Presentation on theme: "Privatisation and Water Governance: What Went Wrong and Where to Next"— Presentation transcript:
1 Privatisation and Water Governance: What Went Wrong and Where to Next 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 Reasons for privatisation Water privatisation outcomes: finance, efficiency, case study (Sub-Saharan Africa)What went wrong? Case study (Malaysia)Where to next?
3 1. Reasons for privatisation Dissatisfaction with public sectorPrivatisation expected to bring:Improved EfficiencyPrivate sector finance
4 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
5 2. Water Privatisation outcomes RegionDataReferenceResultsAfrica21 African water utilities, including 3 private,Estache andKouassi (2002)Private operators more cost efficient; corruption matters more than ownership110 African water utilities, , including 14 privateKirkpatrick, Parker, and Zhang (2004)No significant cost difference once environmental factors accounted; regulation has no significant impactAsia50 firms in 19 countries, 1997Estache and Rossi (2002)No statistically significant differenceArgentina4 provinces, (unbalanced panel)Estache and Trujillo (2003)Significant improvement resulting from 1990s reforms; one renationalised firm maintaining private gainsBrazil20 state operators,Tupper and Resende (2004)Ranking of operators; case for yardstick competition
6 Efficiency: Private better than public? RegionDataReferenceResultsBrazilAround 4000 municipalities,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 productivityPeru43 operators,Corton (2003)Location, dispersion, size in production and administrative responsibility (number of districts covered) account for 90% of differences in costs45 operators,Alva and Bonifaz (2001)Returns to scale; important role for environmental variablesEstache, Perelman and Trujillo 2005
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 Pacific27,22548.21Latin America and the Caribbean22,86040.48Europe and Central Asia4,7828.47Middle East and North Africa1,0821.92Sub-Saharan Africa2660.47South Asia2550.45Total56,470100Source: World Bank, PPI Project Database
9 Case study: Sub-Saharan Africa Share of population using improved water source 19902004SSA4855All developing countries7179OECD9799World7883Source 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 PSP40% 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 costsEfficiency: depends on competition or regulationCompetition → unbundling → ‘cherry picking’ and system fragmentationRegulation → 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, withdrawalsNon-cost covering tariffs → subsidies or profit guarantees → reduced private incentives → efficiency depends on regulatory capacityNon-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 deficitsPoor efficiency: high NRW (37% in 2003 → 40%, 2008 vs 33% worldwide average); water pollution (65% untreated sewage → 70% rivers polluted); poor drinking water qualityNon-cost covering tariffs (sewerage): low cash flow → operational losses → missed investment targets → renationalisation
16 Efficiency: Private vs public NRW, tariffs m3RM1.00200RM2.00RM0.9060RM0.524035RM1.03RM0.4220NRW: 44.7%NRW: 19.8%RM0.57RM0.22
17 Malaysia: Tariff revisions, Selangor state YearAgreed tariff increase (%)20093720122520152020191020215202420272030
18 Malaysia: Privatisation reforms High capital costs: Federal government takeover of all assets and financing of capital investment through government guarantees, direct funding, bondsOperational losses: reduce CAPEX and convert infrastructure costs into affordable OPEXFocus 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 Niaga1.33.1Syabas2.9Splash1.62.0Abbas0.6Total6.4 (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 Presidentand CEO Lars H. Thunell(World Water Week, Stockholm 2008)The view expressed by the WB in their 2008 infrastructure plan is that the lesson of past twenty years is that neither the public nor the private alone can address the infrastructure challenges and that the public sector should be a facilitator / regulator of water services even though they recognise that this is challenging “the public sector needs strong capacities to understand the commitments entered in the partnerships with the private sector and to design and regulate these projects” p. 14 of SIAP.
21 WHERE TO NEXT – OUR VIEW Privatisation and PSP incompatible with WSS Privatisation does not raise finance or improve efficiencyInformation 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 whyWater different because – essential and so subject to political and social priorities. Cannot just base decisions on commercial concerns. And is hence subject to political and regulatory interference.Has not been popular with investors because of high up front investment costs and long pay back period coupled with social nature of investments putting downward pressure on prices. And in developing countries some citizens cannot afford to payPrivatisation fails to address the core challenges of efficiency and financeAnd it makes matters worse as it generates information asymmetries which in context of weak capacity leads to weak regulation.