IN Parts 1 and 2 of this series I recounted the history of Jamaica’s electricity and communications utilities from private ownership in the 1890s to quasi-expropriation in the 1960s, nationalisation in the 1970s and reprivatisations in the 1980s, 1990s and 2000s. The poor regulatory framework and administration of it set Jamaica back 30 years, I contended.

The reprivatisation of communications has been successful in all ways including democratisation of ownership and improving the general efficiency of the economy, but privatisation has not achieved those sound objectives in the case of electricity and I pointed out the opportunities for achieving them even at this late stage.

In this Part 3 I will discuss the water utility.

Phase VI –water privatisation

A January 2013 Gleaner editorial contained a strident plea for NWC to be privatised. To my certain knowledge this has been considered for decades and has been the subject of many studies. None of these studies has advocated “full privatisation”, but rather the recommendations have been to outsource various discrete functions or general functions in small areas.

The stark fact is that only 20 per cent of the water produced is billed! Of the total potable pipe network, 75 per cent is 50 years and older, with the result that water loss due to leakage is estimated at approximately two billion gallons per month or 50 per cent of non-revenue water (NRW).

To produce water, much electricity is needed and the cost to NWC of this is J$500 million per month — so pumping water that leaks costs J$200 million per month and other NRW costs another J$200 million per month, a total waste of nearly J$5 billion per year.

Much of that cost, being fuel, is in foreign exchange. NRW cannot be zero, however, and the regional benchmark is 35 per cent.

In the 2014 financial year NWC lost J$10 billion in a comprehensive profit and loss sense (but it did have a positive cash flow from operations as some profit and loss charges like unrealised devaluation losses, depreciation and pension obligations were non-cash items).

Indications are that the loss for the latest year ended 31 March 2015 will have been halved, and that is indeed laudable. The NWC could return net profits in the region of J$10 billion dollars per year if NRW is reduced islandwide by 50 per cent (after making allowances for “social water”) — that would bring us to the regional benchmark. That would be a turnaround of J$15 billion. I believe this is true after cross-examining my sources.

A contract for the reduction of NRW in Kingston and St Andrew was recently approved, which should result in the reduction in losses and potentially increase revenue in the largest area supplied by the NWC supply.

Given the financial performance and risk that the projections may not come to pass, private investment simply could not be attracted in a full NWC privatisation scenario. But even if NWC was returning a lofty profit I still doubt that it would be possible to attract investment — if good profits were made there would be intense political pressure to reduce rates — even more than there is in respect of electricity.

To quote from Privatisation of Water: A Historical Perspective (a 235-page paper by Naren Prasad):

“Are there industries that should not be privatised? The answer is yes, because certain government services (like national defence, judicial systems, basic welfare services) are best left with the state.”

Megginson (another author) recognises that there is one industry where not only privatisation has proved difficult but also the argument of increasing welfare has been more than ambiguous. That is water and sewerage provision.

“It is recognised (by the World Bank and United Nations) that it is extremely difficult to operate a water service profitably and at the same time provide affordable services to all consumers. The multinational companies have had murky experiences in developing countries because of the large capital investments required to maintain the infrastructure.

“…it is generally recognised that after two decades of involving private sector in water and sanitation there are increasing popular protests, dissatisfied governments and investors. The private sector has been withdrawing from the sector and is only interested when the risks are limited (e.g. management contract, leases). As a result, the World Bank started giving investment loans to public operators but emphasises the need for financial sustainability. In other words, it pressures public companies to operate on a commercial basis which at least covers its costs and where the prices are set by an independent regulator which is not embedded into the daily politics.

“…financing water facilities is unappealing to private investors for reasons such as the ‘lumpiness’ of necessary investments, payback periods of 20 years or more, and the political difficulties inherent in charging and collecting cost-recovering tariffs. In this case, there is no need to be over-optimistic that the private sector will solve the water problem. We caution that even in the best circumstances, PSP cannot replace provision and in some cases, the public sector should be enhanced and given resources.”

The thrust of efforts to improve the performance of the NWC (apart from reducing NRW) must be to make it more independent of political interference through strong legislation, including it having a corporate structure with governance, accountability and transparency features similar to what is required under the Companies Act, to promote commercialisation.

In terms of commercialisation, an improvement is that the OUR established cost-based tariffs within the regulatory framework which sets out targets, standards and reporting requirements.

Although full privatisation is not feasible given the financial prospects, there are opportunities for the private sector to be in the financing and operating of water treatment plants and waste water treatment plants through Private Public Sector Partnerships (PPP) and Build, Own, Operate and Transfer (BOOT) arrangements. My information is that:

* A proposal was made by NWC for PPPs for water and waste water treatment projects as well as the laying of sewage mains in the corporate area totalling approximately J$23 billion.

* After several meetings NWC received firm interest from a number of named major local financial institutions which would form concessionaire companies to undertake a number of the projects.

* The Ministry of Finance advised that the model proposed would need to be adjusted so that the private investors would take the revenue/collection risk so that there was no contingent liability of the government.

* PricewaterhouseCoopers (not my source of any information herein) was engaged as consultants to refine the model and apparently found a solution. That report has been received but may be on ice.

NWC’s objective is to undertake expansion without continuing to borrow (in foreign exchange) from multilateral institutions, especially as NWC’s revenues are in Jamaican dollars. All aspects of the proposed PPP transaction would be in Jamaican dollars and the characteristic of the investment would be equity and not debt finance, with the advantages pointed out earlier in this article.

Conclusions

* The GOJ’s 2012 privatisation policy is adequate though there should be requirements to include an element of a public offer and stock exchange listing for large enterprises with moderate risk.

* The regulatory system for utilities is conducive to privatisation and the legal framework is developing well. This advance must not be allowed to slip away and revert to the pre-OUR days. The Fair Trading Commission needs to develop further, however.

* In the case of telecoms, privatisation has been successful in terms of providing efficiency gains and widening share ownership and there is nothing fundamental left to be done in that subsector and improvements now will be at the margin, but care must be taken to preserve competition.

* The privatisation of electricity has not promoted competition nor has it resulted in the democratisation of ownership. Both will be very difficult to achieve until after 2028 when the JPS license expires, but it must be done before.

* Water is unlikely to ever be privatised in full but it needs to be commercialised and further removed from political interference. The management has been seeking ways to have the local private sector finance new projects, but has the initiative died on the vine?

This article forms part of the Institute of Chartered Accountants of Jamaica’s 50th Anniversary Celebrations’ series of articles which are produced by its members to promote national development. The author, Richard Downer, CD, FCA, is a Fellow of the Institute of Chartered Accountants of Jamaica and a past vice-president. He has been an advisor to the governments of 16 countries on utility privatisation strategy and transactions and was in charge of several large-scale privatisations in Jamaica. Richard Downer may be reached at: rldowner@hotmail.com. Please visit the ICAJ website at www.icaj.org for the complete article.