Public private partnerships in urban water supply a case study in ho chi minh city

i

CERTIFICATION
I certify that this work has not been submitted and is not being currently submitted for any
degrees other than the Master in Public Policy of Fulbright Economics Teaching Program,
MPP4.
I certify that at my best knowledge, I conducted myself in an ethical manner in all aspects of
my research and all sources used have been acknowledged in the thesis.
The research does not necessarily reflect either the views of Ho Chi Minh City University of
Economics or Fulbright Economics Teaching Program.

Author

Ngo Minh Phuong


ii

ACKNOWLEDGEMENTS
This thesis has found its ways with the support of many people. First, I would like to express
my sincere gratefulness to Dr. Huynh The Du who supervised my performing this thesis. He
has continuously spent his valuable time and given me helpful advice without those I would
have hardly been able to finish my study. Also I thank Dr. Jan Hoffer for his initial guidance,
literatures and review, Mr. Ly Chung Dan for his professional knowledge sharing, Mr. Le Huu
Quang for experience and information sharing, Mr. Gerard Soppe for his proof reading and
contribution. Last, I am very thankful for the study at Fulbright Economics Teaching program
and all the teachers and friends who have made themselves available to all the academic
questions and support.
Ngo Minh Phuong
Ho Chi Minh City – May 2013

iii

ABSTRACT
The study analyzes the effects of private sector involvement in Saigon Water Corporation
(Sawaco) through equitization with an aim to draw a picture on lessons learnt from Sawaco for
future PPP activities in Vietnam’s urban water supply. Sawaco equitized six out of eight water
supply branches into joint stock companies. However, two years after the equitization, the
People’s Committee of HCMC guided Sawaco on plan for re-buying the shares in JSCs to
achieve ownership of 75%. In addition, the two remaining branches were transformed to one
member limited liability company. Sawaco Parent Company has transformed to One Member
Limited Company under parent-subsidiary company model since 01 October 2010.
The privatization was one of the efforts in correcting the government failure. Nevertheless,
very little evidence showed the positive influence of equitization on Sawaco. Except for
political criteria like annual new household connections, there was no improvement observed
in NRW or financial situation. On the contrary, the joint stock companies embraced the new
institutional form well. Yet, there is no share of responsibilities between the public (Sawaco)
and private (joint stock companies) sectors. In term of the population accessing the drinking
water network, despite the expansion of network connection, not much attention was paid to
the water provision for poor people. The incentive to give connections to the low-income
group goes down due to commercial characteristics of the equitization process.
Although the equitization has realized the policy to socialize urban water services in Vietnam
in general and in HCMC in particular as well as seeded the market orientation for the water
sector, it has threatened the political priority targets and could have achieved better with
forethoughts and baseline analytical work.
Following the findings, generally it is vital to produce baseline analysis on the situation and
prepare a favorable business and policy environment before involving the private sector.
Second, a balance between commercial achievements of the private sector and societal gains is
required. Last, active involvement of all stakeholders is essential in the increase of
transparency, accountability and efficiency.

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For Sawaco, it is recommended that private engagement should be bounded to non-core
operation and maintenance activities of the utility. Water supply affiliates need to stay with the
parent utility as long as network ownership is involved, therefore efforts to gain full control
over tertiary networks are necessary. It may be executed through the collection of sufficient
shares in JSCs or negotiation for buying back the tertiary network currently owned by JSCs.
Another option is to complete the equitization meaning privatization of the entire Sawaco and
subsidiaries with asset ownerships in hands of the government. This shall transform the
corporation into an operator of the water system. Last, better preparation on asset evaluation
and hydraulic network separation could have helped avoiding problems.


v

CONTENTS
CERTIFICATION ....................................................................................................................... i
ACKNOWLEDGEMENTS........................................................................................................ ii
ABSTRACT............................................................................................................................... iii
CONTENTS................................................................................................................................ v
ABBREVIATIONS .................................................................................................................. vii
LIST OF TABLES................................................................................................................... viii
LIST OF FIGURES ................................................................................................................. viii
Chapter 1: INTRODUCTION .................................................................................................... 1
1.1 Problem statement................................................................................................................. 1
1.2 Research objective ................................................................................................................ 2
1.3 Research questions................................................................................................................ 2
1.4 Research structure................................................................................................................. 2

Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY.... 4
2.1 Water is special goods: ......................................................................................................... 4
2.1.1 Nature of the water product and market failures in water supply:................................. 4
2.1.2 Government failures in urban water supply:.................................................................. 7
2.1.3 Assessment on performance of a water utility............................................................... 9
2.2 Public – Private Partnerships in urban water supply .......................................................... 10
2.2.1 Theory on PPP ............................................................................................................. 10
2.2.2 Empirical findings........................................................................................................ 13
2.2.2.1 Experience in developed and developing countries.............................................. 13
2.2.2.2 Case Cancún, Mexico ........................................................................................... 14
2.2.2.3 Case Manila, the Philippines ................................................................................ 14
2.2.2.4 Experience in Vietnam.......................................................................................... 15
2.3 Research method................................................................................................................. 16
Chapter 3: WATER SUPPLY IN HO CHI MINH CITY......................................................... 18
3.1 Overview on water supply activity in Ho Chi Minh City................................................... 18
3.2 Problems of water supply in Ho Chi Minh City ................................................................. 19


vi

3.3 Public policy in water supply sector ................................................................................... 20
3.3.1 General management and guidelines ........................................................................... 20
3.3.2 Water tariff in Ho Chi Minh City ................................................................................ 20
3.3 Policy framework for private engagement in HCMC water supply ................................... 22
Chapter 4: PRIVATE ENGAGEMENT IN SAIGON WATER CORPORATION ................. 24
4.1 Sawaco’s history and existing situation.............................................................................. 24
4.2 Equitization and impact on governmental performance ..................................................... 28
4.2.1 Sawaco parent company operation .............................................................................. 28
4.2.1.1 Operational figures of Sawaco.............................................................................. 28
4.2.1.2 Financial situation................................................................................................. 31

4.2.1.3 Technology innovation ......................................................................................... 33
4.2.2 Impact of the equitization on HCMC People’s Committee......................................... 33
4.3 Equitization and joint stock companies’ performance........................................................ 34
4.4 Impact of the equitization on customers of the water services ........................................... 36
Chapter 5: THE RIGHT PATH FOR URBAN WATER SUPPLY IN VIETNAM................. 38
5.1 Major findings..................................................................................................................... 38
5.2 Policy implication and recommendation ............................................................................ 39
5.2.1 Recommendation for Sawaco ...................................................................................... 39
5.2.2 Other recommendations............................................................................................... 41
5.3 Study limitation and avenues of further research ............................................................... 42
REFERENCE............................................................................................................................ 43
Appendix 1: WATER SYSTEM PRIVATIZATION IN CANCÚN, MEXICO ...................... 48
Appendix 2: NETWORK MANAGEMENT AT JSCs IN HO CHI MINH CITY .................. 50
Appendix 3: OPERATIONAL RESULT OF JSCs AFTER 2007............................................ 51
Appendix 4: SHARE OWNERSHIP IN JSCs.......................................................................... 54
Appendix 5: PRIVATE SECTOR PARTICIPATION IN WATER SUPPLY AND
SANITATION: LESSONS LEARNED AND GUIDELINES FOR PUTTING LESSONS TO
PRACTICE ............................................................................................................................... 55


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ABBREVIATIONS
ADB

Asian Development Bank

HCMC

Ho Chi Minh City

HH

Household

JSCs

Joint Stock Companies

NRW

Non-revenue water

One Member LLC

One Member Limited Liability Company

PPI

Private Participation in Infrastructure

PPIAF

Public – Private Infrastructure Advisory Facility

PPP

Public Private Partnership

Sawaco

Saigon Water Corporation

SOE

State-owned Enterprise

WB

The World Bank

WS

Water Supply

WTP

Water Treatment Plant


viii

LIST OF TABLES
Table 2.1: PPP models in the water sector................................................................................ 12
Table 4.1: Equitization of Sawaco’s Subsidiaries .................................................................... 27
Table 4.2: Sawaco Coverage and Connections 2004 - 2010 .................................................... 28
Table 4.3: Sawaco NRW 2004 - 2010 ...................................................................................... 29
Table 4.4: Sawaco Employees/1,000 Connections 2004 - 2010............................................... 30
Table 4.5: Sawaco Operational Figures 2004 – 2010............................................................... 30
Table 4.6: Loans of Sawaco to JSCs till 31 Dec 2008.............................................................. 32

LIST OF FIGURES
Figure 2.1: Natural Monopoly and Deadweight loss.................................................................. 5
Figure 2.2: Positive externalities and Deadweight loss .............................................................. 6
Figure 2.3: Vicious Spiral Performance Declines of Utilities .................................................... 8
Figure 2.4: Thesis analysis structure......................................................................................... 17
Figure 3.1: Urban Water Supply in HCMC.............................................................................. 18
Figure 3.2: Average Water Tariff of HCMC 2009 – 2013 ....................................................... 21
Figure 4.1: Corporate Chart of Sawaco .................................................................................... 26
Figure 2.2: Key performance data of Joint stock companies.................................................... 35


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Chapter 1: INTRODUCTION
1.1 Problem statement
Following the trend on Public-Private Partnerships (PPPs) for infrastructure, Saigon Water
Corporation (Sawaco) was equitized under the issuance of decision 131/2005/QD-TTg dated
02 June 2005 by the Prime Minister and Decision 141/2005/QD-UBND instructing the
socialization of water services in HCMC. Sawaco who was the front-runner among water
utilities in Vietnam piloted the equitization of six out of eight branches. The results, however,
have yet to meet the expectation, and problems arose in network management and
development activities.
Equitization of Sawaco was the ultimate effort for PPPs in the Vietnam water sector after
several successful attempts. PPPs are understood in Vietnam as the cooperation between the
governmental bodies and private enterprises in investing to the infrastructure, and delivery of
public services.1 As assessed by the Southeast Asia Water Utility Network, there are some
successful PPP models in Vietnam like Phu My Water Supply Joint Stock Company in Ba Ria
– Vung Tau province, the water supply systems in Lim Town (Design-Build-Lease) and Tu
Son Town (Build-Own-Operate), Bac Ninh Province. In HCMC, the percentage of water

produced by private firms in the total water production of the city increased from 0% in 1995
to 12% in 2000 and 28.9% in 2011. There are also a few attempts to incorporate private
partners in the distribution work of Sai Gon Water Corporation (Sawaco) including services in
Phu My Hung urban area (district 7), 2 Trung Son area (Binh Chanh district), 3 the NonRevenue Water (NRW) project4 and Contract for management and leakage reduction based on
performance5 (HIDS, 2012).

1

There is no common agreement on definition of PPP in Vietnam. This explanation comes from the Decree
71/2010/QD-TTg regarding regulations for pilot investments under PPP model.
2
Water is bought from Nha Be water supply company – a privatized branch of Sawaco.
3
Water is bought from Cho Lon water supply company – a privatized branch of Sawaco.
4
This type of contract aims to encourage the private engagement in construction, management and maintenance
of the network. Majority of the project finance comes from IDA credit for four-year length.
5
This contract was signed with Manila water for zone 1 of NRW project


2

It could be seen from the above-mentioned cases that PPPs may be effective for the water
sector in Vietnam under some circumstances. However, when the involvement of the private
sector was enhanced to the privatization level like in Sawaco, problems arose. In such case,
whether PPPs can support solving the dilemma of growing demand in infrastructure and
shortage of governmental funding and imbedding the professionalism, efficiency, and
technology innovation of the private sector to the poor performing public utilities is still a
question. The troubles in the equitization process of Sawaco are worth further study in the

context of Vietnam where more pilot PPP projects are promoted.
1.2 Research objective
This study analyzes the branches’ equitization of Sawaco in order to draw a picture on lessons
learnt from Sawaco for future PPP activities in Vietnam’s urban water supply. It aims find out
if private sector engagement solves the primary troubles of water sector like lack of finance,
low effectiveness, etc. Moreover, the study also scans examples of successful PPP for urban
water supply in similar areas. As this case is one remarkable sample of privatization, it shall be
useful for other water utilities to know what the flaws are and how to deal with them.
1.3 Research questions
This study aims to answer the following questions:
1.

Does private participation help to solve major problems in the urban water sector in
HCMC?

2.

How does private engagement influence Sawaco and the city water supply?

3.

What is the policy implication for private engagement in Vietnam urban water supply in
the coming time?

1.4 Research structure
The study is divided into five chapters. Chapter One works on policy context and reasons for
pursuing the thesis topic, followed by the research objectives. Theoretical background,
analysis framework and successful examples of PPPs in water companies are elaborated in
Chapter Two. Chapter Three describes the overview and problems of water supply in HCMC,

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the public policy for water supply and framework for private engagement in general and for
HCMC in particular. Chapter Four analyzes the specific issues in the equitization process of
Sawaco. Last, Chapter Five presents the summary on key findings from the case study and
policy recommendation for private engagement in the urban water sector of Vietnam. Also
mentioned are the study limitations and avenues of further research.


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Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY
2.1 Water is special goods:
2.1.1 Nature of the water product and market failures in water supply:
Water is a very special product as it is essential for human live. Furthermore, it is an important
input for industry and agriculture. Economically speaking, water is private goods (high rivalry
due to capacity of the network and excludability from water fee). However, urban water
supply has however long stayed in the government’s hands due to some market failures of its
type, typically named as natural monopoly, externalities and merit good characteristics (Jooste,
2008).
Infrastructure of urban water supply requires large capital investment and economies of scale
exist. The four processes of water supply including capture, treatment, transportation and
delivery are usually natural monopoly (Kessides, 2004). And it takes a long time for payback
meaning that water utilities have to count on future customers for recovering cost. In a study
on natural monopoly in the water supply and sewerage sector for developing and transition
economies, three countries out of four, including Vietnam, have the evidence of economies of
scale, implying the natural monopoly (Nauges & Berg, 2007). Also suggested by the findings
in a note of the World Bank which uses data of Africa, Indonesia, Peru, United States and
Vietnam, cost per customer in small utilities may be more expensive and merging small ones

into a large provider may help to reduce the operating cost (Tynan & Kinngdom, 2005). This
adds barriers for the newcomers in the water supply market. Consequently, it is widely
observed that until the 1990s, not many party involved in the water business except
governmental authorities.
As water sector is natural monopoly, if there is no governmental interventions, the monopolist
shall produce at quantity Q1 and sell at price P1, causing the deadweight loss in area ABC
(Figure 2.1). To reduce the loss, the government shall control the price. If it is set at P2, the
quantity supply falls to Q2 leading to no deadweight loss. However, the producer already
makes loss at output Q2 and will leave the market. In this case the government needs to
subsidize in order to keep the monopolist operating. The optimal output for the society shall be


5

at point H, quantity Q* and price P*. It is no longer necessary to subsidize the producer, but
the society still experiences some loss.
Figure 2.1: Natural Monopoly and Deadweight loss

P
AR
A

P1

Deadweight loss

B
H

P*

MR

P2
Q1

AC
C

Q*

Q2

MC
Q

Source: Author’s product adapted from Pindyck & Rubinfeld (1999)
Water supply generates both positive and negative externalities during the life cycle of the
water product – extraction, storage, use, and disposal. In the first stage, some negative impacts
are found in the reduced flushing of floodplains, creation of sulfuric materials, reduced
amenity and lost biodiversity (Bueren & MacDonald, 2004).
In the second stage (storage), people and ecosystem are negatively disturbed through
constraints in fishing, agriculture and dam habitat. In the usage phase, it is, however, positive
with domestic use of water. These externalities involve better health for users and hence the
community. With less sickness, people save money and more time to spend on education or
generating income. As consequences, their well-being increases and that improve their
contribution to the society. In the long term, access to drinking water is associated with
poverty reduction (Moriaty et al, 2004).
In the last phase of the cycle (disposal), externalities are confined to negative impacts
comprising of algal blooms, degraded stream bank vegetation, damaged to the sea grass,

6

reduced recreation, commercial fishing and amenity (Bueren & MacDonald 2004, pp.4). It
also involves wastewater treatment, the treatment cost, environment impacts of effluent on
water quality in the rivers.
In urban water supply, as the positive externalities are dominant, the society shall gain some
benefits and obtain the inefficiency shown in shape CEF (Figure 2.2). Optimal output for the
society is Q3 where the utility charge price P3. It is however far too much loss for the utility
that they can hardly survive. Subsidy from the government is necessary in order to maintain
the operation of the monopolist.
Figure 2.2: Positive externalities and Deadweight loss

P

MSB

AR
A

B

Deadweight loss

P*

H

F

AC
MR

C

E MC

P3
Q*

Q2

Q3

Q

Source: Author’s product adapted from Pindyck & Rubinfeld (1999)
Spreading positive externalities of drinking water consumption in the society has enforce the
will of governments in equal distribution of water among different income groups (Opschoor,
2006). Government’s interventions to fix the market failures in water supply include pricing
regulation. The government to ensure the right of access to clean water of the population,
including vulnerable groups, normally approves the water tariff. This is currently the case
found in developing and transitional countries (Marin, 2009). The optimal result for the utility
without consideration on positive externalities is found at price P* where output level is at Q*,


7

deadweight loss above zero and no subsidize from the government. In another way, it is costrecovery tariff. However, to include the societal benefit, price P3 and quantity Q3 are required.
As commonly observed, the tariffs of state-owned water utilities are under priced. This implies

a subsidy to customers that distorts the market incentives. Tariff structure is evaluated on four
basic criteria, cost recovery, economics efficiency, equity and affordability. In reality, water
tariff rarely satisfies all four criteria; for example, to ensure the equity and affordability for the
poor, tariff must be set in the way that cannot recover cost and achieve economic efficiency
(Whitington & Boland, 2002). In accordance with the work of Marin (2009), tariffs tended to
increase with the introduction of PPPs, but it is not possible to conclude it as a direct result of
private engagement.
2.1.2 Government failures in urban water supply:
Government failures refer to the situations where interventions of the government to correct
the market failures fail and result in inefficiency or other failures in the future (FETP, 2009).
Stiglitz (2000) has pointed out the four main reasons for government failures consisting of
limited information, limited control over private market responses, limited control over
bureaucracy and limitations imposed by political processes. He also mentioned the sources of
public sector inefficiency as incentives and restrictions at organizational and individual levels.
At organizational level, public enterprises are not motivated by profit, therefore lack the
incentive to reach the optimal productivity. They face a soft budget constraint and experience
an environment where little competition exists. The public enterprises usually deal with
political concerns. Furthermore, restrictions on personnel – civil service rules make the
governmental enterprises difficult in firing incompetent workers or pay them competitive
salaries, procurement – costs escalate in an attempt to avoid abuses in the government’s
purchase, and budgeting – it is hard to make the long-term budgeting for large capital
investments, have made the chance of inefficiency escalating. At individual level, besides the
absence of incentives for the workers like pay or firing, the public sector also face the
principal – agent problems which comprise the pursuit of bureaucratic objectives in an effort
to maximize the size of organization, and high levels of risk aversion.


8

Governments have minimized all the market incentives for running water enterprises and thus

enabled the inefficient operation of those utilities. Under the regulation of the government,
water is usually under-priced to ensure that poor people can afford the connections and
governments subsidize to fill in financial gaps. In theory, tariff structure in developing
countries is designed as increasing block tariff to give cross-subsidy but in reality design is so
poor resulting in the failure of cost recovery and economic efficiency objectives (Whitington
& Boland, 2002). Indirectly, the poor is subsidizing the rich and themselves through such
mechanism. Worse, the water utilities fail to invest in network expansion to poor area which
request large investment capital (which they do not have) and bring less income. Restrain in
profit ratio and subsidization has made water utilities sleep for years and provide unreliable
services, making customers unsatisfied. It is, however, quite difficult to overcome the political
barriers and align the interests of all stakeholders.
Governmental inefficiencies imposed in water utilities may shift the cost curves (MC & AC)
of the utility to the right resulting in smaller volume of water produced and higher fee charged
on the customers (see Figure 2.2).
Figure 2.3: Vicious Spiral Performance Declines of Utilities

Source: Baietti et al (2006) cited in Gunatilake & Jose (2007)


9

2.1.3 Assessment on performance of a water utility
According to Marin (2009), to evaluate the performance of a water utility, it is most
reasonable to work on four major dimensions: access, quality of service, operational efficiency,
and tariff levels. A water utility is analyzed on number of connections made per year, water
supply continuity, water losses in production and distribution, bill collection, labor
productivity and overall efficiency of specific project. However, there are quite some
challenges in adapting these criteria in practice such as the ambiguity of performance
indicators, the multidimensional nature of performance, the influence of multiple local factors
on operating costs and wide variety of tariff structures.

As for Vietnam, it is common to work on a number of criteria proposed by the World Bank
(2004) in Benchmarking program for urban water supply utilities. Among those, ranking is
based on the three main factor including non-revenue water (NRW), number of employees per
thousand connections and operational ratio.
-

Non-revenue water: is the difference between produced (or bought) water and billed

water to customers. It is calculated under following formula.

NRW 

 Pr oducedWater   BilledWater  100%
 Pr oducedWater

Non revenue water is made of unbilled water, apparent loss and commercial loss. Although
there is no standard in such figure, the lower the NRW is the better performance the utility has.
-

Number of employees/1000 connections: presents the labor productivity, management

efficiency and level of technology applied in the work. As observed and recommended by the
World Bank (2004), it is considered good in the South East Asia if there are three or fewer
employees per one thousand connections.
-

Operational ratio: is an important factor for performance evaluation, calculated as

follows

OperationalRatio 

 OperationalExpenses
 Operational Re venue


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An effective utility possesses operational ratio ≤0.7 (WB & VWSA, 2004), which shows that
operational expenses are smaller than operational revenue and that helps with reinvestment
into the business.
2.2 Public – Private Partnerships in urban water supply
2.2.1 Theory on PPP
It is traditional for water utilities to be state-owned until the new trend started in the 1980s
where governments wished to reform their urban water supply and sanitation (Marin, 2009).
Public- private partnership was utilized with high hope on gaining the comprehensive reform
to more market-oriented, solving the government failures in urban water supply.
There are different ways to define the PPP, or privatization as called in some of the researches.
Although the two terms of PPP, and privatization are used interchangeably, they are slightly
different in term of the obligation focus and asset ownership. According to the Asian
Development Bank,
“PPPs present a framework that - while engaging the private sector - acknowledge and
structure the role for government in ensuring that social obligations are met and successful
sector reforms and public investments achieved.”
ADB – Public-Private Partnership Handbook, 2008, pp.7.

Meanwhile,
“Privatization involves the sale of shares or ownership in a company or the sale of operating
assets or services owned by the public sector”.
ADB – Public-Private Partnership Handbook, 2008, pp.8.

In a research public by the PPIAF, World Bank, the distinction is also described similarly.
“Privatization involves the permanent transfer of a previously publicly owned asset to the
private sector, whereas a PPP necessarily involves a continuing role for the public sector as a
“partner” in an ongoing relationship with the private sector”.
Farquharson, E. et al – How to Engage with Private Sector in Public – Private Partnerships in
Emerging Markets, 2011, pp.9.


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Within the scope of this thesis, the concept of PPP is similar to “socialization” which has been
used to name the private sector engagement in infrastructure in Vietnam (see paragraph 3.1.2);
and privatization can be used to explain the so-called “equitization” in the case of Sawaco.
PPPs aim at a couple of targets. First, it targets to mobilize private finances in order to support
the government funding in infrastructure development. Second, high expectation is set on the
increase of public sector performance’s efficiency or correction of public sector’s failures.
More expertise, commercial orientation and innovation are believed to be imbedded to
transform the SOEs. Furthermore, the objectives also cover the reduction of corruption,
increase of transparency and accountability in a general effort to improve administration and
management system of those SOEs (ADB, 2008).
There are different models of PPP in the water sector varies from the lowest level - service
contracts where only operation and maintenance is shared between the public and private to
the Divestiture in which private sector executes almost all of the activities (Table 2.1). In the
Divestiture form, assets are sold to the private sector. The private sector bears all the
responsibilities on finance, operation, management and all the risks. Privatization or
equitization as called in Vietnam is categorized to this arrangement type.
The common characteristics of a PPP in general comprise of the shares on operation,
investment and finances. Risks and benefits are transferred between the public and private.
The government faces two primary risks regarding private sector participation in the water

sector including the potential low quality of services and higher tariff than that of the
government. In term of the private sector, risks involve commercial, financial, technical, legal
and political aspects. They may not generate enough profits due to the lower demand than
projected, currency devaluation, or affected by the change in policies or reluctant to increase
the water tariff from the government (Idelovitch & Ringskog, 1995).


12

Table 2.1: PPP models in the water sector
Option

Setting

Asset

Capital

Design and

Operation and

Commercial

Oversight of

Duration

performance

ownership

investment

build

maintenance

risk

performance

(years)

standards
Service

Public

and fees
Public

Public

Public

contract
Management

Shared

Public

Public

1-2

Public/Private
Public

Public

Public

Public

Private

Public

Public

3-5

Public

Public

Public

Public

Private

Private

Public

10-12

Public

Private

Private

Private

Private

Private

Public

20-30

contract
Lease contract
“affermage”
BOT

bulk

service
Concession

Public

Public

Private

Private

Private

Private

Public

25-30

Public

Shared

Shared

Shared

Shared

Shared

Public

Indefinite

Public/Private

Public/Private

Public/Private

Public/Private

Public/Private

Private

Private

Private

Private

Private

Public

Indefinite

contract
Joint venture

Divestiture

Public

Source: Bradford Gentry, Yale-UND Collaborative Program (1998) cited in Pérard, Eni, & Mattei (2007), table 6, pp 10.


13

2.2.2 Empirical findings
2.2.2.1 Experience in developed and developing countries
There is a wide range of experience regarding the participation of private sector in the world.
In 1984, the United Kingdom processed the initial public offering for British Telecom
successfully, and brought the private engagement to a new level, privatization. The
government privatized the water supply asset instead of only the operation, management and
maintenance like France. Many other countries have followed the trend with asset ownership
staying with the Government (Gunatilake & Jose, 2007).
Another interesting model is observed in the water company Evides in the Netherlands. Evides
itself is a private water company with shareholders comprising of municipalities. The
company owns the assets, and finances the investment. The service is supervised by the board
of directors who are appointed by the shareholders. The water tariff is proposed by the
company director and approved by the shareholders or board of directors (Hoffer, 2008). This
is a good combination of working environment, skills and motivation from the private sector
and the social targets from the public sector. The company shall be encouraged to maximize
the performance output with more attention to the social welfare and less pressure from

shareholders in term of profits.
Regarding the real effects of the PPPs in developing countries, Gunatilake & Jose (2007)
presented that the majority of private sector engagement in water supply services did not either
create sufficient competition in the market in order to reduce the price and costs or attract a
large amount of private finances and increase the coverage. However, there are some
successful cases providing that preconditions like strong and effective policy and institutional
environment, feasibility of metering, adequate willingness to pay, cost recovery tariffs and
context-specific measures exist. Another study by Gassner, Popov and Pushak (2009) on
electricity and water shows some outstanding results in labor productivity and operational
efficiency of privatized firms in comparison to comparable SOEs.


14

2.2.2.2 Case Cancún, Mexico
One of the most typical lessons learnt for privatization of water system is the case of Cancún,
Mexico (Appendix 1). A private agency, Aguakán, was granted with the concessionaire for the
water, sewerage and wastewater treatment systems in Cancún and Isla Mujeres, Benito Juárez,
Quintana Roo, Mexico in January 1994 in an attempt to solve the under - performance of the
current public agency responsible for the water system, CAPA. However, two years after the
privatization, the fact that the performance targets and investment commitment in the contract
for the 30-year concession was not fulfilled, combining with major disagreement in tariff
adjustment has brought both the private and public parties to a confrontation at the court. This
resulted in the takeover of the water system by state administration. In 1997, Aguakán
resumed the concessionaire operation in Cancún and Isla Mujeres as a result of significant
political pressure from federal government. In 1998, the mother corporation of Aguakán,
GMD, faced serious financial troubles, and a political scandal happened to the ex-governor of
Quintanara Roo. In February 1999, the state government recommended GMD to seek
association with a “strategic partner” who has sufficient experience. In March, GMD signed a
partnership contract with Azurix, an affiliate of Enron Corporation, a global energy firm based

in Houston, Texas.
Problems were accounted for an uncompetitive and non-transparent bidding procedure, the
lack of sound and specific regulations in the concession contract. Furthermore, the regulatory
agency, CAPA, failed to perform the management and control of the concessionaire operation.
The tariff was not raised because no performance improvement was observed and external
factor like financial recession in Mexico exists. This has blocked the sources for infrastructure
investment. Such a combination of internal and external influences has prevented the private
sector involvement in the water sector of Cancún from optimal results. This lesson should be
learnt by the water utilities before privatization.
2.2.2.3 Case Manila, the Philippines
In the region, the most impressive case is Manila concessions, the Philippines. In 1997, two
concessions were signed for water supply system in two parts of Manila city. Manila Water


15

Company, Inc (formed by Ayala Corporation, United Utilities -United Kingdom, and Bechtel
Corporation -United States) won the contract for the East of the city, serving a population of
around 4 million people. Maynilad Water Services, Inc (formed by Benpres Holdings of the
Lopez Group of the Companies and Lyonnaise des Eaux-France) was awarded with the West
concession well – developed zone of 7 million people. Two companies gained different results
after the first 5 years. In 2003, Manila Water’s work was very profitable and many new
connections were made. On the contrary, Maynilad Water went bankrupt and the concession
was reclaimed by the government for a rebid in 2007. Lessons learnt are summarized as extra
efforts to NRW reduction, engaging the poor in the agenda, conservation and public education,
transparent corporate governance (ADB and NUS, 2012).6
2.2.2.4 Experience in Vietnam
There are some successful attempts to incorporate the private sector into water sector in
Vietnam. Remarkable achievements in Vietnam are found in the Ba Ria – Vung Tau Water
supply Joint Stock Company, and Lim Town water supply system.

Ba Ria – Vung Tau Water Supply Company was transformed into One Member Liability
Company in 2005 and equitized in 2007. The government currently holds 54.94% of the
shares in the company. According to the ranking in benchmarking 2004 -2007, Ba Ria – Vung
Tau was in the first place in group A (companies with water sale > 20 million m3/year) with
operational ratio of 0.5, NRW 15%, 4.1 employees/1000 connections and coverage of 99% in
2007. This is an excellent background for the privatization in 2007 as the need of investment
becomes minimal and pre-conditions for success were observed. Ba Ria – Vung Tau also
embraced strong support from the municipality. As a result, they managed to maintain the first
place in the benchmarking 2007-2009 with even better figures including operational ratio of
0.44, NRW 12% and 3.4 employees/1000 connections. Reasons for success comprises of the

6

A complete case was described in Chapter VI, pp 103 – 132, Good Practice in Urban Water Management, ADB
and NUS 2012.


16

good preparation from the utility, strong support of the local authorities and favorable
customer groups (a large part of clients is industries).7
The water supply system in Lim Town, Bac Ninh province followed Design-Bid-Lease model
with technical assistance of the PPIAF and funds from Swiss Agency for Development and
Cooperation. The project commenced on 2004 as the pilot of the World Bank in engaging the
private entities to the water sector in Vietnam. The asset owner of the system is Bac Ninh
Water Supply Company. Tuan Duc Company won the bid for design, construction and
operation for 10 years. The system was expected to serve 10,900 people in 2006 and 14,958
people in 2025. Factors for success are listed as strong support from the Government, high
involvement of the contractor from the beginning, high demand on water of the local citizens
and willingness to pay for the service. However, the asset owner lacks the incentive for much

support to operators and the 10-year period is quite short to build commitment of the operator
(HIDS, 2012).
As for production, some BOO and BOT water treatment plants were built. In HCMC there are
BOT Binh AnBOO Thu Duc, BOT Tan Hiep and BOO Kinh Dong. It is too early for
conclusion on the success of these plants. But at the present, they are working at the maximum
of their capacity and making profits. Therefore it is safe to say that production might be a
potential field for the private sector involvement.
2.3 Research method
Methodology applied is a case study on Sawaco equitization. Data is collected from various
sources such as reports of Sawaco parent company and its affiliates, reports of development
agencies like the Asian Development Bank and the World Bank. Furthermore, interviews with
water experts from Sawaco and others are incorporated as part of the research.
Water sector market failure and government failure play the key role in shaping the theoretical
background for the study. The study will evaluate the result of private sector involvement in
the water supply of HCMC for four stakeholders including Sawaco parent company, JSCs,
7

Information collected from the company website annual reports 2010 and 2012,
benchmarking 2004 – 2007 and 2008 – 2009.


17

Customers and the People’s Committee of HCMC. For Sawaco parent company, it is intended
to evaluate if the three targets of PPP consisting of private funding mobilization, performance
improvement and new technology are seen in Sawaco. Assessment on Sawaco performance
before and after the equitization uses criteria suggested by the World Bank in Benchmarking
program for urban water supply utilities in Vietnam, combining with other specific analysis.
With regards to the remaining three stakeholders, context-specific criteria are adopted.
Figure 2.4: Thesis analysis structure

Introduction
- Policy background
- Research questions
- Research objectives

Theoretical
background
- Market failure
- Government
failure
- Public-private
partnerships

Case study of Sawaco
Sawaco parent company
- Benchmarking criteria for
operational performance
evaluation
- Context - specific criteria for
financial situation and technology
innovation evaluation

Empirical
findings
- International
- Vietnam

HCMC People’s Committee
- Evaluation on control over JSCs
and

- Connections for the poor
JSCs
- Context - specific criteria for
evaluation on overall
performance
- Responsibility sharing

Water supply in HCMC
- Overall picture of water supply
in HCMC
- Problems of water supply in
HCMC
- Water tariff
- Policy framework for water
supply + PPP

Customers
- City coverage
- Connections for the poor

Recommendations
- Key findings
- Recommendations for Sawaco
- Other recommendations

Source: Author