Donors, development banks and private companies have strongly promoted privatising water provision in developing countries over the last 15 years. Increased private sector involvement has not, however, led to more people being connected to clean water supplies.

The Public Services International Research Unit (PSIRU) has researched levels of investment in water connections by the private sector. They found that the expectations that private companies invest in water and sanitation infrastructure in developing countries, and that competition brings improved service, have been proved wrong.

Private companies that have contracts to operate and manage water systems in developing countries often invest very little in the infrastructure required to increase access to clean water. This means that the Millennium Development Goal to halve the number of people without access to drinking water and basic sanitation by 2016 will not be met if the current reliance on private investment continues.

Three types of agreement exist with private companies: concessions, leases and management agreements. Of these, only concessions require the company to invest in water infrastructure expansion. There are very few concessions in the regions that most need new connections: sub-Saharan Africa, South Asia and East Asia. Even where concessions exist, many have failed and none have met the investment targets agreed.

PSIRU points out that, with the exception of shareholders’ finance (equity capital), private companies use the same sources of finance for investment as the public sector: money made from selling water, donor and development bank funds and aid and commercial loans. Their analysis of private sector involvement in water provision shows that:

• Private companies select countries and cities where they see potential for commercial gain. They therefore tend to ignore the poorest people and regions where new water connections are most needed.
• Agreements with the private sector are usually guaranteed by governments, which can reduce public funds available for investment in infrastructure.
• Because they assumed the private sector would invest more than it has, donors and development banks have reduced their funding for water services, so that overall investment has gone down significantly.
• Even in a well-regulated system, the UK, privatisation of water has resulted in under-investment in the system. This suggests private companies will always under-invest.

Most private water service contracts include no responsibility to invest in new connections, and those that do have not kept promises. Finance, loans and guarantees from governments, donors and development banks are still needed to increase the number of connections. Donors need to help the poorest countries get publicly run services back on track. They should:

• stop insisting on privatisation as a condition of aid, which is still the norm
• make up for under investment over the last 15 years by increasing funding for water and sanitation programmes
• encourage mechanisms for public financing like redistributive taxes and bonds for investment in water
• support countries to reform public utilities that are performing badly
• assist countries to share good practice and learn from each other’s positive examples of municipal and community water schemes.

Source(s):
‘Pipe Dreams. The failure of the private sector to invest in water services in developing countries.’ Public Services International Research Unit and World Development Movement: London, by David Hall and Emanuele Lobina, 2006 (PDF) Full document.

Funded by: European Union

id21 Research Highlight: 12 February 2007

Further Information:
David Hall
Public Services Intenational Research Unit
University of Greenwich
London SE10 9LS
UK

Tel: +44 (0)20 83319933
Fax: +44 (0)20 83318665
Contact the contributor: d.j.hall@gre.ac.uk

Public Services Intenational Research Unit, University of Greenwich, UK

Emanuele Lobina
Public Services Intenational Research Unit
University of Greenwich
London SE10 9LS
UK

Tel: +44 (0)20 83319933
Fax: +44 (0)20 83318665
Contact the contributor: e.lobina@gre.ac.uk

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'Reforming water services in India'

'Partnerships for water and sanitation management in urban Argentina'

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