Water and privatisationReykjavikNovember 2005www'psiru'org

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Public and private wateran international
perspective David HallPublic Services
International Research Unit (PSIRU) University of
Greenwich, UKwww.psiru.org This draws on
research carried out with colleagues at PSIRU and
elsewhere, especially Emanuele Lobina. It draws
on projects financed by Public Services
International (PSI www.world-psi.org )
European Public Service Union confederation (EPSU
www.epsu.org ) the European Commission,
through the Watertime project, financed under the
Fifth Framework contract no.EVK4-2002-095 and
others.The presentation reflect the views of the
author and should not be attributed to the
funders.
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Summary

• History
• Economics
• Company strategies
• Politics

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History

• Common pattern, including USA etc
• 19th century private, 20th century public
• Municipal extension via public finance
• Public/private world 95/5, EU 75/25, USA 85/15
• National variations
• Municipal utilities German/Dutch/Italian etc
• Untypical developments
• France 19th century firms survive (unique)
• UK municipal, nationalised, private (unique)
• Charging meters or taxation (eg England)
• EU laws now affect structures public debt,
  framework laws
• Developing countries independence, public
  services
• International pressures to privatise in 1990s

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Four groups of EU countries
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City in Time (Watertime project)
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Economics monopoly, factors of production

• Public water supply is natural monopoly
• Cannot build two networks
• No competition possible
• Dangers of private monopoly
• Capital intensive 70
• public borrowing is cheaper always!
• Labour
• Training essential for quality
• Out-sourcing/subcontracting leads to cuts in
  training
• lack of training in UK water/gas/electricity, EU
  electricity
• Water resources
• Problems of private exploitation
• Enron in California

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Efficiency private sector not more efficient

• Lack of general evidence
• Much of the case for PPPs rests on the relative
  efficiency of the private sector. While there is
  an extensive literature on this subject, the
  theory is ambiguous and the empirical evidence is
  mixed (IMF, 2004)
• UK privatisations created no significant
  productivity gain (Florio, 2004)
• Europe liberalisation does not generate
  continuing productivity gains (Griffiths/Harrison,
  2004)

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Water private sector not more efficient

• Empirical studies consistently show no difference
  (Estache, 2005 World Bank)
• Public/private equal in extending water in Latin
  America (Clarke 2004)
• Public/private water in Africa same cost
  efficiency (Kirkpatrick, 2004)
• ADB study of cities in Asia shows public/private
  mixed performance (2004)
• USA public and private utilities equally
  compliant (Clarke et al, 2005)

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Prices France - private water prices 15 higher
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Prices France - lower price in public water
cities
Public
Private
(Price per m3, excluding taxes)
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Prices UK - prices , profits and directors pay
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Buenos Aires private water bills 1993-2002
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Leakage leakage, 7 countries

Sources Blokland et al, Vienna study
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Company behaviour

• Private companies maximise profit
• Affects what actually happens
• Range of strategies and effects
• Reducing competition
• Corruption
• Regulation and gaming
• exits and eternity

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Competition very weak in water

• Natural Monopoly no competing suppliers
• No competition no efficiency incentive, no
  privatisation gain
• Dominated by very few companies
• 75 worldwide by Suez, Veolia
• Enron fails with Azurix, shocked
• Established markets effectively closed UK,
  France, Spain
• Joint ventures further reduce competition

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Lack of competition shared cities
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Lack of competition joint ventures between MNCs
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Corruption to obtain contracts

• Competition to win monopoly
• Companies have big incentive to use all methods
  to get valuable long-term contract, including
  bribes
• Corruption proven
• Suez, Veolia convicted in France, Veolia also in
  USA, Italy Thames in Chile
• transnational firms headquartered abroad are
  more likely than other firms to pay public
  procurement kickbacks (World Bank study)

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Company tactics at Grenoble 1989-1995

• incorrect base for indexing prices leads to 4 to
  5 excess price
• Over-invoicing FF 21m invoiced in excess)
• fictitious accounting and inflated debt service
  costs
• Over-estimated capital maintenance
• Excessive provision for bad debts
• Subcontracting to subsidiaries
• renegotiation after conviction for corruption -
  joint venture with municipality but sub-contract
  management to company

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UK Investment forecasts by English and Welsh
water companies
Source OFWAT, 2000
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Private and public subsidies to and from water
Private
Public
?new IFI subsidies /guarantees?
Government guarantees
Government guarantees
Subsidies from taxation
Water supply operation
Loss leaders
Financing other MNC operations
Financing other public services
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Exits and eternity

• Companies will decide to exit or not invest if
  not profitable
• Companies sell investments in UK, Estonia etc
• eg Suez cuts investments 1/3
• SAUR walks away from floods in Mozambique
• Eternal privatisations?
• UK 25 years notice protects companies
• Barcelona 136 years private concession, none can
  afford to buy assets
• Lawsuits for compensation stop terminations eg in
  Hungary

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Volatile private investment
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Politics

• National, municipal governments key actors
• Role of government to provide public goods
• Private sector provides profitable goods
• Political movements and ideology drive changes
• Development of water services (municipal
  socialism)
• Privatisation companies and neo-liberal ideology
• Right to water and public good Netherlands,
  Uruguay
• Privatisation of water is unpopular worldwide
• campaigns in Spain, Northern Ireland, Peru,
  Ghana, India
• Exploited by Labour in UK in 1997

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Public resistance to water privatisation
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Some national developments

• Netherlands private water supply is illegal
• Sweden new law, Norkoping remunicipalised
• UK campaign in Northern Ireland
• France not much remunicipalisation
• Germany Gelsenwasser municipalised,
  privatisation rejected in Hamburg, Mulheim
• Greece sale of shares to public in EYDAP
• Hungary Pecs wants to terminate Suez

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The public sphere to control private interests
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Public record

• Proven history
• Great majority in developed countries is public
• Costs and efficiency
• Stockholm arguments capital, costs, competitive
  tendering
• Accountability
• public ownership of monopoly, electoral
  accountability
• essential public service
• Solidarity finance
• Solidarity finance (cross-subsidy) for extension
  and lifelines
• Resources management
• Common good