Water: the privatization debate

As cola companies are once again in the eye of a storm surrounding their exploitation of ground water resources, the many aspects and angles related to privatization of water in India are being increasingly talked about, as they must be. At a three-day seminar held in Hyderabad in early July, organized jointly by the Forum of Environmental Journalists of India, Water Supply and Sanitation Collaborative Council, Geneva, the Industrial Finance Development Corporation (IDFC) and the International Crops Research Institute for the Semi Arid Tropics (ICRISAT), one of the most discussed and keenly debated topics was the subject of privatization of water. Presented here are two points of view, largely divergent, raising questions that deserve to be heard and understood. Most, if not all, answers are available - and not a little shocking.

The outlook of the World Bank’s Water and Sanitation Programme, South Asia, in the words of Country Team Leader (India) Vivek Srivastava, was hinged on macro-level policy issues and broad overviews of a complex and changing ground reality. Srivastava opined that Water and Sanitation Services were typically in the public sector. They were justified on the grounds that the sector veered towards a natural monopoly and had some characteristics of public goods.

The existing urban models of delivery were (a) State government owned water boards delivering to cities (e.g. Hyderabad, Delhi), (b) State government owned water boards providing capital works, to be managed and operated by cities (e.g. Karnataka, Kerala) and (c) City water departments responsible for the delivery of W&S Services (Mumbai, Kolkata). Srivastava noted that accountability in these operations is upwards and ‘fuzzy’. It hinged on a long route to accountability via the government, as opposed to a short, compact contract between the client and the provider.

The problem with this situation, feels the World Bank, is that the water service delivery is typically supply-driven. The public agency delivering the service is far removed from the users and does not have the mandate or incentive to be responsive to their needs. Commercial viability is not a concern and expenditure is biased towards new capital works rather than Operations and Maintenance. This results in a lack of accountability, poor quality of service, poor returns on public expenditure and investment. It leads to the conclusion that this delivery model is not sustainable and poorer urban residents are the biggest sufferers. “So, what does the public sector do for poor people?”asks Mr.Srivastava, “Are the poor connected (not adequately)? Is there quality in service (no)? And who gets the subsidies (not the poor)?”

To this difficult scenario, the World Bank’s Water and Sanitation Programme recommends the following ‘reforms’ : the institutional reforms would have to focus on getting downward accountability and levels and structures of tariffs would also have to be ‘reformed’. WSP envisages efficient and professional services through governance and regulation. “The judge, the jury and the executioner cannot be one!” urges Mr.Srivastava, pointing to the multiple roles of policy-maker, regulator and distributor played by the public sector.

Assuming that the debate was centred around privatization in managing the distribution of water, the World Bank representative pointed to the presence of the private sector “already in the business” of providing water. He named as examples traditional systems in the private sector, e.g., the Bangladesh rural water network, the existence of small scale providers and water vendors, bottled water companies, sanitation initiatives and in the supply of inputs (like pumps and tankers).

Why the private sector? To this question, the Water and Sanitation Programme believes the answer lies in “stemming the downward spiral of poor service, worsening service standards and poor collection to bring in efficiency, investment and transparency.” The World Bank agrees that the benefits to the poor are not automatic. Says Mr.Srivastava, “Reforms will benefit the poor only if they are specifically designed to do so, and they are based on a good understanding of the Water Supply and Sanitation market among poor communities. For effectiveness, efficiency gains have to be combined with specific conditions, that is, coverage targets, tariff designs and regulation, in order to benefit the poor.”

Understanding that the market involves acknowledging that poor utility performance hurts the poor first, and more than others. Also, alternative providers like NGOs and Independent Networks are important for the poor. It is important to note that the poor already pay a higher price, says Mr.Srivastava. There are cash flow problems and land tenure is a constraint. The WSP agrees that the market is complex and variations in demand are constant. The traditional utility response to this scenario is conventional private connections that come at high connection charges and the application of standard technologies and solutions.

The poor, on the other hand, are concerned about price and access to water, quality of water, hours of service, and reliability. The WSP suggests that the answer to these issues lies in finding pro-poor objectives for reforms. These include (a) equity: everyone, including poor residents should benefit from the reforms and (b) sustainability: The system should be technically workable and commercially viable. What the World Bank calls the ‘Design Issues’ for pro-poor reforms are matters related to improving the lives of poor people, doing away with the assumption that poor customers are high risk, low return customers and addressing the specific problems of informal settlements. Says Mr. Srivastava, “Where the main service provider may not the best option, the alternative providers may have a role. It is important to find innovative ways to address the physical constraints to infrastructure in low income areas. Also, delivery of subsidies through the volumetric tariff is generally not the best way.”

The World Bank contends that the traditional approaches to delivering subsidies is via cross-subsidies through increasing block tariffs. They are inefficient, misdirected and result in the problems of shared connections. This leaves us, they say, with the need to understand local characteristics, evolve a suitable policy and regulatory framework, incorporate explicit pro-poor provisions and incentives in the contracts and find an “appropriate tariff and subsidy design.”

In the World Bank’s view, contracting options could involve management contract, lease and concession with price setting by the government or regulator, service levels typically decided by them and coverage targets determined by the state or in the contract. Possible pro-poor contractual provisions that can be considered, says Mr.Srivatsava, are service expansion obligations designed to include the poor, some form of subsidy (or finance) for a one-time connection fee and a ‘concessionaire’ responsible for providing water by alternative means where private connections are not feasible.

The World Bank insists that a well designed and competitively procured Public Private Partnership (PPP) can benefit the poor. Mr. Srivastava goes so far as to cite the controversial Metro Manila example (discussed later in this article) where, “Almost 600,000 poor were connected within two years, where the poor now consume three times at half the price and the poor now have more time for productive work and more living space.”

The issues, according to Mr.Srivastava, are, “What does the public sector do for the poor? Can the private sector do better? Are the standards and comparators different?”

To this comprehensive argument comes a forceful rejoinder that touches upon issues and raises questions that activists have long been concerned about. Shripad Dharmadhikary, formerly of the Narmada Bachao Andolan and presently the Founder-Director of the Manthan Adhyayan Kendra, Badwani, Madhya Pradesh, responded to the question “Can The Private Sector Deliver To The Poor?”

“There is lot of discussion on private sector involvement in water. This has raised a large number of issues. However, I will be focussing on only one aspect - namely - can private sector deliver to the poor?

If we simply ask the people - not just the poor but even ordinary people - in Cochabamba, in Metro Manila, in Tucuman province in Argentina, in South Africa and many other places around the world - the answer will be a resounding NO. These are places that have seen massive popular protests and campaigns around privatised water supply schemes. These are places that have seen privatisation drive up the water prices sky high, that have seen lakhs of poor people being disconnected due to inability to pay the bills, driving them out of reach of water services. These are not isolated cases, but represent the anger and frustration building up against privatisation of water resources all over the world.

Before we go into whether the private sector can deliver to the poor or not, we need to look at what we understand by the private sector and privatisation in the Indian context.

What Does Private Sector Mean?

It should be realized that water as a private commodity has been in existence in India since a long time. Ground water is practically private property. The person who owns the land, owns the water below the land. The landowner has virtually unlimited right to pump out this water, regardless of the fact that the boundaries of the ground water storage may go beyond the person's lands. This unlimited access has also given rise to well developed water markets – for e.g. in North Gujarat. Many industries, even large residential colonies pump out their own ground water.

Similarly, water supply through private tankers too has been a part and parcel of Indian life since long. Whether it is handcart or bullock cart mounted drums, or truck/ tractor tankers, private supply of water is common. These tankers supply water to individuals, big colonies, hotels and to many others, especially under water "scarcity" conditions.

In the last 10-12 years, there have been several new developments in the privatisation of water. The emergence of bottled drinking water in India is an important facet of privatisation and commodification of water. In a country where it is considered "punya karma" to give water to the thirsty, and people set up drinking water booths in the summer as a part of "dharma", the rapid spread of bottled water is a paradox that illustrates the power of the market.

Looking from a slightly different angle, the prevention of dalits from using certain water facilities in the villages like wells, ponds and so on is also a form of privatisation – the "owners" in this case being the so called "higher" castes. We are also seeing several urban and industrial water supply schemes being opened up to the private sector.

Fundamental Shift in Character

The new developments represent a fundamental shift in the nature of the water privatisation. In the earlier scheme of things, the private operators were mostly individuals – individual farmers in the case of tubewell based water markets, or contractors in case of tanker water supply. Indeed, many of the tankers operated under contracts from civic or government authorities and were, in a sense, a part of the public sector domain. In most cases, even the words "private sector" are not used for these. They are lumped together under the label of "informal sector".

In the new scheme of things, the players are mostly corporations - in many cases, huge multinational corporations. Importantly, these players are involved in a fixed model of water supply - a centralised source(s), transmission from this source, filtration, and distribution, through a network of pipelines.

The current discussions and efforts of privatisation mainly refer to and focus on the latter type of privatisation. There is little thought given to what role the "informal sector" can play and how it can be supported. Privatisation invariably tends to mean corporate privatisation. All attention and resources are being focussed on this.

Rationale For Private Sector Involvement

What are the reasons given for involving the private sector in an area that till now was considered to be so clearly in the public domain?

Most certainly, this policy is a logical extension of the LPG (Liberalisation, Privatisation, Globalization) policy adopted by the Government of India since 1991. Since 1991 it has been projected that the only way to economic growth is through this policy of LPG. It has almost become an ideology rather than a publicly debated and discussed policy. It is indeed surprising that the water sector did not come under the ambit of this sooner.

The rationale for privatisation of the water sector is much the same as for the rest of LPG. The logic goes like this - Governments no longer have the funds required for the huge investments necessary in sectors like power, water, roads etc. There is little internal generation of resources due to below-cost supply of water. It is only the private sector that can bring in the finances required. Further, Governments have proved to be inefficient, corrupt and must make way for the more efficient private sector. Private sector, especially the global players will bring in superior technology, better management and accountancy practices thus leading to a dramatic improvement in the functioning of these sectors.

Undoubtedly, much of the criticism against the public sector is valid. In India, we have seen the dismal functioning of the public utilities - the inefficiencies, the corruption, the political interference, the negligence, diversion of resources, favouritism and nepotism - all at the cost of the performance. Public agencies are among some of the most unaccountable in the country. Those affected worst are the poor.

However, to believe that all these will be absent in the private sector requires a huge leap of imagination and faith. It is argued that the private sector will bring in new and sorely lacking finances, efficient, non-corrupt working, better technology and management, transparent functioning by itself and through the agency of the regulator.

"…..the private sector does have a valid role to play — not as the owner of water resources but in providing the much-needed expertise, technology and financing for the delivery of efficient water services."
Improving urban water supply through partnership
Alfredo Pascual, Asian Development Bank, in The Hindu, 21 Jan 2003

"Private sector participation may help in introducing innovative ideas, generating financial resources and introducing corporate management and improving service efficiency and accountability to users."
Water Policy of Government of India, April 1, 2002

This is the basic rationale given behind the involvement of the private sector. It is further argued that with the private sector bringing in finances, the Government finances will be released for other sectors like education, health etc. (It is another matter that privatisation is being pushed in these sectors too for reasons of lack of resources).

Examining these justifications is necessary; it will help us understand whether the private sector will really deliver the benefits claimed, and in particular, will benefit the poor. Since there is little experience in India till date, we need to draw upon the experience of water privatisation in other countries in Latin America, South East Asia where privatisation of water supply started about a decade back.

Meeting the Promises

Will the private sector bring in new financing, and if so under what conditions? The basic aim of a private company is profits. That is its primary, and normally sole motive. Hence, while the company may bring in new investments, it is sure to take away the same and more. That is the basic, irrefutable logic of private sector involvement. This needs to be clearly understood, along with the implications.

A private company will want to recover its investment, the interest and principal of debts incurred by it, "reasonable (!)" profits, and also other things like the fluctuations in the dollar exchange rate. We must also bear in mind that the water charges will have to pay for the lavish lifestyles of senior official and executives of the company. Even if it means that the water it is selling becomes too expensive for the poor people. All this implies that the cost of water will go up.

Thus, the first consequence of privatisation is almost inevitably the hiking of water tariffs - making the water service unaffordable for the poor. This is the experience from all parts of the world. In Ho Chi Minh City, the rates went up by seven times. In Cochabamba, rates shot up so that the average worker was required to shell out 25% of his/her salary in water charges. In Metro Manila, where the company Mynilad was given the concession under the condition of supply at Peso 4.96 per cubic metre, the company hiked the prices to 15.46 pesos and then was asking for 30. When this was not granted, it walked out of the concessions, leaving the city high and dry.

Moreover, the private company is in the business for its own profits – and is not going to be considerate to those who cannot afford the high rates. They will simply be disconnected. For example, in Guinea, where prices rose by 650%, taking them even higher than rates in London and Paris, non-payment resulted in disconnection of about 10,000 connections, roughly one-third of the total clientele. In South Africa, millions of people are reported to be affected by disconnections due to non-payment.

When disconnection started becoming politically very damaging, many companies have introduced pre-paid water meters - in some of the poorest neighbourhoods. Now, the company does not even have to bother to disconnect a non-paying consumer - he will cut himself off - with the aid of some of the most modern technologies like SIM card based pre-paid water meters.

So privatisation may bring in new investment - but since all this has to be paid back, in full and more - it will be only for those who can afford this payment. As the poor can't afford to pay, there is little chance that privatisation will deliver to them. Private companies are interested only in those who can pay. In India, we can see that most of the privatisation projects that are either ongoing on in the pipline are industrial water supply schemes - Sheonath, Dewas, Vishakhapatnam, Cochin. Even in Tiruppur, the domestic supply component is piggybacking on the industrial supply.

Forget the Villages

For the same reason, the private companies have little incentive to service the dispersed, low density populations in the rural areas. These areas will require more investment to service dispersed settlements compared to large urban areas where a single pipeline can service many more consumers. The administrative overheads will also be more. It should be noted that the vast majority of the Indian poor live in rural areas. There is little chance of the private companies venturing to the rural areas. What this implies - and answers a large part of the topic under discussion - is that the private sector is not going to deliver to a huge majority of the Indian poor.

This still leave about 25% of the poor - or 67 million people who live in the urban areas. Out of the total urban population (2001 Census) of 285 million, roughly 100 million live in Class II, III, IV,V,VI towns (population below 100,000). If we assume the same poverty ratio for these towns, this means about 23.62 million urban poor live in towns below 100,000 populations. Again, for reasons similar to those for rural areas, there is little chance of the corporate sector getting involved in the water supply of these areas. Big companies with big overheads, who need big centres of concentrated demand - will not be bothered with such towns.

This leaves 44 million people - about 17% of the total poor people in the country. This means that even if the private sector can deliver water each and every poor person in the large cities (a far fetched assumption) - it will be able to reach to at most 17% of the poor in the country. And as we have seen, the companies will have little interest in these poor people if they cannot pay.

Subsidies

So far, most utilities have been adopting two means of continuing to supply water to those who can't afford it - cross subsidies, and direct subsidies. Private companies do not favour the first mechanism, as they are reluctant to "overcharge" their "best" costumers. Indeed, the logic of the private suppliers is that bulk (and important) consumers are charged less, not more. There is also a real danger here of what is called "cherry picking" - meaning, the best customers with paying capacity are taken away by the private sector, leaving the consumers with less paying capacity for the public sector to service. This takes away the capacity to cross-subsidise from the public sector.

Regarding the second option, the Government is washing its hands off from provision of direct subsidies, claiming that it does not have the resources for the same. What is often left unsaid is that the agencies like World Bank are actively pressurising the Government to cut both direct and cross subsidies, often using loan conditionalities to achieve the same.

If neither the high capacity consumers nor the Government are willing to subsidise the consumers with lower paying capacity, prices have to increase, and if anyone can't pay the higher prices, they would stop receiving the supply. In short, the privatisation process is necessarily accompanied by phasing out of cross-subsidies and the increase in tariffs, and a principle of "no payment, no supply".

Thus, water sector ceases to be a social responsibility, and water changes from being a "social good" to a mere commercial commodity. Indeed, in the global push for privatisation, this idea of "full cost recovery" has taken on ideological overtones. In a bid to fend off criticism that these policies are hurting the poor, the World Bank and others have conceded that subsidies may be required, but are advocating that these be "transparent and explicit" and made through the government budget. Governments are saying that they do not have the resources for these subsidies. Indeed, the lack of resources is one of the primary justifications given for privatisation in the first place.

Public Funds, Public Risks - Private Profits

The irony is that the private sector rarely brings in new resources. In project after privatised project, it is seen that the private sector has brought in very little of its own money, and most the finances have come from public funds, or guaranteed with public money. Much of the funding comes from International multilateral or bilateral funding agencies like World Bank or Asian Development Bank. Then there are the national public financing institutions that are another major source of funds. Further, there are several mechanisms to cover the risk - like state and central guarantees, ECAs, escrow covers, assured rates of returns, take-or-pay contracts (assured purchase) and so on.

For example in the Tiruppur Project, out of a total equity of 322.17 crores 105 crores come from the Government of Tamilnadu and IL&FS. IL&FS, apart from being partly publicly owned, receives funds from public institutions like ADB. The debt of 613 crore comes from IL&FS, IDBI, USAID and SIDBI again, mostly public funds.

An interesting speech by J.F. Talbot, Chief Executive of SAUR, one of the biggest water services company makes the situation starkly clear. This speech, delivered by him at the World Bank in Feb. 2002, is nothing but the whining of MNCs in aid of further concessions. He complains of the trends in water privatisation in the world, among other things –

"An emphasis on unrealistic service level..
"Unreasonable contractual constraints..
"Unreasonable regulator power and involvement..
"Attempts to apply European standards in developing countries..
"The demand for "connections for all" in developing countries"

Then, he talks about the "business impacts of these trends" –

"Private balance sheets … getting overburdened
"…. Aggressive competition, forcing prices down to dangerous levels".

As a result, he says –

"….. Private water business is being forced toward a limited market…. in the developed world, to the great loss of the poor in the developing world.
"The water business needs to be made more attractive to gain more investment.."

The solution according to him?

"…(S)ubstantial grants and soft funding are unavoidable to meet required investments levels.
"Risk has to be re- balanced between the public and private sectors and adequate cover found.
"Service levels need to be adapted to the local context."

In short, the solutions mean that the risk will have to be taken by the public sector, service levels will remain poor and yet the private company will demand soft loans, grants – to take home handsome, assured profits. This is the real nature of, and the reason behind the so called Public Private Partnerships (PPP).

If the same concessions, guarantees, assured rates of returns, escrow mechanisms etc. are made available to the public sector - it can also raise the same investment - in fact, it would be easier since much of the funding comes from public sources. But there is one important mechanism that is not available to the public sector - that is of charging full cost price to those who can't afford it, and to disconnect them if they can't pay. This is the essence of the social function of the public sector.

What this leads us to is that there is no getting away from the basic fundamental reality - that due to the highly skewed distribution of income and access to resources in India - a large section of our population will be unable to pay the full cost of water services for some time to come. The challenge is to find ways to ensure services to these households. The privatisation process changes this in a fundamental way - it introduces the requirement of full cost recovery when it is not possible, and allows as acceptable the disconnection of the poor from the services.

Thus, the very fundamental framework in which the private sector operates implies that the poor will be out of its ambit. If this is the case - that private projects are to be largely supported by public funds and guarantees, why involve the private sector at all?

Here, two other reasons are given - efficiency and transparency. On this, we are on very shaky grounds. While there is little doubt about the inefficiency and non-transparent nature of the public sector, evidence from all over the world indicates that the private sector is not very different. Number of privatised projects all over the world have not been able to meet targets of reducing losses, extending new connections even after increasing prices. On the other hand, there are number of examples of very efficient public utilities.

As far as transparency is concerned, the private sector is even less transparent and accountable than the public sector. For these uncertain gains, however, there is a heavy price to be paid for privatisation.

These costs are:

1. As the public funds are used to finance and guarantee private projects, the capacity of the public sector to invest in public projects goes down.
2. The capacity of the public sector to cross subsidise goes down.
3. The country gets bound for years to come into expensive contracts.
4. The kind of privatisation promoted today locks us into a technological option that is highly inappropriate and expensive.

Centralised High Cost Technology

The private sector involvement in the water sector is structured along the lines of single model - high cost, centralised technology, supply side domination, high cost administration, high profits as the central motive. This makes the private sector option as inherently high cost, and hence delivering to the poor that much more difficult. If scarce public resources go towards guaranteeing and supporting profits of private companies who will anyway not supply to the poor, the poor lose from both the sides.

There is a lot of talk about the diversity of the private efforts - including the small and community based private initiatives, but only lip service is paid to these.

We need to pause here in the mad rush for privatisation that is being promoted, and explore exhaustively and comprehensively the development of a diverse range of low cost solutions reflecting the diversity of the demands and circumstances, low cost technology, low cost administration, innovative solutions combining decentralised supply options with demand management including making use of what is called the "informal sector" to harness the low cost private initiative and investment. This should also involve making the public sector transparent and accountable.

If privatisation is such a good option, why is there so much public protest around it? Why did huge popular protests take place in South Africa, in Argentina, in Cochabamba in Bolivia where it led to imposition of martial law? If privatisation is so useful, why is it being carried out in secrecy? Why do even the municipal corporators find out only when the negotiations are in an advanced stage? Why are showcase projects like Metro Manila collapsing? All this speaks of serious problems with privatisation, the rhetoric notwithstanding.

The crucial task for the media and independent researchers is to look at and learn from what is happening all around us in the world where privatisation of water has taken place before us. Else, we will suffer the same fate as in the power sector, where the blind privatization of 1991, acknowledged as a failure now, meant that we lost 10 valuable years, huge amounts of money, got locked in into long term expensive contracts, and people are still without the promised services.