Private sector participation in water management: Amman water management contract case study

Level: Local
Region: MENA Region
Tags: Economic instrument | Institutional measure | Urban water supply
Target audience: Local government/municipalities | National government | Regional government | Water authorities | Water companies


Starting in 1999, a management contract was signed for a four-year period, handing over the operation of the water utility services of the Greater Amman Region to a private operator. The private consortium, LEMA, agreed to implement a well-defined service improvement programme, including the reduction of non-revenue water. LEMA introduced a range of efficiency measures, e.g. reducing the number of employees, while providing training to retained employees. Customers tariffs were restructured to progressive tariffs before the management contract commenced, while the new management succeeded in achieving higher bill-collection rates. The efficiency improvements and higher revenues, coupled with a capital injection from the World Bank, made it possible to improve services (e.g. continuous water supply on a pilot basis) and reduce non-revenue water. By the end of the management contract, the water facility transferred to a government-owned company called Jordan Water Company (MEYAHONA), which is being run on a commercial basis.

Baseline situation

The public sector management of the Amman water supply system had failed to produce improvements in service levels. To overcome the weak governance structure associated with public sector management, the Water Authority of Jordan (WAJ) chose to apply the discipline of contractual obligations to improve service levels by employing a private operator, chosen competitively from among pre-qualified operators with international experience.

Conflicts arising from the baseline situation

Those who were used to consume the most water before the new metres expressed the most dissatisfaction with the new scheme.

Description of the applied measure, its introduction and operation

The Water Authority of Jordan (WAJ) was constrained by a lack of financial resources and insufficient cash flow, coupled with high levels of subsidies. This resulted in inadequate funds for replacing and upgrading water supply systems. Other financial constraints contributing to the crisis were: centralised budgeting procedures, lack of a cost-recovering tariff, and inefficient monitoring control and liability concerning expenditures.These conditions resulted in intermittent and uneven supply, loss of consumer confidence, continued deterioration of water resources, a growing deficit in the supply/demand equation, and more focus on supply than on demand management. It also resulted in the failure to develop an adequate strategy for network rehabilitation, maintenance and repair activities, and restructuring and leakage control. The consequences of high non-revenue water (NRW) and inadequate billing and collection systems compounded the problems.As a result, WAJ decided to hire the services of a consultant. A consultation services company was primarily commissioned to prepare a statement of operation for the Amman Governorate Service Area (AGSA), the largest domestic water market in Jordan. Among the recommendations of the consultant was to involve the private sector in the water management of Greater Amman.In 1997, WAJ decided to prepare a four-year contract, with the possibility of extension, for a private operator to run the Amman Governorate Water Utility and to implement a well-defined service improvement programme.The terms of reference (ToR) of the contract defined the private company’s main responsibilities as follows: 1) to operate the facilities and maintain them to an improved standard; and 2) to carry out all billings and collections, and to improve customer service functions. The operator was also to cooperate with WAJ in developing and implementing the capital investment program. Operator performance was to be measured against specific targets over the four-year contract period: the most important of these had to do with standards of non-revenue water, accounts receivable and constancy of water supply.WAJ issued a request for proposal (RfP) in December 1997, after which five firms out of 25 were short-listed and asked to submit their technical and financial offers. The consortium of the French Company (Lyonnaise Des Eaux), British Company (Montgomery Watson) and the Jordanian Company (Arabtec Jardaneh), abbreviated to LEMA, was selected as the successful bidder on April 19, 1999. The contract was signed by WAJ and LEMA for four years, starting from July 31, 1999.From the start, LEMA brought the necessary technology and experts to facilitate the work process and to improve the efficiency of operations. LEMA brought about its improved utility management performance, largely by technology transfer, to its existing staff and to institutional building with WAJ and others.The GIS system was upgraded for more comprehensive mapping and recording of the water and wastewater networks. The following results were achieved:
- Digitised 100 percent of water mains into the GIS;
- Digitised 270,000 customer meter locations into the GIS;
- Digitised the wastewater mains into the GIS; and
- All repair data was entered in the GIS, which was used to manage the whole process through to completion.

Physical and ecological impacts of the measure

Improved maintenance of the network, reduced response time in case of pipeline rupture (from 72 hours at the start of LEMA’s contract down to six hours), and targeted reconstruction of the least efficient sections of the network resulted in a substantial decline of the ratio of unaccounted-for water, from 54 percent to 29 percent. Sewer network operations were also upgraded, which improved the quality of the environment.

Financial and other impacts of the measure on different stakeholders

Progressive tariffs were introduced and the average tariff level increased, but the higher bills were accompanied by improved service levels. Importantly, the tariff adjustment happened before the public-private partnership (PPP), not as part of it, which helped to avoid a political backlash against the private operator that would have made it difficult to bill and collect for services, albeit on behalf of the employer, namely the Water Authority of Jordan (WAJ). A tariff increase was approved in 1997, well in advance of inviting the private operators to pre-qualify and bid.With respect to human resources, LEMA established a planned training process, a training centre and a specialised training staff. Improvement of staff skills helped LEMA to reduce staff from 1,593 on July 31, 1999 to 1,116 on July 31, 2002. The reduction in staff did not have adverse effects on the quality of service; on the contrary, service was improved over the three-year period.The financial performance of the utility significantly improved after LEMA took over operations. Revenues increased and expenses decreased, thus improving net income.

Resilience of the achievements, sustainability of the resultsThe sustainability of the results depends on several factors

  • Sufficiently high rates of water prices in an expanding block structure
  • Following the commercial mind-set, even after the PPP ended
  • Utilisation of advanced technology and transfer of know-how
  • Continuous training of employees

Results obtained

  • Lower costs and higher revenues achieved;
  • Number of staff reduced from 1,593 in July 1999 to 1,116 on July 2002;
  • The ratio of unaccounted-for water was reduced from 54 percent to 29 percent;
  • Transfer of technology resulted in more efficient operations and improved service quality; and
  • Major advances in GIS technology.

Success factors

  • Competition among bidders for the management contract;
  • Private participation without embedded interests;
  • Utilisation of advanced technology and transfer of know-how;
  • Training programme for employees; and
  • A smart mix of measures introduced simultaneously (revenue improvement, cost reduction, technological upgrade).

Indicators used

  • 250,000 meters of pipelines repaired and replaced;
  • Number of pipe breaks repaired in the water network decreased from 4.2 per km in 2002 to 2 per km in 2005;
  • Reductions in unaccounted-for water achieved are much more dramatic (amounting to 35 percent) in 150 out of 310 districts, where the network and metering have been upgraded; the overall reduction of unaccounted-for water was from 54 percent to 29 percent; and
  • In 30 selected districts where continuous water supply was achieved on a pilot basis, losses were reduced to an average of 23 percent.

The LEMA management contract paved the way for a commercial mind-set in the country's overall management of water and wastewater services. In several cities, water supply and distribution is managed by government-owned companies and run on a commercial basis.

Total costs

  • Total costs, some of which are financed through the World Bank, are presented in the table below.

Contact

Meyahona Water Company
info@meyahona.jo

References

  • Al Zoubi, M. (2008). “Role of Private Sector Participation in the Management of Jordanian Water Sector”, Master’s thesis, Jordan University of Science and Technology
  • World Bank (2007). “Implementation Completion and Results Report on a Loan in The Amount of USD 55 million to the Hashemite Kingdom of Jordan for the Amman Water and Sanitation Management Project”.