G. S. Haripriya
Vinish Kathuria

AFTER the Dublin Conference in 1992 proclaimed that "water has an economic value in all its competing uses and should be recognised as an economic good," multilateral institutions, such as the World Bank, have tried to commodify water across the globe.

They argue that government intervention in the water sector interferes in its efficient management. The other argument against state intervention is that initial investment in water sector is colossal while the returns are realised over a long period. Even the return on investment is not guaranteed due to the poor revenue recovery resulting from inappropriate tariffs.

Thus, water services fall in a low-level equilibrium trap, where the utilities provide limited and low quality services due to insufficient resources. And inadequate service results in fewer resources being collected. As a consequence, the entire population cannot be adequately covered, and it is the poor who have to pay the price by incurring substantial costs to seek alternatives. Paradoxically, any textbook on public economics will tell us that these very arguments make government intervention imperative.

From the early 1990s there has been a splurge in privatisation-related projects/proposals in the water sector in both developed and developing countries (to a greater extent), often at the behest of the World Bank.

The proponents say that the low-level equilibrium in the water sector can be punctured only through private sector participation (PSP). Oddly enough, the World Bank has increasingly made its loans conditional on local governments privatising their waterworks.

The International Consortium of Investigative Journalists (ICIJ) studied 276 World Bank water supply loans from 1990 to 2002 and found that 30 per cent of the projects required privatisation as a precondition. The ICIJ investigation also revealed that the World Bank used its financial clout to make governments offer long-term concessions to some private companies in major water privatisations programmes in Buenos Aires, Manila and Jakarta. In another instance, the World Bank suspended debt relief and funds from Ghana until water services were privatised. In Ghana aid is, in fact, being used as a lever to open up the water sector by other multilateral organisations, such as the Department for International Development (DFID), too.

Privatisation — arguments?

The arguments put forward in favour of privatisation are only a myth. Experience across the world suggests that instead of being a competitive market, water markets are generally monopolistic. The high barriers to entry and the low market contestability have resulted in few firms competing globally.

In such a situation, the only option with the state is to regulate the firm. However, the effectiveness of such regulations is often questionable. There is evidence that the firms even refuse to adhere to the rules of the regulator.

Reports indicate that the private-owner of the Metro Manila Water project challenged the government to take back the franchise if the regulator did not concede to the company's demands for changing the terms of original agreement.

Since the sector has very few firms, terminating the concession is not a realistic option. Sometimes, the contracts may be difficult to alter or cancel once awarded even if circumstances change. This was the case in Tucuman (Argentina), Szeged (Hungary) and Cochabamba (Bolivia), where the MNCs pursued legal claims for compensation.

Even in developed countries, terminating water concessions can be very difficult. In Valencia (Spain), the local council tried to re-tender the water concession, which was expiring after 99 years with the same company (subsidiary of a French multinational — SAUR). The company threatened to sue for damages if any other firm was allowed to take over the system.

Profs Vining and Boardman in an article argue that while privatisation is likely to have a positive effect on efficiency of small firms in competitive and unregulated markets, this may not be true for large firms in monopolistic and regulated markets (like water).

Large firms, public or private, generally have principal-agent problems that cause inefficiencies. In addition, in the case of a regulated sector with information asymmetry (because all the information is not in the public domain), the private operators may be inefficient to even cover the cost prices as a fixed return is assured by the regulator.

The assertion that private sector participation is essential so as to finance large investments needed in water sector is also not entirely true. Contrary to the expectations, despite privatisation, financial support from host governments through subsidies or guarantees remains at significant levels.

According to a recent World Bank report, this support may include: "Cash contributions during the construction period; subsidies during the operating period, for example, in the form of non-refundable grants; and a favourable tax regime — including tax holidays, refunding of tax on construction and operating costs."

Such subsidies, especially "revenue guarantees", tend to artificially protect private sector participants from the market and defeat the very purpose of privatisation. Contrary to belief, there is also evidence that sometimes the MNCs do not bring the complete foreign investment and appropriate public financial investment.

Privatisation experiences across the world

A review of different privatisation experiences across the world shows that privatisation is concentrated in poorer countries and the private water industry is dominated by six MNCs — Vivendi, Suez-Lyonnaise and SAUR of France origin, as also Thames Water (now owned by the German conglomerate RWE), Anglian Water and International Water of British origin.

The ICIJ while tracking the operations of the six companies over a 12-year period found that by 2002, they ran drinking water distribution networks in at least 56 countries and two territories against about a dozen countries in 1990. The explosive growth of these companies in a short period raises concerns that a handful of private companies could soon control the world's most vital resource. The ICIJ investigation has also revealed that these companies often worked closely with the World Bank, lobbying governments and international trade and standards organisations for changes in legislation and trade agreements to force the privatisation of public waterworks.

The efficiency of private-owned utility is also shrouded in mystery. A recent review of 12 empirical studies by Anwandter and Ozuna in the journal Environment and Development Economics on the relative efficiency of public versus private utilities confirms that the effect of privatisation is ambiguous for the water sector.

Only four studies concluded that private ownership is more efficient than public. Numerous examples exist of poorly performing privatised utilities. Several countries in Latin America have in fact reverted to municipal management due to poor performance of the private operators.

Corruption is another accompanying feature of water privatisation. Recently, a French MNC was accused of corrupt practices to secure enormous profits. Moreover, any privatisation when it involves just one or very few participants will lack transparency.

In India, Bechtel, which was involved in the Dabhol power project with Enron, is now involved in water privatisation of Coimbatore/Tirupur as part of a consortium with Mahindra and Mahindra and United International North West Water. As with other water privatisation contracts, this one has not been made public.

For the consumers, the major concern is that they will face higher prices, as once privatised the firms try to charge a monopoly price.

In France, the private operators charged 13 per cent higher prices, while in Latin America privatisation led to a 10-fold price rise. The water charges in the UK are much higher than what the local governments in Sweden and Scotland charge.

Improving efficiency of water supply

There exists several other ways to improve the efficiency of water supply, such as public ownership of resources and operation by enterprise/department, public ownership with operations contracted out to private sector and community and user participation (as also advocated in Dublin Conference). However, a few questions come to the mind.

Why is only private ownership and operations (often accompanied by regulation) being actively pursued? Why not we first try the other ways and then resort to handing over the vital resources to the MNCs?

Private firms may be able to recover the tariffs better as they have no obligation to maintain supplies to non-payers or to keep prices artificially low. To achieve this, they may resort to practices such as supplying water only to enterprises where they can make huge profits.

For example, the 1995 water privatisation in Puerto Rico left the poor without water while the US military bases and tourist resorts got adequate supplies.

Indian law holds that the groundwater is not a common/community resource but belongs to the landowner. Any privatisation will result in unchecked and excessive sinking of borewells, which will: