Privatisation in times of economic crisis: Shalt thou covet thy people’s water?

February 4th, 2013

Aleksandra Peeroo, University of Paris 1 Panthéon-Sorbonne, France

In difficult times, the privatisation of utilities is not a new idea. Actually, such debates always gain momentum with macroeconomic crises.1 Privatisation refers to the transfer of not only the decision rights over the operation but also the property rights over state-owned assets. Proponents of privatisation measures in the water sector refer to other sectors like electricity and telecommunications where such reform has been implemented successfully. The current Euro-zone crisis illustrates again that the expected benefits of such measures lie, firstly, in the relaxation of desolate public budgets and, secondly, in an improved performance of flagging utilities by enhancing efficiency whilst securing the funding for much needed investments. In this context, the European Central Bank and the Commission currently invite countries like Greece, Portugal and Italy to sell their water utilities to private companies.

However, experience with privatisation and less extreme forms of private sector participation recommends caution. In many cases, the private sector did not deliver as expected. Typical problems relate to: tariff increases; the deterioration of the networks due to underinvestment; a reluctance of the operator to extend the network to less profitable regions in developing countries; and risks for the security of water supply due to a trade-off between quality and cost-cutting leading to accidents like sewage spills, with severe consequences for the environment and public health.2,3 The resulting public dissatisfaction leads to an increasing resistance to seeing water in private hands.4

In light of such experiences, New Institutional economists stress that reform dictated from above in a technocratic approach can in fact further decrease the chances of obtaining a satisfactory outcome. Buenos Aires, Cochabamba and Dar-es-Salaam provide recent examples. In order to understand the problems related to the privatisation approach defended by the European Union or the World Bank, the debate must be put in an institutional perspective.

Williamson, Nobel Laureate in economics in 2009, distinguishes four levels of institutions that vary with respect to their characteristics (see Figure 1). Changes at these levels pursue different objectives and take different amounts of time.5

The starting point for reformers is typically level four. They state that countries strain their budgets and waste their resources in providing water services publicly. However, this can be amended by reallocating funds and setting the right incentives. This in turn implies changes at level three, i.e. changes in the mode of organisation where decision and property rights must then be transferred from public to private entities. All these changes can be undertaken smoothly and quickly, usually within a couple of years. Yet, such policies typically neglect the first two levels of institutions.

Level two of institutional analysis pertains to the formal institutions, i.e. the rules of the game such as those set by a regulator.6 Several issues arise here. One often forgets that full privatisation at the national level calls for the creation of a regulatory agency. This implies direct costs, difficult to bear in times of financial crisis and raises the issue of human capacity. Indirect costs are incurred when the new regulator loses its credibility, as has been the case in England, where fines on the private operators have not been enforced.7 Further, since large-scale privatisation calls for some sort of centralisation and coordination, the question of how this can be done in decentralised or federal countries also arises.8

Despite this non-negligible dimension of formal institutions, the perhaps greatest challenges come from level one, i.e. the belief systems of societies. As Antoine de Saint-Exupéry put it after his desert plane crash where he nearly lost his life due to dehydration: water is “[n]ot necessary to life, but rather life itself”.9 Therefore, it is heavily loaded with feelings, and these feelings are identical as proves the fact that strong resistance to privatisation is met in all parts of the world. People are reluctant to see water in private hands. With growing problems of water scarcity, this attitude is likely to become even more widespread. Where users are asked in referenda to express themselves on privatisation, the outcome is regularly a very clear “no”, be it on the local level, as recent cases in Germany illustrate, or on the national level, as the Italian national referendum in 2011 shows. Users also organise themselves in order to successfully impede privatisation. The expression of the intrinsic value people attribute to water finds its epitome in the recognition of water as a human right in a binding UN resolution in September 2010.10

What appraisal can be made of privatisation plans in view of these issues? Firstly, policy makers need to take all the above factors at the four institutional levels into account when considering full privatisation. Otherwise, any reform is bound to fail and will result in possibly higher costs than those being incurred initially. Secondly, because of growing public resistance it is improbable that privatisations on a national scale like in England and Wales and Chile will be repeated. Thirdly, there are also some other interesting trends that question the multiplication of privatisations. Mega-concessions in the provision of drinking water are less and less usual.11 Instead, there is a growing trend towards re-municipalisation, even in big cities like Paris.12 To complete the analysis, it is significant to note that successful public management is possible without ruining public budgets, and this not only in rich countries like Germany but even in developing countries like Tunisia.13 Researchers need to direct their efforts towards the examination of conditions for successful public management of water utilities in order to be able to help political actors propose reforms that show consideration not merely for formal institutional settings, but also for those informal ones such as the feelings and values of the people.

References:

1. Shirley, M.M. and C. Ménard (2002), ‘Cities awash: A synthesis of the country cases’, in: M.M. Shirley (ed.), Thirsting for efficiency – The economics and politics of urban water system reform, World Bank: Amsterdam, pp. 1-41.

2. Hart, O., A. Shleifer, and R. Vishny (1997), ‘The proper scope of government: Theory and application to prisons’, Quaterly Journal of Economics, 112 (4), pp. 1127-1161.

3. Pigeon, M. (2012), ‘Who takes the risks? Water remunicipalisation in Hamilton, Canada’, in: Pigeon, M., D. A. McDonald, O. Hoedeman, and S. Kishimoto (eds.) (2012), Remunicipalisation: Putting water back into public hands, Transnational Institute: Amsterdam, pp. 74-89.

4. Bonnet, C., P. Dubois, D. Martimort and S. Straub (2006), ‘Empirical evidence on satisfaction with Privatization in Latin America: Welfare Effects and Beliefs’, IDEI, available online at:http://idei.fr/doc/by/martimort/empirical_evidence_180309.pdf.

5. Williamson, O. E. (2000), ‘The New Institutional Economics: Taking stock, looking ahead’, Journal of Economic Literature, 38(3), pp. 595-613.

6. North, D. C. (2003), ‘The role of institutions in economic development’, United Nations Economic Commission for Europe, available online at: http://www.unece.org/fileadmin/DAM/oes/disc_papers/ECE_DP_2003-2.pdf.

7. Ménard, C. and A. Peeroo (2011), ‘Liberalization in the water sector: three leading models’, in: Finger, M. and R. Künneke (eds.) (2011), International handbook of network industries – The liberalization of infrastructure, E. Elgar: Cheltenham, pp. 310-327.

8. Peeroo, A. (2012), ‘Decentralisation and the Water Sector: What are the Issues?’, unpublished working paper, 25 pp.

9. A. de Saint-Exupéry (1939), Wind, Sand, and Stars, Reynal & Hitchcock: New York.

10. UN General Assembly Document (2010), ‘Resolution A/HRC/15/L.14’, United Nations, available online at: http://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/15/L.14.

11. Saghir, J. (2006), ‘Public-Private Partnerships in water supply and sanitation – Recent trends and new opportunities’, presentation for the Global Forum on Sustainable Development, OECD, available online at:

http://www.oecd.org/environment/environmentinemergingandtransitioneconomies/37723389.pdf.

12. Pigeon, M., D. A. McDonald, O. Hoedeman, and S. Kishimoto (eds.) (2012), Remunicipalisation: Putting water back into public hands, Transnational Institute: Amsterdam.

13. Pérard, E. (2007), ‘Private Sector Participation and regulatory reform in water supply: The Southern Mediterranean experience’, OECD.

Aleksandra Peeroo is a Researcher at the University of Paris 1 Panthéon-Sorbonne. She is currently finalising her PhD entitled “Decentralisation and the water sector: essays”. Her research analyses the impact of the institutional framework on the regulation and organisation of the water sector and on corruption. She can be contacted at aleksandra.peeroo@gmail.com.

The views expressed in this article belong to the individual authors and do not represent the views of the Global Water Forum, the UNESCO Chair in Water Economics and Transboundary Water Governance, UNESCO, the Australian National University, or any of the institutions to which the authors are associated. Please see the Global Water Forum terms and conditions here.