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Small-scale operators: the other private sector

Beyond water privatization, which involves contractual relationships between a government and formally established large companies, there is also "the other private sector" in water supply consisting of small-scale, often informal local operators who exist in most developing countries and sometimes provide a large share of the population of a city with water. For example, a study of six Latin American countries showed that small-scale private providers provide water to 25% of the population with water in seven cities. In Africa, they serve an estimated 50% of all urbanites. They mainly operate in slums, serving the people who are not catered to by the city authorities. Many small-scale water operators provide water through tanker trucks or animal-drawn carts. Others operate water distribution networks fed by wells, as it is the case in Asunción, Paraguay, and in Sanaa, Yemen. Small-scale operators can be owned by individual entrepreneurs or can take the form of cooperatives, as it is the case in Honduras. Small-scale operators do not always comply with technical norms and the quality of the water they provide or their tariffs are often not regulated. More often than not, their tariffs are significantly higher than those of public water utilities. This can attributed to either profiteering or simply the high transportation costs expended during the distribution of water. They typically lack capital to further expand their network. However, in a few pilot cases – such as in Kenya, Uganda, Cambodia and Vietnam – international aid agencies have provided them with grants to increase access, often in the form of output-based aid.

Motive

The government of Cuba entrusted the water supply of Havana to a private company in order to improve service quality, showing the diversity of motives behind water privatization.

The motives for water privatization vary from one case to the other, and they often determine the choice of the mode of privatization: management and lease contracts are used to increase efficiency and improve service quality while asset sales and concessions primarily aim to reduce the financial burden or to expand access. Ideological motives and external influences also play a role, with market-liberal ideology favoring privatization, left-leaning ideologies opposing, and both conservatives and centrists falling in between, often based on local and business-minded considerations. Usually, several of the above motives are combined.

Increasing efficiency and improving service quality

Water privatization is seen by some as a solution to improving poorly managed public water utility systems. Symptoms of poor management can include low water bill collection, high water losses (known as non-revenue water), and intermittent water supply, sometimes lasting only for a few hours a day or a few days per week. In Algeria, Saudi Arabia, Colombia and Cuba increasing efficiency and improving service quality were important motives for water privatization. In these cases, the argument to privatize water is predicated on the belief that by adopting a market-based approach to the management of water, the service provider will be incentivized by profit to increase efficiency and improve service quality. Some critics argue that this belief is misguided because the water utility sector is typically monopolized by one private company. They claim that this fact counteracts many of the advantages associated with a market economy because it is competition between multiple businesses that drives prices down and ensure increasing levels of efficiency.

External influences

External influences, such as from the World Bank and the International Monetary Fund (IMF), often play a role, as it was the case in Bolivia and in several African countries. This may take the form of structural adjustment programs, whereby loans are given on the condition that the beneficiary country privatize their water utility system. Other aid agencies have also supported water privatization. These include the Inter-American Development Bank (e.g., in Ecuador, Colombia and Honduras), the Asian Development Bank (e.g., in China), the European Bank for Reconstruction and Development in Eastern Europe, German development cooperation through KfW (e.g., in Albania, Armenia, Jordan and Peru), French development cooperation (e.g., in Senegal) and British development cooperation (e.g., in Tanzania and Guyana). Critics claim that these external influences are problematic and argue that influencing water privatization is part of a broader movement of Western powers imposing neoliberalism on countries in the Global South. In the UK, the World Development Movement campaigned against the support of water privatization through aid from the UK.

Fiscal motives

In some cases, where access is already universal and service quality is good, fiscal motives dominate, as it was the case in Berlin, Germany, and in Chile. In Berlin the state government sold a 49.9% share of its water utility in 1999 for 1.69bn Euros in exchange for a guaranteed profit for the private shareholders amounting to the interest rate on 10-year government bonds plus 2 percent, as specified in a contract that was kept confidential until the state government was forced by a referendum to make it public. As a result, tariffs increased (15% in 2004 alone) and the state government's revenues from the company declined compared to the situation before privatization (168m Euro profit for the state in 1997 compared to a 10m Euro loss in 2003). In Chile, where no wastewater treatment plants existed prior to privatization, the government's desire to finance their construction off-budget drove privatization in 1998.

Fiscal motives for water privatization are also common in countries where water access and service quality is poor. In cities with rapidly growing slums, it is very expensive for the government to expand their water utility system infrastructure at the pace of the growing population. Furthermore, maintaining the good condition of old infrastructure is also expensive. Thus, if a significant portion of public funds is not allocated to maintenance, pipes and waste water treatment plants can fall into disrepair. For some countries, the cost of managing a public water utility system becomes unaffordable. In these cases, privatization can be seen as a possible solution for governments to attract national and international private investment.