Proceedings

Paper Presentations Session

 

PRIVATISATION IN THE PUBLIC SECTOR & THE PUBLIC-PRIVATE INTERFACE: TRENDS, CONCEPTS, EXPERIENCES & PERSPECTIVES OF PUBLIC-PRIVATE PARTNERSHIP (PPP)

by

Dr Eric Teo Chu Cheow, 

Managing Director, 

Savoir Faire Corporate Consultants,  Singapore

 

Privatization has been in the “in” mode for the past few years.  Reforms in this area are clearly à la mode as well.  But privatization in the public sector has so far at best met with mixed success, as some recent cases of “failed” privatization in the developed world demonstrate the precarious nature of this process, if insufficient safeguards and inherent pitfalls are not recognized early.  Besides, is the trend currently shifting towards another mode other then outright privatization of public sector services and goods? 

It would be appropriate to first look at the ten global trends, which have affected this public-private interface.  We should also examine the new global context for specifically this public-private interface, according to two fundamental aspects, viz from both the socio-economic as well as politico-social points of view.  Thirdly, we would look at the existing international exigencies, as outlined in the Monterrey and Johannesburg Conference results.  Fourthly, it should then be opportune to examine why PPPs could be made more apt in meeting the needs of developing countries, especially in the public utilities sector, in view of recent failures in privatization in the developed world.  PPPs will thus be discussed from the social, financial, economic management and PR angles.

Ten Global trends which have had an Impact on the “Water Issue”

Firstly, the twin trends of neo-liberalism and liberalization began sweeping the world during the Reagan and Thatcher years. When the Soviet Union ultimately collapsed under the weight of “inefficient” communism, and when China became progressively engaged in a new “socialism à la chinoise” experiment, the days of liberalism’s final triumph were finally hailed and those of communism’s death knell were sounded.  This Reaganite and Thatcherite revolution brought sweeping changes to the popular mentality of the post-World War order; with the ultimate liberation of the Eastern European satellite states and the collapse of the Berlin Wall, neo-liberalism finally triumphed ideologically! A recent award-winning television series, “Commanding Heights” (and based on a book of the same name by Daniel Yergin), emphasized that the most important phenomenon and transition of our post-War modern times was undoubtedly the free market revolution, which progressively gripped the world in the 1990s.

Secondly, neo-liberalism and liberalization then engaged the world in a frantic race towards globalization, as four key elements became progressively “globalized”; but, on the other hand, sadly to say, half the world became and remains de facto “marginalized” in this same globalization process.  The key elements, which have been progressively globalized for half the world, that is already actively engaged in this process, would include the massive and rapid circulation of goods and services, capital, ideas and human resources.  The IT revolution has been instrumental (and in partnering liberalization) in enhancing globalization.  The United States, Europe (including parts of Russia, Eastern and Central Europe), Japan, Australia-New Zealand and the urban agglomerations of the developing world (including many parts of East Asia and China) have been successfully plugged into this globalization process and network, whereas the rural worlds of Asia, Latin and Central America and Africa remain in the dark shadows of “non-globalization”.

Thirdly, globalization had effectively created a more unstable financial system and financial markets, especially for developing countries or “emerging markets”, as what they have come to be termed as.  As international financial markets are prone to wild swings of sentiments, boom to bust, from euphoria to panics, financial liberalization, being grossly incomplete in most emerging economies, has made these same economies very vulnerable to sudden shifts in capital flows too.  The Mexican, Turkish, Venezuelan and Argentine crises of 1994-95, the Asian Crisis of 1997, the Russian crisis in 1998 and the most recent Argentine Crisis of 2002 all share a common characteristic of spectacular capital flows and shifts out of their economies, which these countries simply could not control or stop, and to the detriment of the economy and society. 

Fourthly, these crises in turn have huge social costs in developing economies, as they have been tremendously weakened with each crisis and thus plunge their people into profound social crisis, with consequently, a reduction of the middle class and the impoverishment of the popular masses.  The gulf between the developing and developed economies has widened, as well as between the small proportion of rich and a wide base of the urban and rural poor in the developing countries.  This divide becomes even more glaring because of the lack of social safety nets in emerging economies, and is especially severely felt in the areas of social goods, which States traditionally provide to the people, for example water and sanitation, medical care and even heating and energy.  Impoverished governments, which are in many cases plagued by poor governance practices, can no longer provide such basic social goods, especially to the poor, and have withdrawn subsidies or services totally, when their public sectors lose money and even go bankrupt.  Many of such governments then endeavoured to turn to the private sector to deliver such social amenities, but with mixed successes!

Fifthly, because of the frenzy to develop the economy at all costs, much had been sacrificed in terms of the environment and standards of living.  The pitched battles against globalization had helped highlight the necessity for sustainable socio-economic development, and not just “an economic development at any cost”.  There was then a need for more state regulation of environmental and industrial standards, whereby the corporate sector was subjected to more stringent codes of environmental and labour conduct.  Awareness of the inter-dependency of economies, especially in the environmental area has set in clearly, as developing countries become more aware of their potential resources, like clean water and the environment.   

Sixthly, “unbridled capitalism” has come under attack as well lately since the world-wide anti-globalization campaigns began, from Seattle to Genoa, and more recently, thanks to the accounting scandals and frauds in corporate America.  The private sector, which had been “glorified” by neo-liberalism and the free market revolution, has now to justify its efficiency and morality, as it is suspected of greed and poor corporate practices in order to arrive at their goals and profits.  Privatization is therefore no longer considered the cure to all economic ills and has lost its absolute lustre.  Furthermore, a recent Business Week article highlighted a possible major shift in capitalist enterprise in the next ten years from “market and managerial capitalism” to “managed capitalism”, where stakeholders other than the management (for example, unions and the workers) should play a greater role.  There is definitely a new mutual trust to be re-built between capitalism and the people, and an urgent need to re-look at the concept of privatization, especially when it has been ill prepared.  Fundamentally, capitalism’s future would now depend on whether the flames of entrepreneurship would be tempered, after being rocked by financial scandals, shaky confidence and the burst of the IT and dot.com bubbles.

Seventhly, there has been an upsurge in democracy and participatory politics in the world.  Thanks to the winds of the free market and liberalization, democratic aspirations have also risen in the developing world.  Parallel with this development has been increased decentralization and the devolution of power to the lowest levels of governance possible, so as to allow greater participation in decision-making processes at the grassroots.  People’s power is rising in the developing world as well, even in socialist countries like China, Vietnam, Cuba or Laos, or in Africa, where governments no longer control every aspect of life and politics.  Multiple power centres are sprouting out, even in previously (or presently) centralized and authoritarian political systems and countries.

Subsequently, there has been an emergence of the civil society in many developing economies, encouraged and galvanized by the Western NGOs and interest groups in high-publicity anti-globalization campaigns.  Furthermore, people’s power can now be expected to scrutinize and check both the public and corporate sectors’ integrity and governance practices more closely.  Therefore, this civil society is in an ideal fulcrum position to play a dual role, viz check both good public governance (through active NGO activities) as well as good corporate governance (through the stock market, as private individual shareholders).  The citizenry, through the development of civil society, could after all be voters, users of social goods and services, consumers and individual shareholders on the stock market, all at the same time!  Hence, with the rising civil society and an emerging public opinion, both governments and the corporate world will now have to measure up to popular expectations in a much clearer way.

The nexus of the political economy is consequentially shifting in many parts of the world and public accountability is increasing in importance.  In the developing world, there has been a progressive shift away from a duopole nexus of the political economy (based on big government and big business) to a more tripolar nexus, based on governments, civil society and the private sector (and not necessarily, big business anymore), which would be inadvertently more stable.  The rise of civil society as a “check and balance” against governments and the private sector is definitely an acquis now.  Furthermore, in many developing countries, and especially in those that had been affected by profound crises (like in Asia), there is now a realization on the part of governments that they must re-negotiate the “contrat social” (a reminder of Jean-Jacques Rousseau’s concept in the 18th century) between the governed and the governing class.  Governments are definitely being held more accountable by civil society, NGOs, interest/lobby groups and the media, as popular participation is now clearly on the upswing.

Lastly, there is now realization that the world would be plunging into more political uncertainties and slower economic growth in the coming years.  There would undoubtedly be more political upheavals, inter-state conflicts, religious tensions and ethnic violence.  Terrorism has become a world reality, as many now wonder if it is ultimately the “dark side of globalization”.  A bearish mood has thus set in, in terms of investments, equity and future domestic growth.  At the latest IMF meeting in Washington in the last days of September 02, Director Horst Kohler had actually spoken about the “weakening global economy”.  The tech and dot.com bubbles burst has probably spelt the end to unfettered growth, as productivity in the IT revolution appears to be leveling off (especially in the United States and developed economies), although the United States is still leading the world in hanging on to an eventual economic recovery, probably for the second half of next year.  Agricultural commodity prices remain depressed for most developing country producers, whereas oil prices may jump upwards with tensions increasing in the Middle East, thus affecting the expected world economic recovery.  But key in the hoped-for economic recovery would now be centred on the continuous stabilization and growth in the three “confidence levels” necessary for maintaining growth, viz consumer, corporate and stock market confidence.  Unemployment and social woes are also expected to increase, especially in the developing economies, with dire consequences for the already-severe and increasing social and digital divides.  As the world’s poor would definitely get poorer, it is even more urgent today to try to level this divide in the present anti-globalization context.  In parallel, one of the most important keys to this anti-globalization push has notably been the rise of regionalism in the world, probably as a reaction to globalization itself and the growing political and economic uncertainties, when countries seek greater security and maneouvre space in the comfort of larger regional entities.

The New Global Context for Public-Private Interface

We have indeed entered a new global context for public-private interface today, from both the socio-economic and politico-social angles.

Firstly, the ten trends above could be summarized into the following socio-economic context for public-private interface today:

n                   In the neo-liberalism context of today, the private sector and privatization are considered “in”, although the recent scandals in corporate America have dampened the full confidence given to the private sector as “the panacea of all economic woes”.  This erosion of confidence has also been aggravated by the unstable financial system and market, which are perceived to be detrimental to developing countries in the current anti-globalization context of growing economic and social disparities.

n                   This certain “distancing” from the private sector as a “solve-all panacea” has also been highlighted in the recent crises, especially in Asia (1997-98) and more recently in Argentina (2002).  It is now reckoned that social goods and services cannot be left wholly in the hands of the private sector alone, as the authorities have the primary task of ensuring social distribution and harmony, and thus cannot shirk this primary responsibility and obligation altogether.

n                   As a basis for a sustainable socio-economic development, infrastructure and utilities development is perceived as both a means to provide a more level playing field for the society and community, as well as to lay down the foundation for future and further economic development of the country.  Such development, like the provision of utilities by the public sector, hence constitutes both a social goal (viz meeting the social needs of the lesser developed cross-sections of the population) as well as the fundamental economic basis for growth sustainability.  This provision would also help reduce the social divide and  “redistribute social goods and amenities” to a wider cross-section of the population at a moment, when globalization is widely perceived as having contributed to the widening of the social gap and wealth disparities between and within nations.

n                  Rapid urbanisation and poor urban services management have become an important phenomenon throughout the developing and developed world, with all the critical inherent (but unsatisfied) needs and social strains of fast-growing populations being duly felt.  Amongst these urgent needs are those pertaining to the provision of adequate and satisfactory utilities, which could critically alleviate poverty and depravation, especially in the slums and squatters on the fringes of the urban metropolis.  Urban management is unfortunately stretched to its limits in most developing countries, and has in fact become critical for governments to urgently address, especially for political, economic and social reasons.  All the related social ills and problems of big cities and poor countryside have surfaced urgently, as it is in these sprawling urban centers that forces championing political and social upheaval could take shape and thus lead to dire political consequences, especially when political regimes are in transition or consolidation.

Secondly, the developmental and social situation in the developing world has in fact worsened, as globalization sweeps across the planet.  It is not primarily because of globalization, but as a result of this process, many developing countries have been left farther behind for economic, political and social reasons, and thus face further marginalization.  This new politico-social context in developing countries must be clearly understood and analyzed as well, as follows:

n                   firstly, many developing countries are feeling an enormous financial strain; government coffers are depleted and public budgets for public works, amenities and utilities have dried up  These government are now in dire need of other means of financing (other than via the governmental budget) to put in place the basic necessary infrastructure and utilities.  And to keep social peace, they have now no choice but to urgently turn to either (or both) the regional or international financial institutions or the international private sector as a source of financing.  The key is thus to tap extra-public financing for poverty alleviation and the provision of clean water as a social good and right to the poorest sections of the population.

n                   secondly, globalization, liberalization democratization and the shift to a tripolar nexus of the political economy would mean including the private sector and civil society more effectively and at all levels of decision-making.  Civil society will grow further in the developing world as governments are forced to loosen up to allow greater economic development to take off.  Consumer and electoral aspirations will rise as people’s power increases, and clean water and sanitation (like the price of staple foods, oil, fuels etc) will then constitute a politically sensitive area for the authorities.  Hence, owing to the democratization process, the rise of civil society and a greater accountability of the public authorities to the people, voters are now expecting high quality services from the authorities, who can only deliver them now in partnership with other stakeholders, notably the private sector.

n                   lastly, because of the pressure of democratization, governments have to decentralize governance and their decision-making process down to the regions, provinces or municipalities.  Water used to be a “centralized service” at a State-subsidized rate for many developing countries, but with decentralization, local decentralized authorities would now be held directly responsible to their political constituents in providing this service.  As many decentralized local authorities usually lack the necessary managerial skills and adequate financial resources, the private sector (both international and domestic) and other financial institutions would inevitably have to play a greater financial, managerial and even social role in providing these utilities (like clean water and sanitation) to local consumers.

International Exigencies: Arising from the Monterrey and Johannesburg Summits

In March 2002, the UN Conference on Financing for Development in Monterrey, Mexico and the concurrent Enron-Arthur Andersen debacle in the United States highlighted the inextricable link between the crucial role of the private sector in the international strategy of financing development (in developing countries) and the critical need for good corporate governance (of the private sector) today.  This Conference came on the timely heels of four global geo-political factors, which grossly affect international security.

Firstly, Sep 11 has brought home the long-overdue message that poverty, growing frustrations against the lack of social progress and the growing social inequity found in many developing countries, have helped spawn terrorism.  Secondly, globalization, which has the potential to create unprecedented prosperity through liberalized trade, investments and the technological revolution, has admittedly also increased inequalities both between and within nations, and thus aggravated economic and social inequities.  If un-arrested, this trend could lead to instability, more terrorism and instability.  Thirdly, in this post-Cold War era, developmental aid is no longer tied to ideological support or allies within the former Western or Soviet blocs.  Today, such aid is pegged to criteria other than political or ideological!  Fourthly, there is the realization that a sustainable socio-economic development is far more important than development at any cost!

The “Monterrey Consensus” has thus successfully linked these four key global issues of today in a powerful and logical way in the post-Sep 11 and post-Enron context.  Developmental aid is “de-politicized” today, as Western-Soviet division has since collapsed; today’s aid would be based on merits!  Sep 11 and the anti-globalization clamour have driven home the message that developed nations could no longer live in security, if poverty is not alleviated and social inequities are not quickly reduced in the developing world.  Tearing down trade barriers is therefore imperative, but not sufficient.  Developmental aid must flow effectively to developing countries in order to create a more stable and safer world for all.  But this aid should now be tied more stringently to recipient governments’ anti-corruption clean-ups, democratic reforms, transparency, accountability, domestic private enterprise stimulation within good corporate governance frameworks, and a special focus by developing nations on education, human resource development and health and water services.  Above all, developed and developing nations, the public and private sectors must now jointly involve themselves in both institutional and capacity-building exercises in the developing world!

But also according to the Monterrey Consensus, big “clean” corporate businesses should now be closely associated with development, if certain conditions of good public governance are met by emerging economies, to help invest, alleviate poverty, develop infrastructure, utilities, health, water and educational programmes for a sustainable socio-economic development.  However, there should also be a clear exigency that the corporate sector must strictly embrace good corporate governance, accountability and transparency.  In short, the rampant power and abuse of markets should also be stringently subjected to some forms of control as well!  Furthermore, the “new compact” in Monterrey also highlighted the importance of “public-private partnership” or PPP, as a model for developing basic infrastructure and utilities, and in the fight against poverty in developing countries.  This partnership, which would inevitably come under stricter and more regular public and civil society scrutiny, would be increasingly championed by the World Bank, regional banks such as the Asian Development Bank, and developed countries, as developmental aid donors. 

People’s power could be expected ultimately to scrutinize and check both the public and corporate sectors’ integrity and governance practices closely!  Monterrey has thus focused on the corporate sector’s crucial role in international developmental strategies, but only with corporate governance being strictly enforced.  In short, the cry today is for the rampant power and abuse of once-omnipotent markets to be stringently checked, curbed and subjected to some forms of international, national and “self”-control.

In a certain sense, the Washington Consensus, and especially the prime role of markets and the corporate world, within the context of last decade’s “new liberalism”, appears to have been “dampened” and should now be revisited.  The Monterrey Consensus thus highlighted the need to rehabilitate the “public economy”, a term advocated by Joseph Stiglitz, the former World Bank Chief Economist.  The role of the State in economic intervention and a “participatory inclusion” (to quote Stiglitz again) are now back in vogue; new political and social contracts are thus necessary to be re-negotiated within developing countries.  In the growing anti-globalization climate and the Enron-Arthur Andersen fiasco, markets and big businesses do not necessarily rule the day alone anymore!  It is thus only logical that the role of the State be rehabilitated to develop the economy in a more responsible way, perhaps by even playing a key role in helping enforce corporate governance within its borders.

The Enron-Arthur Andersen saga has therefore clearly highlighted the necessity for the private sector to set its own house in order and strictly enforce good corporate governance, at a time when its contribution is called for in international developmental strategies and in financing development, as contained in the Monterrey Consensus.  As the “Monterrey compact” had already adequately highlighted the necessity for good public governance in attracting developmental aid and investments into emerging economies (on the insistence of Washington and other Western capitals), the corollary of effective corporate governance cannot now be more adequately emphasized as well!  Good governance is therefore both a public and corporate exigency by the rising civil society and emerging public opinion.  In fact, both the governments and the corporate world will now have to measure up to popular expectations!

The economic slowdown has also forced many governments to shift their economic strategies towards Keynesian pump-priming and public spending/works.  In this present context of the slowdown and in order to cushion the harsh realities of globalization, there is hence a dire need for big business and capital to partner international and regional financial institutions in order to work with governments more effectively in alleviating poverty and in bridging the social inequity gap that is perceived to have widened with globalization.  In fact, water and sanitation are good examples of essential public works, which are of great social value; they could in fact be better developed during this period of economic slowdown through Keynesian pump-priming. 

The most recent international forum, which has implications for the public-private interface is undoubtedly the Johannesburg Summit on Sustainable Development, which highlighted in particular the imminent plight of acute water shortages in the world; there is currently no safe drinking water for half a million people in the world, and half the world’s total population still do not have good sanitation facilities.  But of particular interest, there was a heated debate on the public-private nexus in water management and distribution, when Third World countries and activists condemned international water companies for profiteering from the people in the developing world; they were accused of having operated, invested and made money from water projects there.  On the other hand, the developed countries were advocating the greater use of the private sector (primarily, international water companies) to alleviate poverty and help resolve the current water woes of developing countries.  This particular point is worth nothing in the current debate on the private sector, the privatization of utilities and public-private interface, especially in the current post-Enron phase and within the growing anti-globalization debate and context.

Fundamental Options in Public-Private Interface

But before looking more specifically at public-private interface, it is perhaps important to distinguish two basic categories of infrastructural development.  Firstly, there is the “hard” infrastructural development, like roads, rail, seaports, airports and roofs over our heads.  Then, there is the “soft” infrastructure or “utilities”, like water, sanitation, electricity, solid waste collection, telephonic services and cable.  These two aspects are both necessary for the development of human communities to live together and to have access, through trade and communication, to other communities.

The developmental models of “hard” and “soft” infrastructure however differ.  “Hard” infrastructure is considered more “passive” in service provision to clients, as they are built and operated for users (ie consumers) as and when they need them, for example, airports, roads, rail and seaports.  In the case of “soft” infrastructure, the operator plays a more “active” role in service provision as the commodity or service (water, electricity, waste water and domestic waste management) is delivered on a regular and daily basis to customers; the operator needs the constant daily satisfaction and goodwill of his clients, and these clients pay for the continuous service which is provided.  But “soft” infrastructure or services does not mean that capital investments (or sunken capital) are less important than for “hard” infrastructure.  For example, in water services (both potable water and sanitation), capital cost in distribution/pipe-laying and the treatment plant is enormous, not to mention the cost of maintaining them too.

Developmental models of utilities provision (“softer” infrastructure) could also be divided into two categories, ie. either the private sector becomes the outright owner (totally or partially) of the supply company and the assets (as in the case of a full privatization or a joint venture involving the public sector), or the private sector provides services through a contractual relationship with the authorities (central or municipal), who remain the sole custodian of the assets.  But it is becoming clearer today that the asset sale approach is most effective when the public sector entity, that is sold off, is in a field that is, or near being, an industrial activity; an asset sale also works best when there is some alternative form or real competition for the particular service output.  However, this approach becomes more questionable when we consider “soft infrastructure” or utilities, which impinges on the essentials of communal existence, or what we now consider a social good.  Utilities (or “soft” infrastructure) pertain to this second category, where it is best for the authorities to retain the outright ownership of such communal assets, and then delegate the management of the services to the private sector over a specific period of time.  For example, the production of electricity could be in privatized hands, but well regulated (according to the first option); however, its distribution should best be in State hands.  In the case of potable water and sanitation, there are serious doubts today if privatization or “asset sale of water” is indeed the best modus operandi.   After all, water is not considered a commodity for competition to rule over, but a social good, which should remain in the hands of the State, with the private sector being given the operating rights for a service rendered and paid according to the quality of this service.

The success in dealing and managing such utilities (or of the “softer infrastructure type”) lies primarily in two aspects, which must be considered and thought through thoroughly.  These two key aspects are supply versus demand, especially in the mid and long terms, and pricing, or the “just” price, for both the consumer and the private sector operator.  To achieve these two facets over the long term, there is the need to carefully lock in two other related mechanisms, which are long-term financing and a clear and transparent framework that would need to be established, so as to better monitor the whole operation.  But on top of all these, there is today another factor of utmost consideration, viz high political and financial risks for long-term PPPs, especially in developing countries.  There are hence five important parameters to consider in all!

Pitfalls in Privatization: Recent Examples from the Developed World

But in applying these five factors in the public-private interface, one would remember the unexpected disasters, which privatization in the neo-liberal mode has brought about recently. It is why alternatives are now being actively considered in the public-private interface.  Take two examples, one from the water industry and the other from electricity deregulation. 

Outright privatization in the water industry was undertaken in the United Kingdom during the premiership of Dame Margaret Thatcher in the early 1990s.  Today, out of the nine privatized water companies, which were created then in the United Kingdom, half of them are in dire straits, with some already bankrupt, and the other half hardly doing well at all.  In analyzing the debacle of the situation in the British water industry, pricing seems to be the major factor for its quasi-collapse.  The nine privatized water companies were forced to under-cut each other by coerced competition in pricing, after having to pay heftily for the assets, which they had bought over from the authorities.  Furthermore, the British regulatory body suppressed the water tariff to please consumers and to prove that the privatization of the British water industry had inevitably led to the reduction in tariffs.  As a result of this financial “squeeze from both sides” (price war and hefty assets purchase), most of these water companies (especially the smaller ones, which had not been bought up by international water conglomerates) have been running at a loss for years and some have gone into bankruptcy since.  Their stocks had plunged and their financial situation had deteriorated. 

The collapsing water companies then began asking the government or the local authorities to buy their “privatized” assets (like their treatment plants, pipelines and even reservoirs and raw water stock) back, as their funds dried up, share prices collapsed and the companies defaulted on their investment obligations, ie in expanding or improving their distribution.  These companies had thus to be aided by the authorities years after privatization, as they could not be allowed to collapse, owing to the sensitivity of water, as a social good, an essential service to the community and a highly politicized issue.  Furthermore, there had been complaints of unsatisfactory water quality produced and as well as a lacklustre service provided.  Pricing is therefore a crucial element in water management, especially when authorities always pledge good tariff reductions with the private sector taking over, as a means of campaigning for privatization by the authorities.  In this case, the private water companies went either into bankruptcy or financial insolvency, and hence unfortunately ended the privatization of water services in the UK on a sour note.  It was unfortunate that the British water privatization has since experienced somewhat of a “re-nationalization”, when the situation spun out of control!

Taking another example, the collapse of the two Californian utilities in providing electricity had been a big blow to the famous 1996 Californian deregulation package for electricity.  In this case, the supply-and-demand equilibrium and projection, as well as pricing, have been at the core of the debacle.  Fundamentally, electricity rates would have increased by double digits for a few months running in 1999-2000 (if it was not for state intervention in subsidies) and even then, the utilities ran into financial bankruptcy last year.  But they, together with the power producers (one of which was Enron), had in fact tried to manipulate electricity prices through supply-and-demand as well as the electricity wholesale market, thanks to the “automatic” intervention of the State (in subsidies), when the electricity price rose too high.  It was also clear that private companies could not be counted upon alone to build and expand power plants (and hence, to enhance supply in line with the growing demand, either projected or real), especially when they could also control the wholesale electricity market and hence push the price of electricity upwards.  It was then obvious that these producers would naturally prefer to "make a fast buck" on the electricity spot market by voluntarily reducing supply and shelving new investments (to expand power plant capacity, and hence increase electricity supply in order to lower prices).  Unfortunately, the Californian state regulators failed to see this loophole, and thus failed to curb the supply-and-demand abuses in relation to the wanton spot market manipulation by gencos. 

It then became an embarrassing situation for the State of California, which had already lost a lot of money intervening in order to subsidize electricity tariffs for its consumers (each time the electricity price hit a certain fixed ceiling), when greedy producers were at the same time, pocketing the extra profits from their spot market manipulations.  Finally, the State had to save the deteriorating situation, as it was becoming a sensitive political issue; it ultimately did so by “nationalizing” the electricity distribution system and by better controlling traded electricity price on the spot market.  One of the two failed utilities, South California Edison (Eix), had already sold back to the State government its power transmission lines for US$93 million in 2001!  In this case, it was the “greed” of those in the energy industry (gas suppliers, utilities in distribution and power producers or generators) in manipulating the price of electricity (through suppressing supply), the financial mismanagement of the utilities by the authorities in terms of distribution, as well as the failure of a good and impartial regulatory system to detect and arrest the abuse, which had led to the failure of the privatization exercise there.  It was indeed a set-back for free market economics and deregulation, and many Continental Europeans then advocated that their more “regulated” electricity system and tariff structure was far superior to the “lawless privatized system of California”!

Deregulation and privatization are therefore definitely not a panacea to all the economic woes of scarcity and inefficient management of resources, and there is thus no universal marketplace magic!  But what is perhaps more crucial to have learnt from these two “bungled” experiences is to have a well thought-out concept of public-private interface, good regulatory system so as to ensure that the private sector, as well as the public authorities, take their appropriate places in the whole water management system and for this system to reduce abuses of both parties to the utmost maximum, with consumers and organized civil society playing the intermediary role of check-and-balance.

Locking in the Public-Private Interface through the “Public-Private Partnership” Concept

With serious doubts about outright privatization as a cure to all economic inefficiencies, the “Public-Private Partnership” (PPP) concept could be used to provide multi-million dollar utilities or infrastructure to local populations in order to spur sustainable socio-economic development in these developing economies.  This partnership should bring in, as integral partners, the local authorities (with the prior blessings of the central authorities), private sector consortia and its sub-contractors, as well as in most cases, international organizations and financial institutions (which come in either as guarantors or “part-financiers”).  In a PPP, each party needs the close support of the others.  Each also brings its own skills and complements the others, thus combining their respective strengths in the most effective way.

PPP is a key and solution to “deficient” local administrations (“deficient” financially and technically) in satisfying local utilities demands, especially in the present urban context.  Local administrations naturally lack know-how in the building and operation of power and water treatment plants, incinerators or landfills, because of the rapid modernisation of operational facilities and technology, the huge financial costs involved, and continuous advances in industrial management and operations.  In this context, they should out-source the building and management/operation of such infrastructural and utilities works to specialized private companies, through arrangements such as concessions, BOO/BOT contracts or delegated managements, depending on the degree of outsourcing they desire.  Furthermore, being already cash strapped, developing countries need not raise huge amounts of cash in the public sector to pay for such services or projects, as it would have been the case if they had commissioned these water projects as turn-key projects from the private sector.  PPP, in the form of a concession, could be an appropriate model in this regard; the private sector takes over the concession for a specified period of time and would also look after the provision and expansion of services according to supply-and-demand.  But it is also crucial to state that the private sector would inevitably ask for a pricing as close to the “real” cost price of the utilities as possible; gone would be the days of heavy subsidies for such essential services!

It is therefore paramount to re-state the principal arguments for a PPP, as opposed to full privatization.  There are two key aspects and two essential factors that must be considered in a package, when discussing a PPP in providing utilities, as a public-private interface in providing public services. 

n                   Firstly, in the PPP concept, the assets (raw water, water or waste-water production facilities and the distribution network, or solid waste treatment facilities) belong to the State, which also sets the overall developmental strategy and regulatory framework for the private sector to work within.  The private sector would build and operate the facilities, so as to deliver these services more efficiently and effectively, according to its best technical, financial and managerial practices.  The most developed form of PPP is the full concession, where the private sector manages the full potable water production and distribution chain (or full waste water or solid waste treatment chain), from the source right to the delivery or complete disposal, and including the collection of water or waste disposal bills or taxes from the consumers too.  This partnership should clearly establish the quality of service (quality of potable water or waste water/solid waste treatment) provided, the pricing formula, future tariff increases and the duration of the concession or contract (ideally for 25 to 30 years).  It should fix a fair and reasonable water and sanitation/waste disposal tariff for the consumer (for social and political reasons), whilst ensuring that the private sector operator gets a reasonable and fair profit margin over the duration of the concession or contract.  This tariff should also take into account all the valid perimeters, which affect potable water or waste water/solid waste treatment pricing, and cater for the tariff increases by integrating all these factors in a pre-determined and acceptable formula.  The attractiveness of this concessionary formula is the possibility for the concessionaire to recoup its capital investments in the mid term, usually starting from the 7th to the 12th year, depending on the capital outlay which it has to provide in the project.  By fixing a long concessionary period, the private sector partner can seek to plan and achieve reasonable capital returns within a public sector guaranteed framework.  However, it is to be noted that the greatest obstacle to a successful PPP in developing countries will come from the existing service tariff, owing to heavy subsidies in the past for either social or ideological reasons.  The PPP concept could therefore be best described as a “privatization of the services, but not its assets”!

n                   Secondly, to satisfy the projected supply-vs-demand curve over the duration of the concession or contract, there is a need to ensure that the private concessionaire or operator abide by his commitment to expand the supply (or the water and sanitation facilities involved) or facilities to cope with waste disposal, through planned and staged investments throughout the duration of the concession, commensurate with projected demand.  If this planned expansion of supply is not complied with, the authorities would levy a penalty on the operator, except in case of force majeur, which must be proven legally to the authorities, or through arbitration.  On the other hand, if the authorities modify the concession contract, for example over the tariff structure, cost of raw water, land charges (for waste landfills), waste tonnage promised (as in the case of incinerators), change of framework or regulations etc, which inexorably affect the cost of supply or service rendered, the operator should also be entitled to a fair compensation according to contractual provisions. 

n                   Thirdly, financing the expansion of the services (according to supply-vs-demand) must be factored into the project over the duration of the concession, so as to allow the operator maximum predictability and utmost certainty in managing the finances of the concession over the pre-determined duration.  This involves a long-term commitment over the partnership by both the public and private sectors, which is key to a PPP.  Project financing will involve both equity and debt financing (usually at 30-70% ratio) at each and every stage of expansion/investments in the concession.  As cost and revenu for the operations are calculated and controlled at each stage of the concession/investments, there is certainty and transparency for all parties concerned, namely the authorities, operator, banks, insurance, as well as the consumer.

n                   Lastly, regulatory frameworks must be clear and transparent.  The appointed regulator must be fair and neutral, so as to be clearly credible in the eyes of the authorities, operator and consumer.  The transparency and fairness of the regulatory framework and the regulator are of utmost importance for the project, in order to help lower the political risks as much as possible.  This is especially so for long-term concessions of this nature, with a social value and a public good.  It is where developmental banks, multilateral organizations and export credit agencies will have to come in to provide some confidence to private capital and operators.  There would definitely be better risk allocation with such organizations and agencies playing a key intermediary role here and within a clear and transparent PPP framework.

Project financing must now fully integrate the social aspect as much as possible.  Such a scheme should bring together the State (central or local authorities), the private sector (together with private banks, insurance and credit agencies as well as clear moral and financial support from international and regional financial institutions) and the consumers (civil society, unions, NGOs, environmental and lobby groups) in a partnership, which could be none other than the Public Private Partnership or PPP.  This PPP concept is in contrast to the partial failure of outright privatization, as demonstrated in the examples of the United Kingdom and California.  However, the precocity of financing a PPP has been recently exposed in developing countries owing to their high sovereign risks, as follows:

n                   The enormous risks for international water companies in high sovereign risks countries like the Philippines, Indonesia (both in 1997-98) and in Argentina recently have highlighted the precocity of water concessions there.  A collapse of these economies would have set back projected expansion of facilities and the required investments from the private sector, as the tariff of water literally collapsed with the crises.  Furthermore, whilst taking over the water concessions, many of the international companies had to take over the debts of the local companies, before the concession was accorded to them, and with every crisis, new debts would be expected to accumulate on “old” debts in a catastrophic snowballing effect!

n                   With these crises, it is clear that the massive devaluation of the affected currencies would pose a huge risk, together with the collapse of the water price, even if force majeure was to be declared and “calculated” upon.  In the recent Argentine crisis, the water company holding the concession in Buenos Aires had to make a financial provision of US$750 million within a few months in two “installments”!  Currency devaluation (or collapse) has inevitably added to the very high risks of a PPP in emerging markets.

n                   With the rise of the civil society  (consumer lobbies, NGOs, unions and environmental groups) against the backdrop of mounting anti-globalization sentiments worldwide, it has become imperative for the authorities and the private sector to cooperate fully in delivering the best services of water and sanitation to the population.  In a crisis situation, this would certainly become even more acute, as they would have to urgently deliver water and sanitation services at the lowest price possible (and even if need be, by subsidizing perhaps the tariff levied on the poorest sectors of the population), whilst ensuring the financial viablity of the operation or concession over the short term, ie the tough years during the crisis.  In such a crisis, it would also be impossible to raise water tariffs, and in fact, they may have to be lowered to “relieve” the social pains during the crisis; this would definitely be very detrimental to the bottom line of the concessionaire, who could end up facing dire financial straits during or after the crisis too!

n                   It is at this point that it may be advisable to associate the international and regional financial institutions more closely in such PPPs, as private companies may not have the means to maintain the financial stability of their operations in “high risks countries”, especially in terms of investments and capital outlay in expanding water facilities and services to the poorest segments of the population.  There is here a social vocation that the private sector may not be able to shoulder alone!  The three crises above would now have proven the necessity for some form of “social support” from the World Bank or its regional developmental banks in order to help in the poverty alleviation exercise!  This debate is hence crucial today for developing countries, otherwise they may be left behind completely, as international water companies would probably in future avoid “high risks countries” or emerging markets in their future business plans.  It is here that the poverty alleviation crusade of the World Bank could be “mesh in” with the social obligations of the public authorities and private sector participation in a PPP.  It was thought that a financial institution like the World Bank could assist by providing what is now being debated as “output-based aid” or “oba” to water and sanitation concessions in developing countries, within their poverty-alleviation goals and projects.

To recap, by looking beyond the social aspects, and into the purely economic management angle, the five “drivers” (or advantages) of PPP are therefore better human resource (HR) development and management, better financial management, technological innovation, better commercial management and greater customer satisfaction.  Firstly, a PPP provides a boost to HR development and management, as the private sector usually pays more attention to HRD and draws the best out of their employees in terms of productivity, welfare and creativity.  Secondly, a PPP will ensure that the private sector makes better use of available funds in the market in the most efficient way and thus reduce wastage or abuse, but at the same time being mindful of the “real” pricing of the services required as much as possible.  Thirdly, because of the private sector’s emphasis on R&D, a PPP will also ensure that the local population gets the best in cutting-edge technological innovation and research.  Fourthly, the private sector’s rigorous procedures, budgetary rigor, as well as in planning, reporting, project control and information technology, will provide a better commercial management under a PPP.  Lastly, the private sector in a PPP will be more acutely “attuned” to the customer’s satisfaction, from quality and service control to reliability and rapid expansion of services to the local population.  Hence, PPP clearly has its advantages in satisfying local authorities, the local population (the clients or consumers) and investors (private sector and financial institutions).  These five aspects constitute the “economic advantages of a PPP, beyond the social aspects of public necessity and obligation”.

But this concept needs to be carefully explained to the local population, so as to rally them round completely to the PPP cause.  Beyond the socio-economic aspects of a PPP, there is intrinsically a need for a clear PR management aspect of a PPP too.  Nationalistic feelings, fear of unemployment or redundancy and concerns with raising utilities or infrastructure prices indiscriminately will inexorably fan protests in the local population.  All attempts must be made early to project a smooth working “win-win” relationship between the local population and the private sector for the benefit of all.  A transparent and fair regulatory authority should therefore be established by the local authorities, as an independent institution to handle all technical criteria  (like quality, environmental standards etc) as well as the social aspects (like tariff structure and price increases, retrenchment and compensation, etc).  Savings could be achieved as wastage is cut down to the minimum, and the labour force and the operational plants used more efficiently according to the private sector’s best business practices; such savings should be passed on to the consumers as far as possible, and translated into price decreases or slower increments in utilities tariffs.  However, the consumers should also be made to understand that reasonable price increases must be expected as well, in line with inflation, and that they should not always expect prices to remain low or be decreased incessantly, as the private sector needs to be financially viable; otherwise, its collapse would not benefit consumers in the long term!  Once the consumers (local population) are completely assured and rallied to the cause of having a private company (either local or foreign) to provide them with their basic utilities, such as water, then chauvinistic or irrealistic feelings could be effectively contained.  A sound and smooth relationship between the private sector, local authorities, the regulatory body and the consumers/clients (local population) is therefore clearly in the interests of all parties concerned.  All this must be conveyed to the consumer for a PPP to ultimately succeed.

Conclusion

With the manifold changes in the world, through the identification of its ten principal trends, the private sector and privatization may no longer be the panacea to poor economic management and all economic ills.  Public-private interface would now make more sense.  The rise of consumer rights and the civil society have given consumers an increasing say in the provision of public services and utilities, which have clearly a social dimension, both in terms of poverty alleviation, as well as in the foundation of a sustainable economic growth.  The examples of the United Kingdom and California have shown that full privatization of utilities could lead to unexpected set-backs when they are not properly conceived and regulated, or if abuses are left unchecked by slackened regulatory bodies.  A “Public-Private Partnership” or PPP would only work if pricing and supply-and-demand are both properly factored in, with long-term financing and fair and transparent regulatory frameworks well locked in too.  Of late, another facet, which is endangering a PPP, could come from the high risks incurred in such long-term projects in developing countries, especially during wild currency fluctuations and economic crises, like the Asian Crisis of 1997-98 or Argentina today.  A PPP must therefore take seriously into account the social, financial, economic management and PR/political aspects for it to succeed.  This is where international and regional financial institutions must also come in to help play the social role and support governments, the private sector and consumers in a PPP.  The PPP concept is hence the public-private interface par excellence, which must bring together all these four principal actors (public authorities, private sector, the public as the end-user, and international or regional financial institutions), not necessarily out of choice, but rather out of sheer necessity, in an increasingly precarious and uncertain world today.