Examination of Witnesses (Questions 220-239)
MR PETER
HARDSTAFF AND
MR TIM
JONES
5 MAY 2006
Q220 Mr Vaizey: Can you talk about
the World Bank's review of conditionality and what is going on
there?
Mr Hardstaff: The World Bank did
a review of its conditionality. We were calling for it to be a
fundamental rethink, "Let us step back and look at the nature
of conditionality. What is it for? What are we trying to achieve?"
That did not happen. There are fundamental questions about democracy,
about building effective states which conditionality cuts across
in terms of issues about parliamentary scrutiny of policy and
Parliament's ability to change policy. That did not happen with
the World Bank review, it was a fairly functional look at the
number and types of conditions. Broadly speaking, the Bank concluded
that they were on the right track. There was not a fundamental
rethink and, therefore, that was part of the reason which led
to there not being particularly far-reaching conclusions. The
good thing is it is on the agenda for sure, pretty low down it
seems, and hopefully it will continue to come back on to the agenda,
but it was not a very far-reaching review, I am afraid.
Q221 Mr Vaizey: It is sort of parked
for the time being?
Mr Hardstaff: The review will
be reviewed. They will come back to the issue of conditionality
periodically but, sadly, it did not go far enough to suggest that
there needs to be significant changes in the way that the World
Bank and the IMF do conditionality.
Q222 Mr Vaizey: What about the idea
of direct budgetary support? Presumably that is something you
are quite in favour of?
Mr Hardstaff: As the New Economics
Foundation suggested, the problem we have is that governments
have become weaker in many respects. There are various issues
that cross over here. One is conditionality which weakens states.
It effectively puts governments and policy making in the hands
of others outside the country. It weakens parliaments and states.
That is a major problem. Conditionality that has been imposed,
as our previous speakers said, has involved trade liberalisation,
investment deregulation, and these are things which result in
less money for the state, which have ended up making the state
more dependent on aid. A key element of our submission to DFID's
recent White Paper was about how do we get from dependency to
self-sufficiency. What are the measures that we need to take?
What is the best use of aid in doing that? Ultimately we do not
want to be giving countries aid. We want them to get off the aid
treadmill. The problem we have seen is that they have not been
able to do that because the tax revenues from countries have been
eroded and degraded. Now we see that budgetary support is necessary.
Ideally, we want to be finding ways of getting countries off budgetary
support. We want a sustainable tax base in those countries.
Q223 Mr Vaizey: Budgetary support
is simply another way of giving aid.
Mr Hardstaff: Budgetary support
is a necessary evil. Ideally, we want to be getting countries
away from it.
Q224 Mr Vaizey: We all would love
to see these countries self-sufficient but while they are not
that is the best way of giving aid.
Mr Hardstaff: It is not the only
way of giving aid. DFID is utilising various different forms of
project aid as well as budget support.
Q225 Mr Vaizey: That is a new way
of giving aid.
Mr Hardstaff: Relatively, but
a key issue for us—again one of the key points we put in
our submission to the DFID White Paper—was about building
effective states. It ties in with the whole self-sufficiency argument
but you have to have effective government to develop. Budget support
can be part of that if it is used effectively. The problem is
that budget support can be used in a way that undermines the creation
of effective states by imposing policies on countries: we will
give you this cash if you do X, Y and Z policy. That is not building
effective states; that is taking decision making away from the
government and parliamentarians. Yes, budget support can be useful
and at the moment it is necessary.
Q226 Mr Vaizey: What about getting
the environment and sustainability onto the agenda? They are not
part of the conditions that developed countries impose on developing
nations?
Mr Hardstaff: What you tend to
find is that particularly with World Bank projects there are what
is called environmental safeguards attached—ie, we will
give you X amount of money to build this oil pipeline and you
must meet these environmental standards. In terms of budget support,
I do not think there are broader environmental policy conditions
attached. That is fair. I do not think we should be imposing environmental
policy on countries through budget support. We have not seen in
poverty reduction strategy papers the integration of the environment
to a great degree. Mirroring what has already been said by previous
speakers, there is a focus on growth. We want to reduce poverty;
therefore, we must do growth without an examination of what growth
is for; what are we trying to achieve and what are the best ways
of doing that? That is a problem with the conception of PRSPs.
We must pursue a growth strategy in order to achieve poverty reduction
when the evidence for growth equalling poverty reduction is mixed.
There are more important things we need to do or things that are
as important so, to that extent, I do not think sustainability
has been incorporated into the PRSP process.
Q227 Mr Vaizey: How do you get the
environment onto the agenda for developing nations? How do you
get growth or development?
Mr Hardstaff: There was a discussion
earlier about changing global institutions and it is all very
difficult. Is there any hope? There is a key role for DFID to
play in being the first mover, making small changes initially.
I was sad to hear that the Secretary of State is so vehement in
his analysis on economic growth because I think DFID could be
a first mover and reassess the nature and the relationship between
GDP as an indicator and poverty eradication and sustainability.
This has to be done. We have to re-examine this and DFID could
be the one that takes that lead in the way it has done with conditionality.
No one else was doing this. DFID has re-examined conditionality.
That has shifted the debate on conditionality although not in
as big a way as we would like. DFID has an influence. We are one
of the larger donors to the World Bank. DFID is seen as a significant
development institution internationally. What DFID does has a
broader impact so DFID could take first moves on these issues.
What is critical would be for DFID to start to reassess issues
around indicators, what we are trying to achieve and therefore
reassess what achieves poverty eradication in a way that is sustainable
and will accord will with environmental limits.
Q228 David Howarth: One of your current
campaigns is about water privatisation in particular. You had
a bit of a ding-dong with DFID on this. I wonder how you see DFID's
role, what it is doing and what its philosophy is. Does DFID see
privatisation as the way to achieve better water supply and better
water sanitation and achieving the Millennium Development Goal
in this area? What is the state of play in your debate with them?
Mr Hardstaff: Firstly, what we
all agree on is wanting to achieve the Millennium Development
Goals. It is interesting to note that in 1977 a target was set
to achieve universal access to water and sanitation. Since then
we have not achieved this and our ambitions have been recalibrated
to halving the proportion of people without access to water and
sanitation. The key issue is about how we do that. DFID has been
involved in supporting, politically and financially, privatisation
of water and sanitation. I think back to 2002 when we had Clare
Short in the House of Commons saying that privatisation is the
only way that poor countries will get the investment they need
to provide services like water, transport and so on. What this
led to is a focus on the private sector within DFID. What we have
seen over the past few years is a range of mechanisms created
to support the private sector politically and financially. So
there is conditionality. Now, thankfully, we have a commitment
to get rid of that but obviously it is still happening in the
World Bank and the IMF. DFID can come in on the back of the World
Bank and it has done that recently with Sierra Leone. The World
Bank and the IMF have demanded that water privatisation take place.
DFID comes in with aid funding for a consultant to advise. Initially,
it was for public relations as well but that seems to have been
averted. We have a tendency to pay consultants. We are talking
millions in the aid budget to advise developing countries on reforming
their water sector and invariably these consultants are recommending
privatisation. It is partly because these consultants have come
out of the private sector and privatisation in the UK. That is
what they do. We have DFID paying for public relations exercises
to convince unwilling populations that they should support privatisation.
Ultimately when it comes to private sector involvement in the
water and sanitation sector we have subsidies, in effect. We have
aid money being used to prop up the companies to help to smooth
their way or bail them out when they get into difficulties. There
is a range of ways in which DFID has been involved in promoting,
supporting and funding privatisation. What we have seen over the
past year or so—I hope—is a degree of shift, a degree
of questioning with that. Our debate with DFID has, at times,
been difficult but what we are seeing is, I hope, a re-evaluation.
We are holding a meeting in Portcullis House as we speak about
workable, public solutions to providing water and sanitation and
there are many. What we have not seen and what we would like DFID
to do is to provide political and financial support for workable,
public solutions. The key issue to remember is that privatisation
does not happen as a natural consequence of market forces. It
absolutely has to have political and financial support in order
to happen and then survive. Secondly, similarly, effective public
solutions will not happen without political and financial support.
Over the past ten or fifteen years we have seen governments put
their eggs in the privatisation basket. We are starting to see
a shift in that because companies are rethinking their strategies
and governments are beginning to wonder whether we will achieve
the MDGs by assuming that the private sector can do it, because
they do not have the money. The private sector does not have the
cash to be able to do this.
Q229 David Howarth: Do you think
DFID is giving enough priority to water in the first place, to
supply and sanitation?
Mr Hardstaff: There is a whole
range of complementary issues out there in terms of poverty eradication.
It is fair to argue that water and sanitation are probably the
most fundamental. If you do not have effective water and sanitation
you will not be able to go to school; your health will suffer
and so on. There are a number of Millennium Development Goals
which, to be achieved, will require improvement on water and sanitation.
It is fair to say that greater priority should be put into this
but it is a balancing act. We cannot expect DFID to put everything
into water and sanitation. There is a greater priority that could
be put into this. What we have been arguing is we need to be looking
at workable, public solutions about how we spend our own money.
Essentially, it is about public money. How are we going to use
public money? What is the best way of doing this? We have looked
at a range of failures in privatisation in all its different forms
and our assessment is that we need much more political and financial
support for effective, workable, public solutions.
Q230 David Howarth: Do you say the
same thing about the EU and the World Bank?
Mr Hardstaff: Yes. Talking to
colleagues in other European countries, the EU Water Initiative
is similarly beset by this assumption that the private sector
is going to deliver. There are a couple of important points to
remember. One is that the WDM is not anti-private sector. We talk
about an appropriate role for the private sector. We are not anti
all privatisation. When it comes to privatising a state run beer
company, you will not find us campaigning on the streets. It is
about the appropriate role for the private sector and when we
have looked at water and sanitation our assessment of the evidence
is that the appropriate role for the private sector is in out-sourcing
from public utilities, providing technical advice. Ultimately,
the most effective way and the cheapest way to run a water system—we
are talking largely about urban water systems here—is some
form of public system and there are variations.
Q231 David Howarth: To be fair to
DFID, they say they only spend five% of the relevant funds on
privatisation. Do you accept that or is that counting it in a
particular way?
Mr Hardstaff: There are issues
with the figure. For example, our campaign is focused on urban
water supply. That is no small issue because of the increasing
urbanisation across the developing world. DFID's figure includes
its funding for rural supply in which the private sector simply
has no interest. There is no money in it. There is not a hell
of a lot of money in extending access to the poorest people in
cities and that is one of the problems we have encountered. The
figure does not include the money that DFID gives to multidonor
initiatives. That said, our key problem is not just about the
amount of money; it is about DFID being a first mover, its influence
extending beyond just the amount of money it provides in aid in
different forms. It is about its influence in the World Bank and
in developing country governments. There is a real role for DFID
to play in being a first mover, in demonstrating that there are
workable, public solutions out there and providing the political
as well as financial support for these solutions.
Q232 David Howarth: One thing that
particularly caught our attention was the Public Private Infrastructure
Advisory Facility. Could you tell us what its role is?
Mr Jones: It was originally set
up towards the end of the nineties and was the brainchild of people
within the DFID Water Energy and Minerals Department who wanted
to get other donors on board so they brought in the World Bank.
Since 1999 both water and sanitation and other utilities have
funded consultants primarily to do various bits of work on the
privatisation process. That will often include funding studies
that advise on what form privatisation should take, but it also
includes things about building consensus for reform. In lots of
cases they will hold workshops and get journalists and labour
unions in to try and convince them that water privatisation is
the way forward. Examples of this are in Malawi in 2002. Such
a study was done with workshops and now the World Bank has a project
there which is set to fund communications work to convince parliamentarians
and the public that water privatisation is what is needed in the
two largest cities. Similarly in Zambia, a group of journalists
from Zambia were paid to have workshops with the World Bank which
were meant to give an objective view of how to provide water and
sanitation but the whole focus of the workshop was about how to
introduce the private sector. That work in Zambia was followed
up by another consultant being paid to produce a report on how
to privatise water in Lusaka and that is now a condition of the
World Bank's programme. PPIAF has often relatively small amounts
of money involved. These consultants might cost around $100,000-$500,000
and that is the initial impetus to the privatisation. The World
Bank will come in later with funding of tens of millions of dollars
but the PPIAF was set up by DFID and still receives large amounts
of funding from DFID.
Q233 David Howarth: You mentioned
consultants, manufacturing consent and conditionality. Is DFID
involved in directly funding privatisation projects?
Mr Jones: There is one in Guyana
at the moment. Severn Trent International have a management contract
for the whole of the Guyanese water system. All of their fees
are paid for by DFID and the investment for the project is paid
for either by DFID or a few other donors such as the World Bank
and the EU. Certainly that is where money is directly going to
a private company.
Q234 Ms Barlow: To carry on with
the water privatisation issue, a lot of the companies involved
have either withdrawn or been kicked out. What have been the problems?
Mr Hardstaff: There are some fundamental
issues around particularly the multinational private sector involvement
in water and sanitation. The first is around the issue of investment.
There was a conventional wisdom—and to some extent there
still is—that the private sector has pots of cash lying
around somewhere to invest in extending water services to the
poor. This simply has not happened. The private sector, other
than its shareholder capital, has no more access to money and
finance than the public sector but what has happened in the private
sector is that they will borrow on international financial markets
which is relatively more expensive money. Then they will have
to pay that back. They have money to pay back with higher interest
rates; they have dividends to pay to their shareholders. All of
this has to be converted into their home currency. We have seen
in the past, where there have been currency fluctuations, the
company has seen the value of its investment in the developing
country fall because of the currency fluctuations. It still has
to get the money out. It still has to repatriate the profits and
pay off its loans in dollars or whatever it might be and therefore
it has to raise prices for the domestic consumer. There is a key
problem there for the private sector. What these tend to result
in is cherry picking. When the private sector says it is prepared
to go into a country in terms of its negotiations of its contract,
it will cherry pick the best countries in terms of where it might
make some money and then cherry pick the best cities. Within cities
it cherry picks the best areas where there are more people who
have the ability to pay and therefore the privatisation process
does not involve specifically extending water supply to the poorest
people and you have not dealt with the problem. The problems lead
to renegotiation of contracts so if the private sector is not
meeting its investment targets—as we have seen in cities
in Latin America—they renegotiate the contract to negotiate
down the investment targets because the private company cannot
achieve that level, or they simply fail and you get under-investment.
This is one of the arguments around the ejection of City Water-
which involved, UK company Biwater—from Tanzania. It was
all about whether they met their investment targets. You also
get cut-offs. The company is struggling to make enough money so
it will get cut off for not being able to pay. Ultimately, you
need government subsidy, through aid money, loans or the government
of the developing country. Public money is needed to support and
finance the private sector. These are the results of some key
problems that we find in private sector involvement in extending
water supply to the poor in developing countries.
Q235 Ms Barlow: Would you say in
the light of that that there were too high expectations within
the multinationals and within the countries in which they operate?
Mr Hardstaff: Yes. It is fair
to say the expectations were high but I also think that alongside
the expectations was a specific political project with a specific
intention to increase the amount of water and sanitation delivered
by the private sector regardless over time of the evidence of
whether or not the private sector was delivering. As we saw particularly
during the late nineties, the problem was increasing and there
was a bit of a rethink but not a rethink to the extent that maybe
it is not a very good idea but, "We need more donor financing
to help the private sector. Essentially, we need subsidies."
I think there is a mental block about supporting the public sector.
It has to happen. There is no way we will achieve the Millennium
Development Goals without significant financial and political
support for public sector provision. The private sector does not
have the resources to achieve the MDGs in the next ten years.
We have to start rethinking and look at effective ways to support
and finance the public sector.
Q236 Ms Barlow: Taking aside the
public sector just for a minute, are there any privatisation schemes
that you feel have worked well or are there any countries where
those have worked?
Mr Hardstaff: Senegal is sometimes
used as an example of where privatisation has worked. We have
also seen that this was backed by donor money so it was not the
private sector that provided the investment in extending the network
to the poor. It was loans and aid. Whether or not you count that
as a roaring success for the private sector is moot. Chile is
also an example. The World Bank's research says that Chile was
a pretty well functioning utility before privatisation and there
is no real evidence to suggest that the private sector has improved
on the trajectory that the public sector was already on. If you
have a well functioning public utility that is then privatised,
it is more difficult for the private sector to make a mess of
it, if you like, but these are not the critical areas. We have
to try and find ways to provide access to water and sanitation
for the poorest people in the most difficult areas and in those
areas we have not seen major successes from the private sector,
I would argue.
Q237 Ms Barlow: You have talked about
cherry picking by the privatised companies as one of the reasons
why the water needs of the poorest people are not being addressed.
Are there any other aspects that you can expand on? Is that the
only reason?
Mr Hardstaff: The cherry picking
goes together with a process for privatisation. It starts often
with conditionality followed by a consultant or it can start by
a consultant followed by conditionality. They have to bring in
the private sector on advice to the government and at that point
they have to decide what is the best way to bring in the private
sector. We need to increase prices to make it more attractive
for the private sector. We need to construct the contract in a
way that will be attractive to the private sector. That is where
you get cherry picking and a company saying, "Do not make
the investment burden too great." Therefore donors have to
come in with the money. You then get privatisation and problems
can continue. You can get currency problems or the company naturally
wants to make its profit and therefore you get price hikes above
and beyond (a) what people can afford and (b) what is necessary
to improve the system. A key issue is around being able to reinvest
your surplus. This is what we have seen in successful public sector
operations, whether that is Porto Alegre which is run on participatory
grounds or cities in Malaysia. You see the public operator making
a surplus and reinvesting that, extending the network. That is
effective use of that money. That is something the private sector
cannot do. When we talk about efficiency and the cheapest, best
way to get water and sanitation to the poor, as the World Bank
has shown, the private sector is no more efficient than the public
sector at achieving this goal.
Q238 Ms Barlow: In terms of the public
sector, you are saying there has to be public sector involvement
on a greater scale. So far, have there been any schemes where
public sector involvement has been extensive and successful?
Mr Hardstaff: There are different
models, if you like, different forms of public sector provision.
Porto Alegre involved quite an unusual participatory budgeting
exercise. In Savelugu in Ghana a local community was given responsibility
for managing the local water supply. It was paying the national
water company for its water and then it was responsible for distribution,
collecting for bills and so on. It worked well. They cut the incidence
of a rather nasty disease called guinea worm significantly. In
Dakar in Bangladesh a workers' cooperative took over and in comparison
to a private company working in a similar area they did much better.
There is a range of different examples. It is not just the traditional
public utility that we might think of. There is a range of different
models out there and that is what we would call public systems
or public models. They are not profit making in the private sector
but they are not necessarily the traditional conception of a public
utility, although there are those out there that are run effectively.
Q239 Ms Barlow: In terms of the White
Paper, what would you like DFID to be doing about water supplies
for the poorest people?
Mr Hardstaff: In our submission
of evidence to DFID, what we were asking DFID to do was to take
a step back, to re-examine development. We did not go so much
into the nitty gritty. We asked DFID to look at how to achieve
things like self-reliance and how to improve democracy. In that
respect, in our submission, we did not go into the detail because
we have been involved in a dialogue with DFID. What we would like
to see from DFID is firstly the commitment on increased priority
in relation to water and sanitation for sure but also a commitment
that DFID will engage, both politically and financially, in support
for public systems. DFID has a private sector development department.
It does not have a public sector development department. We do
not see institutionally within DFID at the moment the makeup that
is required to properly examine how you achieve successful government
and get successful government or public utilities and public systems.
It is firstly about DFID's own approach to this. There needs to
be some change internally. That has to be allied with clear political
and financial support from DFID for public solutions because developing
country governments are taking their steer from what they hear
from the World Bank, from DFID and bilateral donors and the conditionality
that is imposed on them. What they have heard in the past 20 years
is, "You will get the money if you involve the private sector."
There needs to be something different being said. Someone has
to start doing that and we would like to see DFID take the lead.
| 
