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World Bank officials “learned the hard way” that the private sector alone may not necessarily deliver water and sanitation |
While the world celebrated Water Day on March 22, it most probably went unnoticed that the World Bank made two shifts in policy regarding this vital sector. At events in Delhi and in Washington D.C., World Bank officials indicated that the institution no longer favored outright privatization of public water utilities. They noted that they had "learned the hard way" that the private sector alone may not necessarily deliver water and sanitation, and wondered what it would take for private investment to return to this sector, albeit in the different avatar of private-public partnerships.
This is a far cry from what critics in Washington termed the dogmatism of the Bank in the 1990s, after which several utilities-in Manila, Buenos Aires and Cochabamba (in Bolivia), among others-were privatized. These proved failures due to tariff hikes, exchange fluctuations, and political instability, compelling governments to cancel the contracts later. Even a couple of cities in the US resisted the privatization of their water utilities. All this forced the water multinationals, led by the French, to retreat. In this period, the Bank lent about US$ 20 billion to water supply projects as a whole, though by no means only to private projects.
A Profitable Venture
Although in 2003 only around 5 per cent of the world's water utilities were privatized, growth in the previous decade was rapid. In 1990, some 51 million people received their water from private companies, the most notorious being Thames Water which bought London's water utility. In a dozen years, their customers had increased to over 300 million, with six companies providing drinking water in 56 countries. Thames Water (now acquired by the German conglomerate RWE) earned only US$ 25 million on water in 1990, which rose to US$ 2.5 billion in 2002. The market has been estimated at anything from US$ 400 billion to US$ 3 trillion a year, which explains the commercial interest, particularly since the United Nations has established as Millennium Development Goals the target of halving by 2015 the 1.2 billion in the world without potable water and 2.4 billion without sanitation.
Now that the Bank no longer appears to be championing direct investment in water utilities, companies are shifting their focus to getting public utilities to bear the risks inherent in investment in the water sector. This fits in with the recommendations of Michel Camdessus, the former head of the International Monetary Fund, who headed the World Panel on Financing Water Infrastructure two years ago in Kyoto. The Panel listed some of the risks involved in investing in the water sector which included foreign exchange volatility, political pressure on contracts and tariffs, and contractual risk with projects of long duration entered into on the basis of poor initial information. It proposed that governments should address the sovereign risk on projects, including foreign exchange fluctuations, in order to attract private investment. It also advocated that foreign aid ought to be directed "to facilitate water projects managed by private operators under public control"; the kind of public-private partnerships now being entered into.
| The water market has been estimated at anything from US$ 400 billion to US$ 3 trillion a year, which explains the commercial interest |
The Camdessus Panel called for cost recovery, which requires all customers to pay full or partial costs of delivering water. This has been a controversial issue because the poor may not be able to bear such tariffs. At the same time, it conceded that cross-subsidies could be worked out, for example by charging bulk water consumers higher tariffs. However, in the context of the unserved in cities in the developing world, cost recovery is problematic. South Africa has instituted a basic free supply of 25 liters of water per day to the poor, after which tariffs are charged. However, if families fail to pay, they are disconnected, which leads to cholera epidemics.
Take Mumbai's situation, with 55 percent of its 12 million people living in slums. If slums are to be upgraded with individual taps and toilets, who will bear the marginal cost? The Centre for Science & Environment in Delhi has long pointed out that while private investors are keen on supplying water, which is a profitable business, the costs of providing sanitation is another matter altogether, and cities may well witness the anomaly of those who are unconnected to the sewage system subsidizing those that are. This is because in Delhi, 40 per cent of the population are homeless and thus do not have toilets, and part of the tariffs they pay for water includes the cost of sanitation. As a result, they end up meeting some of the costs of providing house-owners with sanitation.
Hydropower Makes Comeback
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| The World Bank is making a surprising comeback to big dams |
On another front, however, the World Bank is making a surprising comeback to big dams, euphemistically termed "hydropower". As David Grey, Senior Water Advisor, told the World Bank Washington meet, "We are re-engaging in every aspect of water institutions and infrastructure." He listed several Cs as the challenges in this sector: costs, complexities, capital, controversy, and culture, but emphasized that the Bank was now opting for "good" hydropower, including multi-purpose projects. He cited the 1960 Indus treaty between India and Pakistan as "the jewel in the crown of the World Bank's work". The Bank had brokered this treaty, which had withstood wars without being abrogated.
The Bank withdrew its $200 million-plus loan a couple of decades ago for the highly controversial Sardar Sarovar dam on the Narmada in central India following protracted resistance from some 150,000 rural families who were being displaced by it. A senior Bank official told this writer that this had been the biggest public relations fiasco that this institution had ever faced at the time because it was an admission that it had funded a harmful project. Ever since, lending to governments to erect big dams has been on the backburner. The massive outcry by those who would be displaced, backed by environmentalists in Indian cities and abroad, became a cause celebre. Although the state government concerned raised funds from other sources and is building the dam, Narmada has figured as an international controversy when big dams are cited, forcing the Bank to think three times before funding such projects. Five years ago, the Bank partnered with the International Union for Conservation of Nature in setting up the World Commission on Dams which, while by no means ruling out building large dams, made very cogent recommendations on how to take several vital precautions before building them.
The World Bank conceded that in too many cases "an unacceptable and often unnecessary price has been paid…especially in social and environmental terms, by people displaced, by communities downstream, by taxpayers, and by the natural environment. Lack of equity in the distribution of benefits has called into question the value of many dams in meeting water and energy development needs when compared with the alternatives." It laid down, among many other issues, that the "free, prior and informed consent" of those affected ought to be obtained before embarking on such projects. It is difficult to see where such consent would ever be obtained-certainly not in the case of Three Gorges, the world's biggest dam, in China, where democratic freedoms are curtailed.
The Camdessus Panel also makes a strong case for multilateral financial institutions and donors to resume lending to "essential" dams and underground storage projects to meet the large unmet needs for water. It refers to how the World Summit on Sustainable Development in Johannesburg in 2002 gave "recognition of the need for water storage and hydropower development, including dams of all sizes, which signified an important change of mood." It dismisses the World Commission on Dams in a footnote, saying that the Commission encapsulated an opposing view. In all fairness, considering that the Commission's report is the most comprehensive on the subject, it ought to have been given greater weight. Since the Bank was one of the two parties which sponsored the Commission, it owes it to the public to explain how and why it has now repudiated its stand on big dams.
In the cases of both privatization and hydropower, proponents tend to exaggerate the figures of the shortfall in supplies of water and the investments needed to meet this gap. According to the World Commission on Water, developing countries need $180 billion a year over the next 25 years, as against an expenditure of $75 billion a year at present. This does not take into account the possibilities of saving water; irrigation, which consumes 70 per cent of developing countries' supplies, is notoriously profligate. It also does not address the issue of equity-within countries and between them.
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