D+C Development and Cooperation (No. 4, July/August 2002, p. 5-17)

Public or private? - In searching for a solution to the crisis in the water supply and sanitation sector of many developing countries, international development cooperation since the beginning of the 1990s has banked more on private sector participation (PSP). Despite limited successes, negative impacts and growing opposition by local population groups, trade unions and municipal utilities, the liberalisation of the water sector is being pushed ahead at the cost of alternative solutions.

The restructuring of the water sector in Ghana "will improve the efficiency and effectiveness of urban water services and provide safe and affordable water supply services to unserved, low-income urban areas", the World Bank promises. The Bank has held out the prospect of a low-interest IDA loan of US$ 100 million, on condition that the government in Accra privatises the present public water utility.

As now in Ghana, the World Bank and the International Monetary Fund (IMF) have for years been pushing structural adjustment in the water sector of developing countries. As leading creditors they are ideally placed to do that. Governments are called on to improve framework conditions for foreign investors, sell state and municipal water utilities, end subsidies and ensure full cost recovery by charging for consumption.

The two institutions claim that only participation of the private sector can improve the disastrous water supply situation. Some 1.2 billion people do not have an adequate supply of drinking water, and 2.4 billion have no or only insufficient sanitation facilities, because expansion and maintenance of the infrastructure have not kept pace with the rapid growth in demand. Forecasts say that especially in the cities, the number of people that must be supplied will increase drastically in the next few years.

Private companies are expected to raise the necessary billions of dollars for investments which neither the heavily indebted governments, cities and municipalities in developing countries nor international development agencies, whose budgets are stagnating or even being cut, can or will provide. In addition, commercialisation and private sector management is to boost efficiency and improve the sustainable use of the ever scarcer resource of water, which in many cases is polluted, wasted, and lost due to leaky pipelines.

The preconditions for that are on the one hand structural reforms to adjust national regulations on investments, capital transfer and property rights to the demands of foreign companies. To find investors for the frequently ailing, ponderously bureaucratic and poorly managed public supply utilities, international development cooperation also helps by "gilding the lily", as Klaus Gihr, of the German Development Bank (KfW), puts it. The utilities are transformed into autonomously operating businesses to reduce political influence in them, potentially profitable areas are hived off, costs cut by dismissing staff, and debts are rescheduled. In addition, the utilities’ attractiveness for take-over by a private operator is enhanced by offers of low-interest loans from the World Bank and regional development banks.

German development cooperation also discovered these ‘development partnerships’ some years ago by which, as Parliamentary State Secretary Uschi Eid of the Ministry for Economic Cooperation and Development (BMZ) says, "the German water supply industry - operators, suppliers and installation builders, consultants and financiers - can be used more for the benefit of our partners in developing countries". PPP projects with private water supply companies in Albania, Montenegro, Jordan and other countries are absorbing a growing share of the financial and personnel capacities of development agencies, especially those of the KfW:

• in Albania, Berlinwasser International is implementing rehabilitation projects in the water and waste water sector in several cities, supported by EUR 25 million in financial cooperation;
• in Montenegro, the KfW is financing 50 per cent of the costs of a drinking water supply and sewage treatment project which the ‘German Water Alliance’ AquaMundo is implementing;
• for improving water supply in Amman, Jordan, by the French water multinational Suez/Ondeo, the KfW is making EUR 33 million available;
• Ondeo has also taken over management of sewage disposal in El Alto, Bolivia, with a KfW subsidy of 12 million euros.

According to the KfW, public private partnerships are now deployed in every second new publicly funded project in urban water supply and sewage disposal. In September 2001, the Frankfurt-based development bank listed 25 planned or approved PPP projects with a total volume of EUR 400 million, of which about 120 million were earmarked for Jordan alone.

Partners

The main beneficiaries of the privatisation being driven by development cooperation are a handful of globally operating, market-dominant, multi-utility concerns. The market leaders in the water sector are the two French companies Ondeo (Suez) and Générale des Eaux (Vivendi). They are followed by Thames Water, since two years ago a subsidiary of the German-based energy conglomerate RWE, which is expanding aggressively on the world market. The three companies are involved in at least every second large-scale commercial project in the water sector of developing countries that arose in the 1990s.

Most of the BMZ’s ‘development partners’ in this sector are also wealthy companies with many years of experience on the world market. The ‘German Water Alliance’ AquaMundo is a joint venture of the construction company firm Bilfinger & Berger, the ABB engineering concern and the Mannheim-based supply company MVV Energie. Berlinwasser International is a subsidiary of the up-and-coming multi-utility giant RWE and French world market leader Vivendi.

Engagement in the water sector is attractive not only because of high profits offered by long-term anchoring in a monopolistic, vital supply area. It also gives the multi-utility concerns leverage for taking over other municipal services. State Secretary Eid justifies the mix of development cooperation and business promotion with the Federal government’s interest in the German water supply industry "playing a stronger role on the world market, which is becoming very important". In addition, she adds, German water companies would increase competition on the oligopolistic water market and thereby improve the negotiating position of "our partners in the South" in privatisation projects.

Practical test

Private sector participation covers a broad spectrum of types of participation, ranging from a simple management contract, such as for collecting water charges, to concessions - long-term, comprehensive operating contracts in which private companies assume both operations and investment in expansion. The more extensive the private participation the more complicated are the contractual arrangements in order to ensure a fair distribution of profit and risks and prevent abuse of the monopoly situation.

However, the negotiating position of governments, cities and municipalities in the developing countries is mostly weak. Their chances of laying down their social or ecological goals in agreements with the global multi-utility companies so that they are verifiable and actionable are correspondingly limited. Development organisations such as the World Bank press for rapid privatisation as the precondition for further loans, the number of bidders is limited and getting smaller due to the forming of consortia, and developing countries lack expertise and experience. Alternatives to privatisation such as reform and strengthening of public service utilities are mostly not even seriously examined.

Civil society organisations in Ghana complain that the World Bank tries to rush through privatisation without sufficient public participation. To make the ‘bride’, the Ghana Water Company, attractive to private companies, water charges have already been increased by 95 per cent.

In many cases, privatisation has led to drastic price hikes, such as in Cochabamba, the third-largest city in Bolivia, where the government tried without success to forcefully suppress resistance by the affected people. However, in other cases, privatisation may also bring price reductions, but less for business reasons than out of political considerations aimed at heading off threatening protests by consumers or trade unions. But usually, the price cuts are put down to ‘acquisition costs’, which are reeled back in again after a while by charge increases.

Due not least to pressure by the World Bank, most contracts now include an agreement on graduated charge systems, which by means of ‘cross-subsidising’ are supposed to reduce the financial burden on low-income consumer groups. But in order to achieve cost recovery, price increases are needed which, as seen recently in Manila, exclude poor families from supply.

Also on the basis of other parameters, privatisation comes off worse than its champions proclaim:

• in many cases, the core argument that the private sector brings substantial additional investment does not hold up. To reduce their own risk, the operators as in the case of Ghana use low-interest loans, meaning publicly subsidised World Bank or KfW credits, without which a market-rate profit allegedly would not be possible;
• there is no empirical evidence that private companies per se are more efficient than public enterprises, for instance in reducing water losses or more sustainable use of water resources;
• in building up supply infrastructure, companies often prefer expensive high-tech solutions which mean great opportunities of profit. ‘Transfer pricing’ between various subsidiaries enables costs manipulation that is impossible to check;
• in addition, many of the participating companies were involved in corruption cases, and the sector as a whole is extremely prone to bribery and cronyism;
• state regulation by autonomous authorities, which is necessary to reconcile the commercial drive for profit with developmental, social and ecological goals is in most cases non-existent or too weak to control the companies effectively.

Basically, privatisation in the water sector is only a partial solution. Usually, private companies get involved only in areas where a profit can be made. So they focus on the middle-classes, industry and drinking water supply. This is where they can certainly achieve improvements such as more efficient collection of charges, reduction of water losses, better water quality and expansion of supply infrastructure.

Sectors such as the sprawling squatter settlements on city margins, rural areas and cost-intensive sewage disposal, which are unprofitable and thus unattractive for investors, are hardly reached, although this is where there is the most pressing and greatest need. Most of the people in Eastern Europe, Africa and Asia will continue to depend on the public sector for their supply of drinking water and sanitation facilities. For instance, the World Wide Fund for Nature believes: "Private investment in infrastructure and management of services is no panacea as there are still worrying issues concerning the ability of consumers to pay, access of rural populations and sustainable resource management."

Alternatives

Alternative concepts are therefore essential for a comprehensive solution to the water crisis. That includes reform of public services and approaches oriented on the grass roots.

In many cases the public sector is better than its reputation, as is shown by the efficient utilities working along commercial lines in Indonesia, Malawi and Sao Paulo. But there is a need for reform here to correct the defects that are still affecting the work of many utilities and use the public sector’s potential for sustainable development in the water sector. The public side’s potential advantages compared to far-reaching privatisation include better overall management, such as in coordination with environmental or health authorities, less expensive infrastructure solutions, and control by the public and elected local councils. In addition, a strong public sector is a genuine rival to the foreign private companies and thus increases competition.

Second, grassroots-oriented, simple and appropriate solutions found by participation of the people and users such as women’s groups, city district representations and farmer’s organisations are necessary. Such solutions are as a rule less expensive and more sustainable than the concepts of private or public utilities.

Multilateral and bilateral development cooperation is also active in these sectors. Thus in Eastern Europe the KfW is supporting a number of municipal utilities in their reorganisation. The World Bank’s concept of ‘Pro-Poor Initiatives’, independent, purposeful programmes for marginal urban areas, also takes account of the social weak spots of privatisation.

With privatisation, however, development cooperation narrows the space for the necessary large-scale realisation of these alternative, developmentally more sensible and better-targeted approaches to solutions. While the difficult task of providing the poorer sections of the population and rural areas with water and sewage disposal remain largely a public sector responsibility, the possibilities of solving it will remain limited:

• first, the public suppliers lack the public money and loans which flow to promote and subsidise projects with private sector participation. Unlike the companies, they have only limited access to the capital market and therefore depend on public funds;
• second, because the profitable parts of the water sector are left to the private companies, the public sector lacks the revenue to finance by ‘cross-subsidising’ between well-off and poorer consumers, or between town and country, the remaining ‘subsidy’ areas. That means either higher prices for the poorer population groups or neglecting these areas even further.

Report on PPP projects
for spring 2003

In view of the many negative experiences with transnational companies in the water sector and obvious contradictions of the privatisation strategy, the International Conference on Freshwater in Bonn in December last year adopted among other things a call on donors and international finance institutions to give up making privatisation a precondition for fresh loans and thereby disadvantaging alternative approaches to solutions. There was also a proposal for an independent ‘Multi-stakeholder Review’, which both industry and the BMZ endorsed. The ministry will present a report on its PPP projects in the water sector by the Third World Water Forum (WWF) in Japan in the spring of 2003.

Meanwhile, however, privatisation goes on. Not only in Ghana, but also in such other countries as Colombia, Nigeria, Tanzania, Cambodia and Vietnam, development banks are promoting and financing structural reforms and the opening of the water sector to foreign investors.

In addition, these moves are being given fresh impetus by the World Trade Organisation’s negotiations on further liberalisation in the services sector (GATS). The EU, for instance, recently presented other WTO members with a long wish-list telling them in which areas they should dismantle obstacles to access for the European multi-utility companies. But it has long not been solely about water. The future of the entire public utilities sector is at risk.