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Privatisation and Water Governance: What Went Wrong and Where to Next? Kate Bayliss Water for Africa Project at SOAS Jeff Tan Aga Khan University–Institute for the Study of Muslim Civilisations. OUTLINE. Reasons for privatisation

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OUTLINE

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  1. Privatisation and Water Governance:What Went Wrong and Where to Next? Kate BaylissWater for Africa Project at SOASJeff Tan Aga Khan University–Institute for the Study of Muslim Civilisations

  2. OUTLINE • Reasons for privatisation • Water privatisation outcomes: finance, efficiency, case study (Sub-Saharan Africa) • What went wrong? Case study (Malaysia) • Where to next?

  3. 1. Reasons for privatisation • Dissatisfaction with public sector • Privatisation expected to bring: • Improved Efficiency • Private sector finance

  4. 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

  5. 2. Water Privatisation outcomes

  6. Efficiency: Private better than public?

  7. Finance: Total private sector investment commitments in infrastructure 1990–2007

  8. Finance: Private sector water investment commitments by region, 1990–2007 Source: World Bank, PPI Project Database

  9. Case study: Sub-Saharan AfricaShare of population using improved water source Source HDR 2007

  10. SSA: Private sector investment commitments in water (US$m)

  11. SSA: Little evidence of efficiency gains • No 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

  12. SSA: Outcomes • Disappointing results • Focus on attracting investors has dominated sector policy leading to fragmentation and emphasis on commercial priorities. • Modified approach and expectations

  13. 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 regulation • Competition → unbundling → ‘cherry picking’ and system fragmentation • Regulation → institutional & information constraints

  14. Cost covering tariffs and incentives • Cost 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

  15. Case study: Malaysia, privatisation • Cherry picking: water treatment; richer states → low investment + overall deficits • Poor 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

  16. Efficiency: Private vs public NRW, tariffs m3 RM1.00 200 RM2.00 RM0.90 60 RM0.52 40 35 RM0.42 RM1.03 20 NRW: 44.7% NRW: 19.8% RM0.57 RM0.22

  17. Malaysia: Tariff revisions, Selangor state

  18. Malaysia: Privatisation reforms • High 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)

  19. Selangor: Private profits, public debt

  20. 4. WHERE TO NEXT – THEIR VIEW • Privatisation 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)

  21. WHERE TO NEXT – OUR VIEWPrivatisation and PSP incompatible with WSS • Privatisation does not raisefinance or improve efficiency • Information asymmetries in context of weak state capacity → weak regulation • Public provision will continue to dominate • Institutional and financial constraints need to be addressed through public sector • Need to identify and understand what has been successful and why

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