The Invisible Hand of the Market on the Tap(A)

Much of the world is desperately thirsty. Over a billion people around the world don’t have access to safe drinking water, and more than 3 billion lack access to adequate sanitation systems to stay clean and healthy and protect local water resources from contamination. As a result, up to 30,000 people a day—most of them children–die from water borne diseases. In short, kids all around the globe are literally dying for a clean glass of water.
Governments, development organizations, and aid agencies have failed to meet the exploding demand for water services. Even in the United States, strapped local governments are struggling to find the money to replace aging water pipes and infrastructure, and in developing countries with dramatically expanding urban populations, the problems are often much worse. Take Dar es Salaam in Tanzania, one of the fastest growing cities in the world. The city’s water pipes date back to the 1950s and reach only 60,000 of the city’s current population of 3 million residents. Two-thirds of the water supply never even reaches those 60,000 people, and instead leaks from broken pipes or is stolen. As typically happens, in Dar es Salaam, it’s the poorest residents who often pay the highest price for water, buying their water one container at a time from local vendors at high prices. Others without access to the city water system rely on often-contaminated hand-dug wells or polluted rivers.
Some policy makers have argued that the free market and private enterprise can solve these water woes. They note that private companies have the technical expertise to deploy and the capital to invest that many local governments lack, particularly those in the developing world. They also suggest that private companies will operate more efficiently and respond better to customer needs than bureaucratic government agencies.
These ideas have been put into practice around the world in various ways and the results, while mixed, are troubling. They suggest that without strong government oversight and effective regulation, water privatization often fails to deliver on its promises to increase access, and instead raises a host of new problems. Since one of the main arguments for why water privatization is needed is a widespread lack of government resources and expertise, effective government oversight is often sorely lacking. There’s also often a tremendous power and resource imbalance in negotiations between governmental officials and the giant multinational companies that now dominate the market for water privatization. This imbalance is heightened by the pro-privatization policies adopted by the World Bank and International Monetary Fund. Over the past two decades, these institutions have increasingly required countries to privatize water systems and other public services as a condition for receiving much-needed loans or debt relief. Some industrialized countries like Britain and France also tie their bi-lateral development aid to requirements that recipients privatize water services. (Ironically, the Netherlands requires countries receiving its aid to privatize water services even as all of its citizens at home are well-served by excellent, publicly operated water systems.)
To illustrate how these forces can play out in practice, let’s return to the city of Dar es Salaam. As a condition of receiving debt relief, the International Monetary Fund required Tanzania to “assign the assets of Dar es Salaam Water and Sewage Authority to private management companies.” The World Bank funded a $140 million project to establish a privately managed water agency called City Water, a joint venture of a U.K.-based company Biwater and a German engineering company called Gauff.
The project was intended to be a model of boosting service to the poor and helping meet the UN Millennium Development goal of cutting the proportion of people without access to safe drinking water in half by 2015. However, according to Tanzania’s water minister Edward Lowassa, “The company has failed to produce the goods.” He and other officials objected that two years into City Water’s 10 year contract, the company had invested half of what it promised to upgrade infrastructure, had failed to install any new pipes, and that water quality had declined. In the Spring of 2005 Tanzania revoked City Water’s contract, and now faces legal challenges from Biwater on top of continuing to struggle to meet the water needs of residents in Dar es Salaam.
In a similar and even higher-profile example, the government of Bolivia revoked a contract with the U.S. company Bechtel after botched water privatization project in its third largest city of Cochabamba provoked widespread protests and rioting that left one city resident dead. As in Tanzania, Bolivia had been required to privatize the city’s water, in this case as a requirement for getting the World Bank to renew a loan. Water privatizations projects in Argentina, Ghana, South Africa and the Philippines have also provoked widespread community opposition, as have some prominent privatization deals here in the U.S. In 2003, Atlanta terminated a 20 year contract with a subsidiary of French water giant Suez to manage the city’s water system. The project was plagued by five years of problems, which included allegations of overbilling, a series of water quality problems requiring city residents to boil their tap water to make it safe for drinking, and average rate increases to customers of 12 percent annually. In another dramatic example, as a result of privatization, last year poor residents of the California farm town of Chular faced water rates so expensive, they calculated it would be cheaper to fill their tubs with milk bought from the store than from their taps.
Not all examples of privatization are as dramatic or problematic as these. However, there is little in the record of privatization to suggest that free market competition is the only way to solve the world’s water problems. Indeed, there’s little in the record of privatization that suggests free market competition at all, with the World Bank and IMF requiring privatization and private water companies often granted long-term monopoly contracts with guaranteed rates of return. A wave of industry consolidation has left the industry an oligopoly dominated by a few giant multinationals like Suez, Veolia, and RWE-Thames.
These companies have been burned by the protests, cancellations, and backlash against water privatization of the last five years, and momentum towards privatization in developing countries appears to be slowing down. According to Pierre Victoria, Veolia’s Director of Relations with International Institutions “In order for us to consider a project in a developing country, there has to be a clearly defined water policy and the genuine desire to deal with the private sector. [The project] must not be imposed from above, by international financial organizations.” A World Bank report on the two-decade record of its privatization policy called that policy “oversimplified, oversold and ultimately disappointing.” However, campaign groups continue to see the World Bank and IMF promoting privatization and they fear that European countries and others are promoting privatization in ongoing World Trade Organization negotiations, like the development of a new General Agreement on Trade in Services (GATS).
As socially responsible investors, we certainly see lots of important ways to leverage the power of financial markets in the service of sustainable development. However, the current model of water privatization seems deeply flawed and we don’t hold companies like Veolia, Suez, or RWE that are competing for water privatization contracts. Given the need for effective government oversight to make privatization work and to regulate private water utilities’ monopoly power, a model of investing in building the capacity of local public agencies around the world to deliver water own their own seems more likely to yield tangible benefits than pursuing privatization. Those investments are still desperately needed. As Cliff Stone, the chief executive of City Water in Dar es Salaam, noted when after City Water lost its contract, “Our intention was to bring water to the poor. Whatever happens now, the problem of how to provide water for them remains a problem.”