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Privatisation: Getting to the bottom of a muddled debate

By Vijay Paranjpye

Let's face it: water is a commodity. There's nothing wrong with privatisation per se. The debate gets muddled when we fail to see the difference between the privatisation of water, which implies ownership of the resource, and the privatisation of service delivery, such as the purification or distribution of water

Basic economics is necessary to understand water issues in India. Firstly, let’s accept that water is a commodity. Though many people think of it as a public good, water becomes a commodity once an investment is made in it. Rights over water do not preclude private investment. Water flowing in rivers, with people using it for drinking or for bathing, is not an economic good. Till such water is impounded, regulated, improved or in any other way added to in terms of value -- either by the government or any private party -- it remains a social good. When, say, a municipal corporation invests in water either to improve its quality or its availability, a price is charged. But the price is not for the water but for providing the service. For instance, rainwater, when it falls in my field, is a public good since neither I nor anyone else has invested in it. No one has bought it, no one has sold it. It becomes a commodity either when someone adds value to it, or when it is owned by that person legally and that person is willing to sell it.

All surface water in India is a public or social good owned and controlled by the state. Groundwater, on the other hand, according to the Constitution and existing laws of the land, is a private good. This is an anomaly, but such anomalies and contradictions do exist in India and in fact everywhere. Although groundwater is the result of the same source as surface water, once it goes under the ground on my property it is my water by law. So if I pump out my water and decide to sell it, this is a form of privatisation.

The right to charge a price for it accrues to me not because of the intrinsic value of the water but because I have invested in making it available from a location where it is available to another place where it is not available. This is “value added”.  I am charging a price for making the water available, not merely because it exists. This logic applies to all water supply, be it drinking water, industrial water or water meant for agriculture.

Ownership, privatisation and contractual arrangements

Privatisation is related to: 1) ownership of the water source and 2) decision-making about whom to give it to and whom not to give it to, ie how to distribute it. If these two are not part of the arrangement then it is not privatisation. There is nothing against privatisation per se. Even in villages small groups of people get together, start up a little cooperative society, and sell and buy water. Farmer-led privatisation already exists. Groups of farmers in a catchment area invest together in harvesting or impounding water within their village. They use it on their farms or for domestic purposes. This use requires that they charge a price, negotiated by members of the farmers’ group, because they have to invest in providing the water. It is not privatisation if a society of water users or irrigators is formed along the canal, paying a price and getting a certain volumetric quantity of water, which they decide to price among themselves excluding others from using it.

Municipal corporations giving service contracts is also not privatisation. If the Pune Municipal Corporation, or any other municipality, decides to delegate a part of its responsibility for water -- augmentation, distribution, drainage system, effluent treatment -- to a private concern, then that in itself is not privatisation of water. That is privatisation of a service. Every individual in India is assured by law of a minimum amount of drinking water, a minimum domestic supply of 60 litres per capita per day in rural areas, and 125 litres per day in urban areas. In the case of rural areas, the government doesn’t charge anything. The source is developed with government investment; the standpost is paid for by the government. It’s all done with public investment. So the user, the consumer, pays nothing. In urban areas, the state fixes an ad hoc price.

Meeting the basic per capita requirement of citizens is the responsibility of the state. But the state has the right to charge you the cost of making that water available, while meeting a particular standard of purity. This is the cost of making it available, not the cost of the water per se. The cost should include the cost of impounding the water, the cost of bringing it from the reservoir to the purification plant, the cost of transporting it through distribution pipes; then collecting the drainage, purifying it to some standard, and releasing it again.

Even if water belongs to the people, people have the right to ask a company to convert it into purer water and then efficiently distribute it. A village or group of villages has the right to invite someone else to mange their water and ensure that they get it throughout the year instead of just during the rainy season.

That is why there should be no problem with privatisation as long as marginal costs are charged. It makes no difference whether a private company charges it or a municipal corporation charges it, as long as the costs are recovered. If the Pune Municipal Corporation can do it for Rs 5 per 1,000 litres and a private company can do it for Rs 4, there should be no objection to the private supplier.

Lots of private contracts are given for works related to water impounding, such as the construction of dams. This too is not water privatisation. It’s a delegated, contractual relationship where a particular contractor may build a certain part of the dam/canal/spillway, just as the construction of sections of a highway is parcelled off to private builders.

The privatisation of a service function is not privatisation. When a company has been asked to purify water given by the government, to lay in a distribution system, regulate and decide who should and should not get water, the quantity to be given, etc, and when there is a predetermined, differentiated price structure negotiated between the government and the private company, then it cannot be called privatisation. Because the government holds the right to decide who must be given water and what kind of differentiated price structure should be imposed, in negotiation with the company.

This negotiation could, for instance, state that 25% of the city’s population lives in slum areas and so should be given water at a flat rate that is affordable to them. The difference between that flat rate and the cost of providing water is recovered from the rest of the population that can afford to pay. If this decision is taken by the government and accepted by the private company then, in effect, it is not privatisation of water, it is privatisation of a service.

Privatisation is when the ownership of the resource is transferred and the right to distribute or not to distribute it in a particular fashion is transferred to a private organisation. Privatisation is when, for instance, a company is handed a 100-year lease of a water source, or a soft drinks manufacturing company or water bottling company is given rights over a stream for ‘x’ number of years to do what it wants with the water -- sell it, own it at a price or at a royalty given to the government. If the company wants to price it in a particular fashion it can do so, provided it pays a price to the government.

When is privatisation called for?

Why and where does the entire debate on privatisation get muddled? In principle, all public utilities (water included) should be publicly owned and managed. Taxes are being collected for them and therefore the government has no business handing the public utility over to anybody else. Only if the government is incapable of efficiently managing the public utility, ie if it is proved that there is no way to reduce this inefficiency in the public system, then privatisation can and should be resorted to, and only if privatisation is able to reduce the costs incurred by the public.

However, public services have never been very attractive to private companies at any point in history. Take Maharashtra, where around 60% of the population still lives in the rural areas: not one major company has proposed that it manage the rural supply system. Because the company will not get the price it wants for providing the service. Of Maharashtra’s 40% urban population, 25% or so lives in slums. Supplying drinking water to a slum is not attractive either, as the slum-dweller would be able to pay a very small price. The profit margins for the private company would not be worth it. With 25% of the urban populace gone, a private company or multinational is left with only the small percentage of urban population that can afford to pay, and with industries.

Even within this limited scope, urban water privatisation is attractive for companies because urban water users can be locked into the system, as in the case of Enron where users were locked into buying electricity from them or they simply didn’t get it. So, private companies can charge less initially and when people are ‘locked in’ they start charging more because then people have no choice. A service provision becomes a monopoly. The rural user can say: “No thanks, I’ll take water from the nearest stream.” Urban users have no option. A local or foreign company is fine if it charges for the value-added part of its service. But not private monopolists who, to gain control over the water, will charge a lower price to begin with and then, once they control the water and the system, push up prices later. This gives them extraordinary power and profits. The problem is with the transfer of resource ownership, under the garb of privatisation.

If the function of making water available to the poor at affordable rates is transferred to a private company, and they can do it at a price that is equal to or less than what it costs the government, it’s fine. Once you accept the principle of price differentiation, and accept that poor people should be given water at a price they can afford, as it is an absolutely essential commodity for human existence, then the issue becomes clear.

A private company should have to prove and justify why it is charging a particular amount. It has to show its costs, open them up to scrutiny, and then price the water supply, with cross-subsidies for the poor.

The crux of the issue is that the state should never transfer the ownership of water; it’s the ownership of service provision that can be given away. Otherwise privatisation will be, and should be, opposed by everyone. The subtle difference between the two is an important one. For instance, if a bottling unit is draining the entire groundwater supply because the owner has been given the right to withdraw water from a large borewell for years, and this is leading to the exclusion of basic water in 20 nearby villages, it is not acceptable. Then, the guarantee of minimum water to those villages has to be a part of that company’s contract.

The point that we keep returning to, whether it is contracts, or prices, or ownership, is that in any form of privatisation the government has to play a strong role. It has to set the conditions and maintain standards. There must always be a strict contractual arrangement operating on the basis that water as a public utility must be available to all, with no exclusions.

(Vijay Paranjpye is an economist and activist, and Founder Director of Gomukh and Gangotree, both of which deal with watershed development)

Only 10% of water services worldwide are privatised

In spite of the near constant discussion in India over the privatisation of water, only about 10% of water services are privatised worldwide. And most of this is in Europe, home of the largest multinational water corporations.

The idea of water privatisation is a European one (mostly France and the UK), where, historically, water in big cities was often provided by private operators. This also explains why the biggest water companies -- Suez, Veolia and RWE -- are from Europe. In other countries around the globe privatisation is rare. That bastion of the free market, the USA, actually prefers to keep its water utilities in public hands, with just about 5% of the country’s water supply in the hands of private companies. If you include operations and management contracts, the figure goes up to 15%, which is still not very high. In fact, one of the most celebrated cases of a city wresting back its water supply from private companies occurred in Atlanta in 2003, when the town took back its water supply after four years of it being run by United Water. The other classic example is Grenoble, in the home of privatisation, France, where it was discovered that the French water multinational had got its contract through bribery. Two company executives and the former mayor were convicted of corruption and given prison sentences in 1995, after it was found that a 25-year water concession had been awarded to a Suez subsidiary in exchange for contributions to the mayor’s electoral campaign. Incidentally, this is the same company that will be operating the Sonia Vihar plant in Delhi.

Other classic cases of the failure of water privatisation come from opposite corners of the world -- Bolivia and the Philippines.

In 1999, following pressure from the World Bank, the government of Bolivia handed over the water supply of the city of Cochabamba to a consortium led by the giant US Bechtel Corporation. When Bechtel doubled, and in some cases tripled, the price of water there were protests. To control them the government brought in the police, sparking off violence that ended in the deaths of six people. The governor of the province resigned after trying to convince the government to rescind the Bechtel contract. Meanwhile, the protests continued to spread and the whole country seemed on the verge of shutting down. The central government had to declare martial law and a state of emergency. The protests carried on until finally the government cancelled the Bechtel deal.

After it was forced to leave, Bechtel filed a $ 25 million legal action against Bolivia, although international public pressure has convinced the company to drop the claim. Right now, Bechtel is being criticised for its unsuccessful attempts to build water infrastructure in Iraq.

At the end of 2002, Maynilad Water decided to terminate its water contract in Manila, the Philippines. The contract ended when Maynilad, a company made up of Suez and a local industrialist, could not convince the government to allow it yet another rate increase after six earlier ones were allowed in just five years of operation. Unable to raise more capital because of its already high debt, Maynilad pulled out of its contract.

When they started in 1997, the 25-year lease contracts were the biggest water privatisation projects in the world. Oddly enough, the World Bank and the companies involved insist that the privatisation was in fact a success story because of the number of people it connected. But the figures have been contested by regulators and civil society groups that have also criticised the non-democratic privatisation process, constant rate hikes and large numbers of urban poor still unserved. -- Manoj Nadkarni

Why privatise?

Why is privatisation thought of as an option at all? The reason is economics, more specifically the idea of ‘cost recovery’. In most cases the first step has already been taken. The formation of municipal corporations and water or electricity boards is an attempt to ‘corporatise’ infrastructure, run it along business lines and take it away from being a government institution, hence away from political influence and bureaucracy, both more interested in self-preservation than in delivery.

But, in all cases, it must be made clear what it is that is being privatised. Though understood as ‘water privatisation’, rarely, if ever, is the water itself being privatised. Water is always free. It is the provision of water, meaning the collection, cleaning up, storage, distribution from its source to end users, and then the drainage of used and dirty water, that is costly.

Cost recovery is important for two reasons. The first is the expense of water provision, ie, the cost of collecting water, treating it in huge and expensive water treatment plants, pumping it through large pipes and then smaller pipes until it finally reaches the household. Pipes have to be laid every time someone builds a house or a new colony comes up. Already Delhi has a 9,000 km pipeline network for its 1.3 million-plus water connections. Pipes and treatment plants have to be regularly maintained and replaced when they wear out; certain machinery is needed for their maintenance. Water supply has to be monitored for use and quality. All this costs money. Who will pay for it? Even collecting money from the people itself costs money for staff, meters and administration. In a rapidly growing city like Delhi this poses huge problems, the first of which is that many of the water pipes were put in place during British times and need to be de-silted and cleaned, if not replaced altogether. The second is the rapid growth of our cities -- not just a few new buildings but new townships housing thousands of people.

The second aspect of cost recovery is important from the point of view of the environment. Water, even if it is free to the individual, is needed not just for people’s everyday needs but for agriculture, by other plants and animals, for people who may live downstream if it’s taken from a river. Every time someone uses water, something or someone else does not get his share. And when a person ‘finishes’ using it, what happens to it? What isn’t actually ingested goes back to the environment, usually polluted with soaps, detergents, other household cleaners, pesticides, pathogen-ridden faeces and urine from toilets, bits of food and other contaminants. These pollutants are the ‘cost’ of the water to the environment; either it has to be cleaned up or it destroys the environment. This cost is translated into money terms by the government and included in the cost of water. Or, it should be. Most of the water in Delhi comes from the Yamuna river or its riverbed, yet as the Central Pollution Control Board often points out, the Yamuna at Delhi actually has no water, just sewage, since so much is taken out and only sewage dumped back in. Hence, in real terms, water from the Yamuna is getting more and more expensive, a fact that is more noticeable in the downstream town of Agra than in Delhi. This happens because no one, least of all the Delhi government, actually values the water.

Related to both these aspects of cost recovery is what is euphemistically called ‘non revenue water’ (NRW) -- water that is not actually accounted for in financial terms. This ranges from leaks and seepage, to water that’s stolen by individuals or organisations. That obvious water leak that is slowly flooding the road because of a broken water pipe is NRW, as is the family living on the street collecting drop after drop of water from a faulty valve for their drinking. In Delhi, NRW is estimated to be up to 50%.

Cost recovery means that all these aspects are added to the price of water. However it is done, it needs to be done so that services can be extended and expanded, especially to the poor who may not be able to pay for them. In India, Mumbai is the only city that comes close to full cost recovery of water supply. In an ideal situation, water rates, connection charges and taxes specifically taken for water would take care of this. But even this usually does not cover the total cost of water provision, so governments usually ‘cross subsidise’, taking money from other sources like industrial taxes or rent to pay for it. But cross subsidies can take you only so far. Right now the Delhi Jal Board has loan liabilities of around Rs 4,000 crore (

Lack of cost recovery is political. It may happen when a government is either afraid to take decisions that may cost it some votes, or, for the same reason, refuses to follow through once a decision is taken.

Despite this there is still no need to bring in private agencies, as governments can quite easily meet their cost recovery requirements. In India they can’t because the sudden jump in tariffs would make sure that any government that tried to recover costs would immediately be voted out of power. The jump would actually be quite massive, because some of the pricing decisions should have been taken a long time ago. The Delhi Jal Board figures are illustrative. Its total yearly revenue is approximately Rs 250 crore, and it spends Rs 370 crore in the same time period. And let’s not forget the outstanding debts mentioned above.
One of the reasons for this is the bloated bureaucracy; the other, politics. Delhi is one of the richest cities in India, yet Delhi’s water tariffs are amongst the lowest of all Indian cities.

Still, the notion of privatisation rankles. It is as if one were giving up sovereignty over a vital resource. A private water company does things to make profits for its shareholders. That’s it. These shareholders could be in another country or in India, but it is safe to say that they will look after the interests of the rich. A municipal corporation is supposed to be doing things for its citizens, while a private company wants a return on capital and the minimisation of risk. In every city where public utilities have been successfully privatised -- whether it is gas, water or electricity -- certain institutions are required to be in place. Their function is to cancel out, or at least balance, the fact that these are natural monopolies where there is no competition. If there is no competition, the idea of using free market principles to ensure efficiency obviously does not work. The institutions are necessary for a kind of ‘artificial’ competition, where the private company competes against standards set by the institution. These regulatory bodies ensure that although there may be no parallel competition, in time a competition can be set up where companies are compared to whatever goals have been set, and then actually be said to fail if they do not meet those goals, and penalised. In extreme cases, the contract may even be revoked.

Only if there is such a regulatory body in place to oversee the operations of the private company can the needs of citizens and shareholders coincide. But the regulatory body itself has to be transparent and beyond government or industry manipulation. Water privatisation does work in many cities in the west --. cities where government accountability, transparency, citizen involvement, financial watchdogs and good regulatory mechanisms historically exist to ensure that the water utilities work to the advantage of the people. Of course, if we had government accountability, transparency, citizen involvement, financial watchdogs and good regulatory mechanisms, plus enforcement, in any Indian city we wouldn’t need to privatise our water utilities, they would work perfectly fine as public services! -- MN

We can do it ourselves, who needs outsiders?

Water privatisation is often bandied about as total divestiture of water and water infrastructure to a profit-making company. But it need not be like that. Local management and financing is another kind of ‘privatisation’; and it can work. What privatisation is really about is taking utilities out of the hands of corrupt, bloated bureaucracies and putting them in the hands of those who can best manage them, providing good services in sufficient quantity and quality, and enjoying enough cost recovery to finance expansion, as towns and cities grow. The promise of privatisation is not just financial efficiency but also the related investment, either by the company itself, in return for guaranteed profits, or by the state paying the company to build and manage assets. Yet, there is a wide range of ways to get things financed, starting with entirely public money from taxes, tariffs and rent, to entirely private funds, or any combination in between. There is no need to bring in big foreign companies; both management and financing can be done locally. Alternative strategies are a real possibility on the small scale, one that can cancel out the need for privatisation.

Take the Orangi Pilot Project on the outskirts of Karachi, Pakistan. Like other slum localities in Pakistan, the 1 million people of Orangi lacked every civic amenity until 1980. Then, Orangi became known internationally for its sanitation programme, in which the people built, installed and managed their own sewerage and toilets. Later, a successful self-financed local water distribution system was put in place. This, by people who private or municipal contractors would say could not afford their own water supply or sanitation. The people’s strategy was to minimise external support and help households achieve their own local development needs; they have always made a point of not taking loans from the World Bank or other large donor organisations to subsidise their work.

An example from Kerala, India, shows that if citizens work together there is no need to depend on MNCs. In the 1980s, in Kadalundi panchayat, Kozhikode district, the gram panchayat commissioned the first piped water scheme in 1987, in Vettuvedankunnu ward. Later, five neighbouring families in the hamlet of Kambili-Paramba pooled resources and installed a small 1 hp pump. In these cases the water supply was built around a well, the pump set, an overhead storage tank and a gravity distribution system. Encouraged by the initiative and supported by the panchayat president, 54 other households in Kambili-Paramba got together in 1989, and, with contributions of Rs 4,500 each, formed a registered cooperative society to provide drinking water for their own needs. In what should be a lesson to city governments all over India, the panchayat shifted from being a provider of services to a facilitator and regulator, ensuring that people work together and that there are no losers, everyone wins.

Households that join up later have to pay double the original cost since there is no risk involved and since most of the work has already been done; poorer families can pay in instalments. All users bear the operation and maintenance (O&M) costs, including the cost of hiring a pump operator and electricity. The society makes sure there is money in reserve for repairs and maintenance. The due date for monthly payment is the end of the month, but payments are accepted till the 5th of the next month, with a fine. If payments are further delayed, supply is disconnected, though this is rare.

Although these are both small-scale instances, two other examples indicate the possibilities for metros. The first is that of Dhaka, Bangladesh, a city of over 10 million people. When the threat of privatisation loomed large, workers at the DWASA -- Dhaka’s water supply utility -- actually bought out the corporation and ran a section of its operations as a cooperative. The employees’ cooperative clearly out-performed both the DWASA and private contractors who were given a neighbouring area. In the cooperative zone, revenue increased substantially and non-revenue water decreased. One of the first things the cooperative did was double the salary of its staff, ensuring their integrity and active participation. It became a real cooperative, with staff pooling their experiences and knowledge. Consumer satisfaction was high, and the poor also benefited from poor-household connections that were earlier prohibited by the DWASA. Nearby, the private company performed poorly because of lack of experience, top-heavy management and a failure to draw on grassroots knowledge. After the first year, the second zone was also handed over to the workers’ cooperative.

Finally, SAGUAPAC (Cooperativa de Servicios Publicos Santa Cruz) has provided water since 1979 to the people of Santa Cruz, Bolivia, whose 1 million population automatically become members of the cooperative formed to supply water. Santa Cruz has nine water districts, each of whose customers elect members to the administrative board of SAGUAPAC, which, in turn, appoints the general manager and approves tariffs to ensure that all costs are recovered from the water users. The cooperative charges a lower price for the first 15 cubic metres of water consumed per household every month; those failing to pay are not disconnected. Consumers also elect a separate supervisory board that monitors the performance of the administrative board. SAGUAPAC has consistently been regarded as one of the best-run water companies in South America, as seen in the low level of non revenue water, fewer employees per 1,000 water connections, growth from 70 to 100% metered connections, 80% water coverage despite rapid population growth, and 24-hour water supply.

After studying the Santa Cruz experience even the World Bank has admitted that cooperative solutions can be superior to either public or private approaches to utility management. The Bank praised Santa Cruz for its “efficient and transparent administration that appears to have virtually eliminated corruption”. -- MN

InfoChange News & Features, October 2005