Global Policy Forum

By Nancy C. Alexander

In its proposed "Water Resources Sector Strategy, " the World Bank Group asserts that there is a global consensus in favor of private provision of water: "Just as there is a global consensus on what constitutes a sound energy sector, so too is there a consensus on the central features of a sound water supply and sanitation sector. This consensus draws on the same principles of separating the roles of providers (increasingly private) and regulation and policy formulation and assessment (a public role), and of competition amongst providers."

This is music to the ears of industry. Water giants, such as Vivendi, have set aggressive targets for privatizing water. For instance, Vivendi plans to control 20% of the Asia's water markets (up from 1% in 1997) by 2010. Already, Vivendi and Suez, the world's two biggest water companies, supply water and sanitation services to 220 million people. About five percent of the world's population (300 million people) obtain water and sanitation services from private companies.

However, by declaring a consensus and enforcing that consensus through the policy conditions attached to its loans, the World Bank is overriding democratic processes in borrowing countries. The multilateral development banks (MDBs) should support their member governments in promoting national consensus-building about the appropriate roles for the public and private sectors in water sector reform. Instead, they are abdicating their responsibility and advancing private, rather than public interests, in ways that lack transparency or accountability.

In nearly all developed countries, water is a public good and governments are held accountable for delivering safe and affordable water. According to the Bank's own evaluators, "getting the private sector to focus on the alleviation of poverty and to design tariffs in a way that does not discriminate against the poor has proved hard to achieve in practice." ("Bridging Troubled Water," p. 22)

Now, the MDBs are racheting up their efforts to privatize infrastructure and social services. The World Bank and regional banks have adopted Private Sector Development (PSD) Strategies to accomplish that goal. And, the 2001 "Strategic Directions" paper of the World Bank's private sector affiliate, the International Finance Corporation (IFC), targeted "frontier" areas, including water systems, for business expansion. Especially in low-income countries, the IFC will increasingly take the lead in expanding private provision of water, while the World Bank will work with governments to design subsidy schemes to offset the costs of private provision to low-income consumers.

Democratic processes, which hold policy-makers accountable to citizens, cease to function when the hands of policy-makers hands are tied. Yet, creditors and donors aim to tie their hands during privatization processes, as described below:

It is useful to recall that, for individuals or institutions that start from a position of weak credibility, the establishment of credibility generally requires two things. First, a reasonably genuine recognition of the problem on the part of the individual or government. Second, the use of commitment mechanisms. Typically commitment is generated not by nice policy statements or "new years resolutions," but by drastic action, which tie the hands of the policy-makers, reduce their discretion and amount to "throwing away the key to the past. -- "PSD: Entrepreneurship, Markets and Development," The World Bank, May 9, 2001, p. 100.

The MDBs employ numerous levers to tie the hands of policy-makers and promote privatization, including the following:

1) Starving Public Services. The "aid cartel" of donors and creditors acts informally and formally to circumscribe the policy options of government. Informally, among donors and creditors, there is a growing consensus that, in most countries and circumstances, it is unwise to invest in public services. Rather, they believe that, if they withhold resources, governments will be forced to privatize. In other words, in order to be eligible for external assistance, governments often must be willing to privatize their services. Donors and creditors not only influence external flows of resources to public services, but internal credit flows as well. For instance, the IMF can require that, in order to obtain finance, a government must diminish or cut off the flow of domestic credit to loss-making state enterprises, including water utilities.

2) Threatening to withhold the "seal of approval." The IMF is the ringleader of the aid cartel, which is comprised of private banks, official creditors (UN agencies, development banks and export credit agencies, and bilateral donors). It is also called the "gatekeeper," since its approval represents a "seal of approval" for the rest of the aid cartel indicating that a government's policies are satisfactory. If the IMF (as head of a creditor cartel) does puts its "seal" on a country's progress towards privatization, its government may risk losing access to part or all of its external assistance and debt relief.3 The IMF has suspended debt relief operations for many countries for failure to privatize rapidly enough.

To the detriment of IMF members, the IMF insists that governments put a higher priority on budget austerity than on policies that would foster growth and development. For instance, often without considering the social or environmental consequences, the IMF can take the view that, governments should sell off state-owned enterprises to generate revenues and balance fiscal accounts. While balancing fiscal accounts is important, there are many paths to that goal.

3) Utilizing market mechanisms to allocate water. The World Bank and the Asian Development Bank are promoting systems which allocate water to "high value users" - e.g., industry and agro-business. If "low value users," such as subsistence farmers, are deprived of water, it could cost them their lives or their livelihoods. It is one thing to promote participatory management by water users through river basin associations or water users' associations. It is quite another to require that such associations employ policies which will marginalize or ruin their poor and powerless members.

4) Taking the step-by-step approach to privatization. It is typical for the IMF and an MDB to take a number of steps that will facilitate privatization, including decentralization, segregating water systems into profit-making and loss-making portions, so that the profit-making portion can be more easily privatized; passage of water-related laws (e.g., laws that permit foreign ownership of water rights and utilities), promulgation of new regulatory, and introduction of full cost pricing. It is not unusual for the MDBs to draft the laws and regulations and then require that borrowing governments adopt them or risk the loss of external assistance. Examples of the step-wise approach include:

a. Contingent system improvement. In cities and towns, it is customary for the IMF and the MDBs to prepare water utilities for private purchase by making overdue investments, implementing organizational reforms to increase efficiency, and other measures to improving their viability. Ironically, such efforts to attract private providers prove that public water utilities can become viable.

b. Decentralization. The World Bank withheld financing from Indonesia until the government agreed to accelerate its decentralization plans, which involve land management and zoning, as well as performance reporting from service delivery units and user councils. The Bank is supporting involvement by Indonesian civil society and the business community in the dissemination of the decentralization laws as well as an "elaborate information campaign" about decentralization. This approach is typical.

c. Cherry-picking. Water systems in developing countries are not inherently attractive to investors. To increase their appeal for investors, the Banks work with governments to neatly separate profit-making from loss-making markets in the water sector. However, fencing off (or "unbundling") profit-making markets promotes "cherry picking" or "cream skimming" by private investors. That is, private interests can manage or buy the profitable components of the water system (e.g., urban water) and either serve the loss-making portions with subsidies or leave these portions to the government (e.g., sanitation, peri-urban and rural water). In order to facilitate this process, the MDBs usually finance several years of public sector reform in order to restore the financial viability of water systems prior to their sale or lease.

When borrowing governments fence off a profitable segment of water systems, they invite competitive bidding for the water system. Governments wishing to attract private investors will have a strong incentive to define the loss-making component of a water project as broadly as possible, so as to maximize their profit extraction. Broad definitions of loss-making can either allow private companies to focus only on the richest and most accessible water customers, or enable them to demand larger amounts of public subsidies. Given the fact that the IMF and the MDBs pressure governments to allow private involvement in the water system, it is ironic that the institutions condone market segregation and contract designs that saddle governments with heavy fiscal obligations. Indeed, the unbundling approach undermines the viability of cross-subsidies, the cornerstone of equitable service distribution in virtually all developed countries.

d. Fragmentation of rural water systems. Decentralization and fragmentation of rural water supply and irrigation systems can facilitate the eventual purchase or leasing of these systems by large corporations. Fragmentation of the rural water system is usually achieved when an MDB only offers finance for private or non-profit water provision - not public provision. In this way, villages and rural areas are denied the option of public provision. Such loans have many names ("adaptable program loans," "social funds," "community water service loans", etc.)

5) Subsidies for private provision. Increasingly, donors and creditors will provide grants to support corporate water provision to poor areas and populations. Grants may be extended as direct subsidy payments to private providers or poor consumers (e.g., water stamps). Alternatively, grants may subsidize a government's welfare payments to poor consumers.

6) Manipulating information: The MDBs insists that governments conduct "public information campaigns" to persuade domestic constituencies of the virtues of private provision of services. This practice encroaches upon domestic decision-making and constitutes a flagrant conflict of interest. The MDBs also fail disclose information about water-related policy changes that they finance. This lack of transparency on the part of donors and creditors handicaps decision-making about basic service provision. Most of the terms and conditions relating to World Bank Group-financed sector restructuring are contained in sectoral or structural adjustment loan documents that are not publicly disclosed, even after Board approval.

7) Influence-peddling by corporations: In 1996, the World Bank paid about $10 billion to borrowing countries for foreign and local procurement. This represents a substantial market for private firms. However, that market is characterized by a significant level of "tied aid." One form of "tied aid" is called "twinning arrangements." According to the Bank's Handbook of Technical Assistance, "Twinning" is the establishment of an institutional relationship between an organizational entity in a developing country (the recipient) and a similar but more mature entity in another country (the supplier)." In practice, twinning enables the "mature" entity to profit mightily. For instance, the Phnom Penh Water and Sanitation Authority (PPWSA) obtained technical assistance from an Australian utility, which also provided Australian equipment and services.

Feasibility studies can also be mechanisms to "tie" aid. For example, a foreign government may approach an Asian government, which provides a list of the country's most severe environmental problems. The foreign government then puts together a bid and funds the feasibility study, which its firms bid on. For example, the Canadian government only finances a feasibility study, which can be conducted by a Canadian firm. The Canadian firm does a feasibility study and recommends a project that addresses the environmental problem (e.g., design and construction of a water or wastewater treatment plant, incinerators, landfills).

The project recommendation is given to a multilateral development bank -- The World Bank or the Asian Development Bank (ADB). The bank then gives its seal of approval to the study and project, and puts together a short list of contractors, including the Canadian firm that conducted the original study. Since the Canadian firm already knows all about the project, it gets the job. (At the ADB, U.S. firms don't even bid if Japanese firms perform feasibility projects. They know the Japanese firm will win.) Once the foreign company wins the bid, procurement of equipment goes to its national firms. If the U.S. wins a bid, they will procure U.S. equipment, even though English or French equipment might be less expensive. The Japanese, Germans, French, and English are no different. This process provides massive subsidies to foreign corporations.

8) MDB Guarantees. Private lenders and investors in infrastructure projects seek to protect themselves from risks by obtaining commercial or political guarantees from export credit agencies, private insurers, and multilateral institutions. Such guarantees shift private sector risk onto taxpayers - precisely the reverse of what privatization proponents promise for greater private sector participation in services. When private firms lend to or invest in a water project in a borrowing country, the Bank's guarantee promises the private firms compensation for certain losses if, under specified conditions, the Borrower does not meet its obligations. The MDBs offer two primary types of guarantees:

a) partial risk guarantees cover government obligations spelled out in agreements with the project entity and ensure payment in the case of debt service default resulting from non-performance of contractual obligations undertaken by governments or their agencies in private sector projects.

b) partial credit guarantees cover all events of non-payment for a specified part of financing. This helps to extend maturity periods, which is often significant in obtaining longer-term financing for large construction projects.

The MDBs claim that guarantees are indispensable for building the confidence and providing the incentive for private financiers to invest in infrastructure projects. Critics argue that such guarantees distort risk calculations and foist unsustainable price, demand, and currency risks upon the government.

There is not a clear distinction between political and commercial realms, which creates its own set of problems. As a general rule, however, commercial risks refer to the risks to profits due to production inefficiencies or lack of demand. Political risks refer to those risks over which the government has some measure of power. Mitigating political risks involves obtaining government commitments not to expropriate private holding, to protect the investment from consequences of war and unrest, to maintain foreign exchange convertibility, to maintain a favorable macroeconomic environment, to maintain an appropriate regulatory regime, to ensure aspects of the performance of state-owned bodies, and fulfill other contractual obligations.

The Bank's issuance of guarantees constitutes a serious conflict of interest. If Bank action to address social or environmental difficulties with privately-financed projects resulted in the disruption of a project or an escalation of costs, the guarantee could be called. In other words, it could be in the public interest for the Bank to "blow the whistle" on privately-financed projects. However, the Bank would be constrained from taking such action given its liability -- namely, the guarantee.

Furthermore, since guarantees are provided by the private sector, it is redundant for the MDBs to offer these products. If projects are not viable, the Bank should not distort risk calculations by providing extra comfort to investors and lenders. Assuming that the institutions do continue to utilize guarantees, they should use investment screens to ensure that projects meet specified "sustainable development" criteria.

In order to select the portfolios of Socially Responsible Investment (SRI) funds, investment screens have been commonly used by private investors in the United States and other industrialized nations. An investment screen is a set of non-financial (such as social or environmental) criteria that must be met by all companies in an investment portfolio. There are two kinds of investment screens: "negative screens" which are a set of criteria delineating what characteristics companies in the portfolio cannot have (production of nuclear weapons, operations in Burma, Superfund sites, etc.); and "positive screens," which are a set of criteria delineating what characteristics companies in the portfolio must have.

9) Advancing the WTO Agenda. It is no accident that WTO negotiations on services run parallel to MDB initiatives that promote the privatization of services. The WTO's General Agreement on Trade in Services (GATS) excludes services that are supplied in the exercise of government authority - that is, services that are supplied neither on a commercial basis, nor in competition with one or more service providers. The MDBs (and the bilateral donors) are systematically introducing competition and commercial pricing to the basic services sector - health, education and water. Hence, it is not a stretch to assume that these services may fall under the GATS disciplines. Should this happen, government authority and capacity to protect the natural environment and the well-being of citizens would be seriously constrained. Sovereignty would be severely compromised.

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