House of Commons - International Development

Select Committee on International Development Memoranda

Memorandum submitted by the World Development Movement

Water, Sanitation and Private Sector Development

Summary of Submission

Overarching principles

The World Development Movement (WDM) is not anti-private sector. There are many legitimate roles for the private sector in an economy although whether and how such private sector activity benefits society is dependent on how governments regulate. There are also roles that the private sector should not be expected to fulfil.
It is critical that governments understand and promote an appropriate role for the private sector in development. International development policy should not be based on the assumption that the private sector is always more efficient and effective than the public sector or that private sector investment can substitute for government funding.
The water and sanitation sector provides an important case study of the limit to which the private sector can be expected to provide a key public service (or 'infrastructure service' as the World Bank calls it) and contribute to achieving several of the key Millennium Development Goals. WDM's contribution to the IDC inquiry focuses on this sector.

The theory behind water privatisation

There is a global water crisis which needs tackling, especially in terms of connecting new communities to the water network.
There are many expectations and assumptions about what the private sector can contribute towards tackling this global water crisis.

How water is different from other sectors

Water is a natural monopoly so arguments about competition and markets, which may apply to private sector development in other sectors, are not relevant.
The private water sector is not necessarily more efficient than the public sector.
The water and sanitation sector is very capital intensive and billions of dollars of investment in the sector is required.
Access to water is a human right.

The reality of water privatisation

Private companies have not delivered the better capital on better terms that has been expected.
In parts of the world where tackling the lack of access to water is an imperative, few people have been connected due to private investment.
Private companies have also not reduced government risk and the burden of borrowing.
Instead, privatisations have been dependent upon public or donor funding when making new connections.
Investment activity has not been concentrated in the area of most need but rather where companies feel they can maximise their profits.
Private companies have resorted to unacceptable tactics to maintain profits.

The role of donors

Conditions set by donors have pressured developing countries to privatise water.
Donors have also contributed aid funds to public relations work aimed at promoting privatisation.
As a result of misplaced expectations on the private sector, donors and governments have substantially reduced the amount of money they devote to water and sanitation.

Where next for the water sector

Water utilities which keep water in public hands have had success in boosting the number of connections.
The private sector does have a role in the water and sanitation sector but this must be restricted to activities which do not require their control or management of utilities.

Introduction

1. The World Development Movement (WDM) campaigns to tackle the root causes of poverty. With our partners around the world, we win positive change for the world's poorest people. We believe that charity is not enough. We lobby governments and companies to change polices that keep people poor. WDM is a democratic membership organisation of individuals and local groups.

2. This submission concerns the issue of the private sector's role within the water and sanitation sector. It is based, at least in part, on the findings of a study shortly to be published by WDM and Public Services International.[75]

3. This study will look at the claims made by, and on behalf of, the private sector, in terms of the contribution it could make towards tackling the global water crisis. It will look at the structural reasons why these claims were never likely to be realised, as well as the evidence that demonstrates this to be the case. In particular, there will be a number of case studies to demonstrate the failure of the private sector to deliver investment as was promised. It will also assess the knock-on implications of this failure, especially for donors.

The theory behind water privatisation

4. Over one billion people need to gain access to clean water supply and over two billion need to gain access to adequate sanitation. Over 80 per cent of those needing connections are in the regions of Sub-Saharan Africa, South Asia, and East Asia and Pacific. Meanwhile, the Millennium Development Goal (MDG) requires, by 2015, a reduction by half of the proportion of people without sustainable access to clean water and adequate sanitation.[76] Achieving other MDGs, such as reducing disease and cutting child mortality rates, will also require improvements to water and sanitation.

5. There are many misplaced hopes and expectations surrounding the ability of the private sector to make a contribution towards the MDGs in water. If a public utility is failing - and there are many, especially in developing countries, which are - there is often an assumption that inevitably the private sector will be able to do a better job. It is assumed that the private sector will be able to bring in a higher level of finance than is otherwise possible. It is expected that cash-strapped governments will be able to off-load risk and the burden of borrowing and investing themselves if they bring in the private sector. There is also the assumption that the private sector will extract better value from a given sum than the public sector by spending more wisely and streamlining procedures and structures.

6. The assumptions outlined above are similar to the justifications for the private sector's involvement in other sectors: efficiency, injections of cash and relieving the public sector burden. As Clare Short, former UK Secretary of State for International Development, told the House of Commons in 2002: "Privatisation is the only way to get the investment that [poor] countries need in things like banking, tourism, telecommunications and services such as water under good regulatory arrangements."[77] But water is different from almost any other sector, for a number of important reasons.

How water is different from other sectors

7. Firstly, water is a natural monopoly meaning that competition - and any resulting efficiencies - is impossible. As the European Commission's Directorate General (DG) for Competition which, amongst other things, has been working on how to organise the water sector within the European Union, stated, "the liberalisation of water is unlikely to result in the same benefits as other network industries because a large proportion of the cost of supply of residential customers is incurred by the distribution network (which would remain a monopoly) and there is little scope for supply from distant sources."[78] It is hard to see how a privatised water system would lead to a market where competition could lead to benefits for poor people.

8. Secondly, the evidence does not indicate that it is possible to make assumptions about the relative efficiency of the public and private sector. In the water sector specifically, research suggests that the private sector is no more efficient or effective than the public sector. As one research article on water provision in Asia concludes, "The results show that efficiency is not significantly different in private companies than in public ones."[79] Another report concluded that the studies it analysed "reveal that there is no compelling evidence to date of private utilities outperforming public utilities or that privatising water utilities leads to unambiguous improvements in performance".[80]

9. In a study of the Thames Water concession in Jakarta, Thames PAM Jaya, it has been noted that "The overall achievement of the private company must be considered very low. This may imply that the status of water supply system in Jakarta is very much the same as it was before the involvement of the private sector … Officials admit that [the previous] public operation should have been able to attain the targets even better than the private company's performance".[81]

10. Thirdly, the water and sanitation sectors are incredibly capital intensive and investment on a massive scale is required. There have been a wide variety of estimates of the extent of investment needed to tackle the global water crisis: these range from US$51 billion to US$102 billion for water supply, and from US$24 billion to US$42 billion for sanitation.[82]

11. It is difficult to see how the requirement to inject such sums can be reconciled with a private company's profit motive. Companies need to generate profits which they then transfer to shareholders, and they are on the record as stating how this duty can conflict with the need to invest. For example, after negotiations for a water concession in Zimbabwe broke down in 1999, an executive from UK water company Biwater explained that, "from a social point of view these kind of projects are viable, but unfortunately, from a private sector point of view, they are not".[83]

12. Finally, access to clean water is widely recognised to be a human right and as such only deliverable by public authorities and governments. Indeed there are a number of campaigns being run around the world to get this demand entrenched within the United Nations system, which would enable people to hold their governments to account on this issue.[84] At the root of each of these campaigns is a belief that water is a fundamentally important resource that should not be treated as if it were solely an economic commodity.

The reality of water privatisation

13. The reality of water privatisation, and especially the amount of investment it has levered in to connect new customers in developing countries, has been disappointing to say the least. Overall, there is little evidence that private companies have brought in extra capital on better terms to boost the number of connections.

14. Some types of privatisation contracts contain no private investment requirements at all. Management contracts never involve the private sector investing in the water system while lease/affermage contracts involve private investment in renewing the existing system but not in extending the system. Only concession contracts have requirements on private companies to bring investment in to extend the system.[85]

15. But the record of concession contracts has been very poor. Only five concessions for water services have been implemented in sub-Saharan Africa. Three of these covered water and electricity in Cape Verde, Gabon and Mali. The only two concessions for water and sanitation services alone are both in South Africa and both have cut their investment plans - by 60 per cent at Dolphin Coast, and by a complete halt to all investments in Nelspruit since 2001 (see later). Meanwhile, Mali has terminated the concession and renationalised the electricity and water services, and Cape Verde is threatening to do the same, in both cases on the grounds of failure to make the necessary investments. In Gabon, as of 2005, the new investment programme of the privately-controlled utility is being financed by an international public sector bank, and the savings of the residents of Gabon. [86]

16. In the entire South Asia region, including India, Pakistan, Bangladesh and Sri Lanka, there has not been a single concession or lease contract for the private sector operation of water or sanitation services. In a region with 1,400 million people (23 per cent of the world's population) no investments have been made by private operators of water services in extending the water distribution systems. [87]

17. Once a privatisation contract is in place, a company might seek to re-negotiate itself out of some of its commitments. Eight months after starting operations in Buenos Aires in 1993, Aguas Argentinas a subsidiary of Suez, requested an "extraordinary review" of tariffs, due to unexpected operational losses. Despite tariff increases, 45 per cent of projected investments were not implemented in the first three years of the concession. The concession agreement was subsequently renegotiated so that little remained of the initial covenant. In September 2005 Aguas Argentinas' private shareholders decided to terminate the 30-year contract.[88]

18. The only form of finance uniquely available to the private sector is equity finance from private shareholders. All the other funding sources such as finance from donors, development banks, commercial bank loans, bonds and operating surpluses are, in principle, equally available to public and private sector operators.[89]

19. Meanwhile, it costs the private sector more than the public sector to borrow the same amount. Companies have to pay higher interest rates than the public sector when they borrow from the markets, because their credit ratings are worse than governments - and even low income developing country governments can access finance at favourable terms from development banks.[90]

21. Private companies have not helped reduce government borrowing and risk by taking on the burden of making investments to connect new communities to the water network. Privatisations that do deliver investment to connect new communities depend upon public finance, donor finance or government guarantees.

22. In Senegal, the privatisation (lease) contract is frequently quoted as a success story, with a substantial increase in the number of connections - 35 per cent from 1996 to 2001. However, these new connections were not financed by or through the private company, but largely through the public water authority. The leap in new connections came after 1999, when a new injection of public finance - including a World Bank loan - was provided through the public water authority.[91]

23. As the Head of SAUR, one of the major French water multinationals, said in 2002, "Substantial grants and soft loans are unavoidable to meet required investment levels … [This entails] the considerable dependence of the growth of the water sector in the developing world on soft funding and subsidies. If it does not happen the international water companies will be forced to stay at home."[92]

24. All of this evidence illustrates that it is an illusion to think that private companies either have in the past, or will in the future, be able to finance the massive investment required to connect new communities to water networks.

25. This emphasis on the private sector has had negative impacts on poor people without water around the world. Putting private companies in the driving seat in recent years has allowed them to set the agenda in terms of prioritising the continents, regions and cities where investment in the water sector should go. Because of their need to make a profit, companies and donor-funded investment have not concentrated on the areas of greatest need: cities where the poorest live and rural areas.[93]

26. For example, Latin America includes a number of middle income countries, and contains a relatively small proportion of the population who need to be connected in order to achieve the MDGs (nine per cent). The region has nevertheless been the target of most of the investment by the water multinationals, clearly because of its relative profitability. Many of these concessions are now terminated or in crisis, either as a result of popular opposition, or as a result of economic crisis (as in Argentina) or both.[94]

27. Meanwhile, the zero new connections in South Asia from private investment is the most dramatic illustration of how corporate decisions on where to operate are based on commercial judgments which may bear no relation to the relative needs of populations.[95]

28. Companies themselves have admitted this trend too. For example, in a water policy meeting in Uganda in 2001, staff from the French multinational Vivendi (now called Veolia) stated that the need to make reasonable profit means they only invest in the larger, richer cities.[96]

29. In order to meet their profit needs, private companies operating privatisation contracts have resorted to tactics in developing countries which are no longer acceptable in the UK such as pre-pay water meters, massive price rises and disconnections for failure to pay. In South Africa, UK water company Biwater's Nelspruit concession depended heavily on generating a surplus through increased water charges, based on (non pre-pay) metering of households and full cost recovery. Many households could not afford the new tariffs, and payment levels were considerably lower than the company expected. Strict enforcement was attempted: "After warnings, water was cut off, but restored if payment (or part payment) was made. Persistent non-payment led to the removal of pipe work" and disconnections for non-payment continued even during the cholera epidemic of 2000.[97]

The role of donors in pushing water privatisation

30. Donors such as the World Bank and International Monetary Fund have been instrumental in pushing the concept of water privatisation in developing countries. To receive cheap loans and debt relief, demands are made that poor countries reduce their public sector expenditure, while loans and aid to the water sector specify that they will only be given if a privatisation occurs.

31. In March 2005, the UK Government's Department for International Development (DFID) published a new policy on conditionality which stated that economic policy conditions would no longer be attached to its aid programme.[98] WDM and others welcomed this new policy; it was something that we had been calling for, for years. However, in and of itself, this policy has not put a complete stop to the UK government pushing water privatisation in developing countries.

32. Twelve per cent of UK aid is channelled through the World Bank which continues to attach economic policy conditions, such as water privatisation, to its lending. In addition, the UK aid budget continues to pay for policy advice and technical assistance on water privatisations in developing countries, even where that policy had emerged after the World Bank or IMF had attached it as a condition for support.

33. This is the case in Sierra Leone where in June 2005, DFID started to recruit consultants to work with the Sierra Leonean National Commission for Privatisation to privatise 24 state-owned enterprises (including Freetown's water provider). While the civil war was still being fought in that country in 1999, the IMF was first recommending privatisation: "In the area of public enterprises… a program for future reforms, including privatization, in the sector will be elaborated in collaboration with the World Bank". [99]

34. The UK government (and the World Bank) also have a history of funding public relations initiatives to pacify sceptical populations in developing countries, who are often unwilling to see their water services privatised. The consultancy firm Adam Smith International (ASI) received £270,000 of UK aid money in 1999 to produce a PR campaign in Tanzania involving the use of a national comedian in a series of TV adverts as well as a pop video - all promoting the country's privatisation programme.[100] The pop video had the following lyrics: "Young plants need rain, businesses need investment. Our old industries are like dry crops and privatisation brings the rain. When the harvest comes, there is plenty for everyone."

35. More generally, ASI notes that it has the ability to "help muster the critical political support necessary to carry policies through to their successful conclusion".[101] It has built up a reputation as the consultant that 'sells' privatisation to an unwilling population. In Ghana, DfID funded a 'public awareness raising programme' about the benefits of privatisation.[102] In India ASI was given aid money to produce a film about the benefits of privatisation.[103]

37. The expectation of private sector investment has not only failed to deliver what was claimed. Coupled with IMF demands for reductions in state spending and borrowing, and policies of development banks and donors to insist on attracting private finance, it also has had the effect of reducing public sector investment in infrastructure, including water. This has happened because many countries have chosen to cut investment to meet the targets for lower spending and borrowing, in the expectation that the private sector would replace it.[104]

38. The international financial institutions and donors have also cut their own expenditure, with similar expectations that the private sector would take over. The total invested by all the development banks and donors in infrastructure (including water) fell by one third between 1996 and 2002.[105] A World Bank paper concludes: "Ultimately, many of the adjustments in public financing and overseas development assistance largely reflect the fact that the expectations of private sector participation in the financing of infrastructure needs were overoptimistic."[106]

39. The World Bank, according to its infrastructure review paper in 2003 cut its infrastructure investment (in all sectors including water) lending by 50 per cent between 1993 and 2002, from about US$9.5 billion to US$4.8 billion. [107] The report notes that the reasons for this include: "a lack of clarity on the roles of the private and public sector in infrastructure service provision and under-investment in country-level infrastructure diagnostic work". It noted that, contrary to the World Bank's expectations, the private sector's investment (in all infrastructure, not only water) also declined by over 50 per cent between 1997 and 2002, and concluded that "the recent decreases in private sector interest in infrastructure show that reliance on the private sector alone will not be sufficient to guarantee a scaling-up of infrastructure service provision". [108]

40. The same effect can be seen in the donor policies of the EU, which in 2002 set up a new EU Water Initiative, and proposed a new EU water fund, to support the MDGs. By the end of 2005, a WaterAid / Tearfund review concluded that "Not a single extra person has received safe water or sanitation through the Initiative. Separate but linked efforts to increase funding for water and sanitation through the EU Water Facility (EUWF) have similarly failed". The review also identified as one key reason why these initiatives had failed was because of an "ideological bias to private finance", seeing the main function of aid as 'leveraging' private finance.[109]

41. The focus on private sector development has contributed to a reduction in the level of aid and development finance from donors for the water and sanitation sector which is far greater than the actual investments made by the private sector. It is not possible to produce a single figure for this, but it is possible to say that the net contribution of 15 years of privatisation has been to significantly reduce the finance available to developing countries for investment in water.

Where next for the water sector?

42. Where does all this evidence about the failure of water privatisations to make significant progress towards the MDG leave us? Surely the question that needs to be asked is not 'how to get the private sector into the water sector' but instead 'what is the best way to improve water services'.

43. There are a number of successful models of water utilities in developing countries which are in public hands but which are successfully connecting new communities to the water network. Perhaps one of the most well-known examples is that of Porto Alegre in Brazil. In 1961, the city council created a water and sanitation provider that, while remaining wholly owned by the municipality, had a separate legal personality, operational autonomy and financial independence.[110] It is subject to the municipality's 'participatory budgeting' process - where citizens play an active role in taking decisions on how local finances are used - and also subject to public scrutiny through a 'deliberative council'.[111]

46. Even though Porto Alegre nearly doubled in size from some 700,000 inhabitants in 1961 to 1,360,000 in 2001, the water provider has managed to extend service coverage and improve quality. By 2001, it provided water supply to 99.5 per cent of the population, an increase from the 95 per cent supplied in 1990. Similarly, by 2001, sewerage services had been extended to 84 per cent of households, up from 70 per cent in 1990.[112] Now Porto Alegre has an infant death rate of 14 per thousand in comparison with a national average of 65. And by 1999 the city's 'human development index' was 0.79, comparable with a typical 0.80 for cities in the industrialised world.[113]

49. Porto Alegre is a fine example of a successful public provider which responds to the needs of the people and which has been able to extend the number of connections. Interestingly, it also illustrates the role that the private sector can usefully play in water and sanitation provision. Porto Alegre's water operation uses subcontracting, including employing Suez subsidiaries on specific construction jobs when they have won competitive tenders.[114]

50. Indeed, there is a long tradition of public utilities subcontracting to the private sector in many countries and the private sector can be tapped for building up the management, financial and operational capacity of public services, especially in urban areas. Procurement contracts in other countries have included computer services, engineering works and repair, maintenance and rehabilitation of a network. However, in such cases, the control remains outside of the private sector's hands - and the arguments against privatisation do not apply.[115]

Conclusions

51. To conclude, as this submission has demonstrated, there is a role for the private sector in the delivery of water and sanitation services. However, it is a limited one and it should not involve private sector control or management of water services. Indeed, there has been a wholesale failure of water privatisations to extend water and sanitation networks to those who currently lack access in the areas where the need is greatest.

52. Moreover, the expectation that the private sector could deliver has led donors and governments to substantially reduce their overall funding for the sector. There is a massive funding gap in the sector which donors and governments must urgently address if we are to meet the MDG on water, with its knock on impacts on achieving other MDGs. Critically, there is a need to dispel the myth that the private sector will deliver the MDG for us and there must be a complete halt to economic policy conditions which demand water privatisations. The UK government should stop supporting water privatisations that stem from such conditions, stop funding pro-privatisation PR campaigns, and work with international donors to make up the funding gap which results from years of misplaced faith in the private sector.

53. As former British Environment Minister Michael Meacher has noted: "Private sector finance will certainly be important, but it will generally not be used for basic services … private sector investment is at present insignificant at providing basic water and sanitation services to the very people who most need it."[116]

February 2006

References

75 This report will be published in March 2006 and a copy will be sent to the committee. Back

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82 Hall, D. and Lobina, E. (2006). Pipe dreams: The failure of the private sector to invest in water services in developing countries. WDM, PSIRU and Public Services International. London. Forthcoming March 2006. Back

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84 The Right to Water Campaign, Council of Canadians, http://www.blueplanetproject.net/cms_publications/RTW%20handbill.pdf Back