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PRIVATISATION AND WATER GOVERNANCE: What Went Wrong and Where to Next? Kate Bayliss Water for Africa Project at SOAS Jeff Tan Aga Khan University–Institute.

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Presentation on theme: "PRIVATISATION AND WATER GOVERNANCE: What Went Wrong and Where to Next? Kate Bayliss Water for Africa Project at SOAS Jeff Tan Aga Khan University–Institute."— Presentation transcript:

1 PRIVATISATION AND WATER GOVERNANCE: What Went Wrong and Where to Next? Kate Bayliss Water for Africa Project at SOAS Jeff Tan Aga Khan University–Institute for the Study of Muslim Civilisations

2 OUTLINE 1. Reasons for privatisation 2. Water privatisation outcomes: finance, efficiency, case study (Sub-Saharan Africa) 3. What went wrong? Case study (Malaysia) 4. Where to next?

3 1. REASONS FOR PRIVATISATION Dissatisfaction with public sector Privatisation expected to bring: Improved Efficiency Private sector finance

4 Dissatisfaction with public sector Over the period 1973 to 1998 the IDA invested US$152.4m to improve Ghanas 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

5 2. WATER PRIVATISATION OUTCOMES RegionDataReferenceResults Africa21 African water utilities, including 3 private, Estache and Kouassi (2002) Private operators more cost efficient; corruption matters more than ownership Africa110 African water utilities, , including 14 private Kirkpatrick, Parker, and Zhang (2004) No significant cost difference once environmental factors accounted; regulation has no significant impact Asia50 firms in 19 countries, 1997 Estache and Rossi (2002) No statistically significant difference Argentina4 provinces, (unbalanced panel) Estache and Trujillo (2003) Significant improvement resulting from 1990s reforms; one renationalised firm maintaining private gains Brazil20 state operators, Tupper and Resende (2004) Ranking of operators; case for yardstick competition

6 Efficiency: Private better than public? RegionDataReferenceResults BrazilAround 4000 municipalities, Seroa da Motta and Moreira (2004) Private operators stimulate catching up but no significant productivity difference; regional operators benefit from scale economies but have lowest productivity; municipalities have highest productivity Peru43 operators, Corton (2003)Location, dispersion, size in production and administrative responsibility (number of districts covered) account for 90% of differences in costs Peru45 operators, Alva and Bonifaz (2001) Returns to scale; important role for environmental variables

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

8 Finance: Private sector water investment commitments by region, 1990–2007 US$m% East Asia and Pacific27, Latin America and the Caribbean22, Europe and Central Asia4, Middle East and North Africa1, Sub-Saharan Africa South Asia Total56, Source: World Bank, PPI Project Database

9 Case study: Sub-Saharan Africa Share of population using improved water source SSA4855 All developing countries7179 OECD9799 World7883 Source HDR 2007

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

11 SSA: Little evidence of efficiency gains No 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

12 SSA: Outcomes Disappointing results Focus on attracting investors has dominated sector policy leading to fragmentation and emphasis on commercial priorities. Modified approach and expectations

13 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 regulation Competition unbundling cherry picking and system fragmentation Regulation institutional & information constraints

14 Cost covering tariffs and incentives Cost 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

15 Case study: Malaysia, privatisation Cherry picking: water treatment; richer states low investment + overall deficits Poor efficiency: high NRW (37% in %, 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

16 Efficiency: Private vs public NRW, tariffs RM RM1.03 RM2.00 RM0.22 RM0.42 RM0.52 RM0.90 RM1.00 m3m3 NRW: 19.8%NRW: 44.7%

17 Malaysia: Tariff revisions, Selangor state YearAgreed tariff increase (%)

18 Malaysia: Privatisation reforms High 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)

19 Selangor: Private profits, public debt ConcessionaireNet debt (RM billion) State government offer (RM billion) Puncak Niaga Syabas2.9 Splash Abbas0.6 Total6.4 (US$1.7b)5.7 (US$1.5b)

20 4. WHERE TO NEXT – THEIR VIEW Privatisation 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)

21 WHERE TO NEXT – OUR VIEW Privatisation and PSP incompatible with WSS Privatisation does not raise finance or improve efficiency Information asymmetries in context of weak state capacity weak regulation Public provision will continue to dominate Institutional and financial constraints need to be addressed through public sector Need to identify and understand what has been successful and why

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