Private Sector Engagement Debate

Introduction

The objective of this article is to establish a discussion and debate. These are important issues which directly affect the daily lines of many millions of people. It is not possible, nor is it my intention, to cover all the nuances of the discussion and to include all the facts.

I welcome any comments. I undertake to publish all comments, un-censored, provided they are brief. If you have an article which is appropriate to the discussion, I would be happy to include it in this page. There are also a number of links to other web sites covering a wide range of opinion. If there are other links which are appropriate, please let me know.

Len Abrams
(I am not likely to make many friends on either side with this page.)

Private sector involvement in water services is a debate which has been going on for some time. There are strong proponents for and against. In South Africa the debate has become something of a struggle which illustrates starkly the primary issues around which the debate revolves. The proponents of private sector involvement are, obviously, the private sector, some elements of government and agencies such as the World Bank, whilst those against are the labour movement, some academics and some politicians.

My question is where does the consumer stand, particularly the poor? At the extremes on both sides the consumer's interests seem to be sacrificed, either on the altar of profit or on the altar of ideology. There appear to be a number of examples where the private sector has, with scant regard for or understanding of the needs of communities, clearly gone for maximising profit and a return on their investment, whilst at times it seems as though the labour movement would rather nobody had any services than that they were provided by the private sector.

One thing is certain - providing sustainable water services at local level is a complex process whether you are working in a developing country with a GNP of a few hundred dollars a year or in an industrialised country with a GNP of several thousand dollars a year.

The other undeniable reality is that the private sector will always be involved, whether the anti-private sector lobby likes it or not. At the very least the private sector will be involved as consultants, contractors, the suppliers of materials, the manufacturers of pumps etc.

The debate is not whether or not the private sector will be involved, it is to what extent will they be involved as the actual providers of services. There are several degrees of engagement of the private sector as service providers and investors in infrastructure.

 

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Degrees of Private Sector Engagement

Management agreements: Through a management agreement, the operation and maintenance of a service are contracted out to a private company for a predetermined period without the private company or consortium financing the asset. Instead, the public sector finances both fixed assets and working capital.

Lease agreements (affermage): Through a lease agreement, a private company leases, operates and maintains a State-owned asset for a prescribed period. The public sector retains the responsibility of financing the investments in fixed assets.

Concessions: Through a concession agreement, a private operator is responsible for developing or rehabilitating and operating a State-owned asset or service for a prescribed period. Concessions include agreements such as a build-operate-transfer (BOT) or rehabilitate-operate-transfer (ROT) scheme.

Privatisation: Through privatisation, State-owned assets are sold to a private company or consortium and these assets are owned and managed by the private operation in perpetuity.

Southern African Development Bank

My concern is that consumers get the cheapest possible appropriate level of service which is efficient and reliable. This of course raises the issue of whether water services should be paid for at all, particularly by the poorest of the poor. This debate won't go away either, it seems.

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SAMWU Slogan

"No to privatisation! 50 litres of water per person per day free of charge!"

I would agree with SAMWU in their call for no privatisation, if privatisation means the private ownership of public infrastructure. However, I have considerable difficulties with a call for 50 litres of water per person per day free of charge. Whilst I might agree with the sentiment of the statement, it does not stand the test of the real world. Decades of promises from governments throughout the developing world to provide free services have not worked anywhere. The policy itself has provided a barrier to the provision of services. Free services in fact disempower communities and destroy their leverage. It is fundamentally a "top down", centralist approach. It is inherently dependent on a remote bureaucracy. A call for free services is in practice a condemnation to no services, particularly in rural settings. It is not only naive but dangerous and fundamentally unfair as it is a promise which cannot be kept whilst it destroys all local initiative.

See the SAMWU Vision

There is something to be said for and against the positions of both sides. Both sides have their coded language and both sides regard the other with total mistrust. It would be unfair and incorrect to tar everyone with the extremist brush, however. There are certainly proponents of private sector engagement who do not support unfettered exploitation of the consumer in the interests of private capital.

Again, my concern is "what works?" Efficient, sustainable water services are notoriously difficult to achieve, particularly in poor communities. After decades of work we are still not getting it right and countless thousands of people have died as a result. Whilst we have to guard against the excesses which are inherent in any system, do we have the luxury to sit on opposite sides of the ideological fence and score points which are in our interests but not the interests of the unserved?

I am not qualified to expound either position. I sympathise with the underlying position of the labour movement but I part company with them when they use the issue of water services as a tactic in their larger ideological agenda. I am less than comfortable in the somewhat mercenary environment of the private sector, but I am a realist. If the making of profit results in services being provided which would not otherwise have happened then so be it. If the profits derived from this are exploitative and the return on investment excessive then the severest action should be taken.

"Development is the art of finding the confluence of greatest self-interest." I believe this rather cynical definition of development to be true after many years in the field. If the interests of the consumer are met together with the interests of a private sector concern, development may be promoted. If a private consortium has no idea of nor interest in the concerns of the community (as is unfortunately apparent from the way in which some of the BoTT contracts have been working in South Africa) then it is very unlikely that sustainable development will result.

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Can A Leopard Change Its Spots?

One of the recurring themes which is coming out of the experiences with the BoTT programme for the provision of local water supply in South Africa is that, notwithstanding all of the changes which have happened in South Africa, community participation guidelines prepared by the Department of Water Affairs and Forestry, obligations written into contracts etc. etc., little seems to have changed from the way in which things were done in the previous era. Communities are not consulted by the contractors (or where they are it is superficial in order to fulfil the letter of the law with regards to their contracts), there is little notion of "service", and the emphasis appears to be "construct, invoice and move on". As a result there are major problems looming with the sustainability of completed "projects". It seems that there has been little shift in paradigm which does little for the image of the private sector - they are often their own worst enemies.

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NGOS Call For End to Water Privatization

Representatives of NGOs have called on the Non-Aligned Movement (NAM) (http://www.nam-csstc.or.id/) to "cease forthwith the privatisation of all basic services, with particular reference to water transnationals which are currently operating in developing countries to the detriment of the communities". This was included in the declaration of the Civil Society Conference on the Priorities and Challenges for the Non-Aligned Movement (NAM) in the Next Millennium which was held in Durban, South Africa on 19-21 August 1998, prior to the 12th NAM Summit. The conference was organized by the Foundation for Global Dialogue (South Africa) and the International Institute of Non-Aligned Studies (India). The Conference declaration dealt with sustainable development, poverty, debt, trade and investment, environment, South-South co-operation, peace, UN reforms, peacekeeping and disarmament.

(From SOURCE at http://www.wsscc.org/)
Added 2 September 1998

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For & Against

For

Links to other web sites:

Against

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Related Papers

Thanks to IRC's SOURCE Bulletin and the DECNET Bulletin for alerting us to this interesting example in Bolivia. This contains summaries of 2 recent studies:

  • SAGUAPAC/Bolivia: A water co-operative for a large city. Does it work?

  • Pipe dreams. Does privatised water offer poor urban neighbourhoods a better supply?


Both studies are by Andrew Nickson and links to both papers are also on the DECNET web site at: http://www.opendemocracy.net/authors/andrew_nickson

SAGUAPAC/Bolivia: A water co-operative for a large city. Does it work?

Large cities in many low-income countries face a water supply crisis. The most common solution found today is to invite in private contractors to fix the problem. Vivendi and Lyonnaise des Eaux, two powerful French utility conglomerates, dominate the growing global market for private management of urban water utilities. But a University of Birmingham study suggests that there is another solution - the co-operative.

The study examined the only major urban water supply and sewerage co-operative in the world. Known as SAGUAPAC, the Cooperativa de Servicios Publicos 'Santa Cruz' Ltda has provided water since 1979 to the people of Santa Cruz, the largest city in Bolivia, with a population of 1m. All 96,000 of its domestic customers are automatically members of the co-operative. The city is divided into nine water districts, where customers elect members to the administrative board of SAGUAPAC. This board appoints the general manager and approves tariffs. Customers also elect a separate supervisory board that monitors the performance of the administrative board. The Birmingham study found that SAGUAPAC is one of the best-run water companies in Latin America, measured by criteria of efficiency, equity and effectiveness. It has:

  • a low level of unaccounted-for water

  • a low number of employees per 1000 water connections

  • efficient accounting:100 percent of all connections are metered

  • a 96% bill collection efficiency rate

  • 80% water coverage, despite rapid population growth

  • a 24 hour supply of clean water.


The study report identifies two key reasons for SAGUAPAC's superior performance:

Its co-operative structure shields management from undue political interference, especially with regard to hiring, firing, and the awarding of contracts. The general manager has been in post since 1986, in sharp contrast to the norm in Latin America where managers of state or municipal water companies are regularly removed when a new political leadership takes office.

The co-operative structure also means that SAGUAPAC is not bogged down with legal delays in tendering procedures and the administration of external loan finance that bedevil water companies belonging to the public sector. This mean that it can implement investment projects much faster and more efficiently than other companies.

Other lessons for policy-makers are that:

private sector lease and concession contracts are not the only way to improve the performance of water companies in low-income countries

the co-operative model is sustainable and capable of high performance. It is catching on elsewhere in Bolivia, with new water co-operatives established in the towns of Tarija (1988) and Trinidad (1991).

Powerful interests are vested in concealing the advantages of a co-operative model for urban water supply management. SAGUAPAC is highly regarded by the World Bank and internal Bank documents have praised it for its utilisation of two major Bank credits. Yet, under pressure from powerful French companies, the Bank does not promote the co-operative model, either in Bolivia or elsewhere.

Contributor(s): Andrew Nickson

Pipe dreams: Does privatised water offer poor urban neighbourhoods a better supply?

The supply of water to towns and cities in many low-income countries is in crisis One much vaunted solution is for private companies to step in. A University of Birmingham research study examined how water supply is organised in some low income countries. The study report identifies a range of supply strategies, each involving different degrees of private involvement. It concludes that private intervention is not bound to guarantee instant solutions to water supply problems in poor urban environments.

Urban water supply shortfalls in many low-income countries have prompted much pressure from both inside and outside the countries concerned to find conclusive solutions. Often the problem is that cities have grown too fast and water demand has rapidly outstripped supply. The situation is made worse by under-investment and poor maintenance. Two main principles have emerged from research into various problem-solving approaches that have been tried around the world. The first is that water must be seen to have economic value and not simply stand as a social good. The other is that key local stakeholders should undertake the management of water supplies.

The Birmingham study identifies eight arrangements that represent trends in urban water supply. They range from state-owned enterprises with no private links, through contracts with specialised private companies, to leasing and concession arrangements. The report indicates that:

The global trend towards private involvement in urban water supply is very recent and progress is slow.

Where there is private interest, it mainly takes the form of franchise deals based on the French model.

The British model of full private involvement (divestiture of assets) is not being followed anywhere else.

Many countries, notably in Southern Africa, are improving supplies without recourse to the private sector.

Experiences of regulating private involvement vary. Problems include secrecy and over-simplified (or overly complex) management structures.

The commonest forms of private involvement in urban water supply are service and lease contracts.

For governments, implications that arise from the study include:

Governments must be able to manage macro-economic policy not the general economy so as to ensure stability, be seen as legitimate in the eyes of the public and make laws to allow private interventions that protect the public interest

they must be able to monitor and regulate the private sector prior to private intervention.

More general lessons are that:

The organisation of urban water supply must be strong enough to support self-financing, regardless of who controls or owns the supply.

Unless the efficiency of urban water supply is improved and tariffs reflect the actual cost of supply, investment will fail and the quality of service will remain poor.

Andrew Nickson
Date: 26 October 1998

Further information:
Andrew Nickson
International Development Department
School of Public Policy
University of Birmingham
Birmingham B15 2TT
UK
Tel: +44 (0)121 414 4963
Fax: +44 (0)121 414 5032
Email: R.A.Nickson@bham.ac.uk

International Development Department (IDD),
University of Birmingham

Financing of Fresh Water for All: A Rights Based Approach (Added 5 October 1998)

by Ashok Nigam and Sadig Rasheed

Copyright: 1998 United Nations Children’s Fund Programme Publications
3 UN Plaza New York, NY 10017 USA

The purpose of this and other UNICEF Staff Working Papers is to present new ideas, innovative approaches, and research results. A complete pdf version is available via the Decentralization web site at: http://www.unicef.org/reseval/pdfs/freshwat.pdf

Abstract

Over the past two decades a number of international declarations have sought to ensure access to safe water and sanitation with environmental sustainability. A range of criteria and financing mechanisms have been proposed for the mobilisation and allocation of financial resources. Yet millions of people do not have access to basic levels of service and there are concerns about water scarcity and environmental degradation impacting on fresh water resources. There is increasing competition between agriculture, industry and domestic sectors for fresh water which is a finite resources in a given environment. The global fresh water crisis is in fact a local level crisis - in time (at particular periods during the year) and in space (particular locations) - which already exists.

This paper argues that the international declarations on human and child rights provide the political, moral, ethical and legal imperative for ensuring that the fundamental right to water is met. Adopting a rights-based approach, it is argued, is consistent and compatible with economic efficiency. Indeed, such an approach is both efficient and equitable. Implementation of the rights already conferred will be pivotal to the mobilisation of adequate resources for the twin challenges of sustainable financing and environmentally sound use of resources. The paper concludes:

The key constraint in overcoming the challenges is not lack of financial resources but the political decision by the state to implement the rights already conferred on individuals.

The market cannot be expected to safeguard and allocate fresh water resources equitably across income groups and across competing uses. The pressure on domestic water supply as a result of over-extraction for agriculture calls for an examination of 'pricing' of water in its competing uses.

The rights based approach to financing suggests that efficiency with equity can be achieved if basic levels of services for all are guaranteed by the state. What is required is the political will to ensure that the rights are met.

Privatisation and public sector financing can be complementary but the former should not be expected to substitute for the state?s responsibility for ensuring basic levels of service.

Privatisation of water supply and sanitation services must be accompanied with effective regulation.

Microfinance and revolving credit schemes must be promoted along side water supply and sanitation in order to enhance the capacity of the poor to pay and maintain their services.

Community based management as a strategy for service delivery and financing of fresh water for all has been shown to be effective. Communities must be in-charge and participate in all aspects of management if they are to be custodians of their 'fresh water environment'.

The Law for the Regulation of Public Water-Related Utilities

Miguel Solanes

Regional Advisor Water Law and Related Public Utilities

United Nations Economic Commission for Latin America and the Caribbean

A very important document.
(added 2 September 1998)

Conservation And Pricing – Does Raising Tariffs To An Economic Price For Water Make People Worse Off?

Prepared for the "Best Management Practice for Water Conservation" Workshop,
Supported by Sa-USA Bi-National Commission.
7-10 September, 1997
Hermanus, South Africa

KyeongAe Choe
Robert C. G. Varley
(added 2 September 1998, submitted by Rob Varley)

Water System Privatization

Donald Tate

"My view is that we should be very careful on the privatization issue. It's theoretically dumb to priviatize a "natural monopoly." As you may know, I'm writing a book - or a series of books - on demand management. I have addressed the privatisation issue briefly and am attaching a copy for your info." (added 2 September 1998)

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Email Responses

Len,
You have found the right angle to discuss this theme and to avoid ideological blindness: does private sector service delivery benefit the consumer and particularly the poor, or not? A derelict public monopoly run by corrupt bureaucrats costs a lot more in efficiency losses than an average profit realised by a private firm. Profit in its self is not bad.

A private monopoly which is interested only in short term profits and has no long term commitment will probably provide a poorer service than an average public institution. The private sector in itself is not good.

Water is invariably a monopoly with limited scope for a truly competitive situation. And neither the government nor the private sector is inherently good or bad. It all depends on the performance of service delivery to the people.

But: There are two reasons why I personally think that there is no choice but to increase private sector participation in WSS in Africa: 1. Too many public institutions have become so incompetent because of corruption, maladministration, and lack of consumer responsiveness that they seem to be beyond repair. 2. African Governments tend to be so broke that only investments by the (international) private sector can mobilise the funds needed to improve services for the people.

An old saying of Organisational Development people goes: I don't know whether things will be better when they change. But I do know that things have to change if they are to become better.

So let's try it. And let us properly design projects with private sector involvement such that the consumers (and not so much the bureaucrats) have a big say in it.

Stefan Helming
GTZ Water Unit
Eschborn / Germany
[added 4 September 1998]

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Newsletter Items

2 Sept 1998 - Contribution from the IRC weekly water newsletter "SOURCE".

"Just browsed through your good overview on the water privatization issue which I have also been following with interest. Below I have included some items on this topic from earlier issues of Source Weekly for your information."

PRIVATE SECTOR INVOLVEMENT REDUCES PUMP COSTS

International Development Alternatives (IDE) claims that the promotion of competition in their drinking water project in Viet Nam has forced a reduction in pumping and installation costs by the existing installation entities of up to 50%. IDE introduced a low-cost pump for drinking water through manufacturers, retailers and installation teams. [Ideas, vol. 8, winter 1997, p. 1] Contact: Daniel Salter, IDE Country Director Vietnam, 76202.2507@compuserve.com

PRIVATIZATION: THE WATER SHARING PROJECT

As part of their research programme on privatization, the Faculty of Political, Social and Cultural Sciences at the University of Amsterdam has chosen privatization of the water sector for the semester September 1997 - June 1998. At present the site includes a series of articles published in the Online Water Sharing Magazine. Project overviews form both developed and developing countries and the results of interviews with water sector groups will be added from June 1998 onwards. Contact: Prof.Dr. G.C.A. Junne, University of Amsterdam, tel.: +31-20-5252163, mailto:Watersharing@pscw.uva.nl

MULTINATIONAL INCLUDES URBAN POOR IN WATER SERVICES CONTRACTS

When signing private water services contracts with local authorities, multinational company Suez Lyonnaise des Eaux aims to include low-income districts. Their strategy includes the use of BOTT (build, operate, train and transfer) schemes, accepting labour on works instead of connection charges, working with local stakeholders, and involving individual water vendors. The company has used these methods in South Africa (Northern Province and Easter Cape), Argentina (Buenos Aires and Rosario), and Bolivia (La Paz and El Alto). [Water supply to underprivileged districts: Lyonnaise des Eaux' experience (press release), February 1998] Contact: Lisette Provencher, fax: +33-1-46955168, URL: http://www.suez-lyonnaise-eaux.fr/

DUTCH PARLIAMENT SAYS NO TO FREE MARKET IN WATER SECTOR

The Dutch Lower House has passed a motion which rejects proposed changes in the new Water Supply Law which would introduce free market forces, especially for bulk industrial water supply. Members of Parliament stressed the danger of cross subsidization: compensation of market losses by increasing drinking water supply tariffs to consumers. They also feared that less attention might be paid to ecological aspects, sustainable water management, drought prevention, and water conservation. [H2O, vol. 31, no. 9, 1 May 1998, p. 4-5 (in Dutch)]

PUBLIC PRIVATE INTERFACE IN URBAN ENVIRONMENTAL MANAGEMENT

In mid-February 1998, the UNDP's Public Private Partnerships for the Urban Environment along with Yale University began a 10 week Internet Conference "The Search for Best Practices - Improving the Delivery of Urban Water, Waste and Energy Services in Developing Countries". The 200 expected participants will be invited to a workshop in New York, scheduled for June 22-24, 1998. [http://www.undp.org/undp/ppp/listserver/invitation.html]. Contact: Kimberly Heismann, Internet Conference Coordinator: pppconf@undp.org