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 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 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
Region
Data
Reference
Results
Africa
21 African water utilities, including 3 private,
Estache and
Kouassi (2002)
Private operators more cost efficient; corruption matters more than ownership
110 African water utilities, , including 14 private
Kirkpatrick, Parker, and Zhang (2004)
No significant cost difference once environmental factors accounted; regulation has no significant impact
Asia
50 firms in 19 countries, 1997
Estache and Rossi (2002)
No statistically significant difference
Argentina
4 provinces, (unbalanced panel)
Estache and Trujillo (2003)
Significant improvement resulting from 1990s reforms; one renationalised firm maintaining private gains
Brazil
20 state operators,
Tupper and Resende (2004)
Ranking of operators; case for yardstick competition

6. Efficiency: Private better than public?
Region
Data
Reference
Results
Brazil
Around 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
Peru
43 operators,
Corton (2003)
Location, dispersion, size in production and administrative responsibility (number of districts covered) account for 90% of differences in costs
45 operators,
Alva and Bonifaz (2001)
Returns to scale; important role for environmental variables
Estache, 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 Pacific
27,225
48.21
Latin America and the Caribbean
22,860
40.48
Europe and Central Asia
4,782
8.47
Middle East and North Africa
1,082
1.92
Sub-Saharan Africa
266
0.47
South Asia
255
0.45
Total
56,470
100
Source: World Bank, PPI Project Database

9. Case study: Sub-Saharan Africa Share of population using improved water source
1990
2004
SSA 48 55
All developing countries 71 79
OECD 97 99
World 78 83
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 2003 → 40%, 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, tariffsm3
RM1.00
200
RM2.00
RM0.90 60
RM0.52 40 35
RM1.03
RM0.42 20
NRW: 44.7%
NRW: 19.8%
RM0.57
RM0.22

17. Malaysia: Tariff revisions, Selangor state
Year
Agreed tariff increase (%)
2009 37
2012 25
2015 20
2019 10
2021 5
2024
2027
2030

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
Concessionaire
Net debt
(RM billion)
State government offer (RM billion)
Puncak Niaga
1.3
3.1
Syabas
2.9
Splash
1.6
2.0
Abbas
0.6
Total
6.4 (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)
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 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
Water 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 pay
Privatisation fails to address the core challenges of efficiency and finance
And it makes matters worse as it generates information asymmetries which in context of weak capacity leads to weak regulation.