In 2017, a pioneering water concession reached financial closure in Rwanda, involving an international private water company contracted to provide 40 million litres of potable water per day for use in the city of Kigali and a nearby district in the Eastern Province of Rwanda. The private partner in the US$61 million Kigali bulk water project is a subsidiary of Dubai-based Metito Group, an international water management company active in emerging markets. The water supplied by the concessionaire will be sold to the government-owned water utility, which will distribute it to end-users to help meet the water demands of Kigali’s expanding population of households and businesses. Project construction is now nearing completion, but the project already illustrates some of the key characteristics of long-term, capital-intensive public-private partnerships (PPPs), in difficult sectors like water and sanitation.
A new class of PPP
This is not Africa’s first water PPP as it is sometimes characterised. The first long-term water concessions in Africa reached financial closure in Gabon and South Africa nearly two decades earlier. Affermage water projects have long been implemented in West Africa. Leases, management contracts, and build-operate-transfer (BOT) water projects have been implemented in several African countries. But many of these older projects have not met stakeholder expectations and a significant number of them have been terminated prematurely. Compared with other infrastructure sectors, the African water sector has attracted very little private investment.
Meanwhile, the massive unmet need for water and sanitation investment in developing countries continues to grow. The SDGs set ambitious water and sanitation targets, which organisations like the UN and the World Bank argue cannot be met in most low-income countries without outside help. But so far, the private sector has not stepped up to help meet the challenge. In industrialised economies the water industry is often viewed as offering relatively risk-free opportunities to achieve steady if unspectacular investment returns. But the realities of the water sector in poor countries are very different, as illustrated by the contrast between private investments in water and sanitation versus those in electricity. The World Bank’s PPI Project Database (2020) shows that in IDA countries, from 1995 to 2018, the total private investment in electricity was over 53 times greater than in water and sanitation. Why is private investment in water so much more difficult than investment in electricity?
Water and electricity, compare and contrast
Many of the reasons for this difference between water and electricity have to do with the basic characteristic of the sectors. First, water supply is much more of a natural monopoly than electricity, complicating the creation of competitive markets for water. This is because water supply, unlike electricity, is primarily a transport challenge. Water is relatively expensive to transport, especially given health and safety considerations, but relatively inexpensive to source, treat, and store. Electricity is just the opposite – relatively inexpensive to transport, but expensive to generate and store. For a given water service area, it is usually impractical to have more than one competitive service provider – and usually, the single water supplier is required to be a government-owned entity to guard against a private company possessing too much market control. In the power sector, it is possible to have several competing generators of electricity, either public or private.
Second, in jurisdictions like the urban areas of Africa, the principal local sources of water are already being exploited and some form of basic water transport infrastructure already exists (e.g., underground pipe networks). Because of this, the essential capital investment needs in the sector are usually estimated to be much less than for power. The World Bank’s 2010 African Infrastructure Country Diagnostic (AICD) concluded that water investment accounted for about 30 percent of the total infrastructure financing gap in Africa, versus 60 percent for electricity. The water sector also had a much higher percentage of investment needs in maintenance and rehabilitation than in a sector like electricity, where capital investment in electricity generation represented the largest need.
Greenfield vs brownfield projects
Third, the emphasis on maintenance and rehabilitation means that private investment in the water sector requires mostly “brownfield” PPP contract structures, like the traditional water concessions signed in Gabon and South Africa in the late 1990s. In contrast, the electricity sector requires mostly “greenfield” PPP structures that emphasise construction of new generation assets, mostly via BOT (or build-own-operate) contracts as used in Independent Power Producer (IPP) projects. A typical brownfield water concessionaire often must rehabilitate, operate, and maintain assets used in distribution of water to end-users, and traditionally the concessionaire is incentivised in this work by being required to derive income via tariff revenues collected from those customers. An IPP project, on the other hand, involves the construction and sometimes ownership of new (“greenfield”) assets, as well as the sale of bulk services to a government utility pursuant to a long-term purchase agreement denominated in hard currency. In Africa, this utility is typically the only “customer” of the IPP (the so-called “single buyer” of electricity), and usually retains responsibility for retail electricity distribution.
In industrialised economies, brownfield projects can be attractive to investors because risks associated with construction, licensing, etc., have been mitigated or no longer apply. But in developing countries, government-owned utility assets are often old, inadequately maintained, and poorly monitored. Because water assets like pipe networks are usually underground, they may be difficult to evaluate (or even locate). The PPP experience since the early 1990s has taught private investors that such assets are usually in much worse condition than reported by government utilities, and inevitably more costly to rehabilitate than estimated by these utilities.
The Kigali bulk water project successfully navigated these kinds of sector issues and private sector concerns with the help of an extensive preparation process, involving numerous government officials and agencies, the African Development Bank (AfDB), as well several members of the Private Infrastructure Development Group (PIDG). PIDG actors included the Emerging Africa Infrastructure Fund, which arranged financing and provided debt, and PIDG Technical Assistance, which provided technical assistance funding as well as capital subsidy support. The project structuring process was led by IFC’s PPP Advisory Services, supported by PIDG’s DevCo project preparation fund.
The preparation process resulted in a water concession that mirrors a greenfield IPP electricity project, backed by a take-or-pay purchase agreement denominated in US Dollars. In other words, it is a greenfield project that builds and operates new infrastructure assets, which the private partner will continue to own, operate, and maintain over the contract period. Because it is more like an IPP than a traditional water concession, the Kigali project is more attractive to private sponsors, operators, and investors – it represents lower risks to cash flows and profitability than a traditional retail water distribution concession with revenue generated via end-user tariff payments in local currency.
A greenfield project of this kind met Kigali’s most urgent water needs because although the city had existing assets for water extraction and transport, they were near collapse by 2015. Maintenance and rehabilitation of the assets had stopped in the aftermath of the 1994 genocide and civil war, and much of the existing basic infrastructure dated to the colonial period. The deterioration of these assets exacerbated water quantity and quality problems with the main water sources for Kigali, the Yanze River and nearby springs that had been heavily polluted by local homes and businesses. By the early 2000s, the World Bank had already recommended a greenfield project to address the water system problems – the construction of a completely new 105 kilometer, large-diameter pipeline running to Kigali from catchments in the north west of the country. But the pipeline’s estimated cost (US$117m in 2003 dollars) dissuaded the government from taking action at that time.
By 2015, the Rwandan government could no longer ignore the need for massive investment in new assets for water extraction, treatment, and transport. With the help of its development partners, a greenfield water project was structured and financed, which was far less expensive than the solutions proposed in the early 2000s. Plus, the project mirrored the investor-friendly features of an electricity generation IPP. Unlike traditional brownfield water concessions, the Kigali project does not directly address issues with the ongoing management of the national water utility, retail water distribution to end-users, or tariff setting, although support for reforms in these areas was made available to the government during the preparation process. Over the lifetime of the concession, the Rwandan government will have to deal with these other sector issues, if the additional bulk water provided by the project is to be used effectively.
The financial closure of the Kigali bulk water concession suggests that although private investment in the African water sector is extremely challenging, careful project preparation supported by government officials and experienced development partners can lead to private investment projects that help meet urgent service delivery needs in low-income countries.