CS53: Private Sector Participation and Performance of Urban Water Utilities in the PRC

8/3/2019 CS53: Private Sector Participation and Performance of Urban Water Utilities in the PRC

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Private Sector Participation andr r r r

Utilities in the PRC

ADB Water CoPNov. 23 2010



Introduction

Water resources constraint for the PRC Water availability per capita is one fourth of the world average.

a er po u on s severe

Urbanization is to speed up in the next 10-20 years.

supply are needed to meet the challenge.

Water pressure is low and leakage rates are high in many areas.

Utilities are traditionally managed by bureaucrats.



Water Sector Reform

Increase investment and improve efficiency throughprivate sector participation (PSP) in water supply.

- The French Suez Group invested in the water utility of Zhongshan

city in Guangdong province in 1992. - - ,

Nationwide formal opening since 2002 “Guidance on Non-government Investment” (State Planning

, u r rPrinciples for the Municipal Public Utilities” (Ministry of Construction 2002), etc.

,Water, and domestic investors participated (Xie 2009).



Diverse PSP Forms

10+ forms of PSP Share transfer, joint venture, divestiture, BOT, TOT, etc.

are rans er an o n ven ure c ange compos on o cap asources while others may not.

The local government takes away the considerable premium fromse ng s ares.

In the analysis, we define PSP based on the capital

structure due to data availabilit . Mostly share transfer and joint venture in water supply,

and BOT and TOT in wastewater treatment (World Bank

.



Research Questions

What factors at the utility and city levels drive PSP? What are the effects of PSP on water utility performance in

various aspects including inputs and outputs, financialperformance and efficiency?

investors in majority and in minority?

What are the effects of PSP on water supply services, e.g.number of connections, water pressure, water quality?



Literature (i)

Shleifer (1998) contends that government-owned firmsare not the appropriate solution even with market failure.

Incentives to reduce cost, improve quality or innovate

Competition from potential suppliers, reputation-building, not-for-

Air Force One Air Force One

Non-benevolent government

Generally favorable (Megginson and Netter 2001)

More diverse in transition and developing economies --- missing

2005, Estrin et al. 2009)



Literature (ii)

A growing number of studies look at privatization in waterservices

ryy u r r w ydispersed than private in USA; Saal and Parker (2001) find labor

productivity increased due to large employment reduction while

Estache and Rossi (2002) find no efficiency gain among 50 waterenterprises (22 PSP) of 29 Asian and Pacific countries

, . ,al. (2009)

Galiani et al. (2005) find that privatization of municipal water

.could be that privatization expanded access to water services.



Challenge in Assessing PSP Effects

PSP does not occur randomly. There may be factors thatdrive PSP and are correlated with utility performance as

For example, government may privatize the profit-losing utilities,

while private investors choose to participate in the profit-makingones.

For cross-country data, heterogeneity in legal, institutional andcultural contexts is substantial and not measured.

Contributions of this stud Use a large, longitudinal, within-country sample

Account for the drivers of PSP (of policy interest itself)

Estimate the effects of PSP conditional on the ossible time-

varying drivers of PSP



Data

Industrial Firm Surveys 1998-2007 by NBS of PRC

All industrial firms either state-owned or with sales above CNY 5m

r u , , , u ry,and detail information from the financial statement

Water production and supply (4610) Large or medium-sized water utilities in prefecture-level cities

A (nearly) balanced panel of 208 urban water utilities in 192 cities

900 million residents and 300 million residents in the urbandistricts of the sample cities

Cover Lanzhou, Kunming, Qingdao, Sanya, Pudong (Shanghai),etc., which received enormous media attention

Panel of cities from China’s City Statistical Yearbooks.



Definition of PSP

Capital sources are categorized as (i) state, (ii) collective,(iii) legal entity, (iv) individual, (v) Hong Kong, Macau or

Legal entity is very ambiguous.

Assume profit driven.

PSP = share of non-state capital greater than 0 PSP-major = share of non-state capital greater than 50%

PSP-minor = share of non-state capital equal to or less than 50%

Alternatively, PSP = share of non-state and non-collectiveca ital reater than 0



Table 1. Numbers of Water Utilities with Private Sector Participation 1998-2007

Year All State-owned PSP (%) PSP-major (%) PSP-minor (%)

. . .

1999 205 193 12 (5.9) 5 (2.4) 7 (3.4)

2000 208 191 17 (8.2) 7 (3.4) 10 (4.8)2001 207 185 22 (10.6) 12 (5.8) 10 (4.8)

2003 208 176 32 (15.4) 18 (8.7) 14 (6.7)

2004 208 168 40 (19.2) 24 (11.5) 16 (7.7)

2005 208 162 46 (22.1) 30 (14.4) 16 (7.7)2006 208 151 57 27.4 37 17.8 20 9.6

2007 208 140 68 (32.7) 45 (21.6) 23 (11.1)

Source: data assembled from National Bureau of Statistics’ Annual Industrial Firm Surveys.



Figure 1. Shares of PSP Utilities 1998-2007

50

30

40

n t

20 P e r c

0

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Capital Assets Employment Sales



Table 3. Numbers of Water Utilities with Private Participating and Exiting

Year Private participating Private exiting Incremental PSP

- - -

1999 5 2 3

2000 8 5 32001 6 1 5

2003 10 4 6

2004 15 7 8

2005 11 5 6

2007 15 4 11Note: Private-participating utilities refer to those newly involving non-state capital in a given year.

Private-existing utilities refer to those newly turning to pure state ownership.



Drivers of PSP

Panel models (random-effects probit, fixed-effects linear)

Explanatory variables , , , ,

profit to sales and managerial costs, in one-year, two-year, or

three-year lags as well as growth over the past three years. Cit characteristics: o ulation o ulation densit GDP er

capita, industrial structure, fixed asset investment, road areas percapita, public financial condition, residential water consumptionper capita, and water use per GDP, in one-year lag.

One-year lag of the profitability and liability ratio of theutility and road infrastructure are significant drivingfactors.

Strategic investment considering long-term potentials.



Im acts of PSP:

Econometric Models

0 1it it k itk i t it k

y PSP x β β φ μ λ ε

= + + + + +

∑

yit: utility performance indicator

PSPit: =1 if utility i has PSP in year t , and 0 otherwisexit: one-year ags o u y an c y var a es

μi: utility fixed effect

t εit: idiosyncratic shock

: avera e effect of PSP on the erformance indicator



Performance Indicators

Inputs and outputs

(1) investments; (2) (log) total employment; (3) (log) gross sales,

Financial performance and profitability

(5) ratios of liability to assets; (6) managerial expenses to sales;(7) financial expenses to sales; (8) profits to sales; (9) taxes paidto sales; and (10) subsidies to sales

Efficienc (11) average revenue product of labor; (12) total factor

productivity (Caves, Christensen and Diewert 1982)



Table 5. Impacts of Private Sector Participation on Urban Water Utility Performance

Dependent variables Mean (1) (2) (3)

. .

Investment 38373.05 12201 9026 11328[228129] (21725) (21038) (19841)

Employment (log) 959.143 -0.0909* -0.0829** -0.0896**

[958.797] (0.0468) (0.0388) (0.0403)

Sales (log) 98812.61 0.0418 0.0422 0.0475

[149847.8] (0.0472) (0.0365) (0.0395)

Value-add (log) 49377.84 0.0168 0.00999 0.0173

[71923.28] (0.0614) (0.0465) (0.0473)

. . . .

[0.211] (0.0238) (0.0189) (0.0197)

Managerial expense ratio 0.217 -0.0234* -0.0258* -0.0274*

[0.110] (0.0124) (0.0135) (0.0144)Financial ex ense ratio 0.050 -0.0122 -0.0119 -0.00652

[0.113] (0.0115) (0.0110) (0.00835)

Profit-sales ratio -0.0266 0.0701*** 0.0631*** 0.0632***

[0.186] (0.0213) (0.0209) (0.0222)

Tax-sales ratio 0.073 0.00140 0.00125 0.00217

. . . .

Subsidy-sales ratio 0.0245 -0.0164 -0.0156 -0.00891

[0.127] (0.0104) (0.0106) (0.00866)

Average revenue product of labor 51.340 7.986 6.420 6.292

48.542 5.474 4. 5 5.152

TFP (log) 4.90e+16 0.119 -0.0489 0.0545[2.10e+18] (0.427) (0.481) (0.477)



Falsification and Robustness Tests

PSP coincided with city’s business cycle trending upward?

If so, we would observe that PSP “caused” profitability increase

Construct a variable equal to the average profit-sales ratio of all

industrial firms of the city ,

insignificant.

Define PSP as non-state and non-collective capital Little effect on the estimates



Table 7. Differential Effects of PSP-major and PSP-minor on Urban Water Utility Performance

(1) (2) (3)Dependent variables PSP- PSP- PSP- PSP- PSP-

PSP-major minor major minor major minor

Investment 19621 0.581 16755 -3563 20230 -4353

(17713) (42140) (19528) (38549) (19792) (32847)

Employment (log) -0.111*** -0.0597 -0.103*** -0.0510 -0.111*** -0.0527

. . . . . .

Sales (log) 0.0173 0.0805 0.0102 0.0942 0.0169 0.101

(0.0436) (0.0779) (0.0329) (0.0620) (0.0347) (0.0674)Value-add (log) -0.00577 0.0514 -0.0272 0.0691 -0.0169 0.0761

0.0674 0.0895 0.0524 0.0688 0.0549 0.0665

Liability ratio 0.0204 0.00929 0.0248 0.00597 0.0248 0.00296

(0.0282) (0.0307) (0.0230) (0.0228) (0.0234) (0.0237)

Managerial expense ratio -0.0188* -0.0307 -0.0197* -0.0357 -0.0212** -0.0381(0.00953) (0.0207) (0.0102) (0.0231) (0.0107) (0.0251)

nanc a expense rat o - . - . - . - . - . - .

(0.0110) (0.0192) (0.00823) (0.0209) (0.00760) (0.0144)

Profit-sales ratio 0.100*** 0.0225 0.0841*** 0.0290 0.0833*** 0.0278

(0.0214) (0.0298) (0.0190) (0.0300) (0.0195) (0.0334)

- . . . . . .(0.00324) (0.00476) (0.00319) (0.00441) (0.00335) (0.00558)

Subsidy-sales ratio -0.0136 -0.0209 -0.0123 -0.0211 -0.00932 -0.00820

(0.0107) (0.0164) (0.0104) (0.0177) (0.0108) (0.00937)

7.743 8.354 5.073 8.537 5.528 7.588Average revenue product

of labor (6.318) (7.245) (5.511) (6.769) (5.715) (6.872)TFP (log) 0.530 -0.510 0.369 -0.713 0.448 -0.621

(0.490) (0.589) (0.548) (0.707) (0.509) (0.579)



Conclusion and Discussion (i)

PSP, mainly PSP-major, has reduced employment, lowered

managerial expenses and increased profits of water utility-

making from profit-losing with PSP.

Also increased investment, sales revenues, value-added,subsidies, and improved labor productivity and TFP. Butless conclusive.

n average, over wo r s o pro ncrease . osales) come from cost reduction. Lower wages-sales ratio: 9%*20%=1.8%

Lower managerial costs: 2.7%



Conclusion and Discussion (ii)

The rest of profit increase may come from other costreductions and efficiency improvement --- need more

.

The possibility of PSP causing water tariff hikes may be

low.

Ongoing work looks at how PSP affects water servicequality.

a e up e m ss ng sec on n e causa c a n n a an e a .(2005)

Does PSP improve quality or reduce costs through lowering

serv ce qua y



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CS53: Private Sector Participation and Performance of Urban Water Utilities in the PRC

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