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
1.Reasons for privatisation
2.Water privatisation outcomes: finance,
efficiency, case study (Sub-Saharan Africa)
3.What went wrong? Case study (Malaysia)
4.Where to next?
1. REASONS FOR PRIVATISATION
 Dissatisfaction with public sector
 Privatisation expected to bring:
 Improved Efficiency
 Private sector finance
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
2. WATER PRIVATISATION OUTCOMES
Region
Data
Reference
Results
Africa
21 African water
utilities, including 3
private, 1995-97
Estache and
Kouassi (2002)
Private operators more cost
efficient; corruption matters
more than ownership
Africa
110 African water
Kirkpatrick,
utilities, 1998-2001, Parker, and Zhang
including 14 private (2004)
No significant cost difference
once environmental factors
accounted; regulation has no
significant impact
Asia
50 firms in 19
countries, 1997
Estache and Rossi
(2002)
No statistically significant
difference
Argentina
4 provinces, 19922001 (unbalanced
panel)
Estache and
Trujillo (2003)
Significant improvement
resulting from 1990s reforms;
one renationalised firm
maintaining private gains
Brazil
20 state operators,
1996-2000
Tupper and
Resende (2004)
Ranking of operators; case for
yardstick competition
Efficiency: Private better than public?
Region
Data
Reference
Results
Brazil
Around 4000
municipalities,
1996-2002
Seroa da Motta
and Moreira
(2004)
Private operators stimulate
catching up but no significant
productivity difference; regional
operators benefit from
scale economies but have
lowest productivity;
municipalities have highest
productivity
Peru
43 operators, 199698
Corton (2003)
Location, dispersion, size in
production and administrative
responsibility (number of
districts covered) account for
90% of differences in costs
Peru
45 operators, 19982000
Alva and Bonifaz
(2001)
Returns to scale; important role
for environmental variables
Finance: Total private sector investment
commitments in infrastructure 1990–2007
Finance: Private sector water investment
commitments by region, 1990–2007
East Asia and Pacific
Latin America and the Caribbean
US$m
27,225
22,860
%
48.21
40.48
Europe and Central Asia
Middle East and North Africa
Sub-Saharan Africa
South Asia
4,782
1,082
266
255
8.47
1.92
0.47
0.45
Total
56,470
100
Source: World Bank, PPI Project Database
Case study: Sub-Saharan Africa
Share of population using improved water source
1990
SSA
All developing countries
OECD
World
Source HDR 2007
2004
48
71
97
78
55
79
99
83
SSA: Private sector investment
commitments in water (US$m)
90
80
70
60
50
40
30
20
10
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: World Bank Private Participation in Infrastructure Database
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
SSA: Outcomes
 Disappointing results
 Focus on attracting investors has dominated
sector policy leading to fragmentation and
emphasis on commercial priorities.
 Modified approach and expectations
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
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
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
Efficiency: Private vs public NRW, tariffs
m3
200
RM1.00
RM2.00
RM0.90
60
NRW: 44.7%
35
RM1.03
20
RM0.57
40
RM0.52
RM0.42
RM0.22
NRW: 19.8%
Malaysia: Tariff revisions, Selangor state
Year
2009
2012
2015
2019
2021
2024
2027
2030
Agreed tariff increase (%)
37
25
20
10
5
5
5
5
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)
Selangor: Private profits, public debt
Concessionaire Net debt
(RM billion)
Puncak Niaga
1.3
Syabas
2.9
Splash
1.6
Abbas
0.6
Total
6.4 (US$1.7b)
State government
offer (RM billion)
3.1
2.0
0.6
5.7 (US$1.5b)
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)
WHERE TO NEXT – OUR VIEW
Privatisation and PSP incompatible with WSS
 Privatisation does not raise finance 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