PRIVATIZATION OF THE WORLD'S WATER SUPPLIES AND OTHER PUBLIC UTILITIES AND INFRASTRUCTURE
Edition 1 - April 2008 (Updated 10/20/08)
Reference citation format,: e.g. (98C2), cites a document published in 1998 by a lead author whose last name begins with "C". The final integer (2 in this example) is a running index.
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The ideology that lies at the base of globalization also lies at the base of privatization of public utilities and other infrastructure - the idea that globalization (and privatization) increases economic efficiency and therefore must turn out to be beneficial to us all. When the globalization of a century ago turned against its primary advocate (England) England renounced globalization. This might lead one to suspect that globalization is not a noble, altruistic ideology but a strategy of deception useful for acquiring wealth and power at the expense of others. It appears now that privatization might have the same strategy at its roots. The argument that privatization of water supply systems produces increased efficiency was found, on examination, to produce little if any efficiency benefits. The argument was also made that privatization reduces the element of political corruption in water supply systems and other public utilities. However it was found that the element of political corruption was little changed or greatly increased in privatization processes (e.g. Mexico). When the World Bank, the IMF and the World Trade Organization (WTO) imposed their ill-conceived ideology-driven "structural adjustment programs" (SAPs) on much of the developing world (involving privatization of a huge portion of the public sector - even including public education) the results turned out to be utter disasters, the opposite of what its instigators allegedly expected (08S1). SAPS helped to bring about a mass rural-to-urban migration in much of the developing world, resulting in the creation of huge and growing "informal" economies whose members find survival a major challenge. Informal economies could spawn major social, economic and political instabilities as it grows to an anticipated two-thirds of the developing world economy (08S1). Countries that rejected many of the edicts of globalization and privatization (e.g. China, Vietnam, Chile) fared far better than their neighbors that were far more receptive. For example, these neighbors suffered extreme duress during the currency devaluations of the late 1990s. It is shown in another document on this website (08S2) that "inefficiency" problems (i.e. "bad government" or "bad leadership") have little to do with the ills of developing nations. These ills have far more to do with the extreme scarcity of financial capital as a result of the drain represented by the costs of infrastructure growth needed to accommodate high rates of population growth (08S2). Small investments in the right technologies could easily eliminate much of this population growth (07S1).
(Data are from Colleen Long (Associated Press) "US Water Pipelines are Breaking," (4/8/08).)
Research from the IIED warns that four multi-national companies control over 80% of the private water and sewage market (03I1) (03B5). As a result, it is difficult to achieve real competition in bidding for control of public water companies. Contrary to the hopes of market reformers, privatization has not eliminated political involvement or corruption. Bidding processes have not always promoted competition as some companies have underbid competitors with a view to subsequently raising charges or colluded with rival companies to win follow-on contracts. Despite ongoing encouragement from development institutions the rate of water/sewer privatization is slowing. After under-estimating risks and over-estimating potential profits private water companies are becoming more wary of getting involved (03I1).
A detailed study of the results of water system privatization (03B5) found numerous problems and an overall failure of water system privatization to live up to the arguments offered by its proponents. Local operators in developing countries have often found it difficult to get into the market, as they cannot raise sufficient finance. Contrary to the hopes of market reformers, privatization has not eliminated political involvement or corruption. Bidding processes have not always promoted competition as some companies have underbid competitors with a view to subsequently raising charges or colluded with rival companies to win follow-on contracts. The study also found that:
Many of the problems of water and sewerage utilities have nothing to do with whether they are publicly or private operated but hinge on the nature of governance and regulation. There is no justification for the continued promotion of private sector participation as a means of improving services in low-income areas. Imposing privatization as a condition of development funding undermines both democracy and local capacity to address needs.
Even local water supply systems and other utilities are being subject to various international trade agreements. Every country in the WTO (World Trade Organization) is part of the GATS (General Agreement on Trade in Services agreement). This covers everything - even municipal services like sewer and water. The goal is to promote privatization of public services and deregulation, subjecting them to WTO rules. The US pushed to have services included in the Uruguay Round negotiations, but countries resisted privatization and would only agree to GATS if they could choose which ones to include. So GATS has country-specific schedules of services covered. GATS creates obligations backed up by trade sanctions. It is the first multilateral agreement to provide enforceable rights to trade in all services. It has periodic negotiations and covers every means of supplying a service including the right to set up a presence in the export market. This includes the right for US corporations to set up operations in countries immune from US laws. Rebecca Mark, as CEO of Enron's water subsidiary Azurix, remarked that she would not rest until all the world's (fresh) water has been privatized (www.iisd.org/trade/private_rights.htm 3/17/03). Problems are already developing in the area of water globalization. In 2000 in Cochabamba, Bolivia. Bechtel took over the water supply and doubled prices. A bloody uprising drove Bechtel out (02R1).
The revenues of the largest trans-national corporations (TNCs) today exceed the size of many national economies. Many have lost any sense of national identity or loyalty through their footloose operations and through internationalizing their staff. Many are becoming difficult to regulate in the context of national laws. By their political power and influence, they are becoming sovereign-like entities in their own right. They should not forget that they are creatures of civil society (e.g., corporations are inventions of law) and need to serve its purposes. Collectively they are developing instruments of global governance that challenge sources of legitimate democratic authority.
Suez, operating as United Water in Atlanta Georgia under a 20-year contract signed in 1998, had such a poor operating record that Atlanta's mayor canceled the contract in January 2003. This $428 million contract had been touted as a model public/ private partnership. One problem was that staff had been cut to save money and increase profits.
Comparison of the efficiency-related performance of public water systems with privatized water systems (05N1):
Pressured by international financial institutions and corporate interests, regional governments are planning more private participation in water services. And yet, all across Asia, water privatization schemes are failing to deliver clean and safe drinking water to communities.
The Public Services International (PSIRU), based in Britain, which analyses the privatization and restructuring of public services around the world, revealed in a recent study that there has been an extremely high failure rate for private concessions and long-term BOT (Build-Operate-Transfer) contracts. And yet, privatization schemes are being pushed by international financial institutions such as the World Bank and the Asian Development Bank, coupled with lobby groups such as the Global Water Partnership and the World Water Council. The World Bank has increased its lending on water projects from US$546 million in 2002 to US$3000 million in 2005. But there is no clear indication that this has led to cleaner, more affordable water for people on the margins. In addition, the European Union has come up with initiatives in the WTO to pry open national water services to big foreign players. Since the mid-1990s, developing countries have been coaxed to privatize water services through 'public-private partnership' or private sector participation. But many of these schemes in Asia have had disastrous results: soaring water rates, unmet targets, and crippling financial losses and debt. Because municipal water/ sewer services are "natural monopolies," if they are fully privatized, the new corporate owner can impose monopoly prices on the public. This helps to explain why water prices tend to increase dramatically after privatization. Several Western multi-nationals that once thirsted for water privatization projects in Asia have tried to make quick exits from loss-making or problem-saddled privatization agreements in Asia. Instead, they are now restricting themselves only to sure-fire problem-free projects or 'safer' markets like Japan and South Korea (05N1).
Critics of water privatization complain that it tends to focus on urban consumers whereas the vast majority of those who most need water live in rural areas. Worse, privatized water operations are diverting water in rural areas to urban centers, said Kuala Lumpur-based economist Charles Santiago, coordinator of Monitoring Sustainability of Globalization. They do this in two ways: by actually channeling water meant for rural areas into urban areas and by ground water mining in rural areas for use in producing bottled water, which is largely consumed in urban areas (05N1). Over the several years prior to 2006, directors of global water corporations were buying or leasing land in New England towns. Then they announce plans to pump, bottle, and sell millions of gallons of "blue gold." The largest water-bottler in the US -- Nestle Corporation -- makes $1.7 billion/ year peddling the water it pumps from under communities.
The experience in cities across Asia and elsewhere is that when multi-nationals enter the scene, or when private participation is introduced, water rates invariably soar. For instance, in Manila, the government touted water privatization as the solution to a looming water crisis in the Philippines. 'They promised there would be no price hikes in water for five years, but within three years, they filed for tariff increases. Instead of the promised lower rates, Maynilad Water Services, which holds Manila's west zone concession, raised tariffs by as much as 400% between 1997 and 2003. Manila Water Company, the east zone concessionaire, raised water rates by 700% in the same period (05N1).
When Manila's privatized arrangements failed, the eventual 'solution' by the Philippine government was 'rehabilitation'. Others called it a bailout. Manila civil groups filed a petition in court to oppose 'rehabilitation', arguing that it is against public interest and would only burden consumers and taxpayers. In Thailand, thousands protested against the government's privatization policy in early 2004 - though the administration has since reiterated its plans to privatize. In Malaysia, the Coalition Against Water Privatization, made up of 26 civil groups, is opposing Malaysia's plan to privatize more publicly owned water utilities (05N1).
Recently many companies operating private water supplies have been having second thoughts (06E2). Water is heavy and hard to transport, making it difficult for a big company to achieve economies of scale. Also government regulation is unpredictable. One international water company (RWE) has concluded that a global water company "just doesn't have outstanding advantages." Only about 5% of water services worldwide are estimated to be in the hands of the private sector. In a report in the spring of 2006, the UN said water privatization and accompanying price increases are "creating social and political discontent, and sometimes outright violence" in poorer countries. "It now seems like the trend of increasing privatization is reversing," the UN report concluded.
In 2004 a major seminar (04K2) was sponsored by the World Bank, mainly for companies interested in possibly acquiring water utilities in developing nations. The opinion of virtually all the experts who spoke was decidedly negative on the possibilities for investing in water utilities in developing nations. They noted the extreme and growing needs to further develop water supply systems in developing nations in response to growing demands and decaying infrastructure generally. Yet the potential for recovering adequate returns on investment rarely exist. This apparent contradiction clearly puzzled most of the experts, but it should not have. The cost of the additional infrastructure just to accommodate population growth in the developing world is roughly $1.2 trillion/ year. This is money that people with a median income of $2/person/ day (and their governments) simply don't have, since this income is essentially subsistence-level, and many people earn half of that. But this also means that they don't have the money to pay water bills that are sufficient to cover both operating costs and an acceptable rate of return on investment of a private water company. This is why private utility companies are often faced with mob violence when they attempt to raise water rates from government-subsidized rates up to rates that cover both operating costs and a return on investment of the private company. This is also why developing nations usually cannot afford to repay the loans from foreign sources of capital that were used mainly to finance the infrastructure expansion required by population growth. Privatization of infrastructure and infrastructure expansion financed by external loans are essentially the same process with two different labels.
Perhaps nowhere are the rules of water-supply globalization more inappropriate (and needlessly restrictive) than in Canada. Canada has huge reserves of fresh water that it could, in theory, sell to other nations that are in short supply. However if Canada ever decides to sell its fresh water on the global marketplace, WTO rules would then prevent Canada from ever deciding to take it off the world market. So Canada has wisely (under the circumstances) decided not (never?) to sell its fresh water in the global market place. The Great Lakes, for example, undergo a several-decade-long cycle through very high water levels (that damage shorelines, etc.) followed by very low water levels (that make Great Lakes shipping difficult). If Canada were forced to continue selling Great Lakes water on global markets even during periods of excessively low water levels, disruptions to Great Lakes shipping could be even more extreme and costly. The rules of water globalization are simultaneously depriving water-short nations of a source of fresh water while depriving Canada of potential markets for its surplus fresh water.
Proponents of privatization usually argue that it improves efficiency. This is not always the case however. All too often a state-owned industry is "privatized" by selling it to a politically well-connected individual who takes his/ her monopoly for all it is worth. In 1990 the Mexican government of President Carlos Salinas de Gortari sold his friend, Carlos Slim, the Mexican national phone company, Telmex, along with a de facto commitment to maintain its monopoly for years. Then it awarded Telmex the only nationwide cellphone license. Today, Telmex has a 90% share of Mexico's landline phone service and controls almost 75% of Mexico's cellphone market. Mexicans pay well above average for landline, cellphone, and Internet access. Carlos Slim is now the world's richest man, with a fortune worth $59 billion. In 2006 there were 10 Mexicans among the world's 946 billionaires. Many of Mexico's ten billionaires were created by the government during the privatization of state-owned companies in the 1990s. Former Mexican president Vincente Fox appointed a former Telmex executive as minister of communications in 2000 (07P1).
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Privatization of Other than Public Water Systems
The International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO) used the leverage they had via their loans to developing nations and globalization trade agreements to impose extreme hardships on deeply indebted developing nations. They forced these nations to devalue currencies, privatize state infrastructure and services, remove import controls and food subsidies, charge consumers the full cost of health- and education services and generally downsize the public sector. These imposed policies are often collectively termed "Structural Adjustment Programs" - SAPs. They devastated rural smallholders (farmers) by eliminating government agriculture subsidies and pushing them into global commodity markets that were dominated by developed world agribusinesses (that are heavily subsidized by developed-world governments) (00B1). For the typical developing nation with an economy that is 50-70% agriculture-based, this is no small matter. Cambodia and similar developing nations in Southeast Asia illustrate the point. About 80% of Cambodians work in agriculture - typical of poorer developing world countries. Before it joined the WTO in 2004, impoverished Cambodians agreed to expose their farmers to more competition that the wealthy EU and the US were willing to accept for theirs (06W1). Unfortunately the poorer of developing nations lacked both the negotiating skills and political clout to pull this off, and their staggering external debt gave them a weak hand to start with. The Internal Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO) have overwhelming influence over countries with large external debts, and these organizations take a dim view of tariffs, thus giving the US and EU the upper hand in any trade negotiations. The results of all this were huge trade deficits that poorer developing nations like Cambodia cannot afford (06W1). (They cannot afford to subsidize their agriculture to anywhere near the extent to which the US and the EU subsidize theirs.)
All this was apparently designed to make developing world economies more "efficient" and thereby enhance the economic well being of the citizenry involved and thereby enhance the prospects that the developing world's several trillion dollars of external debt might some day be repaid. The results achieved were the opposite of those apparently intended. Some nations (e.g. Chile, China, Viet Nam) were able to avoid serious economic harm by instituting policies that ran counter to the "free trade" spirit and intent of globalization treaties and to the demands of the IMF et al. Other nations were devastated. (See Section (4-C) of Ref. (07S2).) Note that protectionist tariffs and subsidies were the mechanisms used by today's wealthy nations to climb from agriculture-based economies (typical of today's developing nations) to economies based on urban, high-value goods and services (03C1).
The UN's major study of urbanization (03U1) concluded that the single main cause of increases in poverty and inequality in developing nations during the 1980s and 1990s was the "retreat" of the state (i.e. privatization imposed by SAPs). The middle class disappeared. The brain drain to oil-rich Arab countries and to the West increased dramatically (95B1). In Africa, SAPs resulted in capital flight, collapse of manufactures, marginal or negative increases in export income, drastic cutbacks in public services, soaring prices, and steep declines in real wages (97R1). Developing world economies tend to be predominantly (e.g. 70%) agriculture-based. Hence, during the past few decades, SAPs were one of several key causes of mass migrations to the wretched slums that ring nearly all large urban areas in developing nations. There the ex-farmers found themselves in the informal economy - something they had no experience in dealing with.
In South America during 1970-1990, per-capita food supplies increased by almost 8%; yet the number of hungry people increased by 19%. In South Asia during 1970-1990, per-capita food supplies increased by 9%; yet the number of hungry people increased by 9% (00R1). In contrast, China (which was able to avoid being affected by SAPs), the number of hungry people dropped from 406 million to 189 million during 1970-1990 (00R1). Argentina has always thought of itself as Latin America's model for egalitarianism (08L1). In the 1990s its public sector was privatized (by "Structural Adjustments Programs" (SAPs) imposed by the World Bank, the IMF and the WTO) and the economic situation began to deteriorate. The financial crisis of 2001 (the rapid currency devaluation that also devastated much of southeast Asia and much of Latin America - except Chile that rejected SAPs) pushed 50% of Argentina's population into poverty. Argentina's national currency collapsed; savings accounts were wiped out. All this made Argentina much more like the typically "segmented" (stratified) societies common in the rest of Latin America. Some attribute Argentina's lingering income disparities to a decline in the quality of public education. At the peak of the 2001 crisis, half of all jobs in Argentina wound up in the "informal" sector. As was the case elsewhere in the developing world, few jobs in the informal sector provided benefits, protection, or true prospects for mobility. The situation could be permanent; since privatization of the public sector (imposed by SAPs) in the 1990s usually changes public education to private education. Students' families must therefore pay directly for their children's education or see their children remain uneducated. Today, 25% of Argentina's population lives in poverty -quite a comedown for a nation that once prided itself in an egalitarian ethos (08L1).
The major UN study of urbanization (03U1) concluded that, in modern times, instead of becoming a source for growth and prosperity, SAPs and trade liberalization (globalization) have caused cities of developing nations to become "dumping grounds" for surplus populations working in unskilled, low-wage "informal" service industries and in trades without any protection that labor laws and standards would normally provide. The huge growth of this "informal" labor sector was concluded to be a direct result of trade liberalization (globalization) (p. 40 and 46 of Ref. (03U1)).
One should hasten to note that the developing world's subsidies of food, education, health-care, utilities, etc. had been financed largely by borrowing from external sources. Hence they were not sustainable and were bound to collapse anyway. The real mistake was that the IMF, World Bank and WTO viewed these subsidies as "bad economics" caused by "bad government" (at least according to one author of Reference (03U1)). They therefore concluded that, by removing these subsidies, developing world economies would become more "efficient." This, they allegedly believed, would improve the lives of developing world people. The real cause of the external loans and the subsidies they financed was the extreme capital scarcity cause by the costs of infrastructure growth necessitated by population growth. So it would have been just as hard for developing world people to pay the unsubsidized cost of food, health care, education and utilities as to repay their massive external debts. Both options were impossible, so SAPs and trade liberalization simply bought the non-sustainability issue to a head sooner, but otherwise accomplished nothing for those nations having little to offer the global marketplace but unskilled labor earning subsistence wages and agricultural products that cannot compete with heavily subsidized agricultural products from developed nations.
Attributing the developing world's ills to "bad governments" (like the IMF, World Bank and WTO did) is a commonly encountered false ideology. In reality, the developing world's ills are the cause of that world's "bad governments." Cause and effect have been interchanged. Population growth in developing nations produces a need for about $1.2 trillion/ year to finance the infrastructure growth needed to accommodate population growth. This drain on financial capital leads to human capital scarcity, increasingly desperate (and bloody) struggles for basic human needs, political-, social- and economic instabilities, increasingly greater (and more expensive) difficulties in administering basic government functions, and hence brutal leadership and "bad government." (For a far more detailed analysis of this issue see Chapter 4 of Ref. (08S2)) Billions of people have been paying a terrible price over the past two decades for this largely ideology-based error. What is even more tragic is that population growth and the resultant developing world's ills could have been greatly reduced by relatively small investments in contraception, family planning, and the marketing of the virtues of small families etc (07S1). All this would have greatly increased the probability of the external debts of developing nations being paid off. Substitution of ideology for analysis has almost certainly contributed significantly to developing world environments dominated by wretchedness and hope deprivation - environments where terrorists are easy to recruit, and where armed conflicts are more likely to develop (04P1).
~ Some Polls on Public Attitudes toward Privatization ~
The above helps to explain why the number of privatization transactions in developing countries peaked in 1994 at around 1100/ year. That transaction number during 2000-2003 was less than 200/ year. Keep in mind that, frequently, privatization is forced upon developing nations as part of a "Structural Adjustment Program" by the World Bank, the IMF and the World Trade Organization using the leverage these entities have as a result of the huge external debts that many developing nations have.
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95B1 F. O. Balogun, "Adjusted Lives: stories of structural adjustment," Trenton NJ (1995) p. 80.
97R1 Carole Radoki, "Global Forces, Urban Change, and Urban Management in Africa," in Radoki, Urban Challenge (1997) (See Charles Green, editor, "Globalization and Survival in the Black Diaspora: The New Urban Challenge" (1997).
00B1 Deborah Bryceson, "Disappearing Peasantries? Rural Labor Redundancy in the Neoliberal Era and Beyond," in Bryceson, Christobal Kay and Jos Mooji, editors, Disappearing Peasantries? Rural Labor in Africa, Asia and Latin America, London (2000) p. 304-305.
00R1 Peter Rosset, "Lessons from the Green Revolution," Food First (March/ April 2000) 6 pp. http://www.foodfirst.org/media/opeds/2000/4-greenrev.html
02R1 Mort Rosenblum AP Special Correspondent, "Mexico's Big Thirst" (8/17/02) (The Associated Press).
03B5 Jessica Budds and Gordon McGranahan, 'Are the debates on water privatization missing the point? Experiences from Africa, Asia and Latin America', Environment & Urbanization, 15(2) (October 2003) pp. 87-113.
03C1 Ha-Joon Chang, "Kicking Away the Ladder: Infant Industry Promotion in Historical Perspective," Oxford Development Studies, 31(1) (2003) p. 21.
03I1 International Institute for Environment and Development (IIED) Water privatization fails to fulfill its promises http://www.id21.org/society/s2bjb1g1.html Source: Jessica Budds and Gordon McGranahan, "Are the debates on water privatization missing the point? Experiences from Africa, Asia and Latin America" Environment & Urbanization, 15(2) pp. 7-113, (October 2003).
03U1 UN-Habitat (The UN's Human Settlement Program) "The Challenge of the Slums: Global Report on Human Settlements 2003," London (2003) (the first truly global audit on urban poverty).
04K2 Sunanda Kishore and Christopher Head, (Independent Consultants working with the World Bank), "World Water Week: Report on the Seminar on Financing Water Infrastructure," World Bank and the Stockholm International Water Institute Stockholm (8/15/04) 23 p.
04P1 Population Action International, "How Demographic Transition Reduces Countries' Vulnerability to Civil Conflict" in PAI's publication The Security Demographic: Population and Civil Conflict After the Cold War (2/11/04) http://www.populationaction.org/resources/factsheets/factsheet_23_securityDemog.html.
05K1 Sunita Kikeri and Aishetu Fatima Kolo of the World Bank, "Privatization: Trends and Recent Developments," World Bank Policy Research Working Paper 3765 (November 2005).
05N1 Anil Netto, "World Water Day - Asia: Private Sector Still Eyeing to Own Every Drop", Inter Press Service News Agency (3/22/05).
06E2 Mike Esterl, "Great Expectations for Private Water Fail to Pan Out," Wall Street Journal (6/26/06) p. A1.
06W1 Paul Wiseman, "UN disputes US position on free trade's impact on poverty," USA Today (7/5/06).
07P1 Eduardo Porter, "Mexico's Plutocracy Thrives on Robber-Baron Concessions," The New York Times (8/27/07).
07S1 Bruce Sundquist, "Strategies for Funding Family Planning, Maternal Health Care and battles against HIV/AIDS in Developing Nations as Options Expand, Political Environments Shift and Needs Grow: A Critique," Edition 4 (August 2007) http://home.windstream.net/bsundquist1/fund.html
07S2 Bruce Sundquist, "Globalization: The Convergence Issue", Edition 16 (September 2007) http://home.windstream.net/bsundquist1/gci.html
08L1 Sarah Miller Llana, "Class Divide Hardens for Argentina's Growing Poor," The Christian Science Monitor (1/7/08.))
08S1 Bruce Sundquist, "The Informal Economy of the Developing World: The Context, the Prognosis, and a Broader Perspective," Edition 1 (March 2008) http://home.windstream.net/bsundquist1/ie.html
08S2 Bruce Sundquist, "The Controversy over US Support for International Family Planning: An Analysis," Edition 8 (April 2008) "http://home.windstream.net/bsundquist1/ifp.html"
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