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Private Sector Participation (PSP) in Jordan's Water Sector

Diplomarbeit 2005 78 Seiten

VWL - Fallstudien, Länderstudien


Table of content



Acronyms and Abbreviation

List of Figures

List of Tables

1. Problem background
1.1 Structure of the thesis
1.2 Aims and Limitations
1.3 Methodology

2. Theoretical Background
2.1 Overview and definition of private sector involvement
2.2 Different forms of private sector participation
2.2.1 Work & service contract
2.2.2 Management contract
2.2.3 Lease / Affermage
2.2.4 Build-Operate-Transfer (BOT)
2.2.5 Concession
2.2.6 Divestiture
2.2.7 Comparison of PSP options
2.3 Unique Characteristics of Water
2.4 Potential risks of private sector involvement in the water sector
2.5 Performance measurement of a water utility
2.5.1 Unaccounted-for-water
2.5.2 Non-revenue-water
2.5.3 Problems with measuring water losses
2.6 Resume

3. Analysis of risks and benefits of private sector participation
3.1 Assessment of the benefits of private sector involvement
3.1.1 PSP can combat inefficiency, overstaffing and low productivity
3.1.2 PSP can increase the quality of goods and services
3.1.3 PSP cannot cover all investment needs
3.1.4 PSP can solve the lack of managerial skills or managerial authority
3.1.5 The public sector can suffer from unresponsiveness to the public
3.1.6 Public utilities may suffer from undermaintenance of facilities and equipment
3.1.7 PSP is not an adequate way to receive funds for needed capital investments
3.1.8 Excessive vertical integration can harm the performance of the core product
3.1.9 The problems of obsolete practices or products are of minor importance
3.1.10 Public utilities are vulnerable for multiple and conflicting goals
3.1.11 Misguided and irrelevant agency missions leads to inertia
3.1.12 Underutilized and underperforming assets are a serious problem
3.1.13 Illegal practices are difficult to measure
3.1.14 Theft and corruption influence the private sector involvement
3.2 Assessment of the risks of private sector involvement
3.3 Alternative concepts of private sector involvement
3.3.1 Small-scale entrepreneurs can serve the poor
3.3.2 Micro level private sector participation as a short-term option for PSP
3.4 Resume

4. Case Study: The Hashemite Kingdom of Jordan
4.1 Economic, ecological and social information on Jordan
4.2 Jordan’s water institutions and water policy in brief
4.2.1 Jordan’s water institutions in brief
4.2.2 Jordan’s water policy on private sector participation in brief
4.3 Private sector participation in Jordan’s water sector is mainly donor driven
4.4 Jordan’s experience with management contracts in the water sector
4.4.1 Greater Amman Water Supply and Wastewater Service
4.4.2 Northern Governorates Management contract
4.4.3 Wadi Mousa Water and Wastewater Management contract
4.4.4 Further projects and lessons learned
4.5 Jordan’s future: public company?
4.6 Resume

5. Remarks and Conclusion

List of References


Herewith I, Dennis Vilović, born on 23rd of March 1979 in Bad Segeberg / Germany, Matr.No.: 128678 declare that I have independently written this thesis. I have not used other sources and aids than explicitly mentioned; it has never been presented for any Diploma, Degree or other Academic Award in any Institution of High Education.

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Amman, March 22nd 2005


I would like to express my warm thanks to my supervisor Thomas Behrends for his patience, support and understanding and the high evaluation that he always gives to the individual performance. Furthermore I would like to express my sincere thanks to Dorsch Consult and the Gesellschaft für Technische Zusammenarbeit (GTZ), especially to Udo Kachel (Dorsch) and Marina Meuss (GTZ), who gave me the opportunity to work in the ‘Operation Management Support’ project in the Ministry of Water and Irrigation of Jordan. Indeed, I have gained considerable from the materials and discussions with Iyad Dahiyat (PMU).

I would like also to express my appreciation and warmest thanks to the following people which always helped me during my research: (they appear alphabetically)

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Claudia Wolfram

Gerry Wolfram

Hans Meier

Ingo Rudolf

Iyad Qassir

Jamil Shahade

Mohammad Kurdi

My family

Steffen Macke

Torben Feyerabend

Volker Schrank

… and the whole OMS team

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Acronyms and Abbreviation

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List of Figures

Figure 1: Differences of PSP, PPP and privatisation

Figure 2: The range of PSP options

Figure 3: Calculation of unaccounted-for-water

Figure 4: Integration of Micro-PSP in the overall PSP concept

Figure 5. The Ministry Organization Chart

List of Tables

Table 1: Private Sector Participation options

Table 2: Variants of the Acronym BOT

Table 3: Standard water balance

Table 4: Risks of private sector participation

Table 5. Freshwater Resources and Consumption in Germany and Jordan

Table 6. Water Supply-Demand Balance Jordan (Millions of cubic metres)

1. Problem background

To privatise is to drive a two-horse cart. The cart is the enterprise in question. One horse is called Political Goals and is flighty and fickle; the other is called Economics, and is slow and steady. They have to pull the cart along the Road to Privatisation, which is a rough, boulder-strewn track. The cart is full of cases of vintage wine, which is unfortunate because the horses are pulling in different directions. The bottles of wine, which can be enjoyed only when the cart reaches its goals, are labelled ‘improved efficiency’, ‘high sales price’, ‘effective governance’, ‘economic investment’, and so on.[1]

Since the mid-1970s the idea of privatisation has been promoted and the elections of Margaret Thatcher as prime minister of Britain and Ronald Reagan as president of the United States, in 1979 and 1980 respectively, led to a huge privatisation movement in industrial countries.[2] Although some developing countries engaged in privatisation activities during the early 1980s – Chile was a front runner in this movement – most of those countries did not implement privatisation as a tool of macroeconomic liberalisation before the late 1980s.[3]

Since then many experiences have been collected and led to different forms of private sector involvement. Privatisation, public-private-partnerships (PPP) and private-sector-participation (PSP)[4] are common used expressions although the differences between them are very unclear. Nevertheless these approaches have become driving forces in international development strategies although the success is highly questionable. There seems to be a lack of knowledge on the benefits and risks of the private sector involvement in developing countries. Especially the effects in the water sector produced opposing results. The aim of this thesis is to analyse this ongoing debate and to discuss the results of the implementation of alternative private sector involvement approaches in the Jordanian water sector.

1.1 Structure of the thesis

This thesis is structured into three main parts. The first part provides an overview on several private sector involvement strategies, such as privatisation, public-private-partnerships (PPP) and private-sector-participation (PSP). The author wants to highlight the problems by differentiating these procedures and will give recommendations for using them, in order to prevent misunderstandings. Furthermore, the water sector has attracted least interest from the private sector after telecommunications, energy and transport, even in Latin America, which is the region in which most PSP is concentrated.[5] This might be influenced by the unique characteristics of water, which will be mentioned afterwards, in combination with possible risks of private sector involvement in the provision of water. In order to assess the benefits of private sector involvement, the problems with performance measurement of a water utility will be discussed.

The following part will assess the benefits and risks of private sector participation in the water sector. Therefore the author will discuss and prove evidence of fourteen characteristics of a public utility, which should be improved through private sector involvement. Theses indicators are based on a concept of an American economist Savas[6]. After that, risks of private sector participation for the stakeholder, the government, and the population will be assessed. Due to the wide range of private sector participation results, recent alternatives will be proposed. This chapter finalises with a small summary of the assessed results and will provide empirical findings which have to be considered in the ongoing privatisation debate.

The third part of this thesis will deal with a case study on the Hashemite Kingdom of Jordan. Until now several private sector participation methods have been implemented at Jordan’s water sector and alternative approaches are tested. The questions which arise are:

- Who pushed the private sector participation approaches in Jordan?
- What are the aims and methods of private sector participation in Jordan?
- How does the future in Jordan’s water sector look like?

The case study tries to find answers on these issues.

1.2 Aims and Limitations

The idea that private involvement in public sectors has positive impacts in terms of being more efficient, as well as that it induces a better public sector financial health, is not new. Already in 1776, the eminently respectable economist Adam Smith wrote:

“In every great monarchy in Europe the sale of the crown lands would produce a very large sum of money which, if applied to the payments of the public debts, would deliver from mortgage a much greater revenue than any which those lands have ever afforded to the crown […] When the crown lands had become private property, they would, in the course of a few years, become well improved and well cultivated.”[7]

The mechanisms when those improvements in efficiency would take place, were not clear for a long period of time. Having this in mind, the aim of this thesis is not to discuss whether private involvement in public sector in general is desirable nor is it the goal to make definite statement about the success or failure of private sector participation in Jordan. But rather the author wants to assess the benefits and risks of private sector participation in the water sector and its influences. A secondary objective of this research is to highlight alternative approaches and to discuss them for Jordan’s water sector. There seem to be unsatisfied results with private sector participation in Jordan. Otherwise there would be no interest in using alternative approaches. The author wants to assess the reasons which lead to the need for different methods.

The thesis will finish with remarks and conclusion for further private sector involvement in Jordan’s water sector.

1.3 Methodology

In order to analyse the topic of the thesis in an appropriate way, the author was working as a trainee for a German consulting company Dorsch Consult Ingenieurgesellschaft mbH in the ‘ Operations Management Support’ project at the Ministry of Water and Irrigation (MWI) in Amman / Jordan. This project is supported by the German Federal Ministry for Economic Co-operation and Development (BMZ) and implemented by the German Agency for Technical Co-operation (GTZ). The author was working in this project from August 2004 until March 2005. Despite intensive researches in the run-up of this study, the extent of literature and information would be very limited without this field work and so the topic would hardly be handled. Due to researches in the field, manifold information could be gained, like unpublished materials from consultants or public authorities.

During my research I was working closely with several public and private agencies, including the GTZ, Dorsch Consult, the Northern Governorate Water Authority (NGWA), and the Programme Management Unit (PMU) in order to prove the collected data and to discuss the recent findings.

2. Theoretical Background

This chapter will provide background information which is indispensable for further discussion. First different forms of private sector involvement will be assessed and afterwards the unique characteristics of water and the private participation in the water sector will be mentioned. This chapter finalises with an overview on problems with performance measurement of a water utility.

2.1 Overview and definition of private sector involvement

The aim of this chapter is to highlight the slight differences between privatisation, private sector participation (PSP) and public private partnerships (PPP) and put them into relation. While there is a large volume of literature relating to private sector participation in urban services, there appears to be a lack of consensus both about the definition of PPP and the distinction between PPP and the more general terms PSP and privatisation. The literature presents several different conceptualizations of these expressions, which will be summed up below.

In developing countries, increased private sector participation in public services, including privatisation of state-owned enterprises, is often part of broader reform process, which goal is to resolve or prelude a macroeconomic or fiscal crisis.[8] But there is another reason for the boost of private sector involvement. The economic inefficiency in many state-owned enterprises should be solved through private sector involvement.

The term public private partnership is commonly used with three different meanings.[9] First, it is used broadly for any arrangement in which the public and private sectors join together to produce and deliver goods and services. Second, it is used for complex, multipartner, privatised, infrastructure projects. And third, it refers to a formal collaboration between business and civic leaders and local government officials to improve urban conditions. The term private sector participation is understood in the same way. In general there seems to be a lack of consensus about the definition and distinction of ‘public private partnership’, ‘private sector participation’ and ‘privatisation’ although there is a large volume of literature relating to this issue. But nevertheless some slight distinction can be outlined in order to differentiate these forms of private sector involvement. PSP can be defined as any degree of involvement of the private sector in the provision of a service, whereas PPP entails private sector involvement at a level which involves greater sharing of risks and opportunities.[10] PSP can be considered as a more general term that also encompasses PPP.

There is considerable misunderstanding and misinformation circulating about what privatisation itself means. Even the process of privatisation can take many forms and only the most absolute form transfers full ownership and operation from the public to the private sector. Savas defines the term broadly as “relaying more on the private institutions of society and less on government to satisfy people’s needs”.[11] This conceptualisation is similar to the concepts of PPP and PSP, as we discussed above. But privatisation should not absolve public authorities of their responsibility for environmental protection, public health and safety, or monopoly oversight.[12]

The following graphic should visualise the overlapping of the discussed conceptualisations due to the definitions of Budds[13]. The hatched area highlights the lack of consensus about the definition of divestiture as a private sector participation option.

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Figure 1: Differences of PSP, PPP and privatisation

The author wants to emphasise that it is not important for the purpose of this thesis to find exact classifications for PPP, PSP and privatisation, rather than to discuss any form of private sector involvement. As a result the phrases ‘public private partnership’ (PPP), private sector participation (PSP) and privatisation are used in this study as general terms covering a wide range of partnerships between utilities, government, and communities in order to improve or maintain existing infrastructure and to extend services.

2.2 Different forms of private sector participation

There are many different forms of co-operations between the private and the public sector, varying in the degree of involvement of the private sector. All forms which will be discuss in this thesis have the aim to improve the technical and managerial capacity in common, but other objectives, like improving economic efficiency or reducing public subsidies, can only be achieved if the appropriate arrangement for the private sector participation is chosen and if the government creates the necessary enabling and regulatory environment.[14]

Next I would like to describe the different PSP approaches and put them into an order depending on the influence of private sector involvement. The PSP approaches are as follows:

- Service contracts
- Management contracts
- Leases / affermage
- Build-operate-transfer (BOT) contracts
- Concessions
- Divestiture

The range covers options from full responsibility of the government for operations, maintenance, capital investment, financing, and commercial risk to full responsibility of the private sector. But even where the private sector takes over full responsibility for operations and financing, it does so within a framework provided by the government.[15]

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Figure 2: The range of PSP options

Figure 2 shows the most common PSP options and puts them into relation depending on the level of private investment. In practice, private sector arrangements are often hybrids of these model or used in combination.

The next table visualizes the allocation of ownership, operation and maintenance, capital investment, and commercial risk. Furthermore the average duration is added in order to get a brief overview of the main differences between these options. A detailed description will follow.

Table 1: Private Sector Participation options[16]

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2.2.1 Work & service contract

Service contracts are the simplest form of private sector involvement. As a general rule the public authority retains overall responsibility for operation and maintenance of the system, except for the specific services that are contracted out. The public sector also bears all the commercial risk and provides the capital investment whereas the responsibility of the private sector is limited to managing its own staff and services efficiently. These contracts are usually short-term agreements and payments to the private sector are made on the basis of fees agreed in advance, lump sums or unit costs. They require little or no fixed investment on the part of the private firm. Whereas the public authority which plans to implement service contracts may need to undergo some changes in order to fulfil their new role, which shifts from execution to supervision.[17]

Typically service contracts cover tasks like maintenance, emergency repairs, meter reading, operations, billing and collection, upgrading of existing or construction of new facilities, and equipment rental. Summed up, they can cover a wide range of activities.

An advantage of a service contract is that the public authority can achieve a quick gain in operational efficiency. The process of implementation is easy to administer and simple to re-tender and it is a good method to include local firms in the operations. Furthermore contractors are subjected to frequent competition, which encourages efficient performance. In general the payment for the private contractors is linked to performance-based results, instead of guaranteed wages paid to a public utility’s workers. So at their best these contracts can be cost-effective route to a well-managed and commercially viable public authority.

2.2.2 Management contract

Management contracts are more comprehensive arrangements. They have been an important vehicle for transferring managerial, corporate and technological skills to public enterprises at all stages of growth and development. In comparison to service contracts, the private sector obtains more responsibility and autonomy with management contracts. The public sector transfers the responsibility of the entire operation and maintenance of a system. As a result the private company is free to make day-to-day management decisions without bearing any commercial risk.[18] The private company acts at all time on behalf of the public authority and has no direct legal relationship with the costumers. Yet it has to collect the charges from them in order to get paid. The public authority retains financial responsibility of investment and funds of the operation. The contractor receives the agreed income flow through a management fee and can probably earn additional bonuses based upon such variables as performance, sales, or other agreed criteria. So the government has to pay the agreed management fee even if the enterprise does not make profit.

On the one hand, a management contract seems to be a good private sector participation option for the government in order to keep the ownership, to solve enterprises’ managerial, and technical expertise and to obtain technology transfer. On the other hand, the government has to give up the control of day-to-day management and operation, has to pay the agreed fee even if the enterprise does not make profit, the government remains responsible for all operating expenses and debt payment.

The main advantage for the contracted company is that the financial risk is low due to government ownership. But the management company gives up some potential profit for less risk and investment. In many cases management contracts precede longer-term PSP such as concessions or leasing contracts.[19]

All in all this option is a common way of private sector involvement in developing countries but if it is one of the main objectives of the government to access private finance for new investments, this partnership is not the appropriate one because management contracts leave all responsibility for investments with the public authority. They are more likely to be useful in order to rapidly enhance a utility’s technical capacity and its performance.[20]

2.2.3 Lease / Affermage

Lease contracts, also known as affermage, are arrangements where a private company rents the facilities from the government for a certain period. As a result it is responsible for operation, maintenance and management. Because the leaseholder effectively buys the rights to the income stream from the utility’s operations, it takes over much of the commercial risk of the operations.[21] Whereas the government, which remains the sole owner of the utility, is responsible for capital expenditures for new projects, replacement of major works, debt service, and tariffs and cost-recovery policies.

In many cases the leaseholders pay the owner a rental fee sufficient to service the debt and finance part of the investment program.[22] Under a well-structured contract the leaseholder’s profitability will depend on how much it can reduce costs, without breaking the leasing contract. As a result it has incentives to improve operating efficiency. Payments are contingent on the difference between the tariffs revenues collected and the operational expenditures.

Affermage are known as a low-risk PSP, which allows a private contractor to become familiar with the system and creates possibilities for more extensive involvement in the future. As far as risks are limited, there should be more competition, which benefits the government. Generally, the public authority covers the capital investment risk and the contractor assumes the commercial risk.


[1] DONALDSON, 1995.

[2] SAVAS, 2000, p. 15.

[3] SADER, 1995, p. 2.

[4] The differences between privatisation, public-private-partnerships and private-sector-participation will be discussed later in this thesis.

[5] NICKSON, 1997, p. 165-168; ROGER, 1999; SILVA et al., 1998; SPILLER / SAVEDOFF, 1999.

[6] SAVAS, 2000, pp. 111.

[7] SMITH, 1976, p. 824.

[8] RIVERA, 1996, p. 8.

[9] SAVAS, 2000, pp. 106.

[10] BUDDS, 2000, p. 7.

[11] SAVAS, 2000, p. 3.

[12] GLEICK, 2002, p. 26.

[13] BUDDS, 2000, pp. 7.

[14] WORLDBANK, 1997, p. 1.

[15] WORLDBANK, 1997, p. 2.

[16] UNITED NATIONS, 2003, p. 8.

[17] IDELOVITCH, 1995, p. 14.

[18] IDELOVITCH, 1995, p. 14.

[19] IDELOVITCH, 1995, p. 15.

[20] WORLDBANK, 1997, p. 4.

[21] WORLDBANK, 1997, p. 5.

[22] IDELOVITCH, 1995, p. 15.


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Private Sector Participation Jordan Water




Titel: Private Sector Participation (PSP) in Jordan's Water Sector