Supporters of private sector participation (PSP) in water supply have argued that it extends service levels, generates investment and relieves government budget deficits. Incentives to private operators and new regulatory frameworks will, they claim, safeguard the public interest while taking advantage of private sector efficiency. However, empirical evidence is in short supply

A paper from the University of Greenwich’s Public Services International Research Unit (PSIRU) questions whether PSP is the way forward to improve water supply and sanitation. The author argues that the Millennium Development Goal of halving the proportion of people without access to safe drinking water cannot be reached unless there is greater support for public sector operations.

PSP has failed to deliver promised benefits because international water companies are, above all, profit-seeking and risk averse. Ineffective competition, imperfect risk allocation and lax governance have allowed companies to renegotiate contracts and avoid obligations to extend coverage to poor customers.

Two corporations control 70 percent of international private water operations. They have created a network of joint subsidiaries in a number of towns and regions that restrict competition.

The author asserts that:

• The global water industry is resistant to new entrants: even powerful corporations have failed to break into the water market.
• Several major water concessions have been awarded through one-bidder tenders.
• International operators may be virtually freed from risk: contractual agreements are often renegotiated in case of failure to achieve originally set investment objectives or service targets.
• In several cases prices have been forced up within a year or two of a concession being started, as contract assumptions about expected demand turned out to be too high and the real level of demand was then used as a justification for price hikes.
• Private water companies have incentives to engage in corruption of public officials to bypass competition or secure favourable contract terms and/or regulatory laxness.
• Subsidiaries of water TNCs tend to purchase goods and services from other subsidiaries of their own group, often at a high cost, rather than locally.

The conflicts between private pursuit of profit and aspirations to universal access question whether the private sector can ever favour poor people. The World Bank has repeatedly emphasised the problems experienced with public sector operations and made funding conditional on developing countries agreeing to PSP schemes. Little effort has been made to examine successful public sector operations.

It is time for stakeholders in the international water community to:

• learn from those public utilities with efficient, transparent management systems that encourage public participation
• help build capacity of public operations: good established examples of public-public partnerships, especially in the Baltic region, can be used as a model
• switch from providing incentives and subsidies for multinational operators to identifying the financial needs of local public sector water providers
• explore new forms of municipal bonds and revolving funds for municipalities to draw on.

Political resistance to privatisation and the withdrawal of water companies from many developing countries have given World Bank policymakers pause for thought. New guidance to staff states that the Bank is prepared to work with well-performing publicly owned and operated utilities. It remains to be seen whether they will seize opportunities to do so.

Source(s):
‘Problems with private water concessions: a review of experiences and analysis of dynamics’ by Emanuele Lobina, Public Services International Research Unit (PSIRU), University of Greenwich, International Journal of Water Resources Development, volume 21, issue 1, pp55-87, March 2005

id21 Research Highlight: 24 June 2005

Further Information:
Emanuele Lobina
Public Services International Research Unit
Business School
University of Greenwich
Old Royal Naval College
30 Park Row
London SE10 9LS
UK

Tel: +44 (0)208 3319933
Fax: +44 (0)283318665
Contact the contributor: e.lobina@gre.ac.uk

Public services international research unit, University of Greenwich, UK

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