Suplemento nutricional de Drogavet Market Aminovitadrog:

Project: Water and electricity services

provision in Gabon

Description: 20-year concession for the

production, transport, and distribution of both water and electricity in Gabon; the contract can be extended for several periods based on an addendum to the contract

Financial close: July 1997

Capital value: US$135 million

Consortium: Societé d’Energie et d’Eau du

Gabon, comprising Vivendi Water (51 percent) and local shareholders (49 percent). The 49 percent sale of shares through a public offer was the first of its kind in Gabon. Employees were able to buy up to 5 percent of the shares. The first contract to involve private sector participation in Africa in the water sector was awarded in 1960. To date, 27 such contracts have been signed. However, this politically sensitive sector remains one of the least popular for private investment. Nevertheless, it is possible to find successful projects in the sector. According to a report commissioned by the World Bank and the PPIAF (2002), the contract for the management of water and electricity utilities in Gabon was a relative success, thanks to the strong political commitment on the part of the government, the undertaking of essential reforms prior to the transaction, such as legal reform and tariff reform, and the restructuring of Societé d’Energie et d’Eau du Gabon (SEEG) before the transaction, so that a good social climate was preserved throughout the PPP process.5

In July 1997, a 20-year concession contract for the provision of both water and electricity services was signed between the government of Gabon and SEEG, which is majority-owned by Vivendi Water, a large multinational util- ity company. SEEG grew out of private municipal companies that provided water and electricity services in the two main urban centers, Libreville and Port-Gentil, which together comprise half the country’s total population.

5 _{While the restructuring of SEEG by the government eliminated 600 workers between 1989}

and 1997, when the contract was signed, Vivendi committed to maintaining the number of employees at 90 percent of the level at the beginning of the concession (1,355 employees). See World Bank and PPIAF (2002, 12).

Setting the Framework 29

Extensive preparation was necessary to allow important reforms, such as the definition of a legal framework, the increase of tariffs to levels reflecting costs, and the reduction of staff. This began as early as 1989. By 1993, three laws were passed to establish the legal framework for both water and elec- tricity sectors, while the tariff structure was reformed in 1997. This reform consisted of simplifying the tariff structure in order to eliminate all special tariffs that had been awarded to various social and professional categories. Medium-voltage electricity tariffs moved very close to their economic lev- els (with an increase in medium-voltage tariffs in isolated centers, to reflect the high costs of isolated thermal production), whereas the cross-subsidies between water and electricity remained in place. Once the groundwork had been laid, the transaction proceeded smoothly and transparently. Vivendi won the project on the basis of a proposed 17.25 percent reduction in the price of water and electricity services. To allow for maximum transparency, the opening of the financial bids was done publicly, and negotiations fol- lowing the selection of bidders were limited to a minimum (World Bank and PPIAF 2002, 12).

This contract was the first “real” output-driven water concession in Africa: it defined investment obligations and set coverage targets for the private sec- tor provider. For instance, the contract obliged SEEG to invest a minimum of US$135 million in rehabilitation (60 percent in water) and set coverage targets for expanding service to previously unconnected rural areas. SEEG’s electricity business, particularly electricity revenues from the two main towns, cross-subsidized the less developed water business. SEEG informally com- mitted to investing another US$130 million over the life of the contract to improve performance and coverage of the network. Although no separate dedicated regulatory body was set up, a government department within the Ministry of Water and Electricity assumed the regulatory and monitoring functions of the concession.

Nevertheless, some aspects of the contract remained undefined at award, particularly those concerning quality standards. When the government entered the contract, it lacked key information to define those standards. Rather than delaying the transaction, it took a progressive approach to contracting and decided to set aside a transition period of two and a half years, during which these aspects would be negotiated between the parties. Five years down the line, many of the elements had yet to be agreed, and important regulatory tools were still being prepared or negotiated.

The World Bank and PPIAF (2002) report that the private operator had, in the first five years, “performed well in its existing service areas, often exceeding targets, but less progress had been made in more isolated areas.” The report continues, “SEEG has posted good profits since the start

30 How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets

of its operations, paying shareholders a 20 percent dividend per share in 2000. The coverage targets, with penalties for non-achievement, have pro- vided effective incentives for quickly increasing network density in newly served areas. The multi-utility service provision has allowed cost reduction through sharing of resources, particularly at the headquarter level. Cross- subsidization has also been effective in getting 60 percent of investment into the water sector, which only accounts for 15 percent of SEEG’s turnover.”

At the same time, the delays in establishing regulatory and monitoring tools to enforce quality have resulted in some skepticism on the part of the conceding authority on the reality of the improvements mentioned above, “because it is very difficult to assess the overall efficiency of the company and the potential for further improvements.” In fact, the World Bank and PPIAF report notes, “Installing monitoring systems together with an ade- quate analytical accounting system and computer systems remains one of the major challenges for the concessionaire, who was at the time when the report was written in the process of installing these systems, if only as a way of improving its own management.”

Key lessons from this project are the following:

• Government provided strong policy support to the project since its conception.

• Government prepared the ground for private sector participation by devel- oping an appropriate legal, institutional, and contractual framework and by putting in place an appropriate pricing policy.

• Government preserved a good social climate throughout processing of the transaction by completing the restructuring of SEEG prior to the operation.

• The contract defined the investment obligations and set coverage targets for the consortium.

• The experience in this case shows that if some contractual clauses are to be negotiated during the life of the contract, it is important to set and adhere to realistic deadlines and to have safeguards in place to allow for proper regulation of the contract in the absence of an agreement.

• The provision of various utilities allowed cross-subsidization of less prof- itable areas and economies of scale.