The Human Right to Water: The Role of the Private Sector in Urban Water Sector Reform (Lagos, Nigeria)

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1 The Human Right to Water: The Role of the Private Sector in Urban Water Sector Reform (Lagos, Nigeria) Summary Under the Lagos State governor s leadership, the city of Lagos, Nigeria has embarked on its Mega City Project to beautify the city and remake Lagos into a pristine modern agglomeration and destination for international investors. This is especially true for its showpiece project, Eko Atlantic City, a planned expansion of the urban footprint being constructed on land reclaimed from the sea adjacent to Victoria Island, the extremely affluent business and financial center of the state. Fixing the water problem is critical to the sustainable development of Lagos. The state government is seeking to increase access to piped water networks in urban areas and to increase the reliability and financial viability of the government-run Lagos State Water Corporation. To do this, the government is actively seeking private investment. It is expected that a private public partnership (PPP) or private sector participation (PSP) scheme could make significant funding available for urban water investments and improve the management and delivery of water services. This has led the government to enter into an agreement with the World Bank to embark on the Second National Urban Water Sector Reform Project. This provides the government of Nigeria with a low-interest loan in the amount of $175 million from the World Bank s International Development Association (IDA) for water reform projects in Lagos and one other state. The project is designed to improve the water sector by introducing new capital to repair water infrastructure in exchange for reforms that introduce cost-recovery measures such as metering and increased water tariffs, while bringing in private entities to manage distribution and operations. However, not everyone supports the proposed plans to turn Nigeria s water services over to private operators. On World Water Day, the National Civil Society Network on Water and Sanitation (NEWSAN) issued a press release at a national conference on water, sponsored by the international water charity WaterAid. The communication called on the government to stop the privatization of public water utilities in Nigeria, citing high-profile failures of water privatization schemes in other parts of the world such as Bolivia and the Philippines. Local civil society organizations are concerned about the government s discriminatory practices towards the poor. They have written to the World Bank Inspection Panel, requesting that the project be reviewed for violating the human right to water. As the World Bank Team Leader on the project who has a vested interest in seeing the project succeed, how should you respond to the notification of the Request for Inspection? Background The Federal Republic of Nigeria, comprised of 36 states and the federal capital territory in Abuja, is Africa s most populous country, with 173 million people. Lagos itself is often listed as one of the world s largest cities. 1 An estimated 13 million currently live in the metropolis, and 1 This population estimate is based on projections from the 2014 revision of the World Urbanization Prospects published by the United Nations Population Division, Department of Economic and Social Affairs, available at The estimates are based on the 2006 Nigeria Population and Housing Census, which

2 UN projections expect the population to exceed 20 million in Although it is no longer the administrative capital, Lagos remains the nation s commercial capital. Every day, crude oil, cocoa, and rubber leave its ports for destinations that include the United States, India, and Brazil. Since the creation of Iju Waterworks in 1914 under the British colonial administration, water supply in Lagos has been a constant game of catch-up. Priority has always been given to industry and residential areas connected with government or industry, especially during the period when Lagos was the national capital and water supply fell under the responsibility of the federal territory. Today, water supply is decentralized to the state level in Nigeria. But the various water treatment works, water mains, and mini- and micro- waterworks scattered throughout the metropolitan area serve only about 50 percent of the population. All of the waterworks, especially the mini and micro waterworks, face water-quality problems due to electricity outages, damaged pipes, and illegal pipe tapping. Water quality is further compromised by the swampy topography, which exacerbates subsidence 2 and contamination of groundwater. Industrial waste dumping into the lagoon is also a persistent water-quality problem in the metropolitan area. The World Bank and civil society actors, however, disagree about what should be done about these issues. World Bank Assessment In the project description for the Second National Urban Water Sector Reform Project, the World Bank has identified five categories of problems hampering improved performance: 1. Lack of capital investment World Bank economists have calculated that an investment of 20 billion United States dollars is required for water supply and basic sanitation/wastewater disposal facilities. Total investment needed would be approximately four percent of Nigeria's GDP, not including operating costs. 2. Utility performance Water loss and revenue loss significantly disrupt water operations and maintenance. Water production facilities are rarely operated at capacity due to broken-down equipment, inconsistent power supply, or lack of fuel for pumping. Mechanical equipment and pipes are poorly maintained, leading to frequent breakdowns and high rates of water loss through leakage. The lack of metering, outdated information systems, poor cash flow management, and inconsistent billing and collections practices cause severe revenue losses. As a result, the cost of producing water, including costs for distribution, chemicals, equipment, and electricity, is not factored into water rates. As a result, most state water boards or state water corporations do not recover their operating expenses from their own revenues and remain dependent on state governments for subsidies. 3. Autonomy of state water authorities has been disputed by Lagos State government officials, who now estimate the population to be closer to 17.5 million (see 2 Subsidence occurs when the ground collapses or settles due to depletion of the water table. p. 2

3 Even if state water authorities want to increase the tariff for water, they can only make recommendations. Most states require that the state legislative assembly and/or the governor approve recommendations to raise tariffs. For the World Bank, this lack of autonomy in revenue-generating ability is inefficient and adversely impacts service provision. 4. Structure of water regulations and governance This is a larger problem than the autonomy of state water authorities. Governance in the water sector overall is uncoordinated and inefficient. While states and local governments are responsible for water service delivery, state legislators approve pricing. Moreover, it is the federal government that has jurisdiction over shared water resources and large dams, while informal private vendors service significant proportions of the market, yet operate without regulation over water quality and price. 5. Policy environment States in Nigeria lack the policy, legal, and regulatory environment and expertise to attract and sustain private investment. State laws are not clear on the role, rights, and obligations of private parties in the provision of public services and, as stated above, there is no regulatory entity at the state level that can set tariffs in a transparent manner. Water reform thus requires reforms to state law. The World Bank has tied funding for the project to a requirement that the state government pass a law to turn the Lagos State Water Corporation into a private asset holding company, designed to insulate the utility from the political process. Civil Society Assessment The above assessment by World Bank analysts is in sharp contrast to the analysis of the water sector and proposed reforms from the perspective of civil society actors. From their perspective, the solution is not metering and cost recovery when most of the population lives in poverty. They believe the real problem is the lack of democratic governance. As a result, the project has run into trouble as a national network of civil society actors in the water and sanitation sectors have written to the World Bank Inspection Panel, an independent panel that was established in September 1993 to help ensure that World Bank operations both adhere to operational policies and procedures and do not threaten an affected party s rights or interests. The panel allows people who think they may have been adversely affected by a World Bank-supported project to ask for an investigation, which is called a Request for Inspection. Once a request has been accepted by the Inspection Panel, World Bank management has 21 days to respond. Based on the response received, the panel may consider the matter resolved, decide to ask for additional information, or decide to notify the president and directors of the World Bank of its intent to carry out a formal investigation. Local and international non-governmental organizations have joined forces to oppose the World Bank-funded project on several grounds. As stated in the Request for Inspection and various press releases and interviews, activists and community stakeholders have pointed out the following problems with water supply: The poor suffer from intermittent and poor-quality water service and sanitation. Women and girls, given their traditional roles in providing water for the household, bear the largest social and economic burden of inadequate and unaffordable water supply, yet p. 3

4 their voices and preferences are not reflected in the government s proposed water reforms. There is no mechanism for residents to complain about service or raise their concerns with the Lagos State Water Corporation, which will only get worse if it becomes a private entity. Low-income households typically source alternative water at high prices per liter from informal water vendors (who work for wealthy business owners) or more affluent households with water connections or private groundwater systems. They also obtain water from kongas 3 and neighbor-to-neighbor sales. The poor are also more likely to purchase sachet or water bottled by corporations such as Coca Cola, which are not required to pay for the groundwater they use, a potential source of revenue that the government should emphasize. In poorer parts of the central city, residents of public housing are still being required to pay water bills or risk disconnection of shared water services. The project allows private investors to selectively invest in service provision to arbitrary zones serving wealthier neighborhoods in the state. Water connection fees are excessive. The poor live in settlements that are routinely targeted for slum clearance, preventing extension of networked water services to their communities. Water is essential to life and should be treated as a social good and human right. The NGOs have received complaints from community members about landlords who are opposed to extending pipes into their neighborhoods, as the landlords earn money from charging tenants for water and building the cost into rent. Tenants do not receive water bills directly; only property owners receive bills. Given these opposing views, should the project proceed as planned to entice private-sector participation and increase the likelihood of attracting what you and other World Bank economists argue is much-needed foreign investment into the water sector? How should you respond to the demands of the various stakeholders, especially civil society? Actors & Institutions The World Bank and International Development Association (IDA): The World Bank is a multilateral financial organization that provides low-interest loans and loan guarantees to promote development. The IDA, the wing of the World Bank s fund to the poorest, is the sole funder of the National Water Reform Project. Action Congress: The ruling political party to which the Lagos State governor and the President of Nigeria belong. PDP: The former ruling political party, to which many Lagosians belong, which could use the criticism of the water reform project to gain political favor. 3 Public wells p. 4

5 The Lagos State Water Corporation (LSWC): The Lagos State Water Corporation 4 is the utility responsible for water provision throughout the state. It is operating at a deficit, with significant amounts of non-revenue water. The CEO agrees with the World Bank and would like autonomy from the state in order to raise water rates. Network of Water and Sanitation Non-Governmental Organizations: Network of Water and Sanitation is a network of hundreds of non-governmental organizations (NGOs) with various constituencies throughout Nigeria. Heinrich Boll Foundation: This international NGO has been supporting NEWSAN in its campaign against the privatization of LSWC, as other international NGOs have supported reform efforts in other parts of Africa. Local Government Chairman/Chairwoman: There are 16 chairmen and chairwomen representing each local government in the state of Lagos. Nearly all local government revenue is provided by the governor via the central government. Little local revenue is generated through local taxes and fees. Most local governments have invested in a variety of smaller, community water projects using groundwater to supplement the intermittent water provided by the LSWC. Community Development Association/Community Development Commission: The members of the Community Development Association/Community Development Commission, nearly all of whom are men, represent communities throughout each local government and bear grievances of the people to the local government chairmen and chairwomen. Water Vendors Association: Like most other tradespeople in Nigeria, the majority of informal water vendors in Lagos belong to an association. The vendors have vowed to destroy any new pipes that come through their service areas, which are mostly in informal settlements and blighted areas or slums. The Decision As a World Bank team leader on the project advising the Lagos State Water Corporation, you need to make a decision regarding the Request for Inspection. Your options are as follows: a. Proceed as planned requiring passage of the water bill, writing a carefully worded statement showing how the project meets World Bank policies. In choosing this option, you would have to consider what the statement would include and what the likely fallout would be. The World Bank s stance on how to improve water supply in Nigeria reflects shifting international policy towards universal provision of safe water. Instead of treating water as a social good, a competing standard emerged in 1992 at a meeting of global water experts in Dublin. The Dublin Principles which this World Bank proposal adheres to reflected growing concerns about the sustainability of water supplies and called for a market approach to ration water. A United Nations resolution in 2010 recognized the human right to water and sanitation (UNGA 2010), but given the long history of public-sector failures, you believe the World Bank proposal, albeit a privatesector approach, would better meet the city s water needs. 4 This would become the Lagos Water Corporation if a bill passes to turn it into a private asset holding company. p. 5

6 b. Negotiate with civil society to change how the project is managed and implemented. While this option does not change the nature or design of the project, it does introduce more transparency into project implementation and gives civil society representatives a say in day-to-day decision making. Every World Bank project has a Project Implementation Unit (PIU) that provides project oversight. At the time of the civil society protests, there were no civil society representatives serving on the PIU. The lack of transparency in the project and the passage of the water law are among the central concerns of civil society. Simply improving transparency might calm many of the concerns, but it may also open the process to further scrutiny, more well-informed protests, and delays. c. Attempt to make the project more politically acceptable by re-designing a portion of it to address concerns raised in the Request for Inspection. This could include efforts to prevent cherry picking, where private investors can contract to operate in wealthy areas and ignore poor neighborhoods or customers, and promote cross subsidies (water rates based on affordability). This option would help address two of the major civil society concerns, but it may turn away external funders hoping to maximize profits from their investment and could ultimately doom the entire project. d. Change the nature and design process of the entire project. This would involve stopping the project and redesigning it from the ground up, bringing in new stakeholders such as civil society, community representatives, local government, state and federal government, and private-sector stakeholders. Starting over would take considerable time, however, and might not be acceptable to the water corporation executives or the Lagos State Governor, who is eager for the project to begin. You would have to consider if there are different approaches for achieving increased development of water infrastructure and greater access to clean water. p. 6

7 OPTIONAL Additional Information On Policy Options To Help Guide The Decision Practitioners use a range of policy options to address water-supply problems, many of which could be especially relevant to the last two choices (to try to fix only the problematic aspects of the project or to start over and re-design the entire project): Privatization, Private Sector Participation (PSP), Public Private Partnerships (PPP) This is the current strategy, which you support, where public institutions turn over all or part of their assets and/or operations over to private companies. This can take place as a long-term lease (concession) or other arrangements, such as build-operate-transfer (BOT). Typically, private investors would seek to recoup their costs through full cost recovery. This occurs when public agencies seek to be self-sufficient, generating all operating revenue (and sometimes revenue for capital improvements) from user charges and rates based on willingness to pay (WTP). Any costrecovery strategy should be accompanied by improvements in operational efficiency that improve fee collection and reduce the cost of service. Critics concerned about affordability have argued that WTP does not equal ability to pay and should not be the basis for reforms. Metering Many utilities charge so-called block tariffs for water, charging a flat rate by type of user, per connection (residential-rental, residential-owner, business, institution). Meters allow water rates to be based on actual usage. Progressive Tariffs This is a variable rate structure for water use that increases for rates of water use beyond a certain threshold. To be implemented, progressive tariffs require meters. This policy is used to penalize high rates of water use and promote conservation. When there are shared connections, however, such as the community pipe stands often found in lower-income areas, the high volume of water can mean that the poorest residents pay a very high rate per liter of water, unless the progressive tariff specifically recognizes this. Subsidies When costs for operations and capital improvements and maintenance cannot be fully recovered from users, either because the amount is politically unacceptable or incompatible with goals of affordability, or when benefits accrue to many indirect users, tax revenues can be an appropriate source of funding if they are predictable, transparent, and structured to be reduced over time. Cross-Subsidies Cross subsidies allow for a differential rate structure based on ability to pay. This approach requires gathering information on ability to pay by household or by location and charging lower rates to poorer users and higher rates to more affluent users. Universal Lifeline This is a rights-based approach to water that guarantees everyone a minimum (survival) amount of water for free, beyond which tariffs are introduced. It requires connection to the piped water supply and metering. This has been implemented in South Africa. p. 7