Privatising Water as an Effective Route Towards Development?

In June 2010, the UN declared safe access to ‘clean drinking water and sanitation’ a human right. For many this highlighted the importance of water as the world’s most important natural resource for human life. Nevertheless, today many homes lack direct access to safe drinking water and rely on external, purified sources. This situation is all too common throughout the global south. By contrast, for the overwhelming majority in developed societies, access to safe water and sanitation is commonplace. Therefore, improving access to water is a global development issue. Accordingly, a central aim of the UN’s Millennium Development Goals was to halve ‘the proportion of the population without sustainable access to safe drinking water and basic sanitation’. In this guest post, Carlos Kassman assesses the possibilities of private water companies to assist in this respect by investigating cases of water privatisation in France, Argentina and West Africa.

In order to reach this goal, the guiding free market principles of neoliberal development theory assert that opening up domestic services to foreign private control and investment can provide better service provision. Privatisation is a central aspect of neoliberal theory. For neoliberals, faith in the private sector to provide better services than public alternatives is based on the argument that there are four benign consequences of privatisation. The argument follows that as a result of privatisation there would be an increase in the efficiency of service production, an improvement of service quality, reduction in costs for the consumer and the opportunity for companies to make a profit (Bieler, 2014; Bakker 2010: 2). This is rooted in a belief that unlike public systems, private companies are driven to succeed and deliver positive results by the competitive pressures of the market. However, critics refute this position and claim that in reality the profit maximising imperatives of private firms undermine the supposed benign consequences of privatisation.

Water privatisation in France

In 1984, Paris’ mayor Jacques Chiraq privatised the city’s water services by signing a 25 year lease contract to subsidiaries of Veolia and Suez Environnement to manage Paris’ water supply and billing systems. Until then, with the exception of billing, Paris’ water systems had been run entirely by the city. During the 25 years of private water agreement water tariffs increased massively. For drinking water alone, tariffs rose by more than 265 percent between 1985 and 2009; in the same period inflation increased by 70.5 percent (Pigeon 2012: 27). In addition, between 1991 and 1997, water tariffs in French cities with populations of over 100,000 increased by 51.5 percent; however tariffs rose by more than 90 percent in Paris (Main 1999). Furthermore, Paris’ privatisation deal included confidential contract clauses which allowed Veolia and Suez to enforce automatic price rises after every three months of the contract (Hall, Lobina and Terhorst 2013: 197). The significant price hikes experienced in Paris contradict the pro-privatisation argument that external pressures of the market promote efficiency in private companies which leads to a drop in consumer prices. Additionally, Veolia and Suez enhanced profitability by subcontracting maintenance works to subsidiary companies of the same groups; this meant that the payments made for these works eventually found their way back to the parent companies as additional profits.

Ultimately, Paris’ private water deal failed. The city decided not to renew the 25-year lease contracts with Veolia and Suez. Instead Paris remunicipalised water services on January 1st 2010, taking water back under public control through the public company ‘Eau de Paris’. By 5^th January 2011, Eau de Paris announced water tariff reductions of 8% with no decrease in the output of service. In the first year of operations the company made efficiency savings of 35 million euros, helped by internalising profits that were previously extracted by private shareholders. This facilitated investment in broader development schemes throughout the city by allowing Eau de Paris to increase its financial contribution to poor households by over 3 million euros, avoiding cutting off water supply in squats and by embarking on a water-saving campaign which saved social houses 50 euros per year on average (Lobina 2014: 37). Between 2000 and 2014, 49 cities in France followed suit and chose to remunicipalised water services.

Private water in Argentina

Privatisation of water services in Argentina was a central component of a structural adjustment plan agreed with global financial institutions in 1991, to promote development and combat financial crisis. Between 1991 and 1999 the structural adjustment programme resulted in the privatisation of public water companies covering approximately 30 per cent of Argentina’s municipalities and almost 60 percent of the country’s population (Galiani, Gertler and Shargrodsky 2005: 85). In May 1993, the company Aguas Argentinas, joint-owned by four TNCs, was awarded a 30-year water supply and sanitation concession to provide water to 10 million people in the city of Buenos Aires.

In Buenos Aires City, water systems desperately needed investment and capital improvements. Due to a lack of funding, the OSN’s water network suffered technical deterioration which caused a serious decline in the quality of services in the mid-1970s. Advocates of privatisation argue that private firms are better placed to inject investment into depleted service systems. However, Aguas Argentinas failed to meet the capital investment targets set out in the concession contract. The local Argentinian regulator ETOSS estimates that from the start of the privatisation deal in 1993 until 2002, Aguas Argentinas had only met 60.9% of its contractual investment targets, despite contract renegotiations which had lowered investment commitments (Remunicipalisation Tracker 2012). This case contradicts the claim that private companies can be relied upon to provide the investment that struggling public bodies cannot afford.

It was also found that private companies often prioritised profit creation over development. Despite an early 26.9% reduction in Tariffs in the Buenos Aires City deal, after 8 months of the concession, Aguas Argentinas broke away from contractual agreements with an ‘extraordinary revision’ of rates which they blamed on unforeseen operating costs (Teubal 2004: 182). Further, between May 1993 and January 2002 the mean tariff for residential users increased by 87.9 percent; whilst throughout the same period the Consumer Price Index rose by a comparatively minimal 7.3 percent. Between 1994 and 2001, Aguas Argentinas enjoyed a profit rate of more than 20 percent over net assets and around 13.3 percent over aggregated revenues (Azpiazu and Castro 2012: 62).

Like in Paris, water services in Buenos Aires were taken back under public control in March 2006 when President Kirchner terminated Aguas Argentinas’ concession. Aguas Argentinas was replaced by a new state owned enterprise (Agua y Saneamientos Argentinos, AySA) which was 90% owned by the federal government and 10% by employees. This decision aided development by stimulating the local economy through the creation of employment. Under the new public water company in Buenos Aires there have been increased investments in the workforce with the number of hours of training provided to workers rising from 21,874 in 2006 to 60,000 in 2009 (Lobina, Kishimoto and Petitjean 2014: 9)

Lack of Private Water in Nigeria

Just under a decade ago, service infrastructure in Nigeria’s largest city was starkly underdeveloped. In Greater Lagos, only 9 percent of the population had access to piped water and about 99 percent had no access to a closed sewer system. Currently water services in Lagos are provided by the state owned company, Lagos Water Corporation (LWC). However, it is accepted that utility providers such as the LWC, are failing to provide the services and infrastructure for social and political development (Hall 2006: 3). Faced by the financial difficulties characteristic of a heavily indebted, developing country the public company has struggled to improve water services. Investments in the aging water supply system have been limited and the urban poor cannot afford to pay charges that could generate funds to invest in infrastructure (Gandy 2006: 386).

To solve these issues, a deal was struck by the LWC and the Word Bank’s International Finance Corporation in 1999 to expand and privatise Lagos’ water supply system (Hall 2006: 4; Vidal, 2015). However, foreign multinational water corporations failed to invest in the underdeveloped system as the challenges of improvement greatly outweighed the chances of creating profitable operations (Vidal, 2015; Gandy 2006: 386). In addition to the infrastructural investment required, the low levels of income in the local population meant that raising tariffs would not be a viable option for private companies to generate income. This reality has been acknowledged by TNCs such as the French water giant Vivendi (now Veolia) who in 2001 declared it would only participate in investments where consumers could pay enough or governments could guarantee profits. Additionally, Suez, announced no new investment in developing countries in 2003. As a result, Lagos’ failing water supply remains under the control of the LWC. A service provider strained by continued urban population growth and the barriers of corruption and theft which led the company to estimate that 80 percent of piped water in the city is stolen (Vidal, 2015).

Conclusion

This project aimed to use the debate on water service privatisation as a lens through which to examine the wider validity of neoliberal theory as a useful development model. Factual examples of how privatisation deals played out in France, Argentina and Lagos have demonstrated that privatisation cannot be considered an effective means to bring about better service provision. The decisions in France and Argentina to take water services back under public control due to price hikes, a lack of investment and profit-maximising initiatives most strongly defend this case. The lack of TNC investment in Lagos also seriously raises questions about the validity of neoliberal development strategy which suggests the creation of a liberal global economy to allow TNCs to operate freely in foreign services and act as primary agents of development. With the evident successes remunicipalisation in France and Argentina it seems more worthwhile for future policies to explore avenues in which local authorities can take a lead role in services and development.

References:

Azpiazu, Daniel and José Esteban Castro (2012) ‘Aguas Públicas: Buenos Aires in Muddled Waters’ in M. Pigeon, D. McDonald, O. Hoededman and S. Kishimoto (eds.) Remunicipalisation: Putting Water Back into Public Hands, Amsterdam: Transnational Institute. Available at: https://www.tni.org/files/download/remunicipalisation_book_final_for_web_0.pdf (Accessed 07 April 2017), 59-73.

Bakker, Karen (2010) Privatizing water: Governance failure and the world’s urban water crisis. Ithaca: Cornell University Press.

Bieler, Andreas (2014) ‘The perpetuum mobile of privatisation’  (07 May 2014). Available at: http://andreasbieler.blogspot.co.uk/2014/05/the-perpetuum-mobile-of-privatisation.html (Accessed 15 January 2017).

De Clercq, Geert (2014) ‘Paris's return to public water supplies makes waves beyond France’ (08 Jul 2014), Reuters [online]. Available at: http://uk.reuters.com/article/water-utilities-paris-idUKL6N0PE57220140708 (Accessed 28 April 2017).

Galiani, Sebastian, Paul Gertler and Ernesto Shargrodsky (2005) ‘Water for Life: The Impact of the Privatisation of Water Services on Child Mortality’, Journal of Political Economy, 113/1: 83-120.

Gandy, Matthew (2006) ‘Planning, Anti-Planning and the Infrastructure Crisis Facing Metropolitan Lagos’, Urban Studies, 43/2: 371-396.

Hall, David (2006) Water and Electricity in Nigeria. (September 2006), PSIRU [online]. Available at: http://www.psiru.org/reports/water-and-electricity-nigeria.html (Accessed 08 May 2017).

Hall, David., Lobina Emanuele and Phillipp Terhorst (2013) ‘Re-municipalisation in the early twenty-first century: water in France and energy in Germany’, International Review of Applied Economics, 27/2: 193-214.

Lobina, Emanuele (2014) Troubled Waters: Misleading industry PR and the case for public water. London: PSIRU. Available at http://www.psiru.org/sites/default/files/2014-11-W-TroubledWaters.pdf (Accessed 03 January 2017).

Lobina, Emanuele, Satoko Kishimoto and Olivier Petitjean (2014) Here to Stay: Water Remunicipalisation as a Global Trend. Greenwich: PSIRU. Available at: https://www.tni.org/files/download/heretostay-en.pdf (Accessed 28 April 2017).

Main, Pierre (1999) ‘L'économie de l’eau: Quelle tuyauterie à la française ?’ (April 1999) H2O Magazine [online]. Available at: http://www.h2o.net/quotidien-le-prix-de-l-eau/l-evolution-du-prix-de-l-eau-de-1991-a-1997.htm (Accessed 25 April 2017).

Pigeon, Martin (2012) ‘Une eau publique pour Paris: Symbolism and success in the Heartland of Private Water’ in M. Pigeon, D. McDonald, O. Hoededman and S. Kishimoto (eds.) Remunicipalisation: Putting Water Back into Public Hands, Amsterdam: Transnational Institute. Available at: https://www.tni.org/files/download/remunicipalisation_book_final_for_web_0.pdf (Accessed 07 April 2017), 24-39.

Teubal, Miguel (2004) ‘Rise and Collapse of Neoliberalism in Argentina: The Role of Economic Groups’, Journal of Developing Societies, 20/3-4: 173-188.

Vidal, John (2015) ‘Water Privatisation: A worldwide failure?’ (30 Jan 2015), The Guardian [online]. Available at: https://www.theguardian.com/global-development/2015/jan/30/water-privatisation-worldwide-failure-lagos-world-bank (Accessed 07 May 2017).

Water Remunicipalisation Tracker (2012) ‘Buenos Aires’. Available at: http://www.remunicipalisation.org/#case_Buenos_Aires (Accessed 04 May 2017).   

Carlos Kassman completed his BA degree in the School of Politics and International Relations at Nottingham University/UK in June 2017. His final year Dissertation 'Can privatising water services provide an effective route towards development?', on which this post is based, received a first class mark of 73 per cent.