The cautious expansion of water privatization in low and middle income countries

January 23rd, 2013

Gregory Pierce, University of California, Los Angeles

The demise of urban water privatization in low and middle income countries has been greatly exaggerated. Widespread protests to privatization gained legitimacy following the failures of privatization initiatives in the early 2000s. Since then, many scholars have noted the decreased enthusiasm which both local governments and private firms have exhibited for the strategy.1

Pessimism regarding privatization marked a decided turn from the embrace of the strategy in the 1990s, when austerity measures in low and middle income countries (LMICs) compelled national governments to sell off assets and the right to provide valuable services. In the water sector, austerity often meant that governments had to negotiate with multinational firms to provide water service in major metropolitan areas.2 Yet despite the rise and fall of the strategy in recent decades, we are now seeing a cautious expansion of the strategy, which can be considered the third wave of urban water privatization in several world regions. This expansion involves not only a new geography of privatization in LMICs, but also new governance forms and actors.

The case for water privatization

Throughout the three eras of privatization, proponents have based their arguments for the strategy on the dismal record of public utilities in providing basic services. The empirical literature clearly shows that public utilities are plagued by widespread bureaucratization and corruption.3 Most scholars also concede that public agencies perform less efficiently than private firms.4

Do privatized water utilities perform any better? On a case by case basis, early qualitative scholarship on privatization initiatives revealed serious errors in contract negotiation and design by cities, as well as poor accounting for political and fiscal risk by multinational firms. These errors were displayed most dramatically in Cochabamba,5 with similar shortcomings leading to sub-optimal outcomes in Buenos Aires,6 Dar Es Salaam7 and Manila.8

A subsequent quantitative literature featured two camps that use similar, econometric methodologies to arrive at opposing conclusions. One group of scholars maintained that privatized utilities do deliver water more efficiently than public agencies,9 while another group asserted that privatized cities do not tend to benefit from better water access.10

Drawing on these two literatures, it seems safe to say that privatization has experienced mixed success in LMICs. The strategy, however, remains attractive to cities, especially since the 2008 global recession, because there are some examples of improvement in revenue collection and network extensions through privatization.11

New geography

The first wave of growth and the second wave of retreat from privatization occurred largely in South America, Southeast Asia and Eastern Europe. In this new era, however, cities in China,12 India13 and the rich Gulf states14 have lead the strategy’s growth, with urban areas in distressed parts of the EU also reluctantly subscribing. We can attribute urban China’s embrace of the strategy, and to a lesser extent India’s, to the adoption of capitalist principles. Given their size and increasing wealth, the acceptance of contracting out basic service services in these countries is particularly promising for the private water industry as a whole.

New actors and arrangements

Aside from taking root in different countries than in previous eras, this third wave features new stakeholders and governance arrangements. First, the more limited French model, which cedes control of service delivery but not physical assets, has taken precedence over the British model. Thus the French multinational firms Suez and Veolia have also taken a greater role in the privatization market. A more nuanced scope for private involvement has also replaced a one-size fits all mentality.

Moreover, the decision-making power for privatization is shifting away from national governments to local and regional agencies, as decentralization across LMICs takes root. National austerity strategies certainly still play a role in some privatization initiatives, such as in Greece and Portugal.15 Yet, multilateral agencies and private firms have also begun negotiating directly with local governments.16 Finally, while domestic firms have always been involved in privatization as minority partners, they are now increasingly taking a lead role. In other words, low and middle-income countries are creating entirely domestic privatization platforms.

New outcome?

Urban water privatization policy has clearly evolved beyond the notion that it presents a panacea to struggling utilities, and has moved past denunciations that it is unalterably regressive and bad for cities. Will this third wave of privatization yield better welfare outcomes for urban households in LMICs? It is too soon to provide a definitive answer. Cities must have sufficient political will and firms must have some prospect of profit for privatization to have any chance of success. Yet promising recent developments suggest that if privatization strategy is undertaken thoughtfully by both cities and firms in suitable urban areas, it can indeed improve livelihoods.

References:

1. Araral, E. (2009), ‘The failure of water utilities privatization: Synthesis of evidence, analysis and implications’, Policy and Society, 27 (3), pp. 221-228; Bakker, K. (2009), Privatizing Water: Governance Failure and the World’s Urban Water Crisis, Cornell: University Press.

2. Institute for Agriculture and Trade Policy (November 14, 2002), ‘IMF and World Bank push water privatization and full cost recovery on poor countries,’ News and Notices for IMF and World Bank Watchers.

3. Bardhan, P. (2004), ‘Governance issues in delivery of public services’, Journal of African Economies 13, AERC Supplement 1, pp. i167- i182; Tøndel Seim, L. and T. Søreide (2009), ‘Bureaucratic complexity and impacts of corruption in utilities’, Utilities Policy, 17 (2), pp. 176-184.

4. Finger, M. and J. Allouche (2002), Water Privatization: Trans-National Corporations and the Re-Regulation of the Water Industry, New York: Spon Press; Little, R. (April 2010), ‘Beyond privatization: rethinking private sector involvement in the provision of civil infrastructure’, Working Paper Series, Social Science Research Network.

5. Olivera, O. and T. Lewis (2004), ¡Cochabamba! Water War in Bolivia, Cambridge: South End Press.

6. Delfino, J., Casarain, A. and M.E. Delfino (May 2007), ‘How Far Does It Go? The Buenos Aires Water Concession a Decade After the Reform’, United Nations Research Institute for Social Development, Social Policy and Development Programme, 32.

7. Kjellen, M. (2006), From Public Services to Private Hands: Water Access and Distribution in Dar Es Salaam, Tanzania, Stockholm University: Department of Human Geography

8. Botton S., Braïlowsky, S. and S. Matthieussent (May 2005), ‘The real obstacles to universal access to the water service in developing countries: thoughts stemming from the experience of access to drinking water of the poor neighbourhoods: populations living in Port-au-Prince (Haiti) and Buenos Aires (Argentina)’, Programme Solidarité Eau.

9. Gassner, K., Popov, A., and N. Pushak (2007), ‘An Empirical Assessment of Private Sector Participation in Electricity and Water Distribution in Developing and Transition Countries’, World Bank: Public-Private Infrastructure Advisory Facility; Wang, H., Wu, W. and S. Zheng (May 2011), ‘An econometric analysis of private sector participation in China’s urban water supply’, Utilities Policy, 19 (3), pp. 134-141.

10. Estache, A. and M. Rossi (2002), ‘How different is the performance of public and private water companies in Asia?’, The World Bank Economic Review, 16 (1), pp. 139-148; Bel, G., X. Fageda and M. Warner (2010), ‘Is private production of public services cheaper than public production? A meta-regression analysis of solid waste and water services’, Journal of Policy Analysis and Management, 29 (3), pp. 553-577.

11. Zaki, S. and A.T.M. Amin (2009), ‘Does basic services privatisation benefit the urban poor? Some evidence from water supply privatisation in Thailand’, Urban Studies, 46 (11), pp. 2301-2327; Pierce, G. (2012), ‘The political economy of water service privatization in Mexico City, 1994-2011,’ International Journal of Water Resources Development, forthcoming.

12. Perard, E. (March 2011), ’10 Years of water PPPs,’ Handshake: IFC’s Quarterly Journal on Public-Private Partnerships, World Bank: International Finance Corporation.

13. Water and Sanitation Program (September 2011), ‘Trends in Private Sector Participation in the Indian Water Sector: A Critical Review’, Washington DC: World Bank.

14. Global Water Intelligence (2012a), ‘Gulf Action’, 13 (6).

15. Reuters. (May 14, 2011), ‘EU, IMF pushing Greece to fully privatise utilities – reports’,http://www.reuters.com/article/2011/05/14/greece-economy-idUSLDE74D02920110514

16. Global Water Intelligence (2012b), ‘IFC diversifies its water lending strategy’, 13 (6).

Gregory Pierce is a doctoral student at the University of California, Los Angeles. His research interests include the political economy of urban water access in low and middle income countries (LMICs), emerging governance forms for basic service provision in LMICs, and the interaction of income and household travel choices, both in the U.S. and abroad. Mr. Pierce can be reached at gspierce@ucla.edu.

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.