PPP Debate – Patrick Bond | The Water Page

INTRODUCTION:THE WORLD BANK AND SOUTH AFRICAN MUNICIPAL SERVICESThe several dozen trade unionists gathered in Port Elizabeth city hall one sleepy, humid Saturday in February 1998, at a workshop on participation in “PPPs” (public-private partnerships), were stunned from the outset. A Department of Constitutional Development (DCD) deputy director-general began by blaming union opposition to privatisation for the “failure of the RDP.” Following up, the PE city treasurer revealed in a slide-show that, unbeknownst to these leaders of the Eastern Cape region of the Congress of South African Trade Unions (Cosatu), World Bank staff had visited PE roughly eighteen months earlier (September 1996) to offer counsel on expanding the city’s water system.The treasurer, inherited from the previous government, had joined the Bank in a week-long model-building exercise that focused entirely on one option: increasing capital expenditure by privatising the city’s water works. Various claims about likely efficiency enhancements were made, some of which — such as the feasible reduction of staff from 6,5 to 3,5 per 1 000 water consumers, and a 1,2 percent interest rate advantage on capital-related borrowing for a private firm in contrast to the PE municipality — were based on highly dubious assumptions. A lose-win bargain stared the trade unionists in the face: if the DCD official, Bank staff and treasurer were right, only the loss of many hundreds of union jobs, the opportunity for huge rates of private profit, and the more thorough commodification of services would allow the city to expand water-related infrastructure to tens of thousands of residents of unserved townships and shack settlements.Over the next day of deliberations, critical reactions began to gel. Representatives of the SA Municipal Workers Union (Samwu) recalled their own national slogan — “No to privatisation! 50 litres of water per person per day free of charge!” — as a means of disentangling the false division between producers and consumers. Outsiders offered advice. A Johannesburg lawyer from Rand Water — the country’s largest intermediate buyer of water — suggested a “public-public” partnership based on a water utility model instead. The Eastern Cape Socio-Economic Consultative Council’s Bisho-based specialist on Local Economic Development argued for an approach that combined public ownership, expanded services, much greater cross-subsidisation and more explicit economic linkages. A representative of the International Labour Research and Information Group in Cape Town presented options for public sector reform as a means of improving services. Cosatu leadership then made the decision to throw down the gauntlet, vowing that PE would replace Nelspruit as South Africa’s most vibrant site of struggle over infrastructure privatisation. All of this was reactive, however. Already a year earlier, the PE Municipality’s (1997:6) Director for Administration conceded, there had been “pressure for Port Elizabeth to carry the [privatisation] investigations further… from banks and commercial concerns” — Banque Paribas, Rand Merchant Bank, Colechurch International, Development Bank of Southern Africa, Generale des Eaux, Metsi a Sechaba Holdings, Sauer Interantional and Lyonnaise Water had all met with PE officials — as well as from DCD, which allocated R2 million from a R50 million US Agency for International Development grant to fund PE’s PPP business plan development. (In spite of repeated promises, DCD staff repeatedly refused Samwu’s request for financial support to look into alternative business plan options centred around public sector reform.) The workshop participants found themselves, in a sense, at the end of a chain that began with international capital and that was welded together by international development agencies and national and local states.In this paper, I argue that to the extent we can trace the involvement of the World Bank — in this instance working closely with senior local authority personnel, more generally with high-ranking DCD officials and local consultants — the subsequent pressure upon politicians to privatise municipal services will be based on incorrect formulations of the problem, an inability or lack of desire by Bank staff to explore options drawn from South Africa’s Democratic Movement, and a potential conflict of interest between Bank institutional investment interests and its policy advice. What this boils down to, as reflected in PE and many other settings in the near future, is a decisive failure by privatisation advocates — particularly analysts from the Bank and its private sector investment subsidiary, the International Finance Corporation (IFC) — to both respect the core political and developmental aspirations of the local citizenry, and demonstrate that privatisation assists in meeting such aspirations.The question that must also be asked, is whether a public participation process — now often seen as a significant ameliorating exercise — would make any difference in all of this. Too often, participation is a euphemism for clever marketing of top-down, market-oriented policies which have to be sold, to enhance public “ownership,” because they are essentially unpopular and harmful to either the interests of specific interest groups and/or the people as a whole. This paper concludes that much of the advocacy work done by the Bank and IFC in South Africa is very much in this spirit, and hence the more participation, the more informed opposition there will be. This helps explain the secretive nature of the Bank’s work in PE. Indeed I argue that the problem lies in the broader attempt to privatise in a context in which democratic design of social and economic policy is demanded (and denied). So long as the Bank’s work in South Africa follows the patterns outlined next, privatisation itself will be hotly contested.THE SERVICES BACKLOG AND THE POLITICIZATION OF PRIVATISATIONIt has been long recognised in South Africa’s democratic movement that basic human needs related to infrastructure — especially basic access to water, sanitation, energy, housing, a clean environment, transport and communications — are vital to many aspects of everyday life: to women’s status (at home and in society), to children’s welfare, to personal and public health, to the natural environment, and to a better balanced local and national and indeed international economy. Moreover, it is also axiomatic that there are modes of appropriate technology available in South Africa that do not require the kinds of “megaprojects” (like Lesotho dams) often associated with infrastructure but that nevertheless would meet universal coverage of basic needs — if affordable approaches that entail sufficient subsidies and cross-subsidies could be developed. This possibility is growing increasingly remote, however, in a South African environment characterised by growing poverty (and its “feminisation”), unequal distribution of resources, intensifying fiscal discipline and budget cuts, high interest rates, heightened competition between cities and towns, and — in many cases — a lack of respect by the World Bank and even the African National Congress government itself for mass social movements, community-based organisations and non-governmental organisations.South African social movements and allied technical resource personnel have long campaigned for infrastructure and services for all. This was reflected in extremely generous promises made to the populace in the Reconstruction and Development Programme (RDP), the African National Congress campaign platform, in early 1994. But by late 1994, as shown below, World Bank staff and conservative local consultants were actively involved in undermining those promises by developing initial arguments for the South African government about household affordability and funding options related to infrastructure and services. The technical advice was based on faulty information and was explicitly biased towards privatisation and high user fees for at least three reasons. First, the Bank’s South Africa staff ignored not only the RDP but also the Constitutional guarantee of basic services and housing to all citizens. Second, the Bank failed to correctly analyse and incorporate information about relative affordability and the indirect benefits of basic services (e.g., public health, environment, geographical integration, women’s time and micro-/macro-economic multipliers). Third, in their review of funding options Bank staff did not consider utilising a simple mode of redistribution of resources from national to local level that the ANC had explicitly promised during the 1994 election campaign and that even the World Bank’s own World Development Report 1994 endorsed — namely, cross-subsidisation through a progressive block tariff that ensures “lifeline” access to basic services for all. There are other technical and political problems associated with the Bank’s South Africa advice and the later decision by the Bank to invest in privatised infrastructure, as discussed below.Within a few years of the Bank’s initial arguments about privatisation and funding mechanisms for municipal infrastructure, and just as these arguments were being codified as official policy, progressive resistance emerged. In April 1997, Samwu initiated a national campaign against the privatisation of essential municipal services, which were emerging from minor Eastern Cape pilot towns to the battlefield represented by a small city, Nelspruit. The union later filed (unsuccessful) requests to the DCD to develop alternative local solutions that retained infrastructure-related jobs in municipal government and met the needs of unserved residents. Samwu’s campaign against the high-profile privatisation of Nelspruit water services was temporarily successful, as the ANC Youth League, Communist Party and Cosatu leaders managed to delay the sale well into 1998. (Of interest, reflecting the increasingly corporatist reorientation of the SA National Civic Organisation, Sanco Investment Holdings opted instead to support water privatisation, by becoming a junior joint venture partner in the ultimately successful bid by the British firm Biwater, although the local Sanco affiliate was persuaded to oppose the privatisation.)Just as Samwu, NGOs and social movements began turning their attention to the forthcoming infrastructure policy, the World Bank and South African government were finalising many of the central details. In May 1997, the South African Cabinet approved in principle two contradictory policies, one (from the Water Minister) stating the aim of supplying a free lifeline water service to all households and the other (from the Minister of Constitutional Development) promoting cost-recovery policies for household water supplies; the contradiction was still not resolved in September, when the Municipal Infrastructure Investment Framework was released to the public.Moreover, in May 1997, the International Finance Corporation announced a $25 million investment in the Standard Bank “South Africa Infrastructure Fund” with the aim of providing the foreign currency component required for privatisation. That fund, as shown below, anticipates gaining a return on investment of more than 30 percent in 90 percent of its projects. Notably, the IFC makes no explicit effort to invest in a manner that directly broadens ownership to the black majority, but rather promotes an investment fund run by the country’s largest bank.In July-September 1997, as the SA government insisted on using harsh tactics to enforce a cost-recovery approach to infrastructure and services, a series of township protests broke out in Gauteng, Mpumalanga and Eastern Cape provinces. Grassroots demands included lower service charges, an end to pre-paid (and more expensive) electricity meters, and cut-offs of basic services. The protests turned violent in some areas (KwaThema, Tembisa, Butterworth), and included clashes with the police and municipal councilors (ANC councilors’ houses were even burned down in rage) (Barchiesi, 1998; Phadu, 1998). In addition to organised civic groups, a variety of other community-based organisations became active on the issue.In the fourth quarter of 1997, nearly all municipalities began widespread cut-offs of basic services to non-payers. In even central Johannesburg, where public health hazards loomed, this entailed shutting off access to water to tenants who had paid though their landlords had not paid the city council. DCD’s “Project Viability” was expected to declare more than half of all South Africa’s municipalities illiquid, which would intensify the now massive pressure to cut services, including water, to those who could not pay the unsubsidised bills (and for whom, generally, little or no safety net existed). In the Eastern Cape town of Stutterheim, for example, of nearly 5 000 households in Mlungisi township, 10 percent suffered water cuts during the last quarter of 1997, and of these, only 35 found sufficient resources to pay their bills and restore their service.In short, local democracy had been judged too expensive for South Africa, and the 400 or more municipalities expected to fail would be amalgamated into large district councils. Yet behind this lay no large-scale, formal “rent boycott” (the only one of any significance was by white businesses and residents in Sandton). Instead, the growing municipal fiscal crisis emanated from the Department of Finance, which in real terms cut the crucial “Intergovernmental Grants” (which pay for municipal service subsidies) by 85 percent between 1991 and 1997, according to the Financial and Fiscal Commission (1997:18), lending new meaning to the idea of a “culture of non-payment.”In January 1998, a coalition of community, environmental, consumer, labour and non-governmental advocacy organisations from Gauteng province, Lesotho and other countries joined forces to begin challenging World Bank funding for continued construction of the Lesotho Highlands Water Project, partly because of its negative implications for water conservation and lifeline service provision in Gauteng, and partly because of the dam project’s extraordinary ecological and social implications. With vast Lesotho water costs about to be assumed by Rand Water, to be passed on to Gauteng municipalities which were already seriously cash-strapped, the pressure on those municipalities to privatise basic services was sure to increase dramatically. In March 1998, as this article was drafted, a formal request was made to the Bank’s Inspection Panel by two Gauteng civic associations — which simultaneously split away from Sanco — to investigate a myriad of allegedly flawed procedures, decisions and analysis by Bank staff in relation to the retail implications of tripling the raw cost of water so as to pay for the Lesotho dams (Mayekiso and Menu, 1998).There are many issues that deserve exploration here. To keep matters brief and to understand the role played by the World Bank in the run-up to privatisation of municipal services, requires first considering its back-door route to privatisation through the IFC loan, and then the specific debates that distinguished the Bank’s South Africa staff not only from local popular movements — on privatisation and a variety of related issues — but also from Bank headquarters (as seen in conflicting policy advice offered from the two Bank sources).THE IFC’S BACK-DOOR ROUTE TO PRIVATISATIONThe financial logic behind the IFC’s $25 million investment in privatised infrastructure — through the Standard Bank South Africa Infrastructure Fund (SAIF) — is worth examining at the outset, for here is where World Bank conflicts of interest visibly emerge, where the exploitative character of privatisation becomes obvious, and where the broader alliance of international and domestic financial capital, with international managerial capital, is unveiled. According to the IFC,The principle objective of SAIF is to invest in infrastructure projects in order to achieve long-term capital appreciation for investors. The Fund will focus on equity investments in the environmental (water, waste, sanitation and sewerage), energy, telecommunications and transport sectors. Although [the Fund] has achieved some success in developing its deal flow, it is constrained by domestic regulation from bidding for privatisations that require foreign funds. The additional financing will satisfy the Fund’s need for foreign exchange and help diversify its portfolio. IFC’s presence on the board of [the Fund] will help transfer expertise from IFC to the Fund… This is an environmental review category FI project. The Fund will only invest in projects which meet World Bank environmental policies and host country standards (IFC announcement, May 1997).Privatized South African infrastructure is potentially highly profitable, with Internal Rates of Return (IRR) approaching 30 percent. According to an African Development Bank study (1997:13, Annex 6), SAIF projection for before-tax IRRs of 26-27 percent “during SAIF’s 15-year life in constant US dollar terms” assumes that “10 percent of all investments will fail; 50 percent of all investments will generate an IRR of 30 percent; and 40 percent of all investments will generate an IRR of 35 percent.” To earn such high rates of return on infrastructure investments that are often long-term in nature (often forty years before full social and economic returns on investment are realised), and on top of that to compress the high earnings into the early stages of investment (on average 7.5 years, given that the SAIF will shut down after 15 years), and to do so using a wide range of social infrastructure investments, implies an extremely high cost-recovery burden for direct infrastructure recipients, or dramatic cost reductions at the level of the enterprise. Amongst SAIF “potential project pipeline” investments are the hotly-debated Nelspruit water treatment, Eskom electricity transmission lines, Empangeni water management and Telkom’s partial privatisation, all of which entail infrastructure aimed at bringing low-income people into the economy (ADB, 1997:Annex 1).As it stands, the DCD recognises the need for a regulatory framework to prevent undesirable practices such as monopoly pricing or “cherry-picking” (limiting access for low-income people) by private firms (unconscionable profiteering is apparently not considered a matter requiring regulation, however). But by 1998 it had still not yet formally established such a framework even though large documents had been generated by Washington-based consultants and though such investments were being made regularly. As a result, low-income people may face a large hurdle: covering both relatively non-subsidised recurrent (operating and maintenance) costs, and paying sufficiently high service charges so as to reward investors with a 32 percent rate of return. As the rand declines against the dollar (inexplicably, something not explicitly foreseen by the African Development Bank in its report), the IRR target will hve to be raised much higher, so as to remain competitive with other international investments.Several questions emerge through this example. How appropriate is it that infrastructure investment for low-income people becomes the basis for this high a rate of return, with relatively short-term private financial commitment in relation to the entire project? Where are the cost-savings anticipated by the private firms in which local and international financial investors will invest? If such cost savings come through large-scale rationalisation of public sector workers, what are the implications?The IFC — a low-profile institution in South Africa — has not publicly addressed these questions, and this author knows of no internal or public IFC document that does. To get a sense of how cost-recovery may be achieved from widespread privatisation of municipal services, at a time of extreme politicization of services and payment levels, requires considering the World Bank’s broader policy work on municipal infrastructure and services, the “Urban Infrastructure Investment Framework” in which the Bank played a decisive role in late 1994 and early 1995. As a precursor, though, it is useful to glance through the document that should have given Bank staff ideas on what kinds of policies to design, the RDP.GOVERNMENT’S MANDATE ON MUNICIPAL SERVICESThe contrasts between — on the one hand — infrastructure investments being undertaken at present by the IFC and infrastructure policy design carried out by World Bank staff in South Africa in late 1994 and early 1995, and — on the other hand — that recommended in the RDP in early 1994, and later by the Bank’s World Development Report: Infrastructure for Development (WDR) in mid 1994, are striking. To begin with the RDP, it is worth recording the status attributed to the document by President Nelson Mandela, in his victory celebration speech on 2 May 1994:We have emerged as the majority party on the basis of the programme which is contained in the Reconstruction and Development book. That is going to be the cornerstone, the foundation, upon which the Government of National Unity is going to be based. I appeal to all leaders who are going to serve in this government to honor this programme (Business Day, 5/3/94).The RDP book is ambitious about meeting basic needs: “With a per capita gross national product (GNP) of more than R8 500 South Africa is classified as an upper middle income country. Given its resources, South Africa can afford to feed, house, educate and provide health care for all its citizens” (section 2.1.3). The RDP proceeds to list a number of specific areas (many related to the International Covenant on Economic, Cultural and Social Rights) in which South Africans can consider themselves entitled to an adequate consumption level of goods and services. These were codified in the 1996 Constitution, which commits to the citizens of South Africa that the state will ensure second-generation socio-economic rights (such as water, housing, health care and other services), along with a general commitment to equality of state service provision.The RDP’s approach is to ensure that essential service needs are met through vast increases in government subsidies and redistributive tariff systems when a cost-recovery approach fails to deliver services to those who need them. For example, the RDP suggests the characteristics of a decent residential existence: “As a minimum, all housing must provide protection from weather, a durable structure, and reasonable living space and privacy. A house must include sanitary facilities, storm-water drainage, a household energy supply (whether linked to grid electricity supply or derived from other sources, such as solar energy), and convenient access to clean water” (section 2.5.7). The budgetary goal for housing expenditure in the RDP is 5 percent of the entire national budget; this goal was repeated in the Housing White Paper, and if delivery capacity improves there is no reason not to anticipate meeting this target at some stage soon in the course of budget reprioritisation.Perhaps most importantly for municipal services, the RDP commented in some detail on how to finance infrastructure and the recurrent costs of services. The RDP specifies the need for tariff restructuring, cross-subsidies and lifeline services to the poor, with respect to both water (including sanitation) and electricity:To ensure that every person has an adequate water supply, the national tariff structure must include the following:a lifeline tariff to ensure that all South Africans are able to afford water services sufficient for health and hygiene requirements;in urban areas, a progressive block tariff to ensure that the long-term costs of supplying large-volume users are met and that there is a cross-subsidy to promote affordability for the poor, andin rural areas, a tariff that covers operating and maintenance costs of services, and recovery of capital costs from users on the basis of a cross-subsidy from urban areas in cases of limited rural affordability (section 2.6.10).The electrification programme will cost around R12 billion with annual investments peaking at R2 billion. This must be financed from within the industry as far as possible via cross-subsidies from other electricity consumers. Where necessary the democratic government will provide concessionary finance for the electrification of poor households in remote rural areas. A national Electrification Fund, underwritten by a government guarantee, must be created to raise bulk finance from lenders and investors for electrification. Such a fund could potentially be linked to a Reconstruction Fund to be utilised for other related infrastructural financing needs. A national domestic tariff structure with low connection fees must be established to promote affordability (section 2.7.8).With national tariff reform emphasising cross-subsidies (using national and provincial resources, not just local) and lifeline tariffs for low-income consumers, and with a more appropriate use of housing subsidies to finance deeper levels of capital infrastructure — neither of which should ultimately cost central government anything extra beyond even the (original) urban housing and rural land reform targets — promises of humane standards of infrastructure and services for all South Africans can be kept, and additional public health, environmental and economic benefits to all of society (particularly women and children) can be gained.It is possible to translate these broad mandates into a concrete policy directive: a marginal increase in the price of water and electricity should be applied to large corporations and farms (which consume more than 75 percent of water and energy resources, and in a wasteful manner), to pay for a lifeline service to households (the majority of black households together consume less than 2 percent of these resources). It was precisely this funding mechanism that would have obviated the need for privatisation of municipal services; it was precisely this mechanism that was ignored by Bank staff in their detailed study of municipal services, even though the same mechanism was endorsed in the 1994 WDR.CONTRADICTORY BANK POLICY ADVICE:THE 1994 WDR AND THE SA STAFF REPORTSBank policy advice, which was decisive in shifting the terrain of debate over infrastructure investment away from government’s RDP mandate, began with several Urban Reconnaisance Missions to South Africa during the early 1990s (for a critique, see Bond and Swilling, 1992). It included repeated conservative interpretations, profoundly flawed, of how generous the state should be with respect to housing, concluding in 1994 that subsidy levels should be lower and reliance upon bankers heavier than those envisaged by most South African commentators (Bond, 1995); the resulting Housing White Paper was applauded by the Bank’s deputy resident representative — who also coordinated the PE privatisation research — at a mid-1997 Johannesburg meeting with NGOs (personal communication with SA NGO Coalition leaders; Bond and Tait, 1997). For our purposes here, it will be sufficient to analyse the more direct policy advice offered once the ANC government had taken office, particularly two drafts of the Urban Infrastructure Investment Framework (UIIF), dating from November 1994 and March 1995. The irony implicit in the UIIF derives not only from its rejection of the RDP’s core arguments on financing, service standards and redistribution, but from the Bank South African staff’s rejection of the WDR: Infrastructure for Development report issued just a few months earlier. The WDR recommended a relatively interventionist approach to policy, programme and project design, for several reasons:to internalize developmental externalities associated with infrastructure and recognise the public character of infrastructure goods, instead of leaving these to the market;to amplify the effect of infrastructure on the reduction of poverty;to incorporate economic multipliers as integral to infrastructure investment;to incorporate infrastructure’s environmental effects;to incorporate infrastructure’s public health effects;to incorporate locational externalities;to incorporate infrastructure’s role in reducing gender inequality;to establish an appropriate tariff pricing system that will accomplish the social as well as economic objectives associated with municipal infrastructure; andto learn lessons of infrastructure project failure so they are not repeated.Yet World Bank staff in South Africa (and government consultants engaged in parallel work) failed to take such lessons seriously. In many cases, the WDR guidelines regarding such issues were ignored entirely. As a result, the case for state intervention is much weaker in the UIIF, the net economic benefits of infrastructure are suppressed, and recommendations for infrastructure standards are extremely low. The inadequate analysis, failure to engage with the RDP, and lack of participation with its advocates led the Bank to adopt a pro-privatisation position regarding municipal services.In the series of brief comments below, in each case starting with the WDR, it is clear that the precise language of the Infrastructure for Development report was ignored or distorted by the Bank’s South African staff and allied local consultants in the UIIF documents that were generated in late 1994 and early 1995 (leading to similar problems in the final Municipal Infrastructure Investment Framework [MIIF] in drafts from 1995-97, including a short version publicly released in September 1997). In turn, this generally led to lower standards and smaller subsidies for low-income residents than should have been the case.IDENTIFYING PUBLIC AND PRIVATE INFRASTRUCTURAL GOODSOne of the key issues under debate in the controversy over privatisation is whether infrastructural goods are public or private, and if the latter whether public management is necessary to internalize externalities. While World Bank staff in South Africa have strongly advocated privatisation of municipal services, in part or full, a more measured position appears in the WDR,Because many infrastructure facilities are locationally fixed and their products are non-tradable, users cannot readily obtain substitute services that better suit their needs. Moreover, it is often difficult for users to obtain information about service alternatives or characteristics. They cannot, therefore, “shop around” for the best source of supply and are vulnerable to any abuse of monopoly power… Roads are not private goods… Water outside of piped networks is often — in practice and in principle a “common property” resource… Although most infrastructure goods are private, they produce spillovers or external effects — many of which affect the environment. Ignoring the important negative externality of emissions from fossil fuel power generation could lead to excess power being produced with the wrong mix of fuels. By contrast, some cities have neglected to develop a well-designed public transport system, even though such a system can have positive environmental effects and also promote social equity. To ensure that society obtains positive benefits — such as public health benefits from water and sanitation — the private goods must also be delivered effectively. Thus, although infrastructure services differ from other goods, they also differ among themselves. The characteristics of various infrastructure activities have important implications for how services should be provided. To the extent that specific infrastructure activities entail natural monopoly or depend on a network characterized by natural monopoly, they will not be provided efficiently by an unfettered market (Bank, 1994:23-24).A number of problems arise for which markets cannot guarantee solutions. Many infrastructure services, especially those that resemble public goods, will be undersupplied if markets alone are left to determine their provision. Market outcomes may allocate fewer infrastructure services to the poor than society desires (1994:73).Because markets often fail to reflect these externalities, their management usually falls to government (1994:82).The clear message, in short, is that even for those infrastructural services that are private (not public and hence extremely difficult to price) there is compelling evidence to retain state control. For to effectively internalize the developmental externaliti