vonWeizsackeretal_2_2005

vonWeizsackeretal_2_2005 - s s ,E . e- 3 . PART El...

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Unformatted text preview: s s ,E . e- 3 . PART El Privatization in Many Sectors: Case Studies and Snapshots INITEAL REMARKS Oren R. Young In this critical section of the book, we consider a wide range of concrete situations in which societies have chOsen combinations of privatization and deregulation during the recent past. Formally speaking, our examples do not constitute a representative sample of the thousands of experiments with privatization and deregulation that have made privatization one of the mega trends of our times. Nevertheless, we have cast our net Widely and included a large number of cases covering a diversity of situations. These cases range across numerous functional areas or secrets, including natural resources and extractive industries, a variety of other industries and many social services. They pertain to all of the w0r1d’s regions, as well as to advanced industrial societies, countries with economies in transition and developing countries. We are confident that the examples we desaibe include the major types of privatization and that our findings are robust, despite the fact that our sampie is not representative of the entire universe of cases of privatization. Throughout our work on the limits to privatization, we have pursued a Strategy of maximizing breadth rather than depth. Thus, we have chosen to sample a wide range of situations involving privatization and deregulation rather than to engage in an in—depth account of a small number of cases. Some of the contributions included go into the details; but others are extremely brief, often identifying a single point of interest rather than developing a real case Study. We call these shorter pieces snapshots to differentiate them from actual case studies. Our goal has been to identify the main issues associated with privatization as a mega trend rather than to dissect individual cases in sufficient detaii to offer specific policy recommendations. We want to pinpoint the most ]6 PRH’ATIZATION [N MANY SECTORS important factors that determine the balance between the POSlEiVC and the negative impacts of privatization. When we come to discuss strategies for N rebalancil‘lg the private and the public in Parts III to V of our book, we will be seeking to formulate general conclusions rather than to redress the problems of privatization in individual cases. SOLVING WATER-SUPPLY PROBLEMS IN BOLIVIA: BEYOND COCHABAMBA ,Ralf‘Stlidbofi‘ In the year 2000, a symbol for private water supply was born: Coehabamba. The privatization of the water system of Cochabamba, Bolivia, became a notorious failure. Bechtel Corporation pulled out after Furious demonstrations against its plan to increase water prices. However, since then Coehabamba has become a symbol so powerful that'it casts its shadow over positive examples of successful privatizations — even when these other examples are located just 250km from Cochabamba, such as Bolivia’s capital, La Paz. For many, another disaster seemed inevitable in La Paz. In 1997, South America’s poorest country handed over its capital’s water supply to the world’s most powerful water corporation, Suez Lyonnaise des Eaux. The reform was due to a number of problems that had arisen simultaneously during the 19905. Bolivia’s urban population had doubled since the 19703, chiefly due to migration From rural parts of the country, One of the fastest growing cities was El Alto, once a small suburb ofLa Paz. By the early 19905 it had. grown to 350,000 inhabitants ( 2003 figures provide even a total between 600,000 and 700,000 of mostly impoverished people). Yet, infrastructure, including water supply, had failed to keep pace. For this reason, the Bolivian government adopted a major water programme in 1990 with the aim of substantially improving the public water supply in its burgeoning cities. The World Bank provided financial support for the project — until 1997. At that point, the World Bank experts sounded the alarm. Improvements in water and sewerage services in the La Paz metropolitan region - and in Coehabztmba a were making far slower progress than planned. SAMAPA (Servicio Autonomo Municipal de Agua Potable y Alcantariliado), the mLuu'cipal water company, was two years behind the agreed schedule. A wastewater management project supported by German development agencies already Faced an overall delay 003.5 years. Seven years after the public water programme was launched, less than one hOLlSChOld in three in El Alto had a sewerage connection, 18 NA'I'UKAI, llESUUR‘IL-S ANI) lililrfi'l‘ltll INDUSTRth and even in more prosperous La Paz, sewage from one household in every three flowed untreated into the Rio Seco (and from there into Lake Titicaca). Almost half of the piped water seeped away through leaks or was not paid for. At the same time, the poorest rapidly growing districts still had not been connected to the potable water supply. Although coverage in the La Paz metropolitan region was relatively high from the very beginning (at arotmd 85 per cent), the poorest inhabitants still had no access. As the population in El Alto kept growing at about 5 per cent per year, the number of people with no access increased and ever more people had to buy their water from dealers who often charged ten times the regular price. Two reasons were cited for SAMAPA’S problems. First, the company was said to be too linked to politics, with a supervisory board composed mainly of local and national politicians. Second, the company lacked the financial resources to invest in supplying the poor marginal areas and, indeed, had no incentive to do so (Kornives and Brook Cowen, 1998). Therefore, in July 1997, the World Bank made privatization of La Paz water distribution (but not the processing plants or reservoirs) a precondition of its loans’ extensions. The tender process took place in April 1997 and the 3073763.: concession was awarded to the French—BolivianiArgentine consortium AISA (Ag-mas del Illimani S.A.), of which the French company Suez owned 59 per cent of the shares. A detailed catalogue of measures was agreed, especially for the first five years. A nationally based regulation agency was to monitor the progress. Five years later, substantial progress had been made both in equity terms of water access and in efficiency terms of water supply. Following inVestment by AISA totalling US$53 million, the number of water connections rose as planned from 154,000 to 225,000 in 2002 — an increase of 45 per cent. Most of the connections (45,000) have been supplied in the poor districts of El Alto. The. number of households connected to the sewerage system in El Alto has increased from 30 per cent to 54 per cent (contractual target: 43 per cent). In La Paz, around 90 per cent of households are now connected to the sewerage system (contractual target: 77 per cent). In a direct comparison, too, AISA’S performance is well ahc ml of the public water company SAMAI’A. During the first three years after privatization, AISA supplied around 60 per cent more new water connections and 180 per cent more sewerage connections than SAMAPA in its last three years of operation. At the same time, water prices were frozen {or the first live years. Shortly before the tender process took place, prices were increased and an ‘increasing block tariff ‘ was introduced in line with social needs. On average, the price of water increased by 38 per cent, but fell for approximately one third of customers. This balanced result occurred because, first, the block tariff is based on consrunption, with a social pricing structure being introduced for the first 30 cubic metres; and, second, the old basic charge that corresponded to consumption of around 10 cubic metres per month was abolished. The new price was based solely on consumption and therefore led to cost savings for the poorest and most frugal customers as the average consumption in El Alto ,' _ King’s”: WATE R 19 was just about 8 cubic metres per month. In 2001, the average monthly water bjjj thus amounted to the local currency equivalent of US$1.90, with average monthly income standing at around US$134 during this period. The charges imposed by Bolivia’s only private operator became among the lowest in the country Alongside these improvements in the equity of water access, AISA w able to achieve substantial improvements in the efficiency of water supply Although AISA initially took SANlAPA‘s entire workforce of 640 people onto its payroll, it later gradually shed around one third of these jobs while substantially expanding the network and significantly increasing company turnover. With respect to overall employment goals -- which had not been part of the contract - this resulted in around 220 job losses. At the same time, the company substantially improved efficiency m for example, by dismantling tiers of management, deccntralizing its operations, and introducing new information technology (IT) systems. On average, A [SA now employs two members of staff per 1000 connections, compared with a figure between five and nine for Bolivia‘s public water utilities. A more efficient and consistent invoicing procedure has slashed the outstanding debts owed to the company and reduced the share of cnon-revenue water” from 48 per cent to 40 per cent. Compared with the public utilities company, which rarely covered its costs despite the low level of investment, costs as a proportion of total revenue have fidlen to around 75 per cent under AISA. Therefore, AISA has not needed subsidies and has paid a U833 million annual licence fee to the government (Komives, 1999; Foster, 2001). Thus, contrary to widespread concerns about trade-offs between efficiency and equity Lmder privatization, AISA increased efficiency and converted a substantial part of these efficiency gains into equity gains —- which had been a condition of the original tender. This proved essential. Suppliers in other countries had tended to focus almost exclusively on water price. Contracts were typically awarded to the bidder offering the lowest tariffs. In La Paz, the regulatory agency fixed the price for five years and focused on investment. Thus, the contract was awarded to the supplier promising the highest investment in new connections. The tender‘s stated objective was to supply water to as many people as possible in the low income bracket, not to hold down water prices across the board. Moreover, anti-poverty provisions and contractual obligations helped to ensure Suez’s participation in a Water policy focusing on the poor people in the region, whereby Suez’s water business in La Paz was utilized for social objectives. The concession contract. among other stipulations, states that at least 50 per cent of new connections must be supplied in poor districts. Various penalties apply for failing to meet these targets. The bloclt tariffs resulted in Cross-subsidies in line with social needs. The contractual agreements were monitored by a fairly independent regulatory agency. Nevertheless, after five years of privatization, the case of El Alto still has some way to go to become a model of best practice. For example, a risk typically associated with interventionist policies has become a reality in El as also 20 NATURAL RLSOURCLS AND RELATED INDFSE'Rll-Ih Alto, where cXcessivcly rigid conditions imposed by the state impinge upon flexibility. For instance, the regulatory agency stipulated that all new potable water connections had to be high—quality domestic connections. This excluded cheaper interim solutions, such as communal connections, or technically simpler options and made new connections unnecessarily expensive (specified maidmuln price: US$150; Arevalo-Correa, 2000). Other regulations granted too much flexibility to the investor. For example, AISA had exclusive rights as a supplier in the whole area from the very beginning. Following this rule, in some districts other sources such as standpipes had to be closed down even when AISA was not yet able to offer its service. It took a couple of years for the regulatory agency to case these provisions and to allow, for example, ‘condominial water systems‘ with lower standards and alternative suppliers. This also illustrates a structural failure. Integrating the customers in the process could have avoided such shortcomings from the very beginning. However, with respect. to ‘participation programmes” and ‘stakeholder processes”, La Paz is surely no model for other cases (Crespo and Laurie, 2002). At the same time, the agency acted without due care in setting some criteria for better supply. For example, the concession contract states that AISA must supply water connections to all households in districts with a specific minimum population density. However, these districts were not fixed. Assessment of progress, therefore, was difficult since ‘population density” is something of a grey area in places widi many illegal settlements and rapid population growth. According to AISA, the obligation was fulfilled in 2001, and onwards, as the company was no ionger receiving requests for connections from such areas. Thus AISA could claim a supply rate of 100 per cent. However, such a claim, based on the weak criterion of density, is hard for a regulatory agency to verify. These examples of shortcomings illustrate that regulation is a continuing process of checks and balances between the state and the operator. The La Paz case also demonstrates that the state need not be the loser in this game if it manages, in particular, to set up a strong regulator. This is shown, too, by the city’s 2003 price negotiations with Suez. The contract had stipulated that the levels of tariffs were to be renegotiated in 2002. However, the government delayed the renegotiation, which had quite a negative impact on AISA’S revenue situation. After the compmy achieved profits of US$85 million in 1999, yields fell to US$57 million in 200.1, not counting expenses, such as servicing investment loans. In 2003, experts feared that the company’s financial situation could deteriorate significantly to the detriment of future investment. An independent study recommended an average price increase of 22. per cent, and ELISA mede suggestions about how this could be implemented without banning the poor. Even after this increase, water prices in La Par. and El Alto would still be among the lowest in the country. However, due in part to the events in Cochabamba, the political climate in Bolivia had become far less conducive to privatization, and water price increases were viewed as a highly sensitive political issue, especially in the wake ofelections in 2002. Finally, both sides rah“, nude-.2 ., ._ WATER 21 agreed, in 2003, on some financial incentives (such as higher prices for new connections) equivalent to a price increase of just over 10 per cent. Water tariffs themSelvcs remained unchanged since the start of the pn'vatization. In conclusion, four lessons can be learned from the La Paz case so far: 1 Private water supply can meet both equity goals and efficiency goals iF the incentives for the investor are set intelligently and From the very beginning, including the tender. Even small details of regulations and contractual provisions influence the outcomes of private-sector participation. They must be considered and phrased Far more carefully than has often been the case elsewhere: with predictably disastrous results. 3 If sufficient attention is paid to these details (if necessary, by taking external advice as in La l’az), even small stales or cities can involve large private corporations in a water-supply programme designed to improve the situation of the poor, 4: If privatization is conducted this vvay1 far better results can be achieved than by an inefficient public utilities company. Ix) However, La Paz, just as much as Cochabamba, is not the symbol for water privatization. Nor is it the best model for Water supply Bolivia, in particular, demonstrates how important it is to think on a case-by—case basis. In Cochabamba, the state’s initial failure was compounded by a poorly thought- out privatization programme; in Santa Cruz, Bolivia‘s third largest city, a public supplier is achieving good results because it is a highly transparent co- operative organization which has deveioped strong community links over the last 25 years; while in La Paz, an inefficient public company did not get the job done and was outperformed by the biggest multinational corporation of the world’s highly contested water industry (Nickson, 1998; OED, 2002) A ‘WATERL’EAU’ IN GRENOBLE, FRANCEI fl/Iartin Staime For the French, Grenoble is Widely known as the ‘Waterl’eau’ of the privatization of water services. ‘Waterl’eau’ is a play on words that parallels Napoleon’s first great defeat at the Battle of Waterloo with Grenoble’s water service privatization. Corruption and over-pricing led to a wide range of national Commissions and legal processes that signify, in some sense, a defeat for the French method of privatization. The principal actors in this story include local politicians, a group of civic associations, as well as the local Ecology party and Suez,2 the second largest water services company worldwide. In general, French municipalities have always been responsible for water services themselves. Today, half of them accomplish this through a municipally owned enterprise formally separated from the city council (in French: Rift-B). . g _ - w . ‘xfi‘m’lxufli'b. ...
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vonWeizsackeretal_2_2005 - s s ,E . e- 3 . PART El...

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