A thirst for privatization

Elizabeth Brubaker
Financial Post
January 9, 2003

The World Bank, in 1998, called privatization “a defining feature of the last two decades.” Popular candidates for early privatizations included telecommunications and electric power utilities. Water and wastewater utilities soon followed, haltingly at first and then with greater momentum. If water was, as the Financial Times’s John Barham suggested in 1997, “the last frontier in privatization around the world,” it was a frontier that was being aggressively explored. That year, World Water and Environmental Engineering noted “a seemingly irreversible and rising tide of private sector involvement in the provision of water supply and sewage treatment services all around the globe.” By the end of 2000, at least 93 countries had partially privatized water or wastewater services or were in the process of doing so. Privatizers appeared in all regions of the world. They included local, provincial, or national governments in North America’s three countries, 23 countries in Latin America and the Caribbean, 20 in Europe, 30 in Africa and the Middle East, and 17 in Asia and the Far East. Private water companies now serve vast numbers of consumers. The two largest companies, Suez and Vivendi, each provide water and/or wastewater services to 110 million people.

Pragmatism, rather than ideology, drives most privatizations. Although impressed by the successes of Margaret Thatcher’s government in the United Kingdom, many subsequent privatizers do not share her conservative philosophy. Indeed, even staunchly communist governments are privatizing. Cuba has formed a joint venture with a Spanish water company to develop and operate drinking water systems for three cities over the next 25 years. China has signed contracts for the construction and operation of three water supply systems and has contracted out the operation of at least 20 other water and wastewater facilities. Vietnam has given two Malaysian-led consortia long-term contracts to build and operate a water pipeline and two treatment plants for Ho Chi Minh City.

First and foremost, developing countries are turning to the private sector out of sheer, desperate need. More than 1.1 billion people lack access to safe drinking water and almost 2.5 billion lack adequate sanitation. Although estimates of the costs of providing universal access to water and sanitation facilities vary widely, they inevitably exceed current or planned public expenditures. The World Water Council estimates that annual investment must increase to US$75-billion from US$30-billion. Governments that cannot on their own finance or build the necessary infrastructure are increasingly calling on the private sector for help.

Although governments in the developed world have greater resources and face far more manageable demands, many are nonetheless attracted to private capital. Private sector investment obviates governments’ needs to borrow or to raise taxes, reducing their financial and political liabilities. It frees up public capital for competing uses. It moves financial risks away from the public purse. It is also likely to be used more efficiently than public infrastructure spending, reducing overall capital costs.

Many governments privatize to increase the effectiveness of their water and wastewater systems. Whether they are struggling to provide rudimentary service, to stem water losses, or to comply with advanced health and environmental standards, they turn to firms whose many years of experience and large investments in research and development have enabled them to develop a degree of expertise rarely found in the public sector. Governments that privatize also want to improve the economic performance of their utilities. The pursuit of job creation or other social goals has left many public utilities over-staffed and inefficient. Free from public-sector practices that hinder productivity and innovation, and able to take advantage of expertise and economies of scale, the private sector enjoys greater latitude to pursue efficiencies. Disciplined by competition (increasingly, not only for the market but also in the market) and capital markets, it has powerful incentives to do so.

Privatization may correct other inefficiencies as well: those associated with the underpricing of water and wastewater services. Politicized decision making in the public sector distorts the relationship between prices and costs and encourages subsidies to various interest groups. Shifting responsibility to the private sector often allows governments to discontinue subsidies. In a fully competitive, or alternatively, a well-regulated system, competition or regulation set prices that better reflect costs. Governments have fewer reasons to oppose accurate pricing – the private providers take most of the heat for price increases – and, in any case, have little authority to interfere with the markets’ or regulators’ decisions.

Privatization also allows for the de-politicization of environmental and health regulation. Governments that own, operate, and finance water and wastewater utilities cannot properly regulate them. All too often, conflicts of interest prevent them from enforcing compliance with laws and regulations. Privatization reduces those conflicts, freeing regulators to regulate and increasing the accountability of all parties. Enforceable contracts further increase accountability. Contracts with specific performance criteria provide governments with powerful tools to compel compliance. Contracts can guarantee water quality, maintenance levels, and capital expenditures. They can require financial assurance. And they can include financial penalties for non-compliance.

For the above reasons, governments in the developing and developed worlds alike have come to accept that their core function is to “steer rather than row.” Rather than owning, operating, and financing water and sewage works, they are setting policy. Rather than providing services, they are regulating them. The results of this shift have often – but not always – been impressive.

The owners, operators, funders, and regulators of Canada’s water and wastewater systems have much to learn from other jurisdictions’ experiments with privatization. And they have no shortage of reasons to conduct experiments of their own. Across the country, thousands of facilities fail to comply with laws and standards. Many are inefficiently run: Some are grossly overstaffed; others are staffed by insufficiently trained operators. Many are in need of costly upgrades. Water charges are insufficient to cover these costs. Clearly, many systems would benefit from the capital investment, expertise, efficiency, and accountability that privatization can bring.

This article is excerpted from Liquid Assets: Privatizing and Regulating Canada’s Water Utilities, published by the University of Toronto’s Centre for Public Management.

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