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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 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. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iv 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. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com v CONTENTS CERTIFICATION.
vii LIST OF TABLES. viii LIST OF FIGURES. viii Chapter 1: INTRODUCTION. 2 Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY.1 Water is special goods: .1 Nature of the water product and market failures in water supply:.2 Government failures in urban water supply:.3 Assessment on performance of a water utility.2 Public – Private Partnerships in urban water supply .1 Theory on PPP .1 Experience in developed and developing countries.2 Case Cancún, Mexico .3 Case Manila, the Philippines .4 Experience in Vietnam.
16 Chapter 3: WATER SUPPLY IN HO CHI MINH CITY.1 Overview on water supply activity in Ho Chi Minh City.2 Problems of water supply in Ho Chi Minh City. 19 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.3 Public policy in water supply sector .1 General management and guidelines .2 Water tariff in Ho Chi Minh City .3 Policy framework for private engagement in HCMC water supply. 22 Chapter 4: PRIVATE ENGAGEMENT IN SAIGON WATER CORPORATION .1 Sawaco’s history and existing situation.2 Equitization and impact on governmental performance .1 Sawaco parent company operation .1 Operational figures of Sawaco.2 Impact of the equitization on HCMC People’s Committee.3 Equitization and joint stock companies’ performance.4 Impact of the equitization on customers of the water services. 36 Chapter 5: THE RIGHT PATH FOR URBAN WATER SUPPLY IN VIETNAM.2 Policy implication and recommendation .1 Recommendation for Sawaco .3 Study limitation and avenues of further research.
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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vii 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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com viii LIST OF TABLES Table 2.1: PPP models in the water sector.1: Equitization of Sawaco’s Subsidiaries .2: Sawaco Coverage and Connections 2004 - 2010 .4: Sawaco Employees/1,000 Connections 2004 - 2010.5: Sawaco Operational Figures 2004 – 2010.6: Loans of Sawaco to JSCs till 31 Dec 2008. 32 LIST OF FIGURES Figure 2.1: Natural Monopoly and Deadweight loss.2: Positive externalities and Deadweight loss .3: Vicious Spiral Performance Declines of Utilities .4: Thesis analysis structure.1: Urban Water Supply in HCMC.2: Average Water Tariff of HCMC 2009 – 2013 .1: Corporate Chart of Sawaco .2: Key performance data of Joint stock companies. 35 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 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. 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 Non- Revenue 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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 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.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.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, LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 3 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.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4 Chapter 2: UNDERSTANDINGS ON WATER AND PPP IN URBAN WATER SUPPLY 2.