I. Introduction Public water supply systems have increasingly been subject to commercialisation or corporatisation in the developing world. This method is sometimes used as a surrogate for privatisation in circumstances where existing systems of provision are unattractive for multinational water companies. By reforming the public sector in the image of independent and self-sufficient private enterprises, the chief aim of commercialisation is to improve the efficiency of operations often associated with the private sector. (...)Reforming Without Resourcing: The Case of the Urban Water Supply in Zambia

Hulya Dagdeviren

Simon A. Robertson

English

Research Papers in Economics

Policy Sept/2008 no. 8 research brief
The International Poverty Centre is jointly supported by the Brazilian Institute for Applied Economic Research
(IPEA)  and the Bureau for Development Policy, United Nations Development Programme, New York. International Poverty Centre
 By Hulya Dagdeviren and Simon A. Robertson
Reforming Without Resourcing:
The Case of the Urban Water Supply in Zambia
I. Introduction
Public water supply systems have increasingly been subject to
commercialisation or corporatisation in the developing world.
This method is sometimes used as a surrogate for privatisation in
circumstances where existing systems of provision are unattractive for
multinational water companies. By reforming the public sector in the
image of independent and self-sufficient private enterprises, the chief
aim of commercialisation is to improve the efficiency of operations
often associated with the private sector.
Reforming public utilities to improve performance is certainly very
commendable, whether it be to enhance their financial viability, service
quality or service coverage. Problems arise when policies are derived
from a prototype developed elsewhere and copied without regard to
the social, economic and political conditions in which they are to be applied. Often, failure to consider context specificity may
lead to one set of goals, such as financial viability or efficiency, being emphasised to the detriment of another set of goals, such as
affordability, extension of service coverage and so on.
This Policy Research Brief outlines the process and outcomes of commercialisation of the water supply in Zambia, with a view to
extracting lessons for low-income economies elsewhere. For a full account of this case study, see Dagdeviren (2008). The crux of the
conclusions is that commercialisation inhibits the development of service provision when implemented in an environment where
social policy objectives, such as affordability of supply and expansion of network access, are a prime concern. This inherent flaw should
be remedied by means of substantial investment and other revisions to the tariff structure.
II. Background
In Zambia, commercialisation of the water and sanitation system (WSS) started in the late 1980s against a backdrop of economic
decline, falling incomes, increasing poverty and high national indebtedness. In this period the water sector was under enormous
pressure to meet growing demand, while the geographically limited and deteriorating infrastructure required significant investment
for maintenance and network extension.
The process of reform has been spread over a period of two decades and has involved numerous measures, including:
• regional decentralisation of the water supply network;
• creating autonomous public companies to operate the system;
• using new management practices that emulate the private sector;
• curbing overstaffing, and improving billing and revenue collection;
• eliminating transfers from the government to the sector, especially for investment;
• ring-fencing the providers’ cash flows;
• using commercial principles in setting tariffs; and
• reducing subsidies to users.
The goal of all this has been to enable providers to achieve full cost recovery, including the cost of operations, maintenance and
investment, without recourse to the use of government funds.
The water sector reforms in urban Zambia began with the corporatisation of the WSS in Lusaka in 1989 and continued with a period
of “tariff rationalisation”, as well as legislative and institutional changes from 1992 onwards. The process accelerated after 2000 when
the regulatory body, the National Water Supply and Sanitation Council (NWASCO), became operational and nine more “commercial
utilities” were established as autonomous enterprises. They assumed WSS responsibilities previously entrusted to local authorities, but
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remained under the ownership of those authorities. In 2005,
these utilities served about 40 per cent of Zambia’s total
population and 86 per cent of the peri-urban population. The
remaining WSS services were provided by local authorities.
The model of commercialisation implemented in Zambia
shares its origins with privatisation elsewhere, and thus suffers
from similar problems arising from the use of inappropriate
models of provision in developing-country contexts.
In practice, the twin policy goals of ensuring commercial
viability and meeting social objectives have been shown
to be incompatible, if not contradictory, under the new
system. The conditions that prompted commercialisation
have not improved significantly since the reforms were
implemented. WSS access is similar to pre-reform levels,
commercial utilities remain reliant on external support,
and levels of investment are insufficient to improve
infrastructure or expand networks.
III. Tariffs and Affordability of Water
Tariffs for all water utilities in Zambia are set according to the
category of housing, which is classified as low-cost, medium-
cost or high-cost for cross-subsidisation purposes. The “tariff
rationalisation” process started in the early 1990s, since when
tariffs have increased by between twofold and eightfold in real
terms. Low-cost water charges have increased more than
medium-cost charges, and in some provinces even more than
high-cost tariffs. Because of the policy of cost recovery,
therefore, and the associated increase in tariffs and reduction
in cross-subsidy, tariffs remain unaffordable for many of
Zambia’s poor, and pricing has become more socially regressive
during the period of commercialised operations.
Poverty is a major problem in Zambia. Most recent estimates
suggest that 68 per cent of the population live in poverty.
When poverty is widespread, access to water in commercialised
systems of provision is influenced by the affordability of
connecting to the network, and of the water supply itself.
Affordability is often measured according to the share
of household income allocated to payments for water.
If households spend more than 3 per cent of their income
on water, the tariffs are considered to be unaffordable.
Using the same method, we found that low-cost water charges
are unaffordable for the poor in all urban centres except those
in the Southern province. Overall, water is unaffordable for
60 per cent of households in Zambia as a whole.
IV. Decline in Access to Safe Water
After commercialisation, the proportion of the population with
access to safe water declined from 72 per cent in 1992 to 57 per
cent in 2002 at the national level. The overall deterioration in
rates of access to safe water has been less dramatic in urban
centres than it has been nationwide. But there has been a
significant decline in the number of residential connections
following commercialisation, and urban households have
increasingly come to rely on public taps, boreholes, wells,
ponds and so forth.
The conflict between social goals and commercial provision of
the water supply is plainly visible in the slums or so-called peri-
urban areas where most of the urban population live.
Commercial utilities are reluctant to supply water in these
areas because cost-recovery is very difficult. Political
imperatives force the government to devise some solution to
the lack of access to safe water in the slums, especially in the
face of internal and external pressures. The impetus provided
by Millennium Development Goals (MDGs), for example, is
particularly pertinent. Currently, the government and the
regulator emphasise increasing the number of commercially
Table 1
Affordability of Water Tariffs by Urban Household,  2002–2003 (%)
Source:  Dagdeviren (2008).
Share of Monthly Expenditure on Low-Cost Water in Mean Household Income 
 Lusaka  Mulonga  Western  Southern  Nkana  Chipata 
Extreme poor  7.4 7.9 9.0 3.5 5.3  14.0 
Moderate poor  5.2 5.6 6.3 2.5 3.7 9.9 
 
Table 2
Investment in the Water and Sanitation Sector, 1998–2002
Source:  Dagdeviren (2008).
* Including donor funds in the sector.
Actual Expenditure* as % of Capital Expenditure Required  
to Maintain Existing Access Rates   
Actual Government Capital 
Expenditure as % of Budgeted 
Capital Expenditure  Low-cost strategy  Medium-cost strategy 
1998  3.1 8.9  2.4 
1999  2.4 11.0  2.9 
2000  3.0 6.9  1.8 
2001  12.3 7.7 2.0 
2002  8.8 8.2  2.2 
 3
Policy Research Brief
operated public taps (kiosks), which can be viewed as a quick-
fix solution to meet the MDG for water. These interventions in
the peri-urban areas will relieve the problems associated with
lack of access to water in the short term, but it is doubtful if
such measures are sustainable or even desirable in the
medium to long term.
V. Decline in Investment in the Water Sector
Full cost recovery is the chief goal of commercialising public
utilities, but so far this has been impossible in Zambia. The
main reason is the high levels of unaccounted-for water (UFW),
which is the water produced but not billed for. The factors that
contribute to rising levels of UFW include leakages in the
system because of lack of maintenance and poor infrastructure,
water wastage as a result of unmeasured consumption
coupled with fixed payments, and vandalism. On average,
about 50 per cent of the water produced by the commercial
utilities was unaccounted for in 2006. In other words, they
could earn revenue for only half of the water they produced.
Hence the commercial utilities have little capacity to invest in
improving or expanding infrastructure without transfers from
the government or aid from donors. Financing from these
sources, however, has been meagre since the start of the
commercialisation programme. The government always
underinvested in the sector. As Table 2 shows, its actual
investment amounted to between just 2 and 12 per cent of its
planned capital spending on the WSS from 1998 to 2002.
At the onset of commercialisation, a government-funded
project suggested that between US$407 million (a low-cost
strategy) and US$1,553 million (a medium-cost strategy)
would have to be invested every year in the period 1994–
2003 to rehabilitate the existing system and expand the
network in order to obviate any reduction in access rates.
Actual capital expenditure in the sector, even when
combined with donor funds, has never exceeded a trivial
proportion of the levels required by the low-cost and
medium-cost strategies.
Lack of investment in the sector has repercussions for the
continued high levels of UFW. It will be difficult to curb UFW
unless the water infrastructure is repaired, maintained and
extended. Thus far, the commercialisation programme has
emphasised tariff rationalisation. Unless investment needs are
met, no tariff rise can achieve full cost recovery in the sector
without aggravating the problems associated with the
affordability of  water and access to it. If investment needs
remain unmet, WSS provided by commercialised enterprises
will persist in a “vicious circle” of low investment levels, high
system losses, unaffordable tariffs and low access levels. This
circular process counteracts the potential for truly
autonomous self-sufficient enterprises as envisaged by
commercialisation, and more importantly it robs WSS services
of the potential to meet social policy objectives.
VI. Regulation of WSS
It is widely known that the neoliberal paradigm has dominated
the policy agenda for public sector reforms for about three
decades. The naive views of the earlier years have evolved and
the complexities of these reforms, including corporatisation
and privatisation, are now recognised. There seems to be
acknowledgement that there is no universally applicable
blueprint for utility sector reforms. These considerations were
expressed by the World Bank in a landmark publication on
reforming infrastructure (Kessides, 2004). A thorough review of
the changing views on utility sector reforms since the 1980s
can be found in Bayliss and Fine (2007). The new wisdom
highlights the importance of regulation for the success of
public sector reforms, though this in itself may be problematic
and is very similar to universal application of a model derived
from developed-country systems.
Attempts have been made in developing countries to
introduce models of independent regulation that are akin to
the schemes for WSS provision in developed countries. It is
assumed, however, that the financial and technical resources
needed for this form of regulation are available to the
regulatory agency in the developing country. In Zambia,
independent regulation has taken the form of assessment by
the regulator, NWASCO.
 The assessment has focused on the performance of, and
“yardstick competition” between, each utility. NWASCO,
however, is underfunded and understaffed, and the
development of regulatory practice continues
to be ex-post when it should be considered a prerequisite.
Moreover, if measures were to be implemented in an
attempt to achieve social objectives, evidence from
elsewhere indicates that the functions of the regulator
necessarily expand (to encompass cross-subsidisation, for
example), and therefore further strain is placed on limited
financial and technical resources.
Even when the regulatory agency has sufficient capacities and
is closely aligned to the idealised model, the evidence suggests
that the successful operation and regulation of WSS is
uncertain and often remains problematic. As Parker and
Kirkpatrick (2006) maintain, if the regulatory agency is to
function as intended, it needs strong institutional and legal
frameworks that provide the means through which rules and
regulations may be enforced. Without this supporting
environment, the regulatory agency’s actions may be futile.
Often, the legal and institutional environment runs counter
to the neoliberal reforms and to the associated independent
regulatory agency, and thus reform is not as effective as
intended. This is evident in Zambia, where the mechanisms
for enforcing regulatory rules and penalties (essential as a
disciplinary measure in the regulatory system) remain
unclear. Similarly, institutional roles and the responsibility
for tackling affordability and extension of supply to the poor
are somewhat obscure.
Despite the shortcomings of regulation in Zambia, NWASCO
seems to be striving to improve performance in the WSS sector
and has already made significant progress in benchmarking,
transparency, reporting and engaging users in the process.
VII. Policy Recommendations
The commercialisation of the WSS in Zambia has proven
to be less than effective because of inherent design flaws.
The reforms stressed tariff rationalisation and cuts in
government transfers. At present, commercial utilities persist
in a “vicious circle” of low investment levels, high system losses,
unaffordable tariffs and low access levels. The commercialInternational Poverty Centre
SBS – Ed. BNDES, 10º andar
70076-900   Brasilia   DF
Brazil
povertycentre@undp-povertycentre.org
www.undp-povertycentre.org
Telephone   +55 61 2105 5000
The views expressed in this brief are the authors’ and not necessarily those of  the International Poverty Centre, IPEA or the United Nations Development Programme.
efficiency incentives to minimise costs, as well as efforts at cost
recovery, counteract the system’s potential to be effective in
meeting social policy objectives, such as affordable tariffs and
network expansion.
There is nothing inherently wrong about autonomous and
regulated public water utilities. In fact, reforms to improve
public sector performance—including finances, cost recovery,
quality of service and transparency of transactions—are
welcome. The problem lies with the initial conception of the
reforms—that is, the commercial provision of an essential
public service. This is especially problematic in countries where
household income levels are low, poverty is common and a
compensating social welfare system is absent. The more
specific policy lessons concern the issues discussed below.
Investment and subsidies
The means by which the conflicting goals of efficiency and social
policy may be reconciled involves making significant levels of
investment to expand and improve networks, as well as cross-
subsidisation among consumers, which in turn should provide a
viable system of WSS provision. Experience in other countries
suggests that while cross-subsidisation is important in providing
socially progressive tariff structures (the integration of valuable
commercial consumers into the cross-subsidisation structure is
an important factor here), this measure alone is not sufficient
because benefits accrue mainly to those connected to the
network. The poor are generally excluded, since there is little
incentive to expand network access for them (Komives et al.,
2005). Cross-subsidisation is also inadequate as an isolated
policy when consumers consist mainly of poor and low-income
households, as is the case in Zambia and other low-income
economies. Meeting the sector’s investment needs is essential to
improving the effectiveness of cross-subsidisation and ensuring
the utilities’ financial viability, since such a step would help
reduce the unit cost of production through both the scale
effects and lower UFW rates.
Access in slums and peri-urban areas
The problem of access to the water supply in peri-urban areas is
much more pressing, not only in Zambia but in many developing
countries. Low-cost and quick-fix solutions may be important in
mitigating the adverse effects of lack of access to water in the
slums. But a decent solution that is sustainable over the long
term is beyond the commercialised world of WSS systems,
the utilities and the regulators, since it requires concerted
interventions from numerous government departments,
including housing, urban planning, infrastructure development
and so on. It may be important to meet the MDGs, but the MDG
for water does not distinguish among different forms of access
(such as access from wells, public taps, residential pipes,
continuous access and restricted access). It is important to
improve the quality of access to water in general, and for slum
dwellers in particular, and to that end we have to think beyond
the MDGs and 2015.
Assigning an institutional mandate to monitor the
affordability of water for the poor and their access to it
In developing countries where poverty is extensive, it is essential
that the affordability of water and access to it, especially by
low-income groups and the poor, be overseen and monitored
regularly. Responsibility for this, and the means of intervention,
should be determined on the basis of each country’s needs
and institutional structure.  
Hulya Dagdeviren and Simon A. Robertson,
University of Hertfordshire.
References:
Bayliss, K. and B. Fine (2007). Privatization and Alternative Public Sector Reform in Sub-Saharan Africa: Delivering on Electricity and Water.
London, Macmillan.
Dagdeviren, H. (2008). ‘Waiting for Miracles: Commercialization of Urban Water Services in Zambia’ . Development and Change 39 (1), 101–121.
Kessides, I. N. (2004). Reforming Infrastructure: Privatization, Regulation, and Competition. Oxford and New York, Oxford University Press
for the World Bank.
Komives, K. et al. (2005). Water, Electricity and the Poor: Who Benefits from Utility Subsidies? Washington, DC, World Bank.
Parker, D. and C. Kirkpatrick (2006). ‘Privatisation and Regulation in Developing Countries,’ in C. Robinson (ed.), Regulating Utilities
and Promoting Competition. London, Institute of Economic Affairs.

Reforming Without Resourcing: The Case of the Urban Water Supply in Zambia

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