Privatizing Water Supply. Risks and Benefits


Term Paper, 2016

17 Pages, Grade: 2,7

Ayman A. (Author)


Excerpt


Table of Contents

List of Figures:

List of Abbreviations:

1. Introduction
1.1. Problem and Complications
1.2. Scope of Work

2. Privatisation and Water
2.1. The Advent of Privatisation
2.2. Trends in privatisation of water supply
2.3. Actors and International Policy framework

3. Risks and Benefits
3.1. Risks
3.1.1. Accountability for public and Human right to Water
3.1.2. Cherry-picking service areas
3.1.3. Operating Costs
3.1.4. Transfer of water by countries
3.2. Benefits

4. Recommendations
4.1. The role of the Public Sector
4.2 The role of the private sector

5. Outlook and Conclusion

Bibliography

Monographs

Internet

List of Figures:

Figure 1: United Nations Development Programme, Water Prices

List of Abbreviations:

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction:

1.1. Problem and Complications:

Humans mostly stay alive for weeks without food but they die in a few days if they don´t drink water. 768 Million People didn´t have access to clean drinking water in 2011 and 185 million of them fulfilled their needs by drinking the water collected on the ground which was full of Cholera.1 So should water be privatized? Multinational water corporations usually privatize public water systems in poor countries and sell it in the high- or middle-income countries where they can gain huge profits without taking into account the poor people. These corporations charge high costs and taxes which lead to unaffordable high prices. Although water is considered by most people as a natural resource, it has been lately argued that water should be treated as a good.2 Public Citizen’s Water for All Campaign has been devoting their power to conserve water as a natural resource with adequate access for all people over the world and stop privatizing water for commercial purposes.3 On the other hand, WTO and OECD are the largest trade organizations which support all types of water privatization. Most points of view see that water should not be privatized in the fact that it is a human right while others think it should be privatized for a purpose of profit.

1.2. Scope of Work.

This paper defines privatization of water supply along with its different Types as a negative impact on the public, especially the poor people. It shows the risks and benefits of water privatization and how the private sector aims to gain profit with less accountability for the public. At the end, it results that the privatization of water supply has failed, and recommends the governments and private sectors to play an effective roles for an improved access to water.

2. Privatisation and Water.

2.1. The Advent of Privatisation.

From the early 1980s until 2000, international financial institutions were pushing public sector all around the world for privatizing water, and now it is an international phenomenon in different types of governments and in the developing or developed countries. The UK privatization program in the early 1980s was the starting point which led to the spread of privatization all over the world to penetrate into different sectors such as industry, finance, agriculture, infrastructure, health, education and even social and administrative services.4 From 1990 until 1996 Public sectors in many developing countries transformed an estimated 156 billion dollars of their assets to the private sector.55 57 percent of privatization programs occurred in Latin America and Caribbean but 18,7 percent took place in Europe and Central Asia, while only few programs were implemented in sub-Saharan Africa, Middle East and North Africa.66

2.2. Trends in privatisation of water supply.

Private Sector Participation (PSP) in the water sector refers to the involvement of the private sector in the government projects regarding water supply. It is an effective trend, in case of government failures, to reform public sector and improve water services. PSP has been taking place in many development programs considering the form of the public sector, its role in delivering water services and acceptability from citizens since it often charges more cost and taxes. The attractive factors of demand for PSP are summarised as the following:7

- Societal: since the private companies can meet the increasing needs for water and create more satisfaction in the community.
- Commercial: as the Dublin Water Conference in 1992 stated, that water should be treated as a private good in face of many traditional approaches which argue that water should be in the public agencies´ hand.
- Financial: private utilities can manage the financing requirements more efficiently than the public-owned utilities and move easily in the capital markets.
- Ideological: This refers to the concept of “smaller government is better” and pushing towards privatization
- Pragmatic: Privatization is required when the government is unable to control the increasing required capital, operating and maintenance costs of water system.

PSP should be well managed to meet the increasing demand for services, to fill the gap between the public sector and citizens and to keep this resource from wasting.

Another important trend in Privatization is the Domestic Private Sector Participation which helps the people in rural areas, especially the poor ones, to have more access to water services with effective costs where the public sector is incapable of providing water to those areas. This local private sector is now adopted increasingly in many developing countries and plays a complementary role alongside the public sector to provide wider access to all areas. Water and Sanitation Program (WSP) supports DPS´s participants to improve water supply by:8

- Promoting access to finance among “unbanked” populations.
- Developing business models for the poor.
- Supporting public-private partnerships in rural, small towns and sanitation focused on the poor.”

2.3. Actors and International Policy framework:

The World Bank, regional development banks, bilateral donor agencies are the largest Actors in privatization water supply in developing countries. These international financial institutions are supported by OECD, World Trade Organization (WTO) and multinational corporations to put their goals and polices in practice. Since the World Bank is the largest source of financing water projects all around the world, it has invested a total of US$ 35 billion and launched the Water Global Practice program for financing 177 projects in total of US$ 24.5 billion with a lending portfolio of 11% of total World Bank lending.9 Since 1993, the World Bank has had doubts about the public sector performance in the water supply which has appeared clearly in their strategy papers demonstrating privatization as the solution despite acknowledging the difficulties. The water resources Management Policy paper of the World Bank (1993) says that water should be treated as an economic good so that will lead to financial discipline, more effective reforms, full-cost recovery and profits with a caution on cross-subsidies and budgetary transfers to subsidise connections.10

3 . Risks and Benefits.

3.1. Risks.

3.1.1. Accountability for public and Human right to Water.

Multinational water corporates don´t take any responsibility for the public when providing them with water services. On the other side, they are accountable to their stockholders in order to achieve their goals such as profitability but not accountable to their customers. Therefore, they focus on the high- or middle-income areas to gain the profits they seek since the capacity of low-income households to pay is too narrow which can create many problems regarding bills collection and less water used and that drives down profits.11 The United Nations Development Programme stated that poor people in poor countries even pay more than people in rich countries such as in Manila where people pay about 2 times more than people in New York and about 1 time more than people in London as shown in the following figure1:

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Source: United Nations Development Programme, Human development report, 2006. 12

Furthermore, the privatization of water was a controversy case due to its essential need for survival. In the International Conference on Water and the Environment, held in Dublin (1992), the water was recognized as an economic good which is completely in favor of water corporations.13 But on the other side, in 2002, the general Comment issued by the United Nations Committee on Economic, Cultural and Social Rights ensures that water is a human right and everyone should have adequate access to water: “The human right to water entitles everyone to sufficient, affordable, physically accessible, safe and acceptable water for personal and domestic uses.”14

3.1.2. Cherry-picking service areas.

Cherry-picking service areas refers to the selectively choosing of areas from which the companies have the ability to make as much profit as possible.15 These companies avoid moving to low-income areas where the population could not generate the required profit in order to finance the company´s operations sufficiently because the poor can´t afford to pay while the rich people do and the prices for them are acceptable.16 In this case, the Society will be divided into “haves “and “have nots “ or at least, there will be great disparity in the access or quality of water services between areas. Such common complications are existed clearly in informal peri-urban and urban slum settlements where the people face diversity of barriers represented in high connection fees and bills, and hidden costs such as road digging and materials, taking into account the time spent for transporting water manually or the cost of buying water from vendors.17

3.1.3. Operating Costs.

Privately-owned utilities have to cover their costs such as income, property and other taxes that the public-owned utilities don´t have to pay.18 Moreover, for sustainability, they aim to earn at least a rate of profit on investment of 10 percent. The profits, taxes and dividends for the corporate´s stockholders increase the operation and maintenance costs in a total of at least 20 percent, in some cases 30 percent.19 The capital cost of private corporate is higher than the public one due to Taxes on bonds which are 25 percent more expensive than municipal bonds, and overall, many government lending are only available for public utilities.20 Mainstream microeconomic theory posits that the ultimate goal of a business is to make money. Therefore, when water corporates invest more in a business, which means more costs, they expect more profit as a return on investment. A study of the construction of 35 wastewater treatment plants came to the conclusion that “choosing the privatization option is more costly than going with the traditional municipally owned and operated facility”.21

3.1.4. Transfer of water by countries:

Water corporates are not only selling water in the local market, but they are also targeting international markets in water-poor countries, as a form of trading water by very long pipelines, tankers or in a form of bottled water removing this natural resource from the country.22 that means high economic cost of transferring water and opposition from the community in the fact that the private corporates provide their water rights for other countries.

3.2. Benefits.

There are many factors that can create a motive for the private enterprises to be as much efficient as possible such as profit, large market share and competition pressure from other similar enterprises and avoid losses due to inefficiency as in the public enterprises.23 This efficiency will be in favour of all service users including the poor who can be connected as paying customer with cross-subsidies. Proponents of this view claim that the public sector in developing countries has failed to provide the required quality and coverage of water and sanitation.24 The bad management in public utilities lead to financial crises and this shows the increasing need for involving the private sector as a development assistance and finance resource needed to improve the water and sanitation provision as the former UK Minister for International Development clarified regarding the gab in finance in the public sector in the south.25 The private utilities usually seek to work under high performance regulations to achieve the quality standards such as service levels, safety, pressure, technologies, equipment, and procedures.26 The quality and strength of regulations can be a measure whether the privatization has failed or succeeded.

4 . Recommendations.

For an effective water supply, the public and private sector should play a positive role each:

4.1. The role of the Public Sector.

90 percent of water supply in the world is provided by the public sector. That means the efforts should be set towards improving this sector by reform, restructuring the system and involving other public sectors who have sufficient experience in this field and can provide with financing, staff training and experts as Public-Public Partnerships (PPPs) to reach the quality standards and provide adequate access to water, so that can help with more consideration for public interest and for water as a human right.27 Private sector participation (PSP) was a successful experience in the developed countries which is kind of reforming the public sector and should be implemented in developing countries to improve the water supply, as the World bank suggested.28 Although privatization is leading to an evident increase in the service cost (tariffs and connections) and prices, the government can mute these costs or prices by taking some steps forward such as regulations and subsidies, particularly for the poor who can´t afford to pay.29 In general, the United Nations has emphasized that the public sector should provide water services with availability, accessibility and affordability, especially for the poor.30

4.2. T h e role of the private sector

The small local private sector is a local operator in the most developing countries. This sector can provide a large number of populations of a city as a substitute for the multinational corporates.31 The private sector can also develop new technologies and innovations that lead to effective use and reduce wasting of water resources as possible.32 The private corporates can search for alternative resources for water. It´s important to involve the community in decision relating to their water in a way to assimilate the opposition to privatization.

[...]


1 Cf. WHO/UNICEF, Sanitation & Drinking water, 2013, p. 8.

2 Cf. Royeen C., Whiskey’s for drinking; water’s for fighting about, (2002), p. 22.

3 Cf. Public Citizen´s Water for all Campaign, 13.12.2016, 21:31.

4 Cf. Guislain P., The Privatisation challeng, (1997), p.287.

5 Cf. Bangura Y., The public Sector Recruiting, (2000), p.16.

6 Cf. Donaldson D. and Wagle D., Privatization: Principles and Practice, (1995), p. 9.

7 Cf. Pacific institute, The New Economy of Water, 2002, P. 11.

8 Cf. WSP: Jemima Sy, Warner R., Jamieson J., Tapping The Market, 16.12.2016, 22:16.

9 Cf. The World Bank, Projects & Programs, 17.12.2016, 11:50.

10 Cf. Rooyen C., Whiskey’s for drinking; water’s for fighting about, (2002), p.10.

11 Cf. Boland, John J, The Business Water, (2007), p.189-191.

12 Cf. United Nations Development Programme, Human development report, 2006,p. 53.

13 Cf. Savenije H. & van der Zaag P., Water as an Economic Good & Demand Management, (2002), p. 98.

14 United Nations, Economic and Social Council, (2002), draft, General Comment No 15.

15 Cf. Eberhard D. & Burden R., PPI in Infrastructure,(1999), p. 42.

16 Cf. Budds J. & McGranahan G., debates on water privatization,2003, p. 109.

17 Cf. Castro V. & Morel A., Improve Services to Informal Settlements, (2008), p. 291.

18 Cf. Environmental Financial Advisory Board, PPP, (2008), p. 11.

19 Cf. AMSA/AMWA, Evaluating Privatization II, (2002), p. 23.

20 Cf. Food & Water Watch, Money Down the Drain, 2009, p. 8.

21 Holcombe, Randall G., Public Budgeting & Finance, (1991), p. 38

22 Cf. Pacific institute, The New Economy of Water, 2002, P. 22.

23 Cf. Bakker K., A Political Ecology of Water Privatization',(2003), pp.42-43.

24 Cf. Clarissa B. & Barbara A. E., New designs for water & sanitation transactions, (2002), p.18.

25 Cf. IIED, Water and Sanitation, (2003), p. 98.

26 Cf. Kessides L., Reforming infrastructure,2004, p. 249.

27 Cf. Rooyen C., Whiskey’s for drinking; water’s for fighting about, (2002), p. 23.

28 Cf. World Bank (2004a), p. 166-7.

29 Cf. Kikeri and Nellis, An assessment of privatization,(2004), p. 100.

30 Cf. UNDP, Human Development Report,(2005), p. 7.

31 Cf. The Asian Development Bank, (2006), p. 44.

32 Cf. Foodandwaterwatch, Water Privatisation, 20.12.2016, 13:42.

Excerpt out of 17 pages

Details

Title
Privatizing Water Supply. Risks and Benefits
College
University of applied sciences, Düsseldorf
Grade
2,7
Author
Year
2016
Pages
17
Catalog Number
V514855
ISBN (eBook)
9783346102621
ISBN (Book)
9783346102638
Language
English
Notes
Keywords
Economics, Water, Privatising, Supply, Hausarbeit, Government, Private, Sector, Bank
Quote paper
Ayman A. (Author), 2016, Privatizing Water Supply. Risks and Benefits, Munich, GRIN Verlag, https://www.grin.com/document/514855

Comments

  • No comments yet.
Look inside the ebook
Title: Privatizing Water Supply. Risks and Benefits



Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free