Memorandum submitted by David Hall, Director,
PSIRU and Emanuele Lobina, Senior Research Fellow, University
of Greenwich
1. INTRODUCTION
AND SUMMARY
This paper is about how the international community
can support the governments, public institutions, citizens and
workers of developing countries in extending and improving water
and sanitation services. It is based on extensive empirical research
over the last decade on water services in transition and developing
countries.1
The starting point for the development of water
services is the present realities, which need to be recognised
and understood in terms of their historical development. The provision
and extension of water services is a major economic activity,
which requires the use of capital, labour and the natural resource
of water itself. It is therefore necessary to examine the constraints
and possibilities for mobilising these resources. Finally, the
development of water services is driven by political objectives
of achieving greater social and economic development, and so political
mechanisms and processes are also essential aspects of the service.
This submission is therefore divided into five
sections, on history, labour, capital, natural resources, and
politics. Each of the last four sections ends with a discussion
of how international support can assist countries in their attempts
to develop universal water systems.
— The first section examines the
historical development of water services in high income countries,
based on public finance, especially through the growth of municipal
borrowing capacity and national taxation, the different development
in middle and low income countries before and after independence,
and the failures of the recent privatisation experiment.
The following three sections look at the economics
of providing public water supplies, through the three classical
factors of production—labour, capital and natural resources.
— Labour is required to build,
maintain, operate and manage the system and its finances. There
is a need for training programmes to develop a competent workforce
at all levels, for greater recognition of the importance of workers
relationships with communities, for involvement of workers in
reform processes, and for adequate levels of pay. Donors need
to re-develop policies for supporting training and capacity-building.
— Capital is needed to build new
systems for capturing, treating and distributing water. The needs
must be assessed locally and through democratic mechanisms, and
then public finance mechanisms need to be used to raise this finance,
through central or local governments. Donors can help build capacity
for taxation and borrowing, and provide matching financial support
for water services, and assist northern investors in southern
water services.
— The natural resource of water
itself needs to be captured at the same time as conserving and
allocating its use, and protecting the environment. Public mechanisms
for evaluation and decision-making are needed, and should be supported
by donors.
The final section looks at political processes.
— The existence of public water
supplies depends on a political commitment to deliver clean water
to all, and on public authorities with capacity to deliver services.
Political activity is positively important in order to strengthen
this commitment and improve public accountability and transparency.
Donors can assist this by avoiding imposing external policy conditionalities,
and by offering public-public partnerships to support capacity-building.
The policies proposed for international support
are summarised in a table in the concluding section.
Historical development of water services
1.1. Dominance of the public sector
Any realistic attempt to develop water services
in middle and low income countries must focus on how to develop
public sector water services. Despite all the attention that has
been given to water privatization in the last 15 years, the water
services of the world remain overwhelmingly provided by the public
sector. In middle and low income countries, 90% of the largest
cities—those with population over one million—were
served by a public sector operator in mid-2006. This dominance
of the public sector is growing, as the private companies retreat
from many of the concessions and leases in developing countries.
In rural areas, where there is little profitable business for
the private companies, the percentage of water services provided
by the public sector is even closer to 100%. The overall proportion
operated by the public sector is thus at least 95%. The data is
very similar in high income countries—France and the UK
are exceptions, not the norm.2
The history of the development of water and
sanitation systems in the high income countries of the north shows
a common pattern. In Europe, urban water systems began developing
in 17th or 18th centuries as a limited service to affluent customers
and as a public assistance for fire control. As cities grew in
the 19th centuries, the demand for water consumption grew and
the public health issues became more acute. While the initial
systems were usually started by private companies, during the
19th century the utilities were fairly soon taken over by municipalities
in nearly all European countries, including the UK. Only in France
did the old 19th century private operators survive, which is why
the only large water companies in the world are French: Suez (formerly
Lyonnaise des Eaux) and Veolia (earlier Vivendi and the Compagnie
Générale des Eaux) since 1853. If anything, the
process of municipalisation was more rapid in the USA than in
Europe: by 1897, 82% of the largest cities were served by municipal
operations.
Municipalisation was seen as a way to overcome
the systemic inefficiencies of the private contractors: "During
the 19th century, the previously private systems came under public
ownership and public provision because of the inefficiency, costs
and corruption connected to them".3 This was linked to the
growth of municipal socialism (or `gas and water socialism'),
which drove the development of local public services in northern
countries.4 This ideology saw the public sector as a mechanism
to fulfil a set of economic and political objectives—economic
development, public health and improvement of social conditions
for the urban poor. The municipalities developed financial mechanisms,
superior to the private sector, including borrowing long-term
money from local savers, at low interest rates because of the
security of their flow of income from taxes. In the USA, for example,
this capacity was a crucial part of the process: "The central
issue was the ability of cities to incur debt to fund major projects
and to sustain the high costs of operation. As the 19th century
unfolded, city finances underwent changes in scope and complexity
that ultimately made the development of public water supply systems
achievable."5 France and the UK are the only two OECD countries
whose water operations are run by private companies, but in both
cases the cost of extending the networks was met through public
finance mechanisms. While it remains possible for people to hypothesise
or imagine that such private water companies might be vehicles
for investment to extend water systems, there is no historical
record of this happening—not even in France6 or the UK.
In some countries, water charges continue to be collected through
property taxes rather than metered payments—in the UK the
majority of households continue to pay annual charges based on
the value of their property, rather than metered consumption of
water.
Despite the dominant role of municipalities,
central governments have played a significant role in financing
water systems. This has sometimes involved paying directly for
the water supply service, so that there is virtually no role for
charges (eg Ireland); distributing some part of central tax revenue
to support local authority spending on water and other services
(eg Canada); providing cheap loan finance for local authorities
to use for capital investment (eg USA); or collecting part of
water charges centrally and redistributing it to authorities which
need to invest (eg France). In Europe, the EU itself plays a major
role in public financing of water systems in poorer states, and
through low interest loans from its public sector development
instrument, the European Investment Bank (see section 4).
The formal structure of water operations has
changed in recent decades. Even in countries where there has been
no privatization, water services are increasingly carried out
by corporatised bodies, rather than by a municipal department,
for example in the Netherlands. Under the Dutch system, however,
decisions of public authorities are key at every stage—and
the Netherlands has recently legislated to make privatisation
of water services illegal. Regulation is given great emphasis
in discussions of water governance, but it has had little role
in the development of water systems in high income countries,
except in the USA where regulatory systems are extensively used
in public services. In Europe it has played almost no role at
all, with regulatory functions being carried out by the public
authorities themselves as part of their role as owners. No other
country in Europe uses a system of regulation like that of England
and Wales under OFWAT.
1.2. Developing countries: independence and
colonial legacy
Water supply in developing countries has a different
history. In the colonial period, whilst the imperial countries
were extending public networks in European cities, water supply
in the colonies was focused on a colonial elite. The restrictions
were economic as well as political. Even where systems were extended,
requiring the local population to pay charges based on full cost
recovery, without benefit of cross-subsidy, meant the service
was unaffordable to the great majority, as in the case of Kampala,
Uganda.7 These elite systems left a physical legacy of incomplete
networks.8 Colonialism also left a socio-economic legacy of more
unequal societies, which both makes the problem more acute and
makes the requirement for redistributive public finance greater.
After independence, it was possible to start
developing the physical and social infrastructure of public services
for all. The commitment to water supply and other public services
was thus closely associated with the process of building independent
states with political accountability to their citizens for the
first time. But development in non-industrialized countries has
continued to be strongly affected by the economic and political
demands of international agencies and donors, and water services
are a clear example of this.9 The patterns of water privatisation
in Africa closely reflect the patterns of colonialism: British,
Portuguese and German operators are almost exclusively present
in countries which were formerly part of the British or Portuguese
empires, or part of the German empire before the first world war,
while French operators dominate former French colonies. It is
not surprising if this privatisation process is resented as a
reintroduction of colonial relations.
In many developing countries central government
has played a greater role in the water systems than in the north.
Driven by independence rather than industrialisation, these countries
had neither strong municipalities nor a strong local middle class,
and so central state ownership of water providers is more common
than in the north. In Sri Lanka, a country with an excellent developmental
record on health and education, water has been primarily the responsibility
of a central government parastatal. Policies and conditionalities
of the international agencies have nevertheless insisted on making
municipalities responsible for services. The IMF and World Bank
conditions of the early 1990s forced Argentina into breaking up
and privatising its previously national system, and there have
been continuing pressures on Sri Lanka to do likewise.
1.3. Privatisation: a failed experiment
In the 1980s and 1990s the World Bank and donor
agencies promoted a strategy to develop water systems in developing
countries through privatisation. This was expected to deliver
finance for investments, efficiency improvements, and better governance
than they believed possible through the public sector in developing
countries. It was expected that multinational companies would
be attracted by a large new profitable market, and that the process
would be welcomed by populations disillusioned with the corruption
and efficiency which the World Bank associated with the public
sector.
This experiment has now clearly failed, on all
counts.
The private contracts have failed to deliver
investment in new infrastructure as promised. After 15 years,
only about 600,000 households have been connected as a result
of investment by private water operators in sub-Saharan Africa,
South Asia, and east Asia (outside China)—representing less
than 1% of the people who need to be connected in those regions
to meet the MDGs.10 This may be compared with the results of the
"decade of water" in the 1980s, which is usually referred
to as a failure, yet reduced the overall percentage of people
living without safe water supply from 56% in 1980 to 31% by 1990,11
results far better than the privatisation experiment has delivered.
The fortunes of international water supply companies have collapsed
dramatically, due to a failure to make adequate profits in developing
countries. Since 2003 the multinational companies have halted
and reversed their expansion. Suez, the company with the largest
presence in developing countries, announced in January 2003 that
it intended to reduce its presence in developing countries by
one third, and only make future investments that were financed
by the business itself, free from currency risk, and achieved
a target rate of return.12 All the multinationals have been attempting
to sell water operations since 2002, but found difficulties in
finding buyers. In 2006, the Suez group itself was the subject
of two takeover bids from companies interested in its electricity
and gas business: either buyer would sell off the international
water business.
One key reason for this was that developing
countries could not support the rate of return required by international
equity capital. A World Bank study showed that returns on infrastructure
investment in developing countries, including water, fell far
short of the cost of capital.13 International equity finance is
very unlikely to be a significant source of capital for investment
in infrastructure in future.
The failure to achieve an adequate return on
capital was partly due to a remarkable degree of public campaigns
against water privatisation, a global phenomenon. The uprising
which led to the termination of the private water contract in
Cochabamba (Bolivia) in 2000, was the first and most dramatic
of a series of reversals: in 2004 another uprising in El Alto,
the poor suburb of La Paz, led to the termination of Suez' concession
in that city. Suez' concession in Manila (Philippines) had become
the subject of a bitter dispute with the regulator, and by 2006
had been 84% renationalised. In Africa, contracts were terminated
in Gambia, Mali, Chad, Nkonkobe (South Africa) and Dar-es-Salaam
(Tanzania).14
The private companies have also failed to show
greater efficiency than public sector operations.15 Empirical
evidence from studies in all continents shows that ownership does
not appear to make any significant difference to efficiency. It
is no longer possible to assume that the public sector is less
efficient than the private sector, as summarised by a World Bank
research paper: "... in general, there is no statistically
significant difference between the efficiency performance of public
and private operators in this sector... For utilities, it seems
that in general ownership often does not matter as much as sometimes
argued. Most cross-country papers on utilities find no statistically
significant difference in efficiency scores between public and
private providers."16 An IMF policy paper on public-private
partnerships (PPPs) in 2004 agreed, stating that: "It cannot
be taken for granted that PPPs are more efficient than public
investment and government supply of services ... . While there
is an extensive literature on this subject, the theory is ambiguous
and the empirical evidence is mixed. ..."17
The failure of the privatization experiment
confirmed that the public sector must be the important vehicle
for expansion in the future, as in the past. The World Bank's
infrastructure policy review in July 2003 noted that private finance
had accounted for less than 10% of total investment in water in
developing countries in the previous decade, and concluded that:
"the Bank will need to more strongly promote sustainable
public sector investment and service delivery".18 The
recent history of water services has been marked by the development
of public sector water services in many countries, often associated
with political programmes or emerging from social movements resisting
privatisation. As shown by a Brookings institute study in Latin
America, public sector operators in that region have been just
as successful at extending their services as private water companies.
There are already many effective public sector water services
in developing countries—nine of the 16 Asian cities with
public sector operators studied by the ADB (see table above) have
better leakage rates than Thames Water in the UK, for example,
and all but one had achieved better coverage than the privatised
cities of Jakarta and Manila.19
2. LABOUR: WORKERS,
TRAINING AND
COMMUNITIES
Every economic activity involves labour. Even
in a capital intensive service like water, the contribution of
workers is essential, at all levels. Many investments in water
installations have become useless because there is no provision
for employing people to maintain and operate them. Yet during
the last 15 to 20 years workers in the water sector have been
seen, by the mainstream policy institutions, as a problem—a
cost which employers should minimise by reducing the number of
employees or keeping their wages as low as possible. Private companies
were expected to help solve this problem by dismissing more employees
than the public sector organisations (as happened, quite brutally,
in some privatisations). The IMF has often imposed ceilings on
public sector wages.
Labour needs to be recognised again as a key
factor of production, and "public service workers... need
to be put at the heart of expanding services for all." (Oxfam
2006). Workers do not generally avoid doing their jobs, and often
do more than they are strictly paid to do -as pointed out by Francis
Fukuyama.20 The knowledge and commitment of workers, and the capacity
of their unions to participate in restructuring and improvements,
should be seen as key strengths. Water services need a properly
paid, trained and stable workforce.
In all sectors, workers need to be properly
paid, trained and supported to be productive. Henry Ford doubled
the wages of car workers in the early 20st century in order to
make them more productive. In water services in developing countries,
key workers responsible for the crucial tasks of maintenance,
connections and collection of bills are often so low paid that
they have a greater incentive to be inefficient and extract extra
payments and bribes. Creating decent levels of pay is a pre-condition
for delivering an efficient and effective service, and so a number
of successful improvements to public sector services—for
example in Phnom Penh and Kampala—have involved deliberate
sharp increases in pay levels, so that workers no longer had to
resort to other ways of supplementing their income.21
The number of workers also needs to be related
to the services that must be delivered. This becomes especially
important given the ambitious expansion targets of the MDGs for
water. While there has been much discussion of the finance needed
to achieve these targets, there has been very little written about
how much labour is needed to achieve these goals—the official
UN report on the water MDGs in 2005, for example, said almost
nothing about labour.22
A report by Brian Matthew in 2005 has attempted
to estimate the requirement for new staff in achieving the MDGs
in water, on the assumption that the need is to develop "training,
capacity building, and motivation" for existing workforces,
calculated by reference to the numbers actually used in two projects,
and then scaling this up to a global level. The total estimate
is that 161,000 extra workers are needed globally.23 For a global
estimate, this figure is remarkably low: it implies that 10,000
people can be connected per extra worker employed. One explanation
is that the estimate explicitly recognises that there are existing
organisations and workforces already existing in the water sector
throughout the world. One key function of the extra staff is to
increase the productivity of the much larger existing workforce.
The importance of training, which is central
to the preceding estimate, is obvious. Competent water operators
include a systematic and general programme of training and development
for all employees to ensure that they can make an efficient contribution
to the operation.24 Comprehensive projects supporting water development
not only invest in infrastructure but also make provision for
training the whole workforce to a high level.25
Donor policies since 1990 have had a damaging
effect on training. In the 1980s the World Bank treated training
as an important part of its water programme, and was developing
regional centres for training and courses where professionals
and others could be trained and refreshed and exchanged experiences.
This policy was abandoned in the 1990s, and the Bank and other
donors—including the UK, France and Finland—cut back
on their aid for training water workers in developing countries.
One aid official explained that training had become "unfashionable".
Technical institutions in countries such as Kenya and Tanzania,
which were formerly flourishing as training centres, have become
run-down as donor resources dried up.
In public services, labour has an additional
contribution, because of their interface with the public. Studies
of service delivery in India and Pakistan noted the strength of
the commitment of workers, even in very unfavourable circumstances,
to making the service work better, and the central importance
of the relations between workers and communities in improving
a service.26 The same point was noted a decade ago; an important
feature of improvements in public service delivery in Ceara, Brazil,
in the 1990s, was the commitment and involvement of the workers.
This was constantly reinforced by the government's repeated public
demonstrations of admiration and respect for what they were doing.27
Aid agencies and development banks urgently
need to reinvent clear and positive policies on the role of workers
in their programs and policies. These policies need to include:
— A recognition that labour is
an important economic input into the process of extending and
operating water and sanitation services.
— Inclusion of training requirements
in all projects.
— Developing a general commitment
to provide ongoing flows of training of water workers at all levels
so that public sector organizations have a sufficient pool of
trained staff, and sufficient annual funding, to sustain a well-trained
permanent workforce.
3. CAPITAL: FINANCE
FOR INVESTMENT
Water services depend on an extensive underground
physical network of pipes, pumping stations, treatment plants,
and reservoirs. As a result, a very high percentage of the cost
of water systems is the cost of investments in this network, and
so water is a very capital-intensive sector. Extending water services
to all requires a lot of capital to finance the new networks,
and so it is very expensive. Those still needing connection are
poor, and the resources required to connect them cannot be provided
by the expenditure of the poor themselves. It is difficult for
low and middle income countries to find enough capital, and to
afford the cost of interest and repayments on this capital. Further
redistribution is therefore desirable, from rich countries to
middle and low income countries. The MDG targets make the problem
even greater, because they demand achievements in a very short
timescale regardless of economic growth. For all these reasons,
public finance mechanisms remain the key method for raising capital
to finance the extension of water services.
3.1 Demand for investment
The starting point for any discussion of finance
for investment in water must be a local assessment of what extensions
and improvements are required. Local assessments should involve
a democratic process of public and open debate on the needs and
priorities of the city or region or country. Extensions to existing
systems may include unofficial settlements and slums as well as
official settlements. Millennium development goals are one set
of global political objectives, but are only an input from the
global institutions—local political objectives should be
paramount. The local needs assessment will also enable public
authorities to discuss how much can be financed locally: raising
finance from national and local savings is easier and less risky
than using international sources. Projects driven by external
proposals for profitable ventures have often led to costly financial
commitments out of line with local needs.28 Local assessments
of requirements for investment are usually far lower than those
by external actors. The Orangi project in Karachi (Pakistan) successfully
campaigned for the rejection of a $70 million project proposed
by the Asian Development Bank as unnecessary.29
3.2 Sources of finance: taxes, charges and
borrowing
Ultimately all expenditure on water has to be
paid for either through taxation or through user charges. Even
if water is distributed free of charge to the users, it is still
paid for—through the tax system. Even when capital expenditure
is financed by loans or bonds, these loans have to be repaid,
with interest, through either taxes or user charges.
The balance between these sources has implications
for what is possible. Charges can get money only from the people
directly connected to the system concerned. If charges are strictly
applied to recover costs of supplying each household from that
household—full cost recovery, or FCR—then money for
connecting new users is limited by the incomes of those users
themselves. If cross-subsidies are introduced, existing users
can also be required to contribute to new connections, but the
charges still do not touch the income or wealth of people or businesses
in the area, only their consumption of water. Local taxes, such
as rates based on property values, or local income tax can widen
the base to include these groups, but they still do not touch
people elsewhere in the country, let alone other countries. The
general revenues of national taxation draw on the largest pool
available to countries, the incomes and trade of the economy as
a whole. This is most likely to make the necessary investment
affordable, because it can be spread across many more people and
businesses, and also reflect people's ability to pay.
If money is raised by the water operation making
a surplus, the money comes ultimately from charges. The burden
of finance thus falls on the existing body of consumers. In some
countries water and sewerage have been financed out of local taxation,
such as a form of property tax. Even where there is a separate
charge for water, this charge may effectively be a property tax
where most homes are not metered—eg in the UK, where most
households pay a charge based on the value of their property,
not the volume of water consumed, even under the privatised system
in England and Wales. Other countries have used cross-subsidies
between different services to finance water: for example, the
municipal utilities of Italy and Germany have used profits from
electricity services to finance water systems.30 Cross-subsidies
remain a potentially important mechanism for delivering solidarity
financing for infrastructure development, as recently re-emphasised
by a World Bank paper: "if the country can't generate the
tax revenue to finance well targeted direct subsidies, well targeted
inter-user, inter-usage or inter-regional cross-subsidies can
deliver."31
3.3 Taxation capacity
Taxation has to be treated as the fundamental
base for financing infrastructure investment, including water,
whether as a direct source or as guaranteeing borrowing, as acknowledged
in a recent review of infrastructure financing by World Bank economists:
"the main responsibility for financing many of the investment
needs will fall onto the taxpayers rather than the residential
users, at least in capital intensive transport and water and sanitation".32
It is important that public sector accounting and fiscal rules
do not limit the financing of investments. In 2004 the IMF proposed
altering its rules concerning public sector borrowing to finance
investment: "greater importance be attached to safeguarding
public investment, especially in infrastructure, and they welcomed
the staff's suggestion that appropriate attention be paid to the
current fiscal balance, which excludes capital spending and revenues".33
The importance of taxation implies that countries should develop
and increase the amount of taxes they raise.
The IMF and the World Bank recognise this: "in
most developing countries the problem is collecting enough revenue
to provide essential public infrastructure and human development
services. Tax revenue in low-income countries as a share of GDP
is about 14 percent, compared with about 19 percent in lower-middle-income
countries and 23 percent in upper-middle-income countries... Overall,
it appears that there is scope in many countries for raising additional
revenues." (World Bank/IMF 2004) Research by IDS (Sussex
University) also identifies the capacity to raise taxes as crucial
for the state to develop both power and accountability. 34 The
basis of taxes, and the effectiveness of the state in collecting
them, are crucial elements in the legitimacy of the state and
the political interactions between citizens, interest groups and
the state. IDS identified problems where dominant elites managed
to avoid or reduce tax burdens. Commenting on successful rural
schemes in Africa, Brian Mathew of IRC also suggests that the
best prospect for long-term financing of such services is local
taxation: "....These kinds of support systems require a regular
level of funding to work properly, and for long-term sustainability
local taxation would seem to be the most workable solution."35
However, as argued above, the great advantage
of using central government financing is that it enables the greatest
redistribution, by drawing on taxes paid by everybody in the country
and directing it where it is most needed. The poorer the population
of a community, the more they need finance from a source which
can draw on richer communities. The disadvantage is the lack of
local control over this revenue.
3.4 National government finance
Since taxation is the key source of income which
underpins public borrowing, and since central government has the
broadest and most equitable tax base, it is not surprising that
central government plays an important role in many countries.
In the USA, for example, there exists a "revolving fund"
of money borrowed by the federal government at the lowest interest
rates, which municipalities can use for investments and then repay
over a number of years, so the money returns to the fund and can
then be borrowed again by other municipalities. European states
continue to support capital investment by subsidies from central
taxation: even in the privatised parts of the UK, about 9% of
capital investment by the private companies comes from government
subsidy. In France, both municipal and private systems can draw
on funds held by regional authorities, the Agences de l'Eau, which
impose a special tax on water consumers. This kind of mechanism
is also operated at international level by the European Union
itself , which collects taxes from all across Europe to support
a "cohesion fund" for redistribution to poorer member
states: one of its main functions is to finance the heavy cost
of investments in water services required by new member states.
This central support for infrastructure and other measures has
a major effect on economic growth; in Greece, GDP in 1999 was
9.9% higher than it would have been without the central cohesion
funds, in Portugal 8.5% higher.36
In some developing countries water has been
developed as a central government responsibility, and so water
services are mainly provided through state-owned entities, and
financial support is provided by governments. Examples include
Sri Lanka, Uganda, and Honduras. In countries where water is provided
by municipalities, the income of municipalities is invariably
supported by central government transferring significant amounts
of taxation to support local tax revenues. Funding is also provided
from central government taxation to support local government expenditure
through various mechanisms. This may be of greatest importance
in smaller towns and cities, and in peri-urban and slum areas,
where the local tax base is of limited capacity. The examples
from Central America and Venezuela show the potential importance
of this support.37
3.5 Borrowing
Money can be borrowed within a country, from
banks or from a local capital market where savings are invested.
This is the traditional form of borrowing for public services
throughout the world. Government and public sector bonds are a
major part of investment activity in developed countries. This
kind of borrowing is already widespread in developing and transition
countries. It is certain to become more important as a source
of financing, because of the risks in international financing
of essential services, which were highlighted by the case of Argentina.
When the economy collapsed, the "dollarisation clauses",
which guaranteed to protect the dollar value of companies' income,
were unenforceable. Developing countries should also want to avoid
borrowing internationally because of the risk of changes in exchange
rates creating unsupportable burdens—and investing money
in foreign currency reserves to protect themselves against this
risk is an inefficient use of national resources: "because
countries may be accumulating low yielding foreign assets such
as US securities at the expense of investing in the local economy."38
Organisations which are owned or supported by
governments, such as nationalised industries or banks, also borrow
money. These include public sector financial agencies which are
dedicated to providing loan finance for municipal investors. An
example from a developing country is the Local Water Utilities
Administration, which acts as development bank, technical support
agency and informal regulator in the Philippines, which helps
the positive performance of the Philippine Water Districts.39
It is possible to borrow local savings for investment
in public infrastructure such as water even in low income countries.
This has been done by a number of cities in India, including Ahmedabad,
which successfully issued a large bond. In order to borrow money,
capital market mechanisms must be set up to provide security for
people investing their savings. USAID has been supporting the
development of these institutions.40 The private companies themselves
have withdrawn equity finance and identified local savings as
a potential source, and tried to tap these through bonds and loans—but
at a much greater cost than direct municipal or government bonds.
In Jakarta (Indonesia), Suez had originally borrowed $56 million
from Europe to finance its investment, but in 2005 it issued a
bond in Indonesia, on which Suez is paying only 12% interest,
which it used to repay the European loan. But their contract with
the Indonesian regulator includes a guarantee of a 22% rate of
return on capital. The cost to Indonesians is thus nearly twice
as great as if the Jakarta city council or the government issued
a bond, and charged users only the interest of 12% on that bond.41
There are a number of cases of local communities
developing a self-help approach to extending water systems, especially
in slums and peri-urban areas. A community however has more limited
financial powers than a municipality or local government. Without
powers of taxation, it will not be able to rely on the resources
of people other than the users. For long-term sustainability,
support from local or national government finance is necessary.42
3.6 International support
"What is the global public finance equivalent
of ending apartheid?"
—Mike Moore, director of water and forestry
service, South Africa, 2003.
International financial support may be useful
in providing additional capital to finance investment. Development
banks should be the main source of international finance for public
infrastructure investment.
A few cities in middle income countries have
obtained international credit ratings for their bonds—for
example Bogota (Colombia) and Seoul and Taegu (South Korea). There
are two reasons why this is not likely to prove a successful short-term
route for raising international finance. One is the desire by
investors to spread risk. The second reason is of capacity: it
places extra demands on municipalities. Intermediate bodies are
therefore necessary, so that international investors can make
a single investment that is then spread across a range of cities,
and the intermediate body is responsible for assessing the credit-worthiness
of different water operators or municipalities. One such intermediate
body is the national government, which has the further advantage
from an investor's point of view that it can provide a guarantee
for the investments based on a recognisable security, the government's
income from taxation. Most governments in developing countries
have the capacity to borrow from international investors, and
have obtained international credit ratings for this. Another possibility
is to create regional funds which bring together water bonds issued
by public authorities in a given region. Northern governments
could reduce the risk both for investors and southern governments,
for example by providing protection against currency risk, or
by providing tax relief for funds investing in such bonds.
Through a combination of taxes and user charges,
many middle income countries may be able to cover much of the
costs of operating water services at the level required by the
MDGs. But the UN study on the MDGs estimates that for low income
countries to achieve the MDGs, even after a massive increase in
public expenditure by the countries, requires international support
equivalent to over 60% of the costs. This is a measure of the
financial solidarity required to achieve the MDGs. In effect,
rich countries must provide two dollars for every one dollar paid
by citizens in low income countries. Without this, the MDGs will
not be achieved at the accelerated rate specified, and the poor
will continue to lack clean water and sanitation. This support
should be as similar as possible to a tax levied on the richer
countries by the poorer countries. One possible form would be
to provide a matching "water solidarity charge", in
the form of a long-term obligation to match income from water
charges and rates with double the amount from northern aid budgets.
4. NATURAL RESOURCES
The third factor of production is natural resources.
The key natural resource involved in water services is, obviously,
water itself. The public sector and the public domain again have
important roles to play. Some of the oldest democratic bodies
were developed to decide the fair allocation of water. Water resources
management is now recognised as an important element of public
policy on water resources generally, in order to conserve limited
aquifers and protect the needs of the natural environment. Reducing
high leakage rates can make available far more of the water which
is already being captured in reservoirs, and so increase supply
without any further need for new sources. Reducing unnecessary
consumption by industry and business, and more efficient household
consumption, can also enable societies to manage with existing
supplies.
Cities and towns need to capture reliable sources
of large amounts of water to support their unnaturally concentrated
populations. The aqueducts, dams and wells necessary for this
capture of water involve large amounts of capital investment,
but these projects are unlikely to be economic for the private
sector, as noted by David Grey of the World Bank.43 The construction
of dams and reservoirs has a major impact both on the environment
and on the livelihoods of local inhabitants. A bold attempt at
multi-stakeholder governance, the World Commission on Dams, produced
a set of recommendations designed to provide public procedures
and rules for determining whether a dam should be constructed.
The recommendations were however rejected by the World Bank, the
principle financier of dams worldwide.
5. POLITICS AND
PUBLIC INSTITUTIONS
5.1 Political solidarity
Politics is central to the provision of public
services, including water. Demands for improved and extended water
services from communities, consumers, environmentalists and others
are political demands. National and local policies to develop
water are part of political programmes. The Millennium Development
Goals are themselves statements of political commitment to providing
water supply to hundreds of millions of people. This solidarity
principle is not present in policies which seek only to expand
business opportunities in these or other sectors, because the
market can only result in the provision of services which are
profitable.44 The development of water and other public services
is linked to economic growth: the development of services like
water, electricity, healthcare and education is essential to enable
countries to grow economically.45 These services are also central
to social development: they enable people to have better quality
of life, longer life, and greater freedom to develop their own
capacities and potential.46 Countries which give political priority
to public services have higher rates of coverage than others on
the same level of national income.47
The World Bank and other donors have argued
that interference by politicians has led to inefficient management
and inadequate finances dependent on subsidies which are given
as a mechanism to win votes rather than provide services. These
are real problems, but they arise from politics by patronage,
whereby services are just used as instruments to reward cronies.
The use of conditionalities by donors, insisting on contracts
for private companies in exchange for grants and loans, reinforce
this kind of patronage politics rather than doing anything to
eliminate it. The World Bank has also placed great emphasis on
the problem of corruption in developing countries, and argued
that reducing the role of politics is a necessary step to fighting
corruption. However, rather than eliminate political involvement
altogether, what is needed is the active engagement of a different
kind of politics, based on accountability, openness and transparency.
There has been a recent growth in such political activity on water
issues, and the campaigns have often become key issues in elections48.
This kind of political activity should be seen as a starting point
of a solution.
5.2 Corruption, accountability, and civil
society
There are well known problems with corruption
involving governments and public services in both north and south.49,
50 In water, as in other sectors, corruption is closely associated
with issuing contracts to the private sector.51 A study of corruption
in water services in India found that contractor cartels were
operating in every case studied, and that politicians and staff
are bribed with a share of the profits.52 Solutions to corruption
involve developing greater public accountability and staff commitment
(see below), as well as reducing contracting procedures.53
In many cases people experience an inefficient
bureaucracy which they have no effective way of controlling or
improving. These problems of state institutions have been used
as arguments in favour of privatisation, and explain why privatisation
had some initial appeal. But the experience of privatisation itself
has removed any illusion that privatised services might somehow
be more responsive and accountable.
Political responses have emerged which provide
ways of re-inventing the public sector to create better services.
One example is in Brazil, where a number of cities, of which the
best known is Porto Alegre, developed systems known as participative
budgeting, where the annual spending programmes for all services,
including water and sanitation, are subject to a completely public
process of debate and decision-making. In the state of Kerala
(India), the state devolved 40% of its income to local elected
councils, which go through a similar process of public budgeting,
reinforced by a general right to information by which all documents
are publicly available. Participatory systems have financial advantages:
DMAE has succeeded in financing considerable extensions of service
coverage in a decade and all at a low cost for consumers.54
On a smaller scale, there are now a number of
examples where water services have been restructured and improved
by local political processes, where community organisation transforms
previously moribund local authorities.55 These initiatives involve
interaction between community groups, political organisations
and various elements of the state. This is different from the
idea of "community involvement" as promoted by the World
Bank and others for the last two decades. Social organisations
and their activities are closely bound up with politics and the
state.56
5.3 International support: public public partnerships
and public space
Water institutions need to have political standing,
public legitimacy, legal powers, financial resources, and a sustainable
labour force. Established water operators in the north and the
south have developed these capacities. Many in the south have
not yet been able to do so.
Public public partnerships (PUPs) are a mechanism
for providing support for capacity-building for these operators.
The UN SGAB has adopted a similar notion of Water Operator Partnerships
(WOPs) on a non-profit basis as a major instrument to implement
the policy of strengthening water institutions in the south. The
objectives of PUPs should be to help deal with problems of lack
of managerial, technical and financial management capacity of
public sector water operators. Experience with PUPs so far in
water falls into two main categories:
— International partnerships,
of which the best known are the "Baltic sea" partnerships
in the 1990s.
— National partnerships. These
include initiatives within countries, such as the support provided
by SANAA in Honduras for rural water services, or transnational
initiatives such as the support provided by Brazilian association
ASSEMAE to Cochabamba.57
Official donor encouragement is needed to realize
the potential of public partnerships. Without a positive effort,
the potential of the public sector to support development will
remain largely under-utilised. The notion of global public-public
partnerships between OECD and southern cities on a mass scale
is numerically feasible. Of the OECD cities, about 78 are run
by public utilities, and there are a total of 314 cities outside
the OECD area. This implies each OECD public utility adopting
four others.
Northern states and development banks should
at the least refrain from imposing their own preferred political
and technical options on developing countries. Apart from ending
policy conditionalities, donors should in general intervene less
in political activities—such as funding approved NGOs—except
to support initiatives which help encourage a public space for
debate and decision-making.
6. CONCLUSION
The extension of water and sanitation services
must, in reality, be done through the public sector. This requires
political activity, with transparent and accountable procedures,
to create the political demand and win political power to introduce
social solidarity policies. It needs political and public sector
institutions capable of raising the necessary taxation and borrowing,
and of delivering the services. These institutions must be able
to draw on a sustainable supply of trained and committed labour,
and affordable long-term capital, and must be able to exert the
political authority to mange water resources.
International support should cease to be seen
as part of trade policy aiming to generate contracts for the benefit
of northern firms, whether water companies, construction companies
or consultants. It should instead be directed at supporting these
political and economic factors which are crucial to the functioning
of public sector services. It should avoid using conditionalities
to impose policies developed externally, and instead provide aid
to develop the provision of substantial training, to support the
development of public finance instruments and policies, and to
provide financial support for this public finance, directly and
indirectly.
It should not intervene to influence and control
government policies, but should encourage the creation of open
public political space to enable the public development of policies.
It should offer support from existing public sector institutions
to help strengthen and develop the necessary public sector institutions
in developing countries.
|
| Factor
| International support
|
|
| Economic factors | Labour and efficiency
| Training
Public-public partnerships (PUPs)
|
| Capital
| Public finance technical assistance
Guarantees and matching aid
International pooling mechanisms
|
| Natural Resources
| Assessments based on public interest |
| Political factors | Political and institutional capacity
| No conditionalities
Support for public space
Public-public partnerships (PUPs)
|
|
References
1 The reports of the PSIRU (Public Services International
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journal publications of the authors. This submission is based
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2 For a more detailed discussion of this data see Emanuele
Lobina and David Hall "The comparative advantage of the public
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3 Petri S Juuti & Tapio S Katko (eds), Water, Time
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4 Kate Foss-Mollan. Hard Water: Politics and Water Supply
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5 Melosi 2001.
6 C Pézon, "Water supply regulation in France
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7 Public Service for a chosen few? Water and sanitation
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10 See PSIRU Pipe Dreams March 2006 www.psiru.org
11 UNDP, (1990). "Human development report, concept
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12 SUEZ introduces its 2003-04 action plan: refocus,
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14 See PSIRU Pipe Dreams March 2006 www.psiru.org
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18 See "Public solutions for private problems?—responding
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21 Public Services Work 2003 www.psiru.org/reportsindex.asp
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23 Brian Mathew. Ensuring Sustained Beneficial Outcomes
for Water and Sanitation Programmes in the Developing World. IRC
Occasional Paper Series 40 http://www.irc.nl/page/27612
24 eg DMAE. Also note Suez/Veolia training programmes.
25 See for example Asian Development Bank: Project
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Project (Loan 1273[Sf]) In The Socialist Republic Of Viet Nam
July 2004 PCR: Vie 25095 http://www.asiandevbank.org/Documents/PCRs/VIE/pcr-vie-25095.pdf
26 Jennifer Davis: Corruption in Public Service Delivery:
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Development Vol 32, No 1, pp. 53-71, 2004 www.elsevier.com/locate/worlddev
27 Judith Tendler "Good Government in the Tropics".
1997. John Hopkins University Press. p 9,13.
28 For more details see Pipe Dreams—failure of
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29Zaidi, Akbar, From the Lane to the City, WaterAid, London,
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30 For example in Rome: see http://www.watertime.net/docs/WP2/D36—Rome.doc
31 Infrastructure: A survey of recent and upcoming issues
Antonio Estache. The World Bank Infrastructure Vice-Presidency,
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32 Infrastructure: A survey of recent and upcoming issues
Antonio Estache. The World Bank Infrastructure Vice-Presidency,
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April 2006 (version 2.0).
33 Public Information Notice (PIN) No 04/45 IMF Executive
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34 Signposts to More Effective States—Responding
to Governance Challenges in Developing Countries. IDS University
of Sussex June 2005. www.ids.ac.uk/ids/
35 Brian Mathew. Ensuring Sustained Beneficial Outcomes
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36 The contribution of structural policies to economic
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37 Institutional Arrangements for Rural Communities,
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43 David Grey "Water Resources, Growth and Development"
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44 See PSIRU Pipe Dreams March 2006 www.psiru.org
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46 Amartya Sen.
47 UN Millennium Project 2005. Health, Dignity, and Development:
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50 Federal News Service 7 February 2006 Tuesday Hearing
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54 See "Water in Porto Alegre, Brazil—accountable,
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55 Jonathan Caseley: Blocked drains and open minds: multiple
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October 2006
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