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. |