Case Study: The Privatization of Water Essay

World leaders at the Evian Summit have resolved to decrease the number of people who are without access to safe drinking water by half by the year 2015. Critics fear that this may lead to privatization, arguing that private companies are not motivated to provide water to the poor. Those who favor privatization on the other hand argue that only the private sector can make the investment in place of the state, saying that because of the state’s failure, the poor are in fact already paying more. What then is the effective solution for solving this access to water problem? Should the private companies do it or should the responsibility remain with the state? What is the best way to do this? How can the water shortage problem be managed and what are the pros and cons to the issue of privatization? Privatization as an Effective Solution According to Michael Klein, Vice-President for Private Sector Development at the World Bank in Washington, the issue is not whether it is the private sector or the government that should serve as the entity to increase accessibility to water. The realization is that somebody has to pay for water and the real issue lies in who pays? Governments face the fiscal and political difficulty of raising consumer tariffs and providing subsidies. And if nobody pays at the end of the day, even the private sector will not want to invest. The solution then lies in solving the problem of user fees, on who bears the responsibility of paying for water, the government through subsidies or the consumers through service provided by the private companies. The challenges to this standpoint and the corresponding responses by Mr. Klein are the following: Are there any specific Third World countries that have benefited from privatization without corresponding large charges? Examples are Ivory Coast, Guinea, several cities in Colombia, Argentina, two cities in Bolivia and the Philippines (Manila). In the 90’s, the average increase was about 30% of the cost of water systems and in countries where the government provided subsidies like Manila and Buenos Aires, the price levels remained low. But whether public or private, the prices really rise over time. How can it be assured that the cost of water especially in Third World countries will be affordable? Focus should not on those who have access already but to providing access to those who do not have good modern water systems because they are the ones who pay more (by drilling wells, paying private water vendors, among others). Providing access to these people using better services will lower prices and make water more affordable to them. And both for those who have access already and those who really cannot afford to pay, focus should be given to the subsidies to be given by government. The issues here are how much subsidy is available and what kind of subsidy system should be used, and further assuring that these subsidies really go to the poor. How about cases like Tanzania where government has privatized water but entered it into an agreement with the World Bank? In most cases, privatizations are not full privatizations, it is still the state that bears the investment and the private sector just enters into a management contract with the state. It will only work if the private sector has the technical and management capability. Since experience shows the lack of interest of international private firms to invest in the least developed countries, should not the focus be on World Bank supporting public utilities to improve their services instead? That is why the real issue is not public versus private but who pays at the end of the day. In many concession agreements and privatization arrangements where subsidies are given and incentives given to private companies, services expanded. Examples are Bolivia (La Paz), Philippines (Manila), Buenos Aires. The involvement of domestic water companies may also help in expanding water access in remote areas. How can corruption in privatization be avoided? It is commonly known that there is corruption in the public sector that in private companies especially in equipment supply. Privatization does not mean corruption will disappear, it only means that there will be better services. The Case Against Privatization From the Anti-Privatization Forum in Johannesburg, Trevor Ngwane asserts that water is a basic need and as such it is the government that is mandated to ensure it provides all basic needs and services which is in the public interest. If it is the private sector that will do this, profit will become the objective. The clash is between need and profit and in the case of water, the priority is the need which every government should provide the means for. The challenges to this standpoint and the corresponding responses by Mr. Ngwane are the following: Are there any specific Third World countries that have benefited from privatization without corresponding large charges? As to the examples of success cases, they are not really successes and the example that can be given is Cochacamba in Bolivia where privatization caused the loss of access to water, which led to a civil war. In South Africa, even the moves to privatize already brings social conflict, dissatisfied trade unions, more people losing access to water, the outbreak of a waterborne disease cholera, which eventually meant loss of peoples’ lives. People need to realize that water cannot be provided for free. What then is the concrete plan to help government do this? Is the solution in the form of taxation, from payments of consumers, fro m subsidies from other consumers, etc.? In South Africa, the proposal is based on the premise that water is every citizen’s right. The recommendation is cross-subsidization, where high volume users like companies and industries subsidize low volume users like end users and the poor. The pricing system recommended is the block tariff system where the more water you use the higher charges you pay. This will prevent wastage of water. How can corruption in privatization be avoided? How long will the poor wait to have water? Corruption is brought more by privatization with businesses needing to bribe politicians, etc. Instead of expanding or rolling out to remote areas as they should, private companies choose the most profitable areas to operate and these are not the poor areas. Reference http://www.globalpolicy.org/socecon/bwi-wto/wbank/2004/01waterpriv.htm http://papers.ssrn.com/sol3/papers.cfm?abstract_id=317924 http://www.cnn.com/2003/WORLD/africa/11/01/water.shortage.reut/ http://eau.sagepub.com/cgi/content/abstract/12/2/63