Privatising utilities -- almost

By Niveen Wahish
The State Council recently approved a draft presidential decree to regulate private sector participation in the establishment, management, operation and maintenance of water and waste water utilities for periods of up to 99 years. According to sources at the Ministry of Housing, Utilities and New Communities, which oversees water and waste water services, the draft presidential decree deals with two issues. Firstly, it modifies the current concessions law which dates back to the 1940s. Secondly, the draft decree provides for the establishment of a regulatory agency to supervise private sector involvement in the water and waste water sector. The draft decree remains to be approved by the cabinet, after which it will be presented to the People's Assembly.
With this d,ecree, the government has come as close to privatising the sector as possible without actually relinquishing ownership. The actual sale of utilities to the private sector would be unacceptable to a public which still has reservations about the privatisation of public sector companies, not to mention public services. A major concern is that utility bills will skyrocket if infrastructure is run by private investors.
With these constraints in mind, the Egyptian government has been examining ways of reforming public utilities during the last two years. The United States Agency for International Development (USAID) has been a source of technical assistance to the Egyptian government in this regard.
A USAID official told Al-Ahram Weekly that what prompted the Egyptian government to consider reforming this sector was its desire to attract private investment to augment the resources required by the state to extend and upgrade basic infrastructure. According to the USAID official, the government is interested in possibilities for building partnerships and finding other sources of financing to provide capital for infrastructure.
In this quest, Egypt is following in the footsteps of many other countries. Ahmed Galal, director of the Egyptian Centre for Economic Studies (ECES), explained that opening this domain to the private sector is part of a worldwide trend. Many governments have come to realise that infrastructure projects have become extremely costly and are a major cause of budget deficits.
This latter factor, according to Galal, is what finally pushed governments to consider seeking financing from the private sector. But attracting the private sector is not an easy task. Without a reasonable rate of returns on his investment, no businessman will be interested in betting on this sector. For this reason, the modification of the concessions law is viewed as a critical measure.
The original law, which took into consideration the circumstances prevailing in the 1940s, caps profits and the percentage which can be repatriated. The new concessions law is expected to allow for a higher rate of returns and will provide guidelines to ensure transparency on the part of both the investor and state.
One of the main principles behind the draft presidential decree, according to the USAID official, is the provision of a transparent system by which all investments will be treated equally. "Without that, you can have investment but it will be very small."
The mere news of the draft decree has set the private sector aflutter with anticipation. According to Tarek Allouba, an International Finance Corporation (IFC) senior projects manager for the Middle East, international conglomerates operating in utilities are eager to invest in this sector. "The government is moving in the right direction," said Allouba. He cautioned that "issuing the law is not enough, its application is also very important."
The water sector is "strategic," says Allouba, and therefore it must be managed efficiently, especially in light of forecasts that water will be a scarce commodity in the years to come. "It has to be managed efficiently or there will be shortages," he cautioned.
Allouba said that private sector participation can help the government, not only by offering much needed financing, but by providing more effective management and reducing waste. Citing the private sector's record for running more efficient operations, Allouba said he expects costs for providing utilities will be reduced. "This may mean that prices will be raised only slightly. In fact, in some countries which have allowed private investors into this sector, rates were actually lower than those offered by the government," said Allouba.
While the private sector may offer much needed financing for infrastructure projects, regulation is essential to stave off any possibility of monopoly. This is the purpose of the regulatory agency provided for by the draft presidential decree.
The agency will play a crucial role in issuing licences, approving prices, and ensuring that the poor are protected and have access to the service. In keeping with the protection of the public, the agency will also monitor the implementation of projects to ensure that investors abide by their contract, whether this is for a concession to operate an existing utility or a build-own-operate-transfer (BOOT) agreement.
Ahmed Galal of the ECES said that the details of BOOT agreements are critical to ensuring successful cooperation between the public and private sectors. One major concern for the government is that the contract provides for a pricing formula that promotes efficiency and quality.
He added that a contract must also provide investors with protection against expropriation and changes in the taxation and pricing formulas. "The private sector does not want the rules to change suddenly," said Galal. Moreover, they want clear-cut mechanisms for conflict resolution.
In the case of infrastructure projects, avoiding conflicts is one of the investors' major concerns. Galal explained that infrastructure projects are "asset specific projects" wherein the risk of losses is high in the event of a dispute with the government.
But it is not only the private sector which needs to ensure that it is protected by the contract. The government has the obligation to ensure the private sector provides investment needed to meet consumers' needs nationwide, especially for those living in poorer rural areas. Similarly, a contract should ensure that services will be affordable for all, and not simply offered at higher rates to those who can pay for them.
Having negotiated a sound contract, the government's duty is far from over, suggests the USAID official. Public education, which explains the advantages of private sector management as well as the protections afforded by the government's regulatory role, is also an important part of the government-led reform process.
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