Private Sector Participation in Water Management

Outline:● Brief Introduction

● The Politics of Privatization

● Water Rights and Water Markets

● Economic Impacts of Privatization

● Social Impacts of Privatization

● Case Studies:

● England & Wales: A success story

● Jakarta: What can go wrong with water privatization

● Environmental Effects of Privatization

● Summary and Questions

Politics of Water PrivatizationJocelyn Lougheed

Dominant Schools of ThoughtProperty Rights Theory

Water = Economic Good

● Pro-Privatization of utilities● Promote efficiency and improve industry

performance● Price of water at cost recovery levels● Economic Welfare maximization

Commons View

Water = Common Good

● Public ownership of utilities● Users pay what they can/subsidized● Universal access● Protect public interest

Timeline of Late 20th Century Water Privatization

1980

’s

Decad

e of D

rinkin

g

Wate

r Sup

ply an

d

Sanita

tion

Early 1

990s

Large

Fiscal

Deficit

s for

Govern

ments

1992

Dublin

Prin

ciples

Wate

r as e

cono

mic

good

1990

s

Private

secto

r

partic

ipatio

n as s

olutio

n

to pu

blic d

eficie

ncies

1970

s

Rise of

Neo

libera

lism

Late 90

s/Earl

y 00s

Large

scale

failu

re of

priva

tizati

on in

Develo

ping c

ountr

ies

?Private ParticipationWhat does it look like?

Models of Privatization

Light Private Sector Participation Increased Private Responsibility and Risk

Requirements for Success

Strict Regulatory Framework

Stable Governance & Economy

Attentive to Local SpecificsThe Right Price for Water

Competitive Markets

Water Rights & Water MarketsNancy Liu

Property Rights of Water● Public domain

- exclusive economic zones in open ocean up to 200 miles offshore

● Open access

- groundwater

● Common pool rights

- Aboriginal water rights: constitutionally protected in 1982 (Canada)

● Private rights

Private Rights of WaterRiparian vs Prior appropriation

1. Riparian right: right to access

● Limits the use of water only to those whose property lies adjacent to the water body, such as a stream, lake, or pond

● Remains under an obligation to leave the flow “undiminished in quantity and undeteriorated in quality.”

● Example: water use legislation in Ontario and the Maritimes: non-transferable water rights & tied to property

Private Rights of Water2. Prior Appropriation: “first in time, first in right”

● Water rights unconnected to land ownership, and can be conveyed, sold or mortgaged

● The age of the water right determines who can use the available water first● Main elements of appropriation: beneficial use of water, period of diversion, point & type

of diversion ● First originated from western half of the United States, where climate is arid and

water is scarce● Dominant approach to water rights in BC, Alberta, Saskatchewan, and Manitoba

Creation of Water MarketsInformal vs. Formal

● Formal: governed by a set of state and/or federal laws● Informal: developed locally among neighboring farmers and operated based on

rules informally developed at the community level

Water MarketsPhysical & ‘virtual’ transfers of water

● Virtual water: water used in producing goods

Source: www.mtholyoke.edu

Virtual Water TradeAn alternative source of water and an instrument to achieve water security

- a country may choose to reduce the burden on its water resource by importing water

intensive products

- Reversibly, water-rich countries could profit from their abundance of water resources by

exporting water-intensive products

Virtual water trade balances 1995 - 1999

Source: Water Footprint Network

Benefits of Water Trading

● Can address growing water demand● Relocate water resources to those in need, encourage some

conservation & efficiency ● Help mitigate water shortages during periods of drought● Serves as an adaptive tool for climate change

Constraints

● High cost for infrastructure, conveyance of water is difficult and even impossible ● Environmental interests are not able to compete in the market● Water rights transfers can increase conflict by encouraging more intensive use of

existing water rights● Encourage hoarding and tying up of water rights in anticipation of future profit

Example: California Vs. Chile California Chile

● Strong legislative framework & well-regulated

● Prioritizes public interests and environmental protection

● Ensures water is used for beneficial purposes

● Extreme laissez-faire water laws & lack of governmental regulation

● Water as fully marketable commodity

● No provisions for environmental sustainability or river basin management

● Exploitation of less powerful water users: inequity

Economic Impact of private and public water management

Responsibilities of water managementCompanies have the responsibility to ensure a safe and reliable water plumbing system. A good design of water plumbing system can:

1. Conserve limited supply of safe drinking water

2. Manage the health and financial risk associated with plumbing, thus lowering those risk.

Why does government want to privatize water management?Countries cannot afford to manage their own system.Many countries sell their management rights in a rush with little to no guidelines or regulations.

Responsibilities of water management organizations?

- Make sure sure source of water is not contaminated.- Update aging pipes to avoid leakages and contamination.- Change rusty and corroded pipes- Protect clean water after treatment and during distribution.- Filtering of water from pathogens and microorganisms.- Periodic cleaning and inspection of water system by turning off the main.

Why is clean water so expensive?There are cost in the initial construction and maintenance of water facilities and it requires provisions for finance, operation and maintenance. A lot of criteria needs to be filled out in order to ensure water safety.

- Storage of water must be kept at a specific temperature to ensure safety of drinking water (in the UK, shower should be 41C, washbasin 41C, bath 44C).

- Pipes ages and corrosion of water to metal pipes is a big concern, water should be of 7 to 8.5 pH to minimize corrosion. Changing pipes is expensive.

- No cross connection between the drinking water supply and water removal system. (SARS in Hong Kong)

Different types of water management modelType of water

management model

PublicPrivate

Fully privatized model

Private public partnership Public utility model Community run

system

What are the Good and Bad of water privatization? Pro Con

Private companies will have the incentive to upgrade the system. They could build pipes and increase access to water in places where the government otherwise wouldn’t.

Assuming the company will upgrade the pipes is a purely neoliberalism view, an over idealized scenario. They will try to cut cost when they can. Why would they update a system and spend lots of money if they are not sure they could renew their contract in the future? Even if they update, it will not be possible in the near future.

What are the Good and Bad of water privatization? Pro Con

Private companies will have to keep bettering themselves because there is competition on the market, their contract might not get renewed.

In reality, there is always corruptions and it is a real problem in many countries, especially in developing where laws are not strictly enforced. Corruption will only get worse as access to clean water become scarce.

What are the Good and Bad of water privatization? Pro Con

Government does not have be kept accountable but private company does. Government entity can be bailed out with taxpayer money and never run out of business since they are a be a public run business.

Private companies can charge lot of money once monopolized if there is little regulations or they are not enforced. Private companies sometimes charge 50% more than public organization.

What are the Good and Bad of water privatization? Pro Con

Privatization create jobs and push the market, these multinational companies probably have lots of experiences

In the scenario where a developing country hired a multinational company to manage their water resources.

They would create jobs for the locals but they will mostly be low paying jobs, high paying technical jobs will go to foreign professionals.

Private Ownership = Efficient Water Supply?

NONot always at least

Why privatization does not always equates to more efficient service? Political and economical factors affects water efficient and accessibility.

- There are no effective competition to provide water in a given area, there is no market incentive to cut costs or be efficient .

- The intend and agenda of the government directly affect the extent of corruption which in turn drastically change the quality and efficiency of water.

How bad is corruption?

- In China, between 2001 and 2005, only half of the money embarked for environmental protection was spent on legitimate project. Only a quarter of factories in 509 cities treat sewage before disposing it (2005)

- In India, financial leakage account for 30-45% of approved amount, costs overestimated by at least 15-25%.

.

Sociall Impacts off

Waterr Privatizationl

Who is affected by water privatization? ● Rural and low income communities disproportionately impacted● Less developed countries affected, often due to organizations from more

developed countries pushing for privatization

Is water considered a human right?● United Nations General Assembly recognized the human right to water

and sanitation in 2010, asserting that water is essential to the realization of human rights.

Theoretical Framework

Pro Con

Free market control of water will increase efficiency

Privatization shifts decisions about water to commercial interests, focused on profit based motives.

Privatization does not necessarily deprive the state of control, it changes its role but can help develop state capacity.

Privatization poses threat to state’s ability to fulfill human rights of its citizens.

Access & Socioeconomic ImpactsPro Con

Private corporations have resources to finance infrastructure necessary to provide water access to communities.

Private corporations rarely fill this duty completely i.e. rural communities often experience unfulfilled promises of improved access.

Water access is improved in urban areas, albeit with a price increase.

Substantial price increase at the cost of lower income communities losing access due to inability to pay taxes.

Loss of government jobs as private companies take control of the water management system.

Social Unrest & Conflict

Pro Con

Better customer service due to competition and in response to complaints provided by private corporations

Strong public opposition demonstrated through polls or protests and resulting in termination of contracts

First global public outcry for water as a basic human right → UN Committee on Economic, Social and Cultural Rights (2002) likely formed due to rising number of social movements regarding water rights

This committee has not been successful in providing clean water to all

Health ImpactsBenefits Risks

Increased market competition leads to increased water quality and efficiency

Evidence:- In England and Wales, the almost full privatization of the water

supply system has led to increased water quality and environmental improvements

The underlying purpose of water privatization is to make money, not to provide equal access to all; there is a fundamental lack of social responsibility

Increased water quality in urban centres of wealthy nations for those who can afford to pay

Evidence:- In England and Wales, the increased water quality is only

available to those who can afford it

Citizens’ failure to pay can lead to decreased water quality

Evidence:- Health issues in Colombia from privatized water supply systems led the

government to return to the system

Notable cases:

● North Rhine-Westphalia (Germany) → high levels of arsenic● Flint, Michigan → deadly levels of lead● Walkerton, Ontario → deadly E. coli contamination

Overview: Framework comparisonAdvantages Disadvantages

Market

-Firm incentives for efficiency gains

-Risk transferred from gov’t to private

-Improved transparency

-Inability to provide universal access

-Profit maximization can be contrary to public interest

Government

-The root purpose is to provide social services to its citizens: accountability and responsibility of access and quality

-In neoliberalized world, governments often unable to provide/maintain infrastructure needed to support growing populations

Community

-Community ownership over local water supply (agency)

-Context-specific framework; flexible to change depending on varying needs/desires of community

-Context-specific framework can be unclear and hard to apply in spaces currently operating under market or government frameworks

Overview: Framework comparison, cont’dOrganization Government Private sector Community

Accountability and decision-making

-Hierarchy

-High accountability to citizens

-Susceptible to political motives

-Contract

-Low accountability to citizens, accountability to shareholders

-Top-down decision-making

-Community norms

-High accountability to community members

-Decisions made laterally, collectively

Pricing

-Subsidized pricing → water viewed as a basic human right

-Social equity → citizens should pay what they are able

-Market-dependent

-Price caps limits can regulate pricing

-Collectively-owned

Sanctions/Incentives -National accountability -Encourages efficiency due to profit incentives

-Local accountability

Customer Role -Citizens (medium agency) -Customers (low agency) -Community members (high agency)

Examples -Chile under Pinochet -England/Wales, Chile, Jakarta -Denmark (co-op)

England and Wales: Water Management Pre-Privatization

● Water Act 1973

● integrated management approach

● government’s tight fiscal controls resulted in insufficient

investment

England and Wales: Facilitating Privatization● Water Act 1989

● Changes in regulation facilitating the privatization transition

● New fiscal policies governing water corporations

England and Wales: Success of Privatization● Fiscal targets reached by the government

● Efficacy of private corporations in delivering quality water

● High satisfaction amongst consumers regarding price and water quality

● Enforcement on strict regulations facilitated a healthy transition

Jakarta: The 25 years of failure1. How it all started

2. Political Effects

3. Economic Effects

4. Social Effects

Background/History ● 1870s public supply systems built for affluent neighbourhoods● 1920s water supply into the kampongs (traditional villages of indigenous

peoples)

● 1993, The Suharto dictatorship split Jakarta into East and West● 1997 concession awarded to Suez and Thames Water, became effective in

1998● 25 year contract

Political Effects● Private sector participation (PSP) = increased foreign investment● No infrastructure finance● Weak governance of water supply

Low cost recovery Low revenue

Low InvestmentLow service levels

Economic Effects● Since the beginning of privatization, tariffs have increased 10X

● PAM Jaya pays gap between water charge and water tariff to private companies.

● Water charge > water tariff● More poor people connected = lower average tariff collected● PAM Jaya in debt

2014 $0.68/ cubic metre tariff$25/month poverty line

Social Effects

Access Quality

● From 1998- 2008 access to water increased from 46% to 64%

● In 2007, only 30% connected to network had continuous water supply

● Fragmented network coverage leave out low income areas

● Roughly 90% of groundwater is contaminated with e-coli

● Diarrhoea due to polluted water is major killer of young children

● Reliance on wells, water vendors, and bottled water

Privatization & The Environment

Ariane Oro

Outline:● History of commodification for environmental protection

● The arguments for better environmental management: private + public

● Discuss the larger themes that arise at the intersection between water management and the environment

○ The need for regulation and contextual knowledge of place regardless of management type

● Look our two case studies through an environmental lens

● The importance of understanding our ecological impact in the current climate context

1992 Dublin Principles“Past failure to recognize the economic value of water has led

to wasteful and environmentally damaging uses of the resource. Managing water as an economic good is an

important way of achieving efficient and equitable use, and of encouraging conservation and protection of water resources.”

- (Principle 4 of of the Dublin Statement)

Better Environmental Management: Public or Private?Private Management Public Management

Quality ● Corporate management / expertise will ensure better

infrastructure

● Profits will be re-investment in better technologies

● Government has a mandate to uphold fundamental human right

of access to clean water + sanitation to all

Conservation ● Corporate efficiency + technology will reduce waste

● Pricing will incentivize conservation when water is

scarce

● Encourages a collective ethos of sustainability + accountability

● Government is accountable to the wellbeing of their people and

their environment

* Impacts on Ecosystems have largely been left out of the discussion *

Does Privatization Even Matter?The privatization debate is fundamentally a debate about the roles of governments and markets in society

Environmental success is more dependent on how each system is managed than on the inherent characteristics of the system itself

Need for:● Environmental regulation + monitoring

● Local understanding - of political, cultural, and environmental systems

● Study of ecological effects of private + public

● Improvement in water quality of rivers, beaches etc after privatization

● Not necessarily an effect of privatization itself but of the increased regulation that came with this specific implementation

● Privatization -> re regulation -> can be beneficial to environment

● At the cost of what though…

Privatization + Regulation: England+Wales

The Need for Context: Jakarta● Just because a system works in

one place does not guarantee it will in another - existing infrastructure

● Environmental effects unequally distributed

● Urban poor rely more heavily on increasingly damaged ecosystem services

Climate Change and Future Considerations● Now a need more than ever for evidence based understanding of the

ecological impact of water management systems

● Increasing drought, changes in rain/snowfall, melting glaciers, increases in flooding, all coupled with socio, political, and economic pressures will change how we interact with the hydrological cycle

● We have agreed that there is a human right to water, but can and should we extend this? Is there an environmental right to water as well?

● Health of the environment is crucial for the health of our societies

Something to Think About“Human health and welfare, food security, industrial

development, and the ecosystems on which they depend, are all at risk, unless water and land resources are

managed more effectively in the present decade and beyond than they have been in the past.”

- Introduction to the Dublin Principles (1992)

Conclusions

SUMMARY SLIDE● There are many models of public and private partnerships, which differ

mainly in the assumption of responsibility and risk by each party

● Private water management does not necessarily promote efficiency and can come with corruption, lack of transparency, and lack of expertise

● There is disparity between developed and developing countries and urban and rural populations regarding who benefits from privatization. This is evidenced in case studies of Jakarta and England/Wales .

● Political, Economic, Social, and Environmental aspects of water management are all incredibly interrelated and affect each other considerably and must be considered as such

Questions For You:Do you think privatization can achieve its goals of increased efficiency and social development?

Do you think it is reasonable to believe water privatization can evolve to become more socially equitable?

Different models of privatization have failed, can we tailor the models to deliver improvements in efficiency?

In the case study of Jakarta, the reason for failure was low level of infrastructure and finance. How would you propose we resolve this?

Any For Us?

Thank You!