9 Water Privatization

Question 1

Shortage of good policies, not of water:

Answer 1

 Problem is often not water availability

 Comparison Australia-Cambodia:

• Austrialia: 100% of inhabitants have access to safe water
• Cambodia: 30% have access to safe water, although more annual rainfall than Australia

 Example Kenya:

• Potential for supplying entire population with water
• Water resources underexploited

 Lack of development (in poor countries)
- Inability to produce and distribute water

Question 2

Link between shortage of water and shortage of development:

Answer 2

 Level of development determine access to water, not amount of rainfall
 Higher level of development associated with more safe water supply
 Low level of development associated with less safe water supply

Opposite position:
 Development creates water shortage
 Development increases water consumption

Question 3

Water policy problems in developing countries (1)

Answer 3

1. Investments are inadequate
   Infrastructure needed for water supply (construction, collection, purification, distribution, maintenance)
   Costly projects (lack of ex-ante analysis; e.g. huge dam projects)
   Multi-stakeholder approach (government, NGOs, companies)
   Effects on the environment (salination, groundwater overexploitation)
   Capital failure of the public sector

Question 4

Water policy problems in developing countries (2)

Answer 4

2. Weakness of water bureaucracies
    Problem of centralized decisions (politically, administratively)
    Lack of competence (knowledge, management)
    Higher cost structure of government than private company
    Failing incentive structures (subsidies; bureaucracies needs funding, not efficiency)
    Self-interested politicians and corruption

Question 5

Water policy problems in developing countries (3)

Answer 5

3. Laws and regulations applying to water
    Lack of property rights (“The tragedy of the commons”)
    Overexploitation due to public good
    Solution: Private ownership
    Inappropriate pricing
    Inappropriate subsidies

Question 6

Water market privatization as a possibility for improvement

Answer 6

 Profit motives of companies

 Handle water with care, adequate investment, etc.

 Private providers have incentive to reach more people with water pipes

 Clearly defined property rights

 Since years many countries opened public sector to competition (e.g. television, radio, hospitals, private schools, electricity)

 Water privatization seems a special issue

Question 7

Forms of cooperation between public (government) and private (business) sector, called privatization

Answer 7

1. Service contract: Private company looks after maintenance of existing networks
2. Build-Own-Operate-Transfer (BOOT): Private company construct or renovate infrastructure, which is then leased for fixed term
3. Concession: Private distributor is allowed to rent available infrastructure, but is linked to contract
4. Selling of rights and infrastructure to private companies

Note: Degree of cooperation increases from 1 to 4

Question 8

Risks of private enterprise involvement in water markets

Answer 8

a. Customer perspective:
 Replacement of a public monopoly by a private one
 Water prices will rise
 Price undercutting by private enterprises leads to decreasing quality

b. Enterprise perspective:
 Competition on the market
 Incomplete information about infrastructure and region
 Water sector associated with heavy investments (may fail)
 Cost coverage for private enterprise (but also for public supplier)

c. State perspective:
 Regulations and subsidies may fail (public opinion)
 Decreasing revenues (tax)

Question 9

Opportunities of private enterprise involvement in water markets

Answer 9

a. Customer perspective:
 Decreasing prices (due to competition)
 Water quality improves (compared to public supply network)

b. Enterprise perspective:
 Profit motives
 Technology improvement
 Subsidies
 Growth

c. State perspective:
 More tax revenues (customers and companies)
 GDP growth
 Use own capacities more efficient