The World Bank and water privatisation: public money down the drain

26 September 2008

Though the World Bank may be changing its formerly dogmatic approach to full privatisation of the water sector, key cases in Tanzania, Armenia, Zambia and India highlight that the Bank may not be learning quickly enough and that the poor may be left both without improved water and paying for botched privatisations.

At water week in Washington in May, Bank vice president Kathy Sierra asserted that privatisation was not “the only answer” – there was a full spectrum of public-private mix of investments as well. Only a few days earlier senior World Bank official Shekhar Shah reported in New Delhi how the Bank had “learned the hard way” that it was not correct to leave water to the private sector.

But a statement by Lars Thunell, head of the Bank’s private-sector arm the International Finance Corporation (IFC), at World Water Week in Stockholm in August shows that the Bank is still not interested in pursuing public solutions to water provision: “We believe that providing clean water and sanitation services is a real business opportunity.”

this failure has added a burden to a country that is already struggling

Currently the IFC’s focus is on creating the right conditions for private investors, including a $100 million fund, called IFC Infraventures, to “provide risk capital for early stage development of infrastructure projects in the poorest countries, but also to encourage more public-private partnerships.” In a renewed drive to push the private sector into basic utilities, it is unlikely that the IFC will be willing and able to address the main problems stemming from the failed water privatisations of the past. Thunell also claimed: “The debate is shifting. Instead of ‘should the private sector be involved in water?’ the question is ‘how can we work together for sensible and fair solutions?'”

Tanzania’s nightmare

A fair solution has still not been reached in Tanzania, where the Bank-supported privatisation of water services resulted in sharply higher water prices, little improvement in supply and the eventual termination of the contract with UK-based multinational Biwater in 2005 (see Update 55, 46). In August this year, the Bank’s International Center for the Settlement of Investment Disputes (ICSID) issued its ruling in Biwater’s lawsuit against Tanzania, and found that while technical breaches of Biwater’s investors’ rights did occur, Biwater was not entitled to compensation because the breaches were worth nothing and the termination of the contract was inevitable.

“The Tanzanian water privatisation project was a scandal right from the beginning,” said Vicky Cann of the World Development Movement. “It is absolutely right that this Court has found that Tanzania owes Biwater nothing, but shocking that Biwater saw fit to drag the government of such a poor country through the courts in the first place.”

Even though the ICSID’s refusal of Biwater’s claim to compensation was a victory for the Tanzanian people, they have lost years waiting for improvement to their water sector. In a separate arbitration the government was awarded damages for breach of contract by the Biwater-owned local subsidiary, City Water, which had already been declared bankrupt. The Tanzanian government’s lawyer suggested that the World Bank should pay reparations to Tanzania as “the whole affair was the prescription of the World Bank. It will be fair that they should pay the government”.

At the very least, as Mussa Billegeya from the Tanzanian Association of NGOs said, “The failure of this policy should be a lesson to the World Bank, aid donors, and governments that privatisation is not a solution for problems in developing countries. In fact, this failure has added a burden to a country that is already struggling to reach its international poverty target on access to water.”

Armenia water project allegations

In August US-based NGO Government Accountability Project (GAP) released a new report on corruption allegations facing the water privatisation project in Armenia’s capital Yerevan (see Update 57).

Armenia borrowed from the World Bank in 1998 to restore the Yerevan water utility, with water-sector multinational ACEA eventually winning the contract to take control of the facility. The GAP report indicates that an Armenian parliamentary commission became worried about the project because of “continual complaints from Yerevan’s water consumers about service interruptions and poor quality, and … a complaint from a local construction company that alleged improper exclusion from a contract after having been selected through a bidding process held under the auspices of the project.”

GAP reports the allegations that it found in a leaked draft report of the Armenian parliamentary commission set up to investigate the project in 2004. According to GAP, the draft parliamentary study “revealed that the representative of the international operator ACEA, in collaboration with corrupt State officials, had diverted project materials and equipment to commercial enterprises for personal gain. Further, the study showed that costly improvements to the system had been abandoned and replaced by improper for-profit schemes, that the representative of the international operator had used his position to establish a network for the purpose of embezzling public funds, and that the Bank did not oversee the project responsibly.”

In 2007, a member of the commission sought advice from GAP after the Bank failed to investigate what seemed to be a flagrant case of project-related corruption. GAP claims to not have yet been successful in getting the Bank’s Department for Institutional Integrity to investigate. The World Bank issued a press release in October 2007 indicating that preliminary reviews of the allegations “found no evidentiary basis to substantiate [the] assertions nor any issues related to fraud and corruption in a Bank-financed project.”

Upfront investment needed

Privatisation and commercialisation of water in the developing world suffers from several flaws. Companies that took over contracts for water management soon realised the lack of short-term profitability of a sector that required large investment. Unable to fully offset their costs, the companies failed to invest, with negative effects on citizens who faced increases in tariffs and declines in access. Often governments could not supervise company performance or hold them accountable, as proper regulatory frameworks were not in place.

In a policy brief released by the UNDP-sponsored International Poverty Centre (IPC) in September, academics Hulya Dagdeviren and Simon Robertson conclude that “The model of commercialisation implemented in Zambia shares its origins with privatisation elsewhere, and thus suffers from similar problems arising from the use of inappropriate models of provision in developing-country contexts. In practice, the twin policy goals of ensuring commercial viability and meeting social objectives have been shown to be incompatible, if not contradictory, under the new system.”

In a separate one-page paper released in June, Dagdeviren and IPC researcher Degol Hailu conclude that: “So far, Zambia’s liberalisation strategy has emphasised tariff rationalisation. This has failed to ensure full cost recovery and has further constrained affordability and accessibility. The correct policy prescription is up-front public investment to renew and extend infrastructure.”

So why has the Bank not warmed to this policy prescription? A new book analysing the Bank’s water privatisation agenda in India from NGO Manthan Adhyayan Kendra blames the Bank’s structures for producing knowledge (see Update 54,53). Author Shripad Dharmadhikary writes: “the Bank’s process of generating knowledge is flawed and exclusionary. It excludes common people, and their traditional expertise and knowledge. The Bank’s knowledge is frequently created by highly paid, often international, consultants, who have little knowledge of local conditions. The knowledge creation is mostly directed towards arriving at a pre-determined set of policies – privatisation and globalisation. This knowledge creation is often selective, in that information, evidence or experiences that do not support these pre-determined outcomes are ignored.”

The book is based on case studies of the Indian water sector review in 1998, the Bank-support Public-Private Infrastructure Advisory Facility (see Update 56), water privatisation in Delhi, and a project for water restructuring in the Indian state of Madhya Pradesh. Dharmadhikary finds that “[the Bank’s] policies have cut people’s access to water, led to environmental destruction, resulted in displacement and destitution of people, stifled better options for water resource management, have had huge opportunity costs, and privileged corporate profits over social responsibility and equity.”

Remunicipalisation wave

Though the World Bank seems to be unwilling to counsel countries on how to reform public services, developing countries looking for advice can now use a new web site on the de-privatisation of water services. The so-called water remunicipalisation tracker provides information on different cities globally that have successfully taken back public control over water. It is a participatory initiative to which global activists can contribute.

The site, promoted by European NGOs Corporate Europe Observatory and Transnational Institute, says “It’s apparent that a global remunicipalisation wave is emerging.” It indicates that “Approaches differ depending on local circumstances but undoubtedly lessons can be learned from the different but inspiring experiences of remunicipalisation.” That seems to be more than the Bank is willing to offer.

Privatisation facts and figures

The initial hopes for privatisation were so high that donor spending on infrastructure fell in the expectation that the private sector would take up the slack. For example, World Bank lending for infrastructure investment declined by 50 per cent during 1993-2002, with much of this directed towards preparing firms for privatisation. In 2002, Bank lending for water and sanitation projects, in particular, was only 25 per cent of its annual average during 1993-97.

At the same time, the World Bank increased its support for private investment in utilities through its International Finance Corporation (IFC) and its Multilateral Investment Guarantee Agency (MIGA). While Bank lending to public electricity utilities dropped from about $2.9 billion in 1990 to only $824 million in 2001, its sector lending to private investors rose from $45 million to $687 million.

Lending about $20 billion to water supply projects over the last 12 years, the World Bank has not only been a principal financier of privatisation, it has also increasingly made its loans conditional on local governments privatising their waterworks. The ICIJ’s study of 276 World Bank water supply loans from 1990 to 2002 showed that 30 per cent required privatisation – the majority in the last five years.