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The political economy of public sector water utilities reform

By Karen Coelho

Water reform is a Trojan horse utilised by governments, commercial interests and international aid agencies, to turn public resources into profitable enterprises. Today's water wars are sited in cities, not agrarian basins. They are being fought over the control of municipal water systems and services. This article looks at the political economy of public sector water utilities reform in Chennai

Reform. The blandly benign word operates as a Trojan horse, smuggling in an aggressive politics in which global commercial interests, international aid agencies, and national governments conspire to transform public resources into profitable enterprises. In the water sector, these politics have already assumed the contours of war. Wars over water have been recorded since the beginning of human history, usually dealing with riparian rights across political boundaries or intra-basin struggles over irrigation flows. Such struggles have by no means disappeared. But the new wars that are taking shape, and promising to intensify over the coming decades, are distinct in that they are sited in cities rather than agrarian basins. Their flashpoint has shifted to what is known in the jargon of the water industry as “service management,” the issue of who provides, controls, and manages water supply, treatment and distribution. Contemporary water wars are, thus, fought over institutional issues of ownership and control over municipal water systems, terms of contract, channels of finance and issues of sovereignty, all of these in turn carrying powerful repercussions for ordinary people in terms of their access to drinking water. These wars also, in the manner of modern warfare, involve struggles to control “the hearts and minds of people” by invoking moral discourses, deploying theoretical frameworks, and marshalling data and studies that have, by now, accumulated into independent bodies of literature. Thus, one key aspect of these wars, as Vandana Shiva puts it, is the “paradigm war” -- a conflict over how water is perceived, valued and treated. “The culture of commodification is at war with diverse cultures of sharing, of receiving and giving water as a free gift.”

Champions of privatisation conceive of water as an economic good that must be priced in market terms, not only to maintain the financial viability of water utilities, but to reflect the “real” value of water and to promote equity and resource sustainability. Opponents of privatisation conceive of water as a human right that cannot be privately owned or controlled and whose access must not depend on the ability to pay.

Joining hands with the World Bank and the Asian Development Bank (ADB) in promoting privatisation are bilateral aid agencies, several national governments, financial and bureaucratic elites within countries, and some policy think-tanks and NGOs. 

The water wars are not only paradigm wars: they also involve arms, military might and bloodshed, as occurred in Cochabamba, Bolivia, in 1999, and in Soweto, South Africa, in 2002, when state machineries were deployed on behalf of companies against masses of protestors demonstrating against privatisation of their water services.

Neo-liberal prescriptions for public sector utility reform: The case of Chennai’s Metrowater

Current reforms of public sector water utilities must be seen against this background.  The vast majority of these reforms follow a standard prescription, in line with the orthodoxies laid out in the World Bank’s influential publication Infrastructure for Development (World Development Report 1994).  This report marshals evidence of the failure of state-run utilities across the Third World to make a case for a package of reforms designed to prepare utilities for eventual privatisation (Box 1 outlines the various steps through which privatisation typically occurs). The report ascribes these failures to the “inherent” conditions of government functioning, including political compulsions to favour capital investments that result in immense under-utilised capacity; overstaffing, corruption and inability to charge tariffs that reflect the true value of the resource and the costs incurred. The report identifies three major principles that must guide any solution: 1) Corporatisation, designed to insulate public entities from “non-commercial pressures and constraints”. 2) Unbundling and privatisation of components of the service. 3) A pricing strategy aimed at full cost recovery. 

While the Chennai Metropolitan Water Supply and Sanitation Board (CMWSSB, popularly known as Metrowater) was an early reformer in India, by the late-1990s these thrusts had become part of the national discourse of reform in the water sector. The Eighth Five-Year Plan (1992-97) of the Government of India outlined a key principle for the sector: water being managed as a commodity and not a free service. The National Water Policy of 2002 favours widespread private sector participation in the country’s water management. The privatisation agenda is promoted by a subtle conflating of the private sector with “community” and “civil society”, all of these shown in opposition to “the state”. This strategy was evident, for example, in the prime minister’s speech at the Fifth Meeting of the National Water Resources Council in 2002, in which he promoted the revised National Water Policy:

“The policy should…recognise that the community is the rightful custodian of water. Exclusive control by the government machinery, and the resultant mindset among the people that water management is the exclusive responsibility of the government, cannot help us to make the paradigm shift to participative, essentially local management of water resources…Wherever feasible, public-private partnerships should be encouraged in such a manner that we can attract private investment in the development and management of water resources.”

Such a conflation flattens the vastly unequal field of non-state actors, and produces a concept of “stakeholders” in which multinational corporations are attributed stakes alongside people whose lives and livelihoods depend on low-cost or free access to water.

Privatisation by any other name…The incremental path to private sector control of water

Privatisation, conceived as the opening of state sector services and operations to private or market entities, can occur through a range of forms, representing a progressive degree of state withdrawal from direct provisioning roles. Service contracts involve short-term arrangements whereby private firms provide specific services such as meter reading or bill preparation; these contracts involve no investment from or financial risks for the private company. Lease or management contracts are also usually short-term agreements -- often for three to five years -- in which the private company either leases a facility such as a sewage pumping station from the civic authority and runs it, or is contracted by the authority to operate and maintain the facility. Ownership remains public, performance is often directly supervised and monitored by civic officials, and the private company is not responsible for new investments or expansion. Contracts of this type, as shown above, now cover increasing sectors of the water and sanitation service in major cities such as Chennai. 

BOT (Build-Operate-Transfer), BOOT (Build-Own-Operate Transfer) or DBOT (Design-Build-Operate-Transfer) contracts are those in which the private company builds some component of the infrastructure, eg a treatment plant, and then runs it for an initial period before transferring ownership to the state or to another buyer. The latter two categories often involve long-term agreements of 20-30 years, with substantial private investment in the project, often backed by purchase agreements that guarantee a minimum demand. 

Concession contracts are long-term contracts of 20-30 years, in which the private company takes over all responsibility for running a system, including expansion, recovering its investments through payments from users. 

And finally, divestiture is a form of privatisation in which the government sells its equity in a utility that is then bought off by a private company (this typology is partly based on Dharmadhikary 2002). 

In practice, privatisation tends to occur in a progressive manner along the continuum described above, with service and management contracts preparing the grounds and achieving the “commercialisation” of operations required to attract firms to bid for concession contracts or direct purchases down the road

Pitfalls of privatisation

Experiences with dominant models of privatisation emerging in different parts of the world over the past decade show that they pose serious threats to popular sovereignty, not only in terms of national and local decision-making but in terms of the continued access of people to basic life resources. 

1 The primary justification for privatisation, that it makes private funds available for infrastructure investment in cash-strapped countries, has proved false. Corporations introduce very small proportions of equity into their investments, increasingly relying on debt financing and recovering the interest on their loans through user charges. The past few years have seen a pronounced decline in private equity investment, from a peak of US$ 50 billion in 1997 to $ 7 billion in 2002. As major companies decline to risk their investments in Third World countries, international funding institutions (IFIs) increasingly channel their infrastructure assistance loans to these countries via private companies. 

2 In addition, governments offer extraordinary sops to private corporations to attract their investments: these include assured rates of return (usually indexed to the dollar), government guarantees on loans, take-or-pay clauses (which assure them a minimum volume of demand or monetary compensation for the shortfall), and escrow accounts.

3 In a large number of cases, the private company asserts and seeks to expand monopolistic control over local water resources, extending the “natural monopoly” of the piped network to claim control even over alternative sources in the area.

4 The new arrangements have almost invariably brought tariff hikes of many orders of magnitude. In Ghana, water rates more than doubled in 2001 and 2002 as the government prepared to privatise the system. Companies display far less hesitation in disconnecting customers for non-payment of tariff than do governments: in Manila, Buenos Aires, Nespruit, and even in Ghana (under World Bank and IMF pressure), nearly a third of the customers were cut off from the system when they could not meet the new tariffs. Automatic tariff-adjustment formulae, commonly negotiated by private companies, allow rates to rise automatically to offset inflation, and more disastrously, index tariffs to the dollar to allow companies to repatriate profits and repay foreign debt. This clause subjects consumers to price rises every time the domestic currency depreciates, in addition to the price rises from tariff hikes, amounting to what a community health activist in Ghana called a “deadly poison and a prescription for death for the poor” (Patrick Apoya, quoted in Public Citizen 2002). 

5 The structure of liability of multinational corporations and their size carry serious implications for their accountability to people and to governments, as seen in cases where companies have broken their contracts and left, often as a result of public protests against their services. The companies have then proceeded to sue the governments for millions of dollars. 

6 Transparency is severely compromised in most of these agreements. Contract negotiations occur behind closed doors, decisions are taken with no input from users, and most contract documents remain confidential, violating citizens’ rights to information. Recent and close to home, Delhi’s water system privatisation has been found to be manipulated by the World Bank’s clandestine interventions in setting the terms of reference for contracts, and eligibility and selection criteria for bidders, to favour PricewaterhouseCoopers’ bid.

In Metrowater, the process of commodifying water has been in operation since the early-1980s when the newly-formed board negotiated its first big loan from the World Bank. Although outright privatisation is not yet publicly on the cards in Chennai, the trajectory of reforms was clear to at least one senior official in the agency, who predicted:

“Slowly [the agency] will be privatised. Mainly in the form of small contracts. They are not yet talking about it, but already so much has been privatised. Our lower levels [of staff] are not aware, have not understood the transformations that are coming within Metrowater.”

Meanwhile, the water service in Chennai is being transformed through two major processes of reform. First, financial and management disciplines modelled on commercial organisations have been prioritised as the core of “institutional strengthening”. As a senior official of the organisation described it: “Commercialising the organisation has been very much on stream for more than ten years now: Metrowater has been functioning not like a government department but like a company for a while now!” This process has included vigorous streamlining and cost-cutting in all operations, massive contraction of staff through a freeze on hires and active promotion of voluntary retirement schemes (VRS) particularly among labour cadres, and the unbundling of services into “cost centres” and “profit centres” to facilitate more stringent audits. All this has resulted in a financially strong organisation: by 2001, Metrowater reported a surplus on its revenue account and had been operating without state government grants for over six years.

The second thrust is the creation of consumers from citizens, involving tariff reform and a thrust on full cost recovery from users. The meanings of a “good service” are increasingly associated with this thrust. Agency documents as early as 1978 recommended that, “eventually the total capital and operating costs of the water and sewerage system have to be borne by the consumer through the tariff”. This principle was subjected to a stinging critique by a senior executive of an infrastructure financing institution in Chennai, as posing an unfair burden on the current generation of water users: “Since the benefits are not accruing only to the current users of the system, it is unfair to bill them in the way the [World] Bank and others are doing now.  It is now fashionable to say that users have to pay. But this is nonsense! It’s an orthodoxy, and a nonsense orthodoxy! Theoretically, there is no case in economics -- even a first year economics student will tell you that when there are externalities, you cannot price the entire thing on to the consumer.” 

This “nonsense orthodoxy” of “moving towards full-cost pricing of water services”, however, is one of the five key actions that the World Water Vision (a document of the World Water Council [WWC]) identifies as necessary to achieve sustainable access for all people to safe and sufficient water. The highly subsidised provision of water that has hitherto been the norm must indeed be re-examined in the light of the increasing pressure on water resources, especially since such subsidies tend to benefit wealthier people with access to piped water and storage facilities rather than the poor who rely on mobile sources often involving private providers. However, in the vast majority of cases, tariff reform occurs in preparation for, or as a concomitant of, privatisation, and/or as part of donor-imposed reform conditionalities. 

At the crux of the debate is the meaning of the term “costs”.  While full cost-recovery is widely understood as the recuperation of the financial costs of treating and supplying water, the more radical long-term goal of reformers is to reach the full “economic costs” of water. In this system, water will be valued according to its opportunity costs, which in turn will reflect its highest value across the spectrum of water use. In other words, the cost of drinking water to the average consumer would reflect the price that industrialists would be willing to pay for it. Global water scarcity is used to make the case for economic pricing of water in economic terms, and conversely, economic pricing is promoted as a means of reducing water consumption. The vision of a global water policy, as articulated by the WWC, is of the development of  “markets of transferable water rights” and the reallocation of the limited resource to “high value users of water” by “treating water as a tradeable commodity”.  A World Bank strategy paper foresees that “…in case after case, reformed utilities…(will) push for market-based rules for facilitating the voluntary temporary or permanent transfer of water rights from low-value to high-value users”.

The notion of costs also differs radically between private companies and the public sector.  Government costs go to provide protected employment with living wages and benefits to large numbers of public sector staff, while private company costs include the salaries of multinational corporate bosses and shareholders’ profits.

In Metrowater, pressures to achieve full cost-recovery and tariff reform have translated into punitive effects for clients as well as frontline service-providers. Field officials face sanctions if they fail to achieve ambitious revenue-collection targets; annual performance awards are based on success in meeting these targets; clients are denied service until they meet all arrears, even if they have not received water for several months. 

How has this thrust of cost-recovery from users affected services to the slums? Services to slum-dwellers have remained a contentious theme in the World Bank’s relationship with Metrowater since the 1980s. A 1986 Bank mission pushed the organisation to re-examine its responsibility for supplying water to the slums, and recommended that the city corporation meet these costs: “The principle of cost-recovery, even if indirectly recovered from the MMC (Madras Municipal Corporation), should be sought from slum-dwellers especially those occupying illegal land since they pay no taxes nor water charges.” 

In 1989, the World Bank spelled out its opposition to the utility being directly involved in government schemes to provide water to the poor through unlevied public standpipes, and advised that it disaggregate this section of clients from the revenue-paying public. While the Bank was “not opposed to subsidies per se”, it objected to the inclusion of these citizens in the mainstream of the state service. The accountability of the state for water provision is thus redefined as a commercial accountability to consumers, and separated from the government’s accountability to the poor. 

Thus, while water sector reforms are pushed in the name of serving marginal populations, the issue of subsidising costs for poor consumers remains a very equivocal one in international reform orthodoxies. ADB reports virtuously assert that “basic water requirements need to be made affordable to all”.  However, of the two available instruments through which this can occur, namely cross-subsidy (from wealthier to poorer consumers) or direct government subsidy, the former is strongly discouraged in water reform prescriptions from the World Bank and its partners. “Distortions in tariffs, where one part of a community cross-subsidises another, need to be smoothed out” (ADB 1999).  Cross-subsidies are unpopular with private providers that are loathe to penalise their wealthier consumers. As Shripad Dharmadhikary argues: “[T]he logic of the private suppliers is that bulk (and important) consumers are charged less, not more.”  The pressure on public utilities to eliminate cross-subsidies then may be seen as part of a process of preparing utilities for private markets. The second option, of direct, targeted and transparent subsidies for the poor, demands that governments cover the costs of private provision to poor consumers, at profit-making rates for the private company. Many governments have declared themselves unable to meet these costs, leaving the poor to pay or be cut off: this has happened in Ghana, Bolivia, Manila and other instances.       

By the late-1990s, Metrowater had adopted a policy of gradually eliminating public standpipes (handpumps), although the policy was never publicly announced. A senior engineer told me: “There has been a decision to not provide public standpipes in new areas that are being served, that is, where the service is being extended. This was a decision taken internally by Metrowater in 1996 or so, because of the problems in maintaining these standpipes, and also because the Board has turned towards revenue-generation as the focus.”

Meanwhile, the slums remain woefully underserved. If the average allocation of water in a normal Chennai season is about 70 litres per capita daily (lpcd), itself way below the norm (India’s National Commission on Urbanisation sets the norm as 135 litres per capita daily), slum-dwellers get about 25 litres through public standpipes, lorries and tankers. Piped water through pumps is usually free; in many cases, however, it falls under the control of politically powerful local leaders. Meanwhile, the more expensive and wasteful options of lorry and tanker supply to slums remains alive as a lucrative source of revenue for local party workers. When Metrowater engineers attempt to reduce tanker supply in good seasons, due to good flows in the pipe system, they encounter substantial opposition, especially from the ruling party workers. As Susheela Gopalakrishan, a city councillor, remarks: “No permanent solution [to the water problem in slums] is allowed because party workers earn money from lorries.”  A Metrowater field engineer explained to me how the allocation of tankers worked in the political field: “The party secretary looks at his list of party workers and finds ten people without jobs, so he demands from us: ‘Give us ten tankers!’ If I say there are already tanks there, he says: ‘Those are for the previous government -- now OUR men need to earn. Or you get rid of those fellows and put ours in.’ Nowadays I find that some tankers are shared between two parties -- alternate day control!  They have tendered out shares!”

Magic and mythologies of supply-side solutions

While the WB and ADB promote “demand management” through tariff reform, state politicians struggle to outdo each other in grandiose posturing as the saviours of the water-starved metropolis of Chennai, through initiating massive transfer schemes. Supply-side solutions, especially in the form of capital-intensive hardware projects, are favoured by a cross-section of powerful interests -- politicians, senior bureaucrats and the engineering and construction firms they patronise, engineers and managers of the water utility who gain money and prestige from handling big projects, and the urban elite who can continue to behave as if supply was endless.  Not surprisingly, the costs and pitfalls of these projects are glossed over or minimised.  The Telugu Ganga Project, commissioned in 1996, was envisaged to bring 12 tmcft (thousand million cubic feet, about 930 million litres a day [mld]) of Krishna water to the city from the Kandaleru reservoir, over a distance of 152 km. However, it has never, since 1996, delivered more than about 1 or 2 tmcft a year. This is largely because it passes through the perennially drought-prone Rayalaseema district, whose farmers were never consulted, and who continue to tap into its canals for their irrigation needs. 

Despite its failure to materialise, Krishna water formed the basis for more massive investments.  Between 1996 and 2002, Metrowater spent close to Rs 1,000 crore, under the World Bank-assisted Second Chennai Project, to expand and improve the city’s pipe network to carry the additional 930 mld of Krishna water expected. In 2002, most of the newly built water distribution stations (WDSs) built under the project were not functioning as there was no water in the system. A retired bureaucrat analysed this project as a deliberate eyewash: “They (in Metrowater) don’t want to solve the problem -- it is all a fraud. I have worked out the mechanism very clearly, it is simple!  The big guys go for the bulk money from big projects, and when these fail, they still make money!  Because you can make a lot of money from scarcity and distress. They cheat the funding agencies, and then when they have to repay them it is the taxpayers who pay. And then to keep the lower levels (of the bureaucracy) happy, you still have most years as distress years! This is their source of money. If people get adequate water will they pay? Even the mineral water people -- their business is distress. It is only because of Metrowater’s failure that they are growing!  This is a win-win situation for the corrupt and rotten!” 

As Lewis Menezes (formerly special officer to the corporation of Chennai) writes: “Thanks to the false promises of politicians and bureaucrats and the colossal apathy of Chennai’s citizens, we have criminally neglected all proximate solutions which are within our capacities and within our means.”  Ramaswamy Iyer, a long-time water expert, writes: “The approach common in the case of other consumer or industrial goods, of projecting demand and providing the supply through production, is inappropriate in the case of water. Here we need to start from the recognition of finite availability and learn to live with it…The answer does not necessarily lie in large, centralised, top-down, technologically-driven projects: local, de-centred, people-centred alternatives are available…These are instances not merely of water management but of social mobilisation and transformation.”

Meanwhile, solutions become increasingly more desperate and unsustainable. From long-distance transfers, the next option is groundwater mining. The New Veeranam Project was built to convey 180 mld of Cauvery water to Chennai from the Veeranam lake in Cuddalore district, through a 230-km pipeline at a capital cost of over Rs 700 crore.  Now, fearing that the Veeranam lake may dry out in deficit rainfall years, the government sanctioned another Rs 300 crore for the New Veeranam Extension Project, to extract groundwater from the Kollidam river basin and convey it to the city through the New Veeranam infrastructure. In January 2005, villagers from the catchment areas staged a fast in protest against the proposed depletion of their water resources and the threat to their livelihoods. This practice, of sucking resources out of rural hinterlands to cater to the ever-expanding urban appetite, is now a globally recommended policy breakthrough, facilitated by the institution of “modern water rights”, which create markets in groundwater and permit individuals to profit from selling water commercially. 

Chennai’s Metrowater, entrusted with protecting the region’s groundwater resources, has emerged as the greatest culprit in depleting the aquifers of river basins near the city through highly unsustainable extraction over the past ten years. Emerging proposals to introduce tradeable water rights in these areas implicitly allow and encourage the continuing dependence on groundwater extraction as the solution to the problem of supplying the city. They would allow the organisation to continue these practices under a legal, ostensibly more controlled regime, and exonerate the utility of its responsibility to explore other, more sustainable long-term options such as treating and recycling waste water, harvesting water through regeneration of tanks and lakes, promoting re-use and conservation, and others.

(Karen Coelho is an anthropologist and an independent scholar based in Chennai, working on issues of urban services reforms and the changing state)


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InfoChange News & Features, October 2005