Privatization of water

Private water utilities were distributed in Europe , the USA and Latin America in the middle and end of the 19th century. Their importance gradually disappeared by the beginning of the 20th century, as they proved incapable of expansion and public utilities owned by the state became stronger. The second global dawn of private water utilities came in the early 1990s after Thatcher’s privatization in England and Wales , the fall of communism and the subsequent global emphasis on free-market politics. The World Bank and the International Monetary Fund have played an important role in this process by putting forward their lending terms. However, some privatization projects in the field of water supply failed, especially in 2000 in Cochabamba , Bolivia , which opened the way to new pragmatism and a weakening of the emphasis on privatization.

In England and Wales, the first private water companies appeared in the 17th century. In 1820, six such enterprises operated in London. However, the market share of private water companies in London fell from 40% in 1860 to 10% in 1900. In the 1980s, their share throughout England and Wales was about 25% ^[11] . The situation completely changed in 1989, when the conservative government of Margaret Thatcher privatized all public water and sewer companies in England and Wales. In Scotland, local governments led by the Labor Party held water systems in public hands.

The water sector in France has always been characterized by the coexistence of public and private governance, with their respective shares changing over time. The two largest private companies are Veolia Environnement , and Suez Environnement . At the end of the 19th century, municipal authorities, dissatisfied with high tariffs and the lack of expansion of networks to poor areas, did not renew private concessions and instead created municipal enterprises owned by them. The share of private water supply companies fell to 17% in 1936. The share of the private sector gradually increased to 32% by 1954, 50% by 1975 and 80% by 2000 using the new model: instead of concession agreements, which assigned the responsibility for financing investments to a private company, the new lease agreements made the private company only responsible for operation and maintenance, while large investments have become the responsibility of municipalities ^{[12] [13]} . French water companies also escaped nationalization after the war and later under President Francois Mitterrand because the central government did not want to intervene in the autonomy of the municipalities and did not want to finance large projects ^[14] . The water supply in Paris was privatized in 1985, when the conservative mayor concluded two lease agreements, each of which covers half of the city.

In Spain, private water companies have maintained their position, advancing a global trend in the late 19th and early 20th centuries ^[14] . The largest private water company in Spain is Aguas de Barcelona. Originally created by French and Belgian investors, it was sold to Spanish investors in 1920 ^[15] .

In Germany, a British private water company created the first water supply system and a sewage treatment plant in Berlin in 1852, but the city, dissatisfied with the lack of investments, in particular, in sewers, canceled the contract in 1873 ^[16] . In the German water sector, municipal utilities have always dominated. Despite this, the water supply system in Berlin was partially privatized in 1999 for financial reasons.

In the United States in 1850, 60% of plumbing systems were privately owned. This share decreased to 30% in 1924 ^[17] . As of 2010, 2,000 water supply and sanitation facilities in the United States were operated as part of a public-private partnership, a joint effort between a private group and the municipality in which it worked ^[18] .

European and local private water companies expanded in Latin America, Africa and Asia in the second half of the 19th century, while their importance in Europe decreased. In Uruguay, water was supplied privately from 1867 to 1950; in Buenos Aires , Argentina , for a short period from 1887 to 1891 and again from 1993 to 2006; in Cairo and Alexandria , Egypt , from 1867 to 1956; in Beirut , Lebanon , from the 19th century to 1951; in Shanghai , China , from 1875 to 1949; in Casablanca , Morocco , from 1914 to 1962 and then again after 1997; in Senegal until 1971 and then again after 1996; and in Côte d'Ivoire from colonial times to the present day without interruption ^[19] .

In Central and Eastern Europe, private companies expanded in the late 1990s, especially in Bulgaria , Hungary , Romania and the Czech Republic .

In 2019, Austria prohibited the privatization of water supply through its constitution ^{[8] [9]} .

In general, there are two forms of private sector participation in water supply and sanitation. In full privatization, assets are constantly sold to a private investor. Within the framework of public-private partnerships, ownership of assets remains public, and only certain functions are delegated to a private company for a certain period. The complete privatization of water and sanitation is an exception today, being limited to England, Chile, and some cities in the United States. Public-private partnerships (PPPs) are today the most common form of private sector participation in water supply and sanitation.

The most common forms of PPP in order to increase the responsibility of a private partner are:

• a management contract, according to which a private company is only responsible for starting up the system, in exchange for a fee that is somewhat related to performance. Investments are financed and implemented by the public sector. Duration, as a rule, 4-7 years.

• a lease agreement under which property is leased to a private company receiving a share of the proceeds. Thus, it usually carries a higher commercial risk than under a management contract. Investments are fully or mostly funded and carried out by the public sector. Duration, as a rule, 10-15 years.

• a mixed company in which a private investor holds a minority stake in a water company with full management responsibility vested in a private partner.

• concession , according to which a private company is responsible for the operation of the entire system. Investments are mainly or fully funded and carried out by a private company. Duration, as a rule, 20-30 years.

Concessions are the most common form of PPP in the field of water supply and sanitation. They are followed by leases, also called affermages, which are most commonly used in France and French-speaking West Africa . Management contracts are used, in particular, in Saudi Arabia , Algeria and Armenia . Mixed-ownership companies are most common in Spain , Colombia and Mexico .

The concession for the construction of a new plant is called the Build-Operate-Transfer (BOT) contract. Under a BOT agreement, a private operator enters into an agreement with a utility company that acquires water or wastewater treatment services.

The reasons for privatizing water resources vary from one case to another, and they often determine the choice of method of privatization: management and lease agreements are used to increase efficiency and improve the quality of services, while selling assets and concessions are primarily aimed at reducing the fiscal burden or expanding access. Ideological motives and external influences also play a role. Often several of the above reasons come together.

Improving efficiency and improving the quality of service

In Algeria , Saudi Arabia , Colombia and Cuba, improved efficiency and improved quality of services are important reasons for privatizing water resources. Proponents argue that utilities can be poorly managed. This can be manifested in the form of low collection of bills, high losses of water (non-profit water) of more than 50% and intermittent water supply, sometimes lasting only a few hours a day or several days a week.

External influence

Organizations such as the World Bank and the International Monetary Fund (IMF) often play a role, as was the case in Bolivia and several African countries. This may take the form of structural adjustment programs. Other relief agencies also supported the privatization of water resources. These include the Inter-American Development Bank (for example, in Honduras , Colombia and Ecuador ), the Asian Development Bank (for example, China ), the European Bank for Reconstruction and Development in Eastern Europe, German development cooperation through KfW (for example, in Albania , Armenia) , Jordan and Peru ), French development cooperation (for example, in Senegal ) and the UK Department for International Development (for example, in Tanzania and Guyana ). In the UK, the World Development Movement has opposed the support of water privatization through assistance from the UK ^[20] .

Fiscal motives

In some cases, when access is already universal, and the quality of services is good, fiscal motives prevail, as was the case in Berlin, Germany and Chile. In Berlin, the state government sold 49.9% of the shares of its water utility in 1999 for 1.69 billion euros in exchange for guaranteed profit for private shareholders in the amount of the interest rate on 10-year government bonds plus 2%, as indicated in the contract held in secret until the referendum forced the state government to make it public. As a result, tariffs increased (only in 2004 by 15%), and state government revenues from the company decreased compared to the situation before privatization (168 million euros profit for the state in 1997 compared with a 10 million euro loss in 2003) ^[21] . In Chile, where there were no treatment facilities before privatization, the government’s desire to finance their construction with extrabudgetary funds led to privatization in 1998.

Data on the impact of privatization of water resources is mixed. Often supporters and opponents of privatization of water resources emphasize those examples, studies, methods and indicators that confirm their respective point of view. As with any empirical study, the methods used influence the results. For example, some studies simply compare the situation before privatization with the situation after its implementation. More complex studies attempt to compare changes in private utilities with changes in public utilities that operate under similar conditions during the same period. The second group of studies often uses econometric methods. The results also depend on the choice of indicator used to measure impact: one of the common indicators is an increase in access to water supply and sanitation. Other indicators are changes in tariffs, investments, water-borne diseases, or indicators of service quality (for example, continuity of supply or quality of drinking water) and efficiency (for example, water loss or labor productivity).

Access Impact

A comparative study by the World Bank before and after privatization analyzes how access, service quality, operational efficiency, and tariffs have evolved through 65 public-private partnerships in urban water supply in developing countries. The study estimates that "PPP projects have provided access to tap water for more than 24 million people in developing countries since 1990." Private entrepreneurs make a small contribution in terms of financing, which is largely provided by tariff revenues and development assistance ^[22] . A study comparing changes in PPPs with changes in public utilities under public administration during the same period in Argentina, Bolivia and Brazil showed that access to water supply increased for both public utilities and private and under public administration to the same extent. The study concludes that “private sector participation alone may not be responsible for these improvements” ^[23] . Others have argued that privatization is often associated with higher tariffs, which reduces the availability of resources for poor households ^[24] . Privatization of water can impede access to water. When commercial companies invest in a water supply system, the desire to profit from an investment can create the most difficult distribution system. In this case, the desire to equip poor areas is reduced because the poor cannot pay tariffs, no matter how small they are. On the other hand, investments are aimed at improving accessibility in richer areas where people can pay at tariffs. Thus, the need for a water utility to obtain adequate returns is satisfied by supplying water only to those who can pay ^[25] . However, privatization of water supply can in some cases lead to expansion of services in low-income areas. The urban poor, who do not have official access to water, may have a relatively high willingness to pay, as they may suffer from even higher tariffs, usually charged by unofficial water suppliers ^[26] .

Health Impact

A study of the impact of privatization of water resources on health, measured by child mortality , showed that between 1991 and 1997 in Argentina, child mortality decreased by 8% more in cities that privatized their water and sanitation services, compared to those that remained under state or cooperative management. The greatest effect was observed in the poorest areas (the difference in reduction was 26%). The main reason was a greater expansion of access to water in cities with privatized utilities. This increase was concentrated in poorer areas that did not receive services before private sector participation was introduced ^[27] .

Tariff Impact

In almost all cases, water tariffs increased in the long run as part of privatization. In some cases, for example in Buenos Aires and Manila , tariffs first decreased and then rose above their initial level. In other cases, such as Cochabamba or Guyana , tariffs were raised during privatization. In some cases, in sub- Saharan Africa , where much of the investment is funded by development assistance, tariffs have not risen for a long period. For example, in real terms, tariffs remained stable in Senegal, while in Gabon they fell by 50% in five years (2001-2006) and by 30% in ten years in Côte d'Ivoire (1990-2000) ^[28] . Despite these exceptions, raising tariffs is the rule in the long run. However, in almost all cases, the initial tariffs were significantly lower than the cost recovery level, sometimes covering only part of the cost of providing services. Thus, an increase in tariffs would be necessary under public administration, if the government wanted to reduce subsidies. The growth in tariffs is affected not only by the profitability of private companies, but also to a large extent by the efficiency of utilities in terms of water losses and labor productivity.

However, a study of household spending on water in cities under private and public administration in the United States concludes that “regardless of whether the water systems belong to private firms or governments, it simply doesn’t matter much on average” ^[29] .

Performance Impact

A World Bank study claims that the most consistent improvement achieved through public-private partnerships in water supply was operational efficiency. Thus, private companies made a significant indirect contribution to financing by improving efficiency, which allowed utilities to finance domestic investments rather than relying on more debt.

An earlier World Bank paper examined six empirical studies on the impact of private governance on the performance of water enterprises in Africa, Asia, Argentina, and Brazil. He concluded that some studies found evidence of higher cost-effectiveness of private companies and improvements resulting from privatization, but general evidence suggests that “there is no statistically significant difference between the performance of public and private companies in this sector” ^{[30 ]} . A survey conducted by the Asian Development Bank in 2008 shows that of the 20 studies reviewed, only three show specific evidence of improved technical efficiency or cost reduction in private management ^[31] .

Profitability

An empirical study of 34 concessions in nine Latin American countries in the 90s, including 10 water concessions in 5 countries (3 in Argentina, 1 in Bolivia, 1 in Brazil, 3 in Chile and 2 in Colombia), allowed us to evaluate the profitability of concessions in comparison with the cost of capital of private companies. According to the study, contrary to public opinion, the financial returns from private infrastructure concessions were modest. The average annual return on invested capital was 7%. For a number of concessions, the return was lower than the cost of capital. On average, telecommunications and energy concessions are much better than water concessions. 7 out of 10 water concessions had a negative rate of return, and two concessions had a return that was lower than the cost of capital of private companies ^[32] .

• Balanyá, Belén, Brid Brennan, Olivier Hoedeman, Satoko Kishimoto and Philipp Terhorst (eds): Reclaiming Public Water: Achievements, Struggles and Visions from Around the World , Transnational Institute and Corporate Europe Observatory , January 2005. ISBN 90-71007-10- 3 .
• Schiffler, Manuel: Water, Politics and Money. A Reality Check on Privatization, Springer International Publishing, 2015. ISBN 978-3-319-16690-2 .
• Segerfeldt, Fredrik: Water for sale: how business and the market can resolve the world's water crisis , Presentation at the Amigo Society, Brussels, May 30, 2006.
• Sjölander Holland, Ann-Christin: The Water Business: Corporations versus People , Zed Books, 2005, ISBN 1-84277-564-2 .
• Kleemeier, Elizabeth L. Private Operators and Rural Water Supplies: A Desk Review of Experience The World Bank, Nov. 2010.
• Marin, Philippe Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries The World Bank, Feb. 2009, ISBN 978-0-8213-7956-1 .