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Transcript of PRIVATISATION AND WATER GOVERNANCE: What Went Wrong and Where to Next? Kate Bayliss Water for Africa...
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PRIVATISATION AND WATER GOVERNANCE: What Went Wrong and Where to Next?
Kate BaylissWater for Africa Project at SOAS
Jeff Tan Aga Khan University–Institute for the Study of Muslim Civilisations
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OUTLINE1.Reasons for privatisation2.Water privatisation outcomes: finance,
efficiency, case study (Sub-Saharan Africa)3.What went wrong? Case study (Malaysia)4.Where to next?
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1. REASONS FOR PRIVATISATIONDissatisfaction with public sector
Privatisation expected to bring: Improved EfficiencyPrivate sector finance
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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
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2. WATER PRIVATISATION OUTCOMESRegion Data Reference Results
Africa 21 African water utilities, including 3 private, 1995-97
Estache andKouassi (2002)
Private operators more cost efficient; corruption matters more than ownership
Africa 110 African water utilities, 1998-2001, 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, 1992-2001 (unbalanced panel)
Estache and Trujillo (2003)
Significant improvement resulting from 1990s reforms; one renationalised firm maintaining private gains
Brazil 20 state operators, 1996-2000
Tupper and Resende (2004)
Ranking of operators; case for yardstick competition
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Efficiency: Private better than public?Region Data Reference Results
Brazil Around 4000 municipalities,1996-2002
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 productivity
Peru 43 operators, 1996-98
Corton (2003) Location, dispersion, size in production and administrative responsibility (number of districts covered) account for 90% of differences in costs
Peru 45 operators, 1998-2000
Alva and Bonifaz (2001)
Returns to scale; important role for environmental variables
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Finance: Total private sector investment commitments in infrastructure 1990–2007
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Finance: Private sector water investment commitments by region, 1990–2007
US$m %East Asia and Pacific 27,225 48.21Latin America and the Caribbean 22,860 40.48Europe and Central Asia 4,782 8.47Middle East and North Africa 1,082 1.92Sub-Saharan Africa 266 0.47South Asia 255 0.45Total 56,470 100
Source: World Bank, PPI Project Database
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Case study: Sub-Saharan AfricaShare of population using improved water source
1990 2004SSA 48 55All developing countries 71 79OECD 97 99World 78 83
Source HDR 2007
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SSA: Private sector investment commitments in water (US$m)
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SSA: Little evidence of efficiency gainsNo 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
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SSA: OutcomesDisappointing results Focus on attracting investors has dominated
sector policy leading to fragmentation and emphasis on commercial priorities.
Modified approach and expectations
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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 regulationCompetition → unbundling → ‘cherry picking’ and
system fragmentation Regulation → institutional & information
constraints
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Cost covering tariffs and incentivesCost 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
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Case study: Malaysia, privatisationCherry 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 quality
Non-cost covering tariffs (sewerage): low cash flow → operational losses → missed investment targets → renationalisation
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Efficiency: Private vs public NRW, tariffs
2035
RM0.57
4060
200
RM1.03
RM2.00
RM0.22
RM0.42RM0.52
RM0.90
RM1.00m3
NRW: 19.8%NRW: 44.7%
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Malaysia: Tariff revisions, Selangor stateYear Agreed tariff increase (%)2009 372012 252015 202019 102021 52024 52027 52030 5
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Malaysia: Privatisation reformsHigh 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)
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Selangor: Private profits, public debt
Concessionaire Net debt (RM billion)
State government offer (RM billion)
Puncak Niaga 1.33.1
Syabas 2.9Splash 1.6 2.0Abbas 0.6 0.6Total 6.4 (US$1.7b) 5.7 (US$1.5b)
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4. WHERE TO NEXT – THEIR VIEWPrivatisation 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)
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WHERE TO NEXT – OUR VIEWPrivatisation and PSP incompatible with WSSPrivatisation does not raise finance or improve
efficiency Information 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 why