A survey of water privatisation

When six people died in October 2003 when Manila suffered its worst cholera outbreak for over a century, the citizens of the Philippines capital were in no doubt where the responsibility lay. Six years after the city’s utility operator was privatised, the city’s residents had only seen a fraction of the $7.5 billion improvements that were written into the 25-year concession.

Over the same period, they’d seen their water tariffs soar, some to as much as seven times 2001 levels. The result? At least 1.2 million of Manila’s poor being forced to buy bottled water at exorbitant prices.

Touted as the biggest privatisation project of its kind in 1997, the example of Manila’s failing water services has become a symbol for the difficulties of utility liberalisation. It’s not just angry residents that are kicking up a fuss. Currency devaluations, poor returns and a hostile public are causing giant utility companies such as Suez, Veolia (formerly Vivendi), RWE Thames Water and Bechtel to think twice about involving themselves in long-term privatisation schemes.

A liquidity crisis?

First, the statistics. An estimated 1.1 million people lack access to safe water. Two million children die every year from diarrhoea1 diseases that are directly linked to the poor provision of safe drinking water. As part of the Millennium Development Goals, the United Nations set itself the target of halving these numbers by 2015. That works out at 175,000 people gaining access to clean water every day between now and then.

Research indicates the challenges are only set to become bigger in the future. Rising population figures and growing economic production are set to cause world demand for domestic water use to grow by 70% over the next two decades.

Water access is not just a humanitarian issue. Concerns whispered among strategy wonks about water-related conflicts are now being openly discussed by politicians. Only last month, the US Senate majority leader Bill Frist tabled a legislative proposal to demand the security-obsessed Bush administration to develop a national strategy for implementing aid to water-impoverished regions of the world. A second report, this time from the European Union, recently issued dire warnings about the impact of competition for scarce water resources on the region’s economic growth.

Private-sector promise?

Faced with cash-strapped and inefficient public utilities, policy gurus began eyeing up the private sector for solutions to the world’s water problems a decade and a half ago. In a wave of public utility reforms in the 1990s private companies snapped up water assets and concessions to deliver municipal services. Private sector operators, with their access to international credit, were not only expected to bring in a much needed injection of cash, but also show bloated, out-dated public utilities what modern water management was all about.

This ad hoc privatisation process took different forms, depending on the technical and financial requirements of the host countries. The “public-private partnershipâ€? menu offers everything from management assistance projects and leasing arrangements through to construction agreements to the outright sale of state assets. Not every contract necessarily implies a commitment to invest. Those that don’t, however, still hold out the promise to cash-strapped authorities of financial market access.

Read any of the publicity documents from these early days of public-private partnerships and you’ll see countless references to their “win-winâ€? potential. “Private sector partnership is a way to break the vicious circle of under-investment, low or no tariffs and poor service that characterises many urban areas in the developing world, while building in social protection for the poorest sections of society,â€? reads one contribution from the UK operator Thames Water, which is owned by the German utility RWE.

Private sector companies were promised rich pickings by governments in exchange for their technical skills and financial clout. Local authorities and state-run utilities, meanwhile, brought planning experience and local know-how to the table. The promised return was better services. Multi-sector partnerships were heralded as a match made in heaven.

Muddied waters

The honeymoon didn’t last long. Given water’s relationship to livelihoods, water access and costs will always be an emotive subject. Add to that the technical complexities of water management, plus the pressures of increased urban growth and environmental concerns, and it was always going to make for an explosive political mix. Civil protests, unforeseen risks and rescinded contracts bring the story up to date.

Private sector involvement in water management has faced heated opposition for many reasons. Top of the list is the general failure of the partnership process to deliver on its promises, particularly for low-income communities. “Case after case shows that the promises of greater efficiency are not being fulfilled. More and more people find themselves priced out of the water market; water delivery and water quality have hardly improved; and water sources are being rapidly depleted,â€? Friends of the Earth says it its report “Privatisation: Nature for Saleâ€?.

Critics blame increases in water tariffs and price rises on the requirement of private companies to recoup their investments (so-called “full cost recoveryâ€?). This pressure for financial returns, it is argued, means that profits are repatriated and the investment cost burden passed onto users. A second side-effect of the profit motive according to opponents is “cherry pickingâ€?.

This is the inevitable concentration of water services on better-off districts. The development community has coined the term “hydrological divideâ€? to describe the resulting imbalance in provision between the rich and poor.

Private water partnerships face opposition at the level of ideological principle to boot. “Multinationals are trying to take over people’s rights and livelihoods, and trying to make profit out of the commodification of nature,â€? says Uvi Farah Sofa, international corporate campaign coordinator for Friends of the Earth.

Many protest groups are adamant that water is a human right, not a human “needâ€? as the United Nations has historically defined it. The inclusion of the right to water access in the International Agreement of Economic, Social and Cultural Rights, which was ratified by 145 countries in November 2002, shows that rights-based concerns are gradually gaining a legal foothold.

Concrete proof of the ideological antipathy to profit-making from water is evident in Uruguay. In October last year, the country voted on an amended national constitution that would explicitly include water provision as a human right. The revision also includes a clause that requires water services to be supplied “exclusively and directly by state legal personsâ€? — i.e. not by private companies.

Response time

The private water industry puts out a different picture. Examples of well-constructed private partnerships delivering higher quality, cheaper, more efficient services abound on the websites of multinational utilities.

The UK provides a trump card for pro-privatisation supporters. Following the radical public sector reforms of the 1980s, the water industry in England and Wales is almost unique in being entirely owned and managed by private businesses. Yet figures from the industry body Water UK show companies’ operation costs remain the same as pre-privatisation levels despite increased costs of enhanced drinking water and environmental standards. Water quality standards, on the other hand, are now at their highest for a decade.

The picture is rosy — as long as the focus remains on the developed world. But as in Manila, the record of private partnership initiatives in the developing world is less conclusive. Through its Business Partnerships for Development (www.bpd-waterandsanitation.org) programme, the World Bank presents case studies of partnership initiatives from ten developing countries, including Colombia, Tanzania, Angola, Haiti and Senegal. All encountered problems. Common sticking points include gaining community buy-in, establishing clear roles and responsibilities and overcoming cultural differences between multi-sector groups.

The business community has responded in two ways to the botched report card of private partnerships in the developing world. The first has been to put out some facts of its own. Suez is one company that has gone in for its fair share of statistic slinging. The French multinational is the main private sector partner for the hugely controversial privatisation project for the highland city of El Alto in Bolivia. After weeks of civil unrest over price rises and low investment, the Bolivian government announced the termination of the contract in January 2005.

Data published by Suez, however, suggests that its $63 million investment in service infrastructure has resulted in 57,000 new water connections over the past seven years. Water rates, meanwhile, have remained at the dollar rate agreed in 1997. Contrary to popular opinion, the French multinational insists that 92% of its profits stayed in Bolivia, either through taxes, investments and rent to the state (65%), staff remuneration (20%), or direct payments to suppliers (7%). “Aguas del Illimani has acted above and beyond its contractual commitments in favour of the disadvantaged people in certain districts of El Alto outside its service perimeter,â€? Suez says.

Combative civic groups refuse to listen. They just want Suez out of Bolivia. The same happened five years ago to the US corporation Bechtel in the Bolivian city of Cochamamba, when violent street protests and the imposition of martial law forced the private engineering behemoth to leave. Both examples demonstrate the fragile, complex local environments in which water management partnerships are often carried out. Operational performance aside, it takes political and financial stability, social legitimacy and regulatory authority to make a successful partnership work. All are in short supply in Bolivia.

Disinvestment

Faced with similar conditions in the rest of developing world, the second response of the private sector has been to head for safer ground. Following its purchase by German mega-utility RWE, for example, Thames Water recently reported its intention to concentrate future investments in “key marketsâ€? such as the UK, North America and Germany.

Suez, meanwhile, which already derives 80% of its €1.8 billion annual profits from within Europe, has unveiled a similar strategy. The French multinational, which pulled out of large-scale water projects in Puerto Rico and Bogotá last year, posted a 7.3% reduction in its water and waste activities for 2004. The company assured investors that its strategy will “observe a high degree of selectivity in identifying opportunities and improving the profitability and financial stability of less well-performing assetsâ€?. The announcement seems to confirm rumours in campaign circles that the big transnationals are losing patience with water projects in the developing world.

International capital markets are also getting twitchy. The promise of rich pickings from public water reforms in developing countries, many of which don’t even have credit ratings, have been slow to materialise.

“As far as I’m aware there are no new projects in Africa for very poor people. It just doesn’t work. International financiers aren’t happy with the long-term payment rates of these regions,â€? says Emily Boyd-Carpenter of the international water charity WaterAid.

Necessary ingredients

Against this background, water specialists met in New York at the end of April to discuss how the Millennium Development Goals for water and sanitation could be met by 2015. While the rhetoric of privatisation may have cooled in recent years, the involvement of private operators cropped up in enough presentations to suggest that there’s life in the partnership model yet.

As we begin the UN’s “Water for Lifeâ€? decade, launched on “World Water Dayâ€?, 22 March, the question has to be: how do you get partnerships to work?

Top of the list must be financial sustainability. The options are two-fold: decrease costs or increase revenue, according to Meike Van Ginneken, a water and sanitation specialist with the World Bank. Policy makers continue to attach a considerable faith in the management expertise of private companies to rein in costs. As far as the income side goes, bill collection and customer service are basic elements that need to be tackled across the board.

At a political level, pressure is rising for donor countries to increase official development assistance for water projects. Addressing the debt burden of poor countries and bolstering revolving fund and micro-credit programmes also occupied delegates at the New York conference.

When it comes to water, however, the free hand of the market will slap the poor in the face every time. The message from the business community is clear: “Rain is free, but safe, clean tap water is not,â€? as one major water operator so eloquently put it. Extending access to water will require either the customer (through cross-subsidies) or the support of government institutions, either domestic or multilateral, to pay.

That’s not to say that private partners should not play an important role in water provision. “The business community should work creatively, in partnership with governments and civil society, to help achieve better provision of water services for the unserved,â€? a new briefing paper by the World Business for Sustainable Development (WBCSD) contends.

The business-led group proposes a pilot project in Manaus, Brazil, between privately owned Aguas do Amazonas and two non-profit partners as a prime case study. A discounted tariff structure provides the necessary financial conditions for the private sector operator to extend water services to low-income communities. Meanwhile, its community partners have encouraged local groups to pay for legal connections to the water supply through an integrated education campaign. The pilot is paying off, the partners claim. Water rates for Manaus’s poor now average $3.50 per month, down from $8.50 (about 11% of average household income).

The magic phrase “good governanceâ€? crops up time and again in discussions with water specialists. “What makes a good private utility also makes a good public utility,â€? Van Ginneken of the World Bank argues. Corruption, lack of transparency and an absence of accountability mechanisms bedevil too many large water supply projects.

Governance is not just an in-house priority, however. Public-private water partnerships also need sound external frameworks to operate properly. The World Bank likes to cite public reforms in Senegal as a best practice model. The establishment of a state-owned but autonomous asset-holding company, an open bidding process and a separate department for water policy are judged to have kept private interests and backhanders to a minimum.

A third component stressed by business representatives is contractual clarity. Many of the most contentious multi-sector partnerships have derived from misunderstandings over the respective roles and responsibilities of the various parties involved, it is often argued. “The Partnership Paperchaseâ€? report, funded by the World Bank last November, represents a first stab at providing a framework for future partnership arrangements in the water sector.

It’s quickly becoming key reading for corporate lawyers, many of whom have had to learn contract law the hard way through the courts. Vivendi, Saur, Suez and the Enron subsidiary Azurix are among the private water companies currently pursuing multi-million-dollar lawsuits for breach of contract.

“A contract that a local government might agree with a private company to deliver water services needs to be very clear that meeting the human rights of water provision is the responsibility of local government,â€? argues Andy Wales, group head of corporate responsibility at Severn Trent. “That way, a business has a clear framework outlining which services it is expected to provide to which customers and how those services will be funded.â€?

Alternatives

“The days of the image of the private sector riding in on a white horse are gone,â€? said Jeremy Pelczer, president of American Water, at the recent launch of “Running Dryâ€?, a film about the world’s impending water crisis.

Modifying expectations won’t silence private sector critics, however. Rather than ploughing more and more money and energy into making private partnerships work, civil society groups are calling on policy makers to take account of possible alternatives.

Of all the options, the most straightforward would be a return of water services to state management. A case in point is the French town of Grenoble, which reinstated government control over its municipal water services in 2000, 11 years after they were first privatised.

Private contractors are still employed, but all essential work is handled through public administration. This enables water services to be provided independently of market or private-profit considerations, Grenoble’s utility manager, Raymond Avrillier, argues in a new book, “Reclaiming Public Waterâ€?.

“Democraticâ€? reforms, meanwhile, have enabled the municipal utility to meet customer expectations and help finance more than two-thirds of recent infrastructure improvements through tariff revenue. Innovations at the Grenoble experiment include public accounting, transparent annual reporting on water quality, a user advisory committee and budget-setting by an elected council.

“Involving citizens in a variety of ways through democratic reforms ensures that the utility management is more responsive to the needs of the population, especially the poorest,â€? argues Olivier Hoedeman of the Brussels-based campaign group Corporate Europe Observatory. “Giving local users a direct say in making investment priorities is one of the ways you can overcome problems like local economic elites defending the status quo and blocking improvements.â€?

Water campaigners also point to the growth of public-orientated initiatives. Models being currently tested in regions as diverse as India, Ghana, Bolivia, Brazil and Malaysia include local co-operatives, “public-public partnershipsâ€? between governments and non-governmental organisations, and community-based schemes. All stress the importance of localisation, democratisation and decentralisation.

The stellar example from the water sector of so-called “participatory managementâ€? is provided by the Brazilian city of Porto Alegre. The city has had an autonomously administrated, municipally owned utility since the 1950s. Financially independent from the city hall, the utility boasts a “deliberative councilâ€? designed to ensure the transparency of administrative decision-making. Budgets, meanwhile, are discussed and voted on in public assemblies. The number of households with water connections has grown by almost a quarter despite an 8% rise in the city’s population.

“Public water delivery can be effective, but reform models need to be supported,â€? says Hoedeman of Corporate Europe Observatory. “If the same kind of energy and effort would go into supporting the public sector as private sector solutions then you could see many more models succeed and more successful utilities around the world.â€?

But re-nationalisation of water services would require a major about-face. If nothing else, the image of state utilities as lumbering monopolies still weighs heavy in the public consciousness. As for the other crop of other water service alternatives, the hurdles of financial sustainability and technical expertise make it difficult to see how they could ever be scaled up.

The same, only smaller

So, will vast portions of the world be facing another century of queuing at communal wells or making do with jerry cans of polluted river water? The question is ultimately one of political will rather than market capacity. The price tag for halving the proportion of people without sustainable access to water supplies and sanitation stands at $11.3 billion a year, according to the World Health Organisation.

The bill jumps to $136 billion if the topic turns to access for all to regulated in-house piped water supply and sewerage connection. As is argued above, private capital generally finds its way to where it can be put to best use. Regrettably, that’s not in rural Africa or the urban slums of Latin America and Asia.

So, should the private sector just get on with the business of providing an efficient, profitable service in countries where consumers can pay? Despite the podium rhetoric to the contrary, the trends suggest that’s precisely what the multinational utilities will do. Commercial logic (and the burnt fingers of investors) demands it.

Yet the investment potential, management skills and technical expertise that first inspired public utility reformers to look to the private sector are still there to be used in the developing world. Recent public-private partnership initiatives in countries such as Ethiopia, Ecuador and Columbia already show town water boards contracting local companies where possible. Local solutions guarantee lower salary costs, reduced exchange risks and, most importantly, the development of domestic economies.

Innovation will be essential to future water policy. This is where the radical alternatives really come into play. Principles of community involvement, democratisation and genuine public service will be fundamental to politically legitimate water management systems in the future.

“Water Sanitation for the Urban Poorâ€? (www.wsup.com), a consortium of private, public and civil sector organisations, proves the health of the partnership principle. Contractual arrangements will allow individual project partners that include RWE Thames Water, Unilever, WaterAid and WWF to make a margin of up to 10% on the resources they commit. Local management, strong community engagement and social mobilisation skills are all watchwords of the tri-sector partnership initiative.

If nothing else, the looming threat of a global water crisis is ending the ideological bickering that, more than anything, has held water services back in past decades. The water sector continues to have many different players, but most, if not all, are coming to realise that the efforts of each and everyone need to be utilised if water for all is ever to be a reality. That bodes well for the cause of partnership, in whatever guise it happens to take.

“Water is critical for sustainable development, including environmental integrity and the alleviation of poverty and hunger, and is indispensable for human health and well-beingâ€? - United Nations, World Water Day, 22 March 2005

“At Suez, we are convinced that partnerships between the public and private sectors offer the most modern and reliable means of responding to the needs of public operators and the expectations of citizensâ€? - Gérard Mestrallet, chief executive, Suez

“The need for companies to generate profits and transfer them to shareholders, coupled with other limitations inherent in the structure and operation of the water multinationals and the result is a consistent failure to meet basic water delivery requirementsâ€? - Dirty Aid, Dirty Water, World Development Movement

“Water and sanitation problems have reached boiling point: children are dying unnecessarily at the rate of 20 jumbo jets crashing every single dayâ€? - Ravi Narayanan, WaterAid

“The bottom line is that prices go up, efficiency is achieved by laying off staff and in the case of the developing world, new infrastructure takes place in the wealthy neighbourhoodsâ€? - Wenonah Hauter, Public Citizen

Water statistics

• 1.1 billion people do not have access to safe water. This is roughly one sixth of the world’s population

• 2.6 billion people do not have access to adequate sanitation. This is roughly two-fifths of the world’s population

• The number of people living in “water-stressedâ€? countries is projected to climb from 470 million to three billion by 2025

• 2.2 million people in developing countries, most of them children, die every year from diseases associated with lack of access to safe drinking water, inadequate sanitation and poor hygiene

• A child dies every 15 seconds from water-related diseases

• More than 80 countries with 40% of the world’s population are subject to water shortages

• Since 1950 the world population has doubled but water consumption has increased six-fold

• The average person in the developing world uses ten litres of water every day for their drinking, washing and cooking. This is the same amount used in the average flush of a UK toilet

• On current trends over the next 20 years humans will use 40% more water than they do now

• 40 billion working hours are spent carrying water each year in Africa

• It would cost an estimated extra $16 billion each year to reach the Millennium Development Goals of halving the proportion of people without access to safe water and sanitation. This is less than North Americans and Europeans spend on pet food in one year

Source: WaterAid

Recommendations for priority actions

• Public versus private delivery of services is not the issue. The provision of water and sanitation services is generally recognised as a public service, whether operated by the public or private sectors. Governments, donors and civil society should ensure that they support solutions that are both efficient and acceptable to the local community

• New management models based on clearly defined partnerships should be encouraged. These may include different combinations of local and international NGOs, businesses, public sector operators and local water sellers, and fountain or well operators

• Training on partnership working should be encouraged for all those engaged in partnerships: much of the success of a partnership lies in a common commitment to understanding the challenge, trust and solving problems together

WBCSD submission to the UN Sustainable Development Commission (April 2005)

Ethical Corporation, 4 May 2005 ...