offering services Competition for the Market Competition via Capital Markets Competitionin the Market

  44. ESTABLISH Competition Rules Competition in the Market Alternative Small Scale Providers Competition:In the Market “ Competition in the Market is when Operators are free to enter and offer services in a Market. More usual in consumer goods market, more difficult to organize in Water Services market” • Exclusivity Issues: Often Exclusivity given to Operators, it limits competition, but may be needed to make the contract economic.  Liked by Operators - Protects Operator from competition and some uncertainty of future demand. Prevents inefficient duplication of pipe networks. Helps preserve cross subsidies (since high paying customers cannot change providers) • Customers may benefit from more liberal entry policies. • May prevent small scale Alternative Providers from offering services Competition for the Market Competition via Capital Markets Competitionin the Market

  45. ALLOCATE Responsibilities to different levels of Government DETERMINE Market Structure ESTABLISH Competition Rules Reviewing Module 4 “The Module has looked the main areas of upstream Policy that should be established before developing PP design…………” Identify the Reform Leader (Module 2) Introduce Private Participation

  46. Module 4 More Information “……..and further background information is available”

  47. Supporting Material • The Toolkit Financial Model • Toolkit Case Study material • Toolkit Website: http://rru.worldbank.org/Toolkits/WaterSanitation/ • For comments or further details contact Cledan Mandri Perrott at cmandriperrott@worldbank.org

  48. Toolkit: Module 4 End of Module

  49. Toolkit: Module 4 Return to Start

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