QBR Print Edition 2021-2022
By: Aritra Saha
In 1997, southeast Asian capital cities Jakarta and Manila were both undergoing financial difficulties, prompting each to undertake near-identical decisions with respect to their water.
The metropolitan area of Manila chose to offload their water distribution facilities and services to two private companies. Over 20 years later, and despite the turbulence borne from the earlier Asian Financial Crisis and the subsequent Global Financial Crisis, 94.3% of Manilans now have access to clean drinking water—up from 58% pre-privatization.
Jakarta did not share that same success. Seeing through a water privatization transition that has not improved the distribution infrastructure, the Indonesian capital further poses similar utility rates as in Manila, and, crucially, continues to not provide service to 41% of the municipal population.
Irrespective of whether these private companies take control of part of the infrastructure or the whole distribution system, the water privatization model is evidently imperfect, while leaving it in corporate hands is arguably outrageous given the liquid’s status as a human right and its necessity to our survival. However, with many governments now cash-strapped from the effects of the COVID-19 pandemic, external providers may return to the fore once again.
If this proves to be the case, then the water privatization model must adjust in certain key areas for it to succeed in more than a few off-cases.
Align Benefits & Incentives
At the highest level, privatizing water provision services arrives with the expectation of improved infrastructure, greater service access, and reduced long-term usage rates. Municipalities must then focus on integrating these core measures into the profit-centric environment surrounding private investments.
Providing the right incentives within the agreed contracts then becomes a pivotal element of these relationships. It’s what facilitated private ownership in Ho Chi Minh City to reduce water leakage by nearly 50%—equivalent to providing clean water to an additional 500,000 people in the area.
Doing so is certainly much easier via adopting a form of public-private partnership (PPP), where local governing bodies maintain relative control over either the physical assets (water system) or other service components. Though the right incentive structure will motivate private firms to focus on investing in the local infrastructure, the PPP approach becomes especially crucial during economic downturns: When corporations opt to levy increased rates on their citizens to balance their ailing books, it then falls on the local government to exert their control over the water systems to reduce these charges or prevent them altogether.
In this manner, expectations surrounding water infrastructure and accessibility growth can certainly be met, but now the emphasis on costs becomes further magnified.
Abolish the Monopoly
The consumer cost-cutting conundrum is rather ironic given that the major selling point of privatization is built upon increased efficiencies leading to reduced costs for the consumer. The unfortunate reality is that this draw to the private sector is predicated on competition driving greater innovation and better services amongst competitors, leading to this price drop for the average citizen.
This is not what is happening within water privatization. Upon agreeing to a contract with a local municipality, these private companies effectively operate as monopolies as the services for the given area become completely managed by this one company. For water privatization to truly succeed in a complete capacity, implementing competitive measures into the existing model becomes the imperative.
Reducing the monopoly’s power through bidding processes and benchmarking against competing water providers is within reach and can certainly be seen as a first step. These measures would enable public bodies to better identify the right partner for these crucial services, consequently reducing any firm’s leverage entering such an agreement. From there, however, the goal must evolve towards integrating numerous providers into the distributive mix. The common carriage model, as attempted in the U.K., may be one such approach, functioning with a few providers that compete against each other across the full water distribution supply chain to attract consumers to their services.
Ameliorate Oversight & Regulation
Ultimately, the appropriate incentives, partnerships, and level of competition mean nothing if the regulations are not there to support these measures.
This lack of oversight is what hampered Grenoble, who in 1995 witnessed their mayor be charged with bribery relating to these contracts. It’s what continues to plague Santiago, where reduced supervision over private water companies since the 1980s has led to millions in the Chilean capital still without access to clean water. A stronger foothold into private matters may have even prevented Jakarta, as mentioned earlier, from falling astray due to complications within these private corporations.
In an environment as volatile as one created by the ongoing pandemic, enforcing regulations which offer local municipalities insight into the state of these private operators, while further managing measures such as the aforementioned incentive structures becomes essential for the privatization model to thrive in any capacity. Coupling this oversight with competitive measures would thus properly incentivize private companies to act in the best interests of their consumers, leading to the desired impact entailing water infrastructure, access, and usage rates.
Resist the Temptation?
Despite the potential changes, the best solution available may be to simply uphold public water services. The World Bank has already proposed various financing solutions for distressed local governments in order to continue to serve their citizens. The wave against privatization was already a considerable force prior to COVID-19’s reckoning, and it is entirely possible that this persists even as nations begin to move past the worst of the pandemic.
There is, unfortunately, no way of knowing for sure if this will prove to be true; in that case, making the most of a rainy day might not sound that bad after all.