PRIVATISATION AND WATER GOVERNANCE: What Went Wrong and Where to Next?

Kate BaylissWater for Africa Project at SOAS

Jeff Tan Aga Khan University–Institute for the Study of Muslim Civilisations

OUTLINE1.Reasons for privatisation2.Water privatisation outcomes: finance,

efficiency, case study (Sub-Saharan Africa)3.What went wrong? Case study (Malaysia)4.Where to next?

1. REASONS FOR PRIVATISATIONDissatisfaction with public sector

Privatisation expected to bring: Improved EfficiencyPrivate sector finance

Dissatisfaction with public sector“Over the period 1973 to 1998 the IDA invested US$152.4m to improve Ghana’s urban water supply infrastructure. The results over 25 years of public sector management have been disappointing and the urban water sector remains in a poor condition with the trend in service and sustainability currently worsening. Thus the continuing with a public sector only regime for a new project was not recommended by IDA nor was it chosen by the Government of Ghana” World Bank Project Appraisal Document 2004

2. WATER PRIVATISATION OUTCOMESRegion Data Reference Results

Africa 21 African water utilities, including 3 private, 1995-97

Estache andKouassi (2002)

Private operators more cost efficient; corruption matters more than ownership

Africa 110 African water utilities, 1998-2001, including 14 private

Kirkpatrick, Parker, and Zhang (2004)

No significant cost difference once environmental factors accounted; regulation has no significant impact

Asia 50 firms in 19 countries, 1997

Estache and Rossi (2002)

No statistically significant difference

Argentina 4 provinces, 1992-2001 (unbalanced panel)

Estache and Trujillo (2003)

Significant improvement resulting from 1990s reforms; one renationalised firm maintaining private gains

Brazil 20 state operators, 1996-2000

Tupper and Resende (2004)

Ranking of operators; case for yardstick competition

Efficiency: Private better than public?Region Data Reference Results

Brazil Around 4000 municipalities,1996-2002

Seroa da Motta and Moreira (2004)

Private operators stimulate catching up but no significant productivity difference; regional operators benefit fromscale economies but have lowest productivity; municipalities have highest productivity

Peru 43 operators, 1996-98

Corton (2003) Location, dispersion, size in production and administrative responsibility (number of districts covered) account for 90% of differences in costs

Peru 45 operators, 1998-2000

Alva and Bonifaz (2001)

Returns to scale; important role for environmental variables

Finance: Total private sector investment commitments in infrastructure 1990–2007

Finance: Private sector water investment commitments by region, 1990–2007

US$m %East Asia and Pacific 27,225 48.21Latin America and the Caribbean 22,860 40.48Europe and Central Asia 4,782 8.47Middle East and North Africa 1,082 1.92Sub-Saharan Africa 266 0.47South Asia 255 0.45Total 56,470 100

Source: World Bank, PPI Project Database

Case study: Sub-Saharan AfricaShare of population using improved water source

1990 2004SSA 48 55All developing countries 71 79OECD 97 99World 78 83

Source HDR 2007

SSA: Private sector investment commitments in water (US$m)

SSA: Little evidence of efficiency gainsNo utilities in SSA have been turned around

by PSP 40% of contracts in SSA water sector

cancelled before completion (Foster 2008)“Private ownership leads to higher efficiency

scores but also that many state owned water firms in Africa seem to perform relatively efficiently” (Kirkpatrick, Parker and Zhang 2004) based on study of 71 water utilities in Africa

SSA: OutcomesDisappointing results Focus on attracting investors has dominated

sector policy leading to fragmentation and emphasis on commercial priorities.

Modified approach and expectations

3. WHAT WENT WRONG?Privatisation benefits: premised on ownership

incentives → water is a natural monopoly (limited competition), merit good (public health), very high capital costs

Efficiency: depends on competition or regulationCompetition → unbundling → ‘cherry picking’ and

system fragmentation Regulation → institutional & information

constraints

Cost covering tariffs and incentivesCost covering tariffs → depend on ability to pay

→ ‘cherry picking’ (globally and within countries) → limited investments, withdrawals

Non-cost covering tariffs → subsidies or profit guarantees → reduced private incentives → efficiency depends on regulatory capacity

Non-cost covering tariffs + high capital costs → operational losses → insufficient cash flow to finance infrastructure

Case study: Malaysia, privatisationCherry picking: water treatment; richer states

→ low investment + overall deficitsPoor efficiency: high NRW (37% in 2003 → 40%,

2008 vs 33% worldwide average); water pollution (65% untreated sewage → 70% rivers polluted); poor drinking water quality

Non-cost covering tariffs (sewerage): low cash flow → operational losses → missed investment targets → renationalisation

Efficiency: Private vs public NRW, tariffs

2035

RM0.57

4060

200

RM1.03

RM2.00

RM0.22

RM0.42RM0.52

RM0.90

RM1.00m3

NRW: 19.8%NRW: 44.7%

Malaysia: Tariff revisions, Selangor stateYear Agreed tariff increase (%)2009 372012 252015 202019 102021 52024 52027 52030 5

Malaysia: Privatisation reformsHigh capital costs: Federal government takeover

of all assets and financing of capital investment through government guarantees, direct funding, bonds

Operational losses: reduce CAPEX and convert infrastructure costs into affordable OPEX

Focus on efficiency: asset light model → reduced entry barriers → ↑ competition → ↓ costs → low tariffs (i.e. competition will ↓ cost)

Selangor: Private profits, public debt

Concessionaire Net debt (RM billion)

State government offer (RM billion)

Puncak Niaga 1.33.1

Syabas 2.9Splash 1.6 2.0Abbas 0.6 0.6Total 6.4 (US$1.7b) 5.7 (US$1.5b)

4. WHERE TO NEXT – THEIR VIEWPrivatisation is still a core policy:

‘We believe that providing clean water and sanitation services is a real business opportunity’

IFC Executive Vice President and CEO Lars H. Thunell

(World Water Week, Stockholm 2008)

WHERE TO NEXT – OUR VIEWPrivatisation and PSP incompatible with WSSPrivatisation does not raise finance or improve

efficiency Information asymmetries in context of weak state

capacity → weak regulationPublic provision will continue to dominateInstitutional and financial constraints need to be

addressed through public sectorNeed to identify and understand what has been

successful and why