HAS URBAN WATER PRIVATIZATION WORKED IN THE GLOBAL SOUTH? by Christos Vardacostas B.A., Simon Fraser University, 1 9 9 4 B.Comm., University of Northern British Columbia, 1 9 9 7 THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS IN DEVELOPMENT ECONOMICS UNIVERSITY OF NORTHERN BRITISH COLUMBIA M ay 2 0 1 3 © Christos Vardacostas, 2 0 1 3 1+1 Library and Archives Canada Bibliotheque et Archives Canada Published Heritage Branch Direction du Patrimoine de I'edition 395 Wellington Street Ottawa ON K 1A 0N 4 Canada 395, rue Wellington Ottawa ON K1A 0N4 Canada Your file Votre reference ISBN: 978-0-494-94123-2 Our file Notre reference ISBN: 978-0-494-94123-2 NOTICE: AVIS: The author has granted a non­ exclusive license allowing Library and Archives Canada to reproduce, publish, archive, preserve, conserve, communicate to the public by telecommunication or on the Internet, loan, distrbute and sell theses worldwide, for commercial or non­ commercial purposes, in microform, paper, electronic and/or any other formats. L'auteur a accorde une licence non exclusive permettant a la Bibliotheque et Archives Canada de reproduire, publier, archiver, sauvegarder, conserver, transmettre au public par telecommunication ou par I'lnternet, preter, distribuer et vendre des theses partout dans le monde, a des fins commerciales ou autres, sur support microforme, papier, electronique et/ou autres formats. The author retains copyright ownership and moral rights in this thesis. Neither the thesis nor substantial extracts from it may be printed or otherwise reproduced without the author's permission. L'auteur conserve la propriete du droit d'auteur et des droits moraux qui protege cette these. Ni la these ni des extraits substantiels de celle-ci ne doivent etre imprimes ou autrement reproduits sans son autorisation. In compliance with the Canadian Privacy Act some supporting forms may have been removed from this thesis. Conformement a la loi canadienne sur la protection de la vie privee, quelques formulaires secondaires ont ete enleves de cette these. While these forms may be included in the document page count, their removal does not represent any loss of content from the thesis. Bien que ces formulaires aient inclus dans la pagination, il n'y aura aucun contenu manquant. Canada ABSTRACT This thesis seeks to determine whether urban w ater privatization has worked in the Global South. As water is required for domestic purposes, privatization is a contentious reform in most countries. W ater privatization is investigated in six different prominent Global South cities to determ ine whether it has led to improvements over the previous publicly-provided w ater models. A com parative qualitative analysis of contracts, governance, contextual factors, and outcomes is conducted along with a partial quantitative analysis comparing water coverage, consumption and pricing before and after privatization. The results generally show that water privatization has mainly failed to improve water services beyond levels attained during previous public water services. There are a few exceptions though, highlighting both the complexities of delivering w ater service and a general lack of easily verifiable information to clearly compare the water models. TABLE OF CONTENTS ABSTRACT........................................................................................................................................... ii TABLE OF CONTENTS...................................................................................................................... iii LIST OF TABLES................................................................................................................................. v LIST OF FIGURES..............................................................................................................................vi ABBREVIATIONS..............................................................................................................................vii CHAPTER ONE: INTRODUCTION.................................................................................................... 1 1 .1 W ater Privatization Background...................................................................................... 2 1.2 W ater Privatization D e b a te ............................................................................................... 3 1.3 Research Objective.............................................................................................................. 5 1 .4 Comparative Case Study R ationale.................................................................................6 1 .5 Thesis Contributions............................................................................................................7 CHAPTER TWO: LITERATURE REVIEW....................................................................................... 1 0 2 .1 W ater Privatization Can W o rk........................................................................................ 1 0 2 .2 W ater Privatization Has Failed....................................................................................... 1 7 2 .3 Governance & Regulatory Issues - Lessons & Failures...........................................3 0 2 .4 Summary Comments on the Literature Reviewed.................................................... 3 8 CHAPTER THREE: CASE BACKGROUNDS................................................................................ 4 0 3 .1 Buenos Aires, Argentina (1 9 9 3 - 2 0 0 6 ) ..................................................................... 4 0 3 .2 Jakarta, Indonesia (1 9 9 8 - ) ........................................................................................... 4 3 3 .3 Manila, Philippines (1 9 9 7 - ) ...........................................................................................4 6 3 .4 Casablanca, Morocco (1 9 9 7 - ) .....................................................................................4 7 3 .5 La Paz-EI Alto, Bolivia (1 9 9 7 - 2 0 0 5 ) ..........................................................................5 0 3 .6 Guayaquil, Ecuador (2 0 0 1 - ) ......................................................................................... 5 1 CHAPTER FOUR: COMPARATIVE QUALITATIVE ANALYSIS....................................................5 5 4 .1 Qualitative Approach....................................................................................................... 5 5 4 .2 Nature of Contracts.......................................................................................................... 5 9 4 .3 Governance and Regulation........................................................................................... 6 8 4 .4 Contextual Factors............................................................................................................ 7 2 4 .5 Privatization Outcomes.................................................................................................... 7 4 4 .6 Qualitative Sum m ary........................................................................................................7 7 CHAPTER FIVE: QUANTITATIVE ANALYSIS................................................................................ 8 3 5 .1 Data Sources and Definitions........................................................................................ 8 3 5 .2 Data Limitations and Qualifications.............................................................................8 4 5 .3 Water Connections........................................................................................................... 8 6 5 .4 Water Coverage..................................................................................................................9 0 5 .5 Water Consumption.......................................................................................................... 9 8 5 .6 Water Pricing....................................................................................................................1 0 2 5 .7 W ater Consumption and Pricing.................................................................................1 0 3 5 .8 Partial Quantitative Analysis - S u m m ary.................................................................. 1 0 5 CHAPTER SIX: CONCLUSION AND DISCUSSION.................................................................. 1 0 8 6 .1 Summary of Results....................................................................................................... 1 0 8 6 .2 W ater Governance Lessons.........................................................................................I l l 6 .3 Limitations of the Study.................................................................................................1 2 0 6 .4 Further Research............................................................................................................1 2 1 REFERENCES.............................................................................................................................. 1 2 3 LIST OF TABLES Table 4 .1 Table 4 .2 Table 5 .1 Table 5 .2 Case Comparison: First Ten to Fifteen Years of Privatization.......................5 7 Summary of Privatization Concessions Structure and Perform ance..........7 9 Proportion of Urban Population Living in S lu m s.............................................. 8 6 W ater Coverage Versions - Average Annual Changes Per M o d e l.............. 9 7 v LIST OF FIGURES Figure 5 .1 Figure 5 .2 Figure 5 .3 Figure 5 .4 Figure 5 .5 Figure 5 .6 Figure 5 .7 Water Connection Trends..................................................................................... 8 7 Average Annual Connections.............................................................................. 8 9 Water Coverage Com parison.............................................................................. 9 1 Water Coverage - Alternate ( 2 ) .......................................................................... 9 4 Water Coverage Comparison - Alternate ( 3 ) .................................................... 9 5 Water Consumption............................................................................................. 1 0 0 Water Pricing Comparison................................................................... 103 vi ABBREVIATIONS ADB Asian Development Bank AySA Agua y Saneamientos Argentinos S.A. CPI Consumer Price Index ECAPAG Empresa Cantonal de Agua Potable Alcantarillado de Guayaquil ETOSS Ente Tripartito de Obras y Servicios Sanitarios (Argentina) FDC Freedom from Debt Coalition (Philippines) GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries IADB Inter-American Development Bank ICSID International Centre for Settlem ent of Investment Disputes IFI International Financial Institution IMF International Monetary Fund INDH National Human Development Initiative (Morocco) INE Bolivian National Institute of Statistics IPO Initial Public Offering JBIC Japan Bank for International Cooperation JWSRB Jakarta W ater Supply Regulatory Body KRuHA Koalisi Rakyat untuk Hak Atas Air (Jakarta) Lydec Lyonnaise des Eaux Casablanca MWSS Metropolitan Waterworks and Sewerage System (Manila) NGO Non-Governmental Organization OCSP Observatorio Ciudadano de Servicios Publicos (Guayaquil) PSIRU Public Services International Research Unit WATSAL Water Resources Sector Adjustment Loan (Indonesia) CHAPTER ONE: INTRODUCTION W ater is an essential ingredient for human life. It is needed for a myriad of uses in improving and maintaining public, environmental and individual human health. W ater is a necessary input for production of many goods in various economic sectors. It has been noted that the absolute minimum water required per person to satisfy basic needs is 5 0 litres per day (Gleick, 1 9 9 6 ). Such assessments may be critical in establishing social policies pertaining to urban water availability. Increased industrialization, commercial agriculture and urbanization in the Global South put pressure on available potable water resources. However, historically established water networks and aging infrastructure are insufficient to meet modern urban domestic, commercial and industrial needs. Consequently, cities have searched for ways to improve urban water distribution services in recent decades. An increasingly common solution has been private sector involvement, also commonly referred to as public-private partnerships or water privatization. Such contractual arrangements, in various forms, have acted to transfer operations, maintenance and improvements of w ater distribution and related services1 from governments to private sector parties. W ater privatization has been introduced to varying degrees with differing intentions and promises of providing increased efficiency, financial capital, and water access. In all cases, water is treated as a commodity, in so far as there is a charge for access and specific consumption volumes to recover costs. Pricing water is deem ed a necessary measure towards achieving state fiscal balance while giving incentive to private sector involvement. 1 Related services include billing collection, infrastructure works, and sewerage services. The latter includes sewer line connections, drainage networks, waste water treatm ent facilities, and other infrastructure (eg. Piping, lift stations, and materials). 1 There is considerable debate though as to whether water privatization works and who has been served by such reforms. 1 .1 W ater Privatization Background Since the international push for w ater privatization in the early 1 9 9 0 s , w ater privatization arrangements have varied across the world in terms of scope of services, level of control of the operator in planning and providing services, financing, contract terms and pricing mechanisms. During the 1 9 7 0 s and 1 9 8 0 s , th e US and UK led various market-oriented deregulation and privatization reforms. The International Monetary Fund (IMF) and World Bank aligned with and developed these policies in their respective structural adjustm ent policies across the Global South which have included the sale of public utilities, fiscal control measures, and deregulation reforms. The United Nations declared the 1 9 8 0 s the 1 st international decade for clean drinking water (1 9 8 1 -1 9 9 0 )2. As water needs have become increasingly overwhelming despite UN efforts, the World Bank began advocating for a comprehensive framework of water resource m anagem ent that has included urban water privatization. The IMF has provided ongoing national level structural adjustment supports through loans, fiscal spending conditions, and related policy reforms. In 1 9 8 9 , the US government and international financial institutions (IFI’s) developed the Washington Consensus which reiterated the market principles of the World Bank and IMF (See, for example, WHO, 2 0 1 3 ). This policy framework has acted to reinforce the principles, promotional efforts and actions to im plem ent w ater privatization. 2 Declared in 1 9 7 7 at United Nations 'Water Conference' at Mar del Plata. 2 Since the 1 9 9 0s, water privatization has been implemented in Global South nations on a widespread scale following structural adjustm ent programs of the World Bank, and IMF, also involving regional developm ent banks. This policy fram ework has also generally included program m anagem ent decentralization (as part of fiscal control measures) as part of the privatizations of utilities. The specific w ater concession model design has included loan and grant financing to governments leading up to privatization, followed by longterm capital financing to be provided by the private sector participants. W ater pricing under the model is established to ensure full cost recovery. 1.2 W ater Privatization Debate The ongoing water privatization debate has been increasingly contentious and polarized. The arguments for water privatization are that the private sector can more effectively and efficiently deliver the technical, operational, and infrastructure expansion requirements for water supply services. Elements of these assertions include that the private sector is more efficient than the public sector and has greater access to financial capital. These factors all am ount to the argument th a t the private sector has superior capacity to provide services. The private sector’s access to capital is dependent on the potential profitability of investments. The efficiency argument for private sector provision is argued as a contrast to pre-existing public inefficiencies. These include, for example, poor m anagem ent, inefficient investment, fiscal imbalances, and that the provider and regulator should not be the sam e entity. Efficiency and addressing state fiscal burdens are noted as two of the most important reasons for private sector involvement in public utilities (Graham, 1 9 9 8 ). Shirley and Menard (2 0 0 2 ) note that, “Efficient operation keeps 3 costs down, thereby reducing dependence on government subsidies and freeing resources for investment in expansion and m aintenance” (p. 3). Privatization proponents would also argue that the private sector can better respond to specific operational requirements such as increasing labour productivity, reducing w ater system losses (generally referred to as non-revenue water or unaccounted-for-water), and improving bill collection services3. These efficiencies are also cited as potentially helping to alleviate poverty, an objective of water privatization that has been cited by the World Bank. Such notions of efficiency imply that water service improvements can positively impact social welfare in various ways. For example, less tim e collecting water can free tim e that could be used for gainful employment. Improved quality of water improves health which also can improve productivity. Both of these effects can potentially reduce poverty. The World Bank acknowledges th a t there are consumers unwilling (or unable) to pay for water, and indicate that: “To m anage w ater resources more effectively, a balanced set of policies and institutional reforms should be sought th a t will both harness the efficiency of market forces and strengthen the capacity of governments to carry out their essential roles” (The World Bank, 1 9 9 3 , p. 10). Arguments for public provision of w ater revolve around the notion th a t elected governments are answerable to the people (i.e. water customers), and th a t w ater is necessary for human health and well-being and that its access can only be assured by the state's direct involvement in funding and operating water services. These arguments centre on the notion th at a price should not necessarily be charged for water, or that it should be provided without charge to households th a t cannot afford 3 Bill collection is not specifically assessed in this thesis. 4 it. A core part of the argument for public provision of w ater suggests th at access to water is a human right and that the social or cultural value placed on w ater cannot necessarily or easily be monetized. In the cases examined in this study, domestic households were paying for potable4 water from the existing networks prior to w ater privatization. Pricing reform is just one potential elem ent of water privatization. Realistically, privatization requires various regulatory mechanisms to adjust to a third party w ater provider. Public water model arguments might suggest that privatization argum ents fail to acknowledge the nature and extent of the essential roles of government and the potential broader social consequences of privatization. These arguments may not necessarily differ from the privatization argum ent - adm itting that many Global South nations have had a poor track record in providing adequate water services to urban populations. The complexities of the public vs. private water debate become apparent when applied to urban water service in the Global South. Issues of allocative efficiency and equitable distribution are not easily addressed strictly within the confines of the public vs. private water debate. As a result, it is simply imperative to assess the merits of the application of the water model and its respective outcomes. 1.3 Research Objective The objective of this thesis is to examine the question of whether urban w ater privatization has worked in the Global South. This objective can be pursued by assessing and comparing cases where water privatization has been im plem ented. 4 Although network water is intended to be potable, levels of contamination vary, partly relating to water pressure. 5 The nature and extent of privatization’s performance is examined by identifying the underlying factors that have contributed to w ater privatization’s successes a n d /o r failures. Important criteria include whether w ater privatization has: (1) provided water access to new consumers, while (2) continuing and improving upon service to existing customers. As more information is generally available on the privatization era of water services, contractual and performance target compliance act as proxies to assess water privatization. The overall goal of the study is to identify and articulate meaningful policy lessons and recommendations for the future of w ater distribution policy frameworks in the Global South. At the sam e time, the rising trend of w ater privatization in the Global South in recent decades holds important lessons for future water privatization and water services models in general implemented in regions with comparable levels of urban sprawl and poverty. 1.4 Comparative Case Study Rationale In order to understand the underlying reasons for water privatization outcomes, it is important to examine the evidence across multiple cases as relating to various influential factors such as contractual arrangements, governance, economic and political contexts, and the direct outcomes stemming from these factors. A broad set of criteria is essential to this analysis. These varied factors reflect the value of a mixed method approach that includes qualitative and quantitative elements. This thesis examines water privatization in six major urban cities around the world: Buenos Aires (Argentina), Jakarta (Indonesia), Manila (Philippines), Casablanca (Morocco), La Paz-EI Alto (Bolivia), and Guayaquil (Ecuador). All six of these cases are water concession agreements, which comprise water distribution system operation, 6 maintenance and capital investment requirements over an extended 2 5 to 3 0 year lease period. These cases were chosen as they m eet specific criteria. First of all, they are all water concessions, which are the most comprehensive w ater privatization arrangements.5 Contractually, concession agreem ents by definition all include w ater operations and maintenance, and private investment requirements. This type of arrangement is considered to be the flagship model of w ater privatization th a t was being implemented in the 1 9 9 0 s throughout the world. Secondly, all six cases have been based on long range commitments and have been in place more than five years (and generally much longer). Thirdly, all of the cases represent large urban populations over one million inhabitants. The six chosen w ater privatization cases all m eet these criteria.6 1.5 Thesis Contributions The academic literature to date has covered a variety of topics and has mostly covered specific case findings. The purposes often differ from the intentions of this thesis. Many previous studies’ findings are not necessarily robust due to either limited geography (i.e. the number of cases assessed) or varying elem ents of analysis (in contrast to those suggested above and herein). There does not appear to be an individual study that attempts to broadly understand how w ater privatization has been implemented across several com parable cases objectively analyzing factors and trends that have contributed to the resulting outcomes. Therefore, this thesis undertakes to systematically examine w ater privatization in six major urban cities 5 Sewerage services, waste water management, and regional water resource management issues are only anecdotally assessed in this thesis. 6 For purposes of this thesis, water privatization is defined as the concession agreement model and its components relating to water provision. 7 with the purpose of identifying the factors that have contributed to success a n d /o r failure using both qualitative and quantitative analysis. A comparative qualitative approach is used, sourcing information from academic literature and public sources describing and examining any of th e six urban water privatization cases. The categorical information for this analysis includes the elements previously noted: (1) the nature of the contracts, (2) governance and regulation, (3) economic and political contextual factors, and (4) resulting outcomes. As mentioned earlier, far less information is available on the previous public w ater model for these cases; as a result, the above categories of analysis are the benchmarks used to assess water privatization. A quantitative approach was initially intended, to involve a full analysis of w ater coverage as well as consumption7 trends under public and private water models. However, significant data limitations for the various cities have severely limited the degree to which a proper quantitative analysis could be carried out. As a result, only a partial quantitative analysis has been attempted in this thesis. The partial quantitative analysis is based on sporadic information from varying sources, permitting a cursory analysis of w ater coverage, consumption and pricing, as applicable, to supplement the qualitative analysis. Consequently, the thesis gives more weight to the qualitative analysis. As the general goal of privatization has been broadly cited as to outperform the prior public model, the metrics of this performance should be comprised in the contractual agreem ents and respective targets. The key findings of this thesis are th at w ater privatization has not generally worked. The examined cases show that w ater privatization, as implemented, has not 7 Analysis of consumption also includes pricing comparison. 8 effectively improved levels of water service beyond those encountered during preceding public provision models. W ater privatization has brought with it various complications to the governance of water services, which have contributed to a lack of water network expansion. Some of the key reasons for such lack of service relate to the contractual design and resulting arrangements, governance and regulatory weaknesses that permit a lack of service accountability and capital outflows (or flight). The competing interests reflected by an internationally predetermined w ater model, and government policies that maintain national oversight over local administration of urban water models are also identified as contributing to privatization failures. The potential exception to some of these findings relates to Casablanca which has made specific contract remedies to address perform ance shortcomings during the first ten years of privatization. Furthermore, part of the Manila case, the East Manila concession, appears to operate more successfully than other concessions based on reported water coverage performance, although this is found to include use of pre-existing informal w ater supply methods. Again, these findings are subject to various information limitations which are highlighted through the analysis and in the conclusions drawn in this thesis. 9 CHAPTER TWO: LITERATURE REVIEW In this chapter, literature assessing water privatization is reviewed, with particular focus on the six cases examined in this study. Although som e of the research conducted has aligned with the objectives of this thesis, particularly for Buenos Aires, Jakarta and Manila cases, far fewer research articles and sources are identified for the other three cases, Casablanca, La Paz/EI Alto, and Guayaquil. Even fewer studies found on the latter cases have focused on the specific objective of whether water privatization has worked. For guidance, this chapter is broadly organized into three categories th at include some topical and perspective overlaps. The first category covers research that finds privatization has worked or can work if specific conditions are met. The second category includes literature th a t finds w ater privatization has failed or focuses on identifying its failures and lessons learned. The third category examines issues relating to governance and regulation. 2 .1 W ater Privatization Can Work Buenos Aires: Alcazar et al. (2 0 0 0 ) examine the Buenos Aires water concession during its early years (1 9 9 3 onwards) finding that the concession expanded services and also resulted in lower tariffs8 (26.9% reduction in bid). Consequently, the authors have concluded that Buenos Aires was better off with water privatization. They conduct a welfare analysis finding that consumers benefited most, although upper and middleincome users benefited disproportionately. They also suggest that contract revisions and renegotiations did not substantially impact consumer welfare (Alcazar et al., 8 Water tariff is the common description of the price of potable water, as it is deemed a charge for access to the resource, although in most cases, the water tariff generally refers to a variable price per cubic metre of water. 10 2 0 0 0 ). Various areas of improvement are identified such as, information asymmetries, perverse incentives, weak regulatory institutions, politicizing of the regulator, contract flaws, an obscure tariff system and lack of transparency in the regulation process (Alcazar et al., 2 0 0 0 , p.2). The authors conclude th at privatization resulted in better performance, operational efficiencies, and increased investment, but that the areas requiring improvement led to a lack of public confidence (Alcazar et al., 2 0 0 0 , p.1-2). Alcazar et a I. (2 0 0 0 ) have conducted a relevant analysis for review, although the data and methodology used to arrive a t their findings are not clear. Also, the authors have made broad generalizations that do not appear substantiated. For example, they indicate that those that gained piped water and sewerage services in Buenos Aires, “...will no longer be consuming contaminated well water or polluting groundwater or rivers” (Alcazar et al., p.53). Such statem ents are questionable considering the short period of observation, which raises questions as to the legitimacy of these findings. Post (2 0 0 9 ) suggests that Buenos Aires w ater contract provisions designed to increase company revenues, with additional policies to enhance company reputation being added later can have socially beneficial effects. Post concludes th at the contract was weakened and time horizon shortened by moves relating to either short term political survival or firms losing confidence in the region, which in turn reduced social benefits. The author identifies the lesson of needing to understand the institutional environment before entering the concession, continuing th a t the apparent lack of such understanding weakened the Buenos Aires concession. Post suggests that the private sector’s lack of service to the poor related to the profit 11 motive deterring the firm from capital investment in poor areas. The author also identifies the need for information improvements, and that the company needed to address issues previously perpetuated by the state. Consequently, Post implies that water privatization can theoretically have positive social benefits although the Buenos Aires case has failed in some respects.9 As with Alcazar et al., Post’s analysis, appears to focus on the tenets of privatization, with some illustration of failures that, if avoided, may have helped the concession succeed. Both Alcazar et al. and Post focus on criticisms of the Buenos Aires privatization model as implemented, but with underlying tones being apparent, that support this specific type of service delivery model. Also, both articles give little weight to public opinion, and their respective analyses ignore international factors. Furthermore, public opinion is viewed only from the perspective of its value in garnering acceptance of water privatization policy and the company, Manila: Wu and Malaluan (2 0 0 8 ) compare the two water concessions in Manila (Manila W ater serving East Manila, and Maynilad serving W est Manila), exploring the differences in internal factors that have affected concessionaire10 success. The authors find that, of the two concessionaires, Manila Water, the company serving East Manila has been successful. This success is found to be a result of a combination of factors including corporate governance, financial m anagem ent and operations management. The authors cite the importance of employing a sustainable method of awarding technical consultant contracts, and find th at 9 Note that the Buenos Aires concession was terminated in 2 0 0 6 . 10 Concessionaire is used synonymously with consortium and company to describe the private entities contracted to provide the water services under a concession agreement. 12 Maynilad (West Manila) failed in this respect. The authors identify differences in financial management practices, operational efficiencies, service improvements and capital expenditure decisions between the companies as reasons for M anila W ater’s success. Wu and Malaluan focus their analysis on internal company factors in affecting water privatization outcomes. Chia et al. (2 0 0 7 ) also examine M anila’s w ater privatization, concluding th at it can work if various challenges are navigated; with government, private sector and the public all playing key roles to make it successful. They find that the concession process was transparent. The authors also find th a t there were early improvements in water coverage, availability and quality, but had problems with non-revenue w ater targets11. The West Manila (Maynilad) contract failure led to early notice of termination in 2 0 0 2 , and is noted as being the result of an inability to obtain financing, currency devaluation, and ineffective planning and m anagement practices. Specifically, it is suggested that Maynilad did not engage in due diligence with respect to the condition of water infrastructure prior to the concession. The authors acknowledge the lack of capacity of the regulator, whose employees also complained of irregular practices during the concession process (Chia et al. 2 0 0 7 ). The regulatory office, created as a result of the concession, did not provide for transparency or public involvement. The authors recommend the importance of: government capacity and regulatory structures, policy, research, public input, 11 Non-revenue water generally refers to the proportion of water volume produced that is not sold. The proportion that is sold is also referred to as water consumption. 13 allocation of risk, transparency, financing, and (acknowledge) the challenge of the politics of water (Chia et al., 2 0 0 7 , p .16-17). Chia et al. (2 0 0 7 ) provides a focused analysis on factors that led to the failure of the West Manila concession. This analysis is contrasted to the implied success of the East Manila water concession. The authors are not attempting to assess whether water privatization works though. Although various criteria for success are identified, the authors do not provide a critical examination of how these factors affected both concessions. Casablanca: Jamati (2 0 0 3 ) examined the first five years of the Casablanca w ater privatization. The article concludes that the Casablanca utility privatization has been successful given a 20% increase in population served, water loss reductions (2 4 million cubic metres per year), significant flood risk reduction, and custom er service improvements (Jamati, 2 0 0 3 ). It appears that the data used to report on these findings came from the Moroccan government or concessionaire12 although references are not provided for the article. This is the only article identified th at finds Casablanca’s water privatization a success. Its primary shortcoming, in addition to no verified peer reviewed sources, is that performance targets are simply stated as having been achieved without any critical assessment. La Paz-EI Alto: Foster and Irusta (2 0 0 3 ) examine electricity, telecommunications and w ater and sewerage privatization reforms in La Paz-EI Alto, Bolivia to determine the effects 12 The term Concessionaire refers to the partnered entity that holds the water concession agreement with the respective government. This term is used synonymously with consortium, partnership or company (although this may also refer to the majority shareholder which is generally the operator of the water services). 14 on poor households. The authors find that the w ater and sewerage concession initially showed improvements in service access and improved accountability, with a 20% water tariff increase. The report indicates that network water and sewerage coverage increased in the few years prior to reform, and was then to expand further under the concession specifically in El Alto, which is predominantly poor. The authors find that changes to the block tariff structure, removing a fixed charge but increasing per-use rates, should save water costs for households consuming less than seven cubic metres of water per month (Foster and Irusta, 2 0 0 3 ). Foster and Irusta generally conclude that water and sewerage reforms led to positive impacts for poor households.13 Foster and Irusta have focused on assessing the contract targets relating to poorer neighbourhoods in La Paz-EI Alto. Their results are preliminary given th at only a few years of observation were available. Also, the authors are not critically examining the La Paz-EI Alto water contract, its circumstances or questioning reported outcomes. Hailu et al. (2 0 0 9 ) also look a t Bolivia’s w ater privatization experiences, examining water coverage, equity and affordability. The authors conclude th at w ater access expanded proportionally for La Paz-EI Alto, and highlight that th e poor in La Paz were spending 2.6% of their income on water, which is considered affordable (Hailu et al., 2 0 0 9 ). The authors suggest that the private sector needs public support to meet network expansion obligations. This article is rather cursory and does not critically examine the La Paz-EI Alto water privatization. 13 Note that the contract terms for water network expansion in La Paz / El Alto focused on predominantly poor un-serviced areas in El Alto neighbourhoods. This is discussed further in this chapter as well as in Chapter 3. 15 Dardenne (2 0 0 6 ) concludes that La Paz-EI Alto is a good example of a w ater distribution program servicing the poor (Dardenne, 2 0 0 6 , p.9). The author finds that this concession was generally successful until its second five years of implementation when the rise in political unrest responding to poor economic conditions and a stoppage in network expansion deem ed the concession not economically viable.14 Morales et al. (2 0 0 6 ) author a report for CIESS-Econometrica (Centro de Estudios Economicos y Sociales), a Bolivian research institute, which concludes that the La Paz-EI Alto water privatization had no impact on consumption, and a possible positive impact on coverage within El Alto, and specifically for its poor (M orales et al., 2 0 0 6 , p.50-51). Specific lessons identified are discussed in the next section. The literature in this section has included coverage of the Buenos Aires, Manila, Casablanca and La Paz-EI Alto cases. Although the studies do not all necessarily conclude that water privatization has or could succeed, it has generally focused on the private sector’s potential to succeed without critical exam ination of direct comparison to potential public sector or alternative modes of w ater provision. Although lessons or failures have been identified in a few cases, the focus has generally been on internal company factors. Also, the above literature’s preliminary shortcomings include a general lack of examining contractual performance failures, governance and regulatory factors, and political and economic factors th a t have affected water privatization outcomes. The few exceptions to these criticisms include additional coverage in the next section. 14 Specific failures relating to the La Paz-EI Alto privatization identified by Dardenne (2 0 0 6 ) are discussed in the next section. 16 2 .2 W ater Privatization Has Failed Buenos Aires: Solanes (2 0 0 6 ) draws lessons from the Buenos Aires water privatization (1 9 9 3 - 2 0 0 6 ). The author indicates th at privatization was precipitated by a debt crisis that worsened during the privatization reforms. During water privatization, Argentina suffered currency devaluation, doubling of unemployment, and increased poverty and inequality. The author identifies privatization factors and failures: information asymmetries, inefficient, vague and non-transparent pricing, a weak regulatory system, high price impacts on low income households (represented 85% of the unconnected) (Solanes, p.6). The regulatory system was deemed flawed based on contract regulation (rather than law) and a politically appointed regulator with insufficient tools that was circumvented at tim es (Solanes, p.11-12). Solanes’ article highlights that many of Buenos Aires’ privatization failures relate to the lacking regulatory model, methods of evaluating the contract, and factors not easily separated from the economic situation in Argentina. The author also finds that monopolistic private sector water m anagement, and full cost recovery up to the medium term, are not feasible policies (Solanes, 2 0 0 6 ). Solanes’ report provides a critical analysis of the Buenos Aires case. The author does not cover international influence though. Furthermore, the assessm ent is not intended to assess whether privatization has worked. Olleta (2 0 0 7 ) assesses the World Bank’s role in urban water privatization with specific review of the Buenos Aires case. The author concludes that the Buenos Aires case was a failure since the private consortium, Aguas Argentinas, focused services on areas already covered by the w ater and sanitation network, and delayed 17 investments in expansion (particularly with respect to sanitation infrastructure). Olleta discusses the World Bank’s unchanging stance th at has continued to support private sector participation in water. Olleta (2 0 0 7 , citing Karina Forcinito a t the Third World Forum, March 2 0 0 3 ) points out th at the World Bank managed to change the original contract over a nine year period to transfer risks to users, add new fixed charges and increase tariffs by 88.2% , where by 2 0 0 3 poorest families spent 9% of their income on water and sewerage. Olleta provides valuable insight into the World Bank’s influence on the Buenos Aires water privatization, but does not assess other privatization factors. Food and Water Watch (2 0 0 9 a ), an NGO focused on the safety of food, w ater and fish, which advocates for public control, lists the following contextual failures relating to the Buenos Aires water privatization case: (1) internal political pressure and corruption that weakened the regulator’s authority, and removed it from subsequent contract negotiations, (2) the direct influence of the World Bank as an advocate and shareholder of the Aguas Argentinas (the company) including a manager being appointed to the company to facilitate the contract renegotiation in 1 9 9 7 , (3) support and pressure for the French w ater company by the French Government (Food and W ater Watch, 2 0 0 9 a ). As th e Argentinean financial crisis response resulted in denying the company’s requests for a new fixed $US-Peso exchange rate and 42% water price increase, the company threatened legal action through the International Centre for Settlem ent of Investment Disputes (ICSID), which eventually lead to the contract’s termination in 2 0 0 6 (Food and Water W atch, 2 0 0 9 a ). Finally, Food and W ater Watch report, citing the regulator Ente Tripartite de 18 Obras y Servicios Sanitarios (ETOSS)15, finds that over the duration of th e contract, the company only met 10% of its contractual obligations (Food and W ater Watch, 2 0 0 9 a 16). Food and W ater W atch’s report on the Buenos Aires provides some valuable contextual information, although the report is not a comprehensive critical assessment of the privatization. Castro and Azpiazu (2 0 1 2 ) find that the Buenos Aires private w ater operator failed to comply with contractual expansion and investment targets (as well as environmental protection and service quality); and that government authorities submitted to company interests. The authors add that the company’s strategy was to pursue "extraordinary profits” which worked for the company until 2 0 0 2 when the renegotiated contract model collapsed in the face of a national crisis. They also acknowledge that the impacts from the privatization are not yet fully understood, and such impacts will hinder the state’s ability to reach universal access to services in future (Castro and Azpiazu, 2 0 1 2 , p.71). Castro and Azpiazu provide insight into the Buenos Aires water privatization although the primary focus of their article relates to institutional changes transitioning to remunicipalization of the water services. The Public Services International Research Unit (PSIRU) has produced a number of reports, which surround the international failure of water privatization, power of multinational companies, policies of the World Bank and implied impacts on affected populations reflected by widespread protests (PSIRU, 2 00 5). One of these reports, by Lobina and Hall (2 0 0 7 ), finds that the Buenos Aires concession was suffering poor performance even before currency devaluation. They highlight th at 15 No citation provided. 16 Also see Public Citizen (20 03 ). 19 water prices were renegotiated and the company under invested (Only 6 1 % of projected levels achieved) during the first 1 0 years (Lobina and Hall, 2 0 0 7 , citing ETOSS via Ducci, 2 0 0 7 ). This report provides some compelling evidence, and although previously published PSIRU reports are also cited, the contractual terms, governance and performance outcomes are only briefly highlighted without extensive examination in the individual reports accessed. Dardenne (2 0 0 6 ) finds that two million inhabitants, primarily living in slums, were left out of the water and sewerage concession area. Additionally, the author finds that only 25% of the two million poor which were within the concession area were receiving water services after 1 0 years (Dardenne, 2 0 0 6 , p.7). He indicates that it was an ambitious plan to connect the un-served 3 .5 million inhabitants within the concession area. This report provides valuable insight into the lack of performance on initial targets and the exclusion of peri-urban populations from the concession area. Jakarta: Argo and Laquian (2 0 0 7 ) find that Kampong17 (remnants of original villages within the city) conditions in Jakarta worsened because the water privatization forced wells and other sources, including illegal connections, to close (Argo & Laquian, 2 0 0 7 ). The authors point out that vendors increased water fees in the face of scarcity experienced in the poor neighbourhoods. They conclude various reasons impacting the Jakarta water privatization: (1) the size and scale of the privatization schemes, (2) incentives based on water volumes, (3) the difficulty in extending into informal settlements contributed to the companies not extending services to the poor 17 Also spelled Kampung. 20 in hazardous areas (that would have ended informal water arrangements th a t had been providing water and sanitation options to such areas)18, (4) political interference, influence, and corruption, (5) the high costs of foreign borrowing and consultants, and (6) concessionaire deals and bailouts contributed to the exorbitant costs of the privatization schemes (Argo and Laquian, 2 0 0 7 , p .245-246 ). The authors conclude that all of these factors affected the ability of the concessionaires to extend network services (Argo and Laquian, 2 0 0 7 ). M anila: Argo and Laquian’s (2 0 0 7 ) article also covers Manila and the conclusions cited above also apply to this case. The authors point out th at vendors in Manila also increased water fees affecting poor neighbourhoods. M anila’s situation was already bad before privatization, then prices increased ten-fold for the rich while increasing four-fold under vendor schemes (Argo & Laquian, 2 0 0 7 ). The authors indicate that water rates in Manila were increased in response to company troubles partly arising from the fallout of the Asian economic crisis, with Maynilad (West M anila contractor) increasing prices by four times and Manila W ater (East Manila contractor) increasing prices six-fold. Although water rates increased, the volume of water available also increased, albeit unequally. Argo and Laquian find that the resulting rate increases mostly affected middle and upper classes and private businesses. The authors’ previously cited reasons affecting water privatization in Jakarta, also apply to Manila: (1) privatization size and scale, (2) water volume incentives, (3) informal settlem ent difficulties maintaining informal w ater arrangements, (4) Political interference, 18 The authors also note that services in Jakarta (as well as Manila) were extended to the edges of poor neighbourhoods with responsibility transferred to local leaders and vendors to extend network services. 21 influence, and corruption, (5) High costs of foreign borrowing and consultants, and (6) The concessionaire deals and bailouts contributed to the exorbitant costs of the privatization schemes (Argo and Laquian, 2 0 0 7 , p .2 4 5 -2 4 6 ). The authors conclude that all of these factors also affected the M anila concessionaires’ ability to extend network services (Argo and Laquian, 2 0 0 7 ). Argo and Laquian provide a detailed analysis of the Jakarta and M anila cases, although the nature of the contract model and terms, including regulatory term s and international influence, are not thoroughly examined. A Public Citizen (2 0 0 3 ) report covering the Maynilad Water privatization for West Manila finds that unanticipated high operating costs and price regulation led to disputes and the eventual changeover of company ownership. The report (2 0 0 3 , citing Esguerra, 2 0 0 1 ) also highlights contract renegotiations including foreign exchange loss transfers to consumers, so th a t corporate suppliers and consultants could continue being used. The Public Citizen report on the W est Manila water concession highlights some privatization failures. This report is very brief though and is focused on advocating for public water provision. The Asian Development Bank (ADB) evaluates its own role in M an ila’s w ater privatization and recommends the need for: (1) an appropriate tariff policy, whereby tariffs increase only after service improvements, and (2) financial support during early stage operations (ADB, 2 0 0 8 , p.37). The report identifies key lessons such as (the need for) holding concession designers accountable, flexible terms, independent and effective regulation, and political leadership (ADB, 2 0 0 8 , p.38). The report also 22 points out that about 65% of connected households surveyed still use other w ater sources (ADB, 2 0 0 8 , p.51). Casablanca: Lahlou (2 0 0 8 ), President of ACM E-Morocco, a water advocacy group, discusses the negative aspects of water privatization in Morocco. He explains Morocco’s background with structural adjustm ent policies in the 1 9 8 0 s and 1 9 9 0 s , and the rigidity of policies that do not allow for an alternative to privatization. The article points to the magnitude of Moroccan water and electricity privatization in Casablanca, Rabat and Tangier-Tetouan: accounting for 2 - 2.5% of the country’s GDP. Lahlou finds that water privatization has a social constraint given th a t poverty prevents a full cost recovery model from actualizing. The author discusses the results of a state study, which finds that the concessionaire, Lydec, has not m et its contractual obligations, and that this is linked to early distribution of dividends (Lahlou, 2 0 0 8 ). Lahlou also indicates that Lydec acknowledges its contractual limitations; admitting that key variables such as water volumes, yields and prices have changed since the contract was established. The author concludes with the example of Grenoble, France, where the return to public w ater provision led to lower prices and increased investments. An ACME-Morocco (2 0 0 7 ) article on Lydec discusses the results of a report reviewed by Casablanca’s technical committee in preparing to revise the w ater contract with Lydec in late 2 0 0 6 . The report summarizes missed contractual obligations that require revision in the contract for 2 0 0 7 to 2 0 2 7 . Based on th at report, ACME-Morocco finds that the ‘delegating’ authority needs to recover funds under the contract due to: (1) a shortfall in securities investment (including early 23 dividend issue), and (2) excess of foreign technical assistance fees (ACME-Morocco, 2 0 0 7 , near end of translated report paragraph). ACME-Morocco (2 0 0 8 ) citing the findings of an independent Casablanca study characterizes Lydec services as “failures, overruns and disrespectful behaviour” in reference to contractual obligations (ACME-Morocco, 2 0 0 8 19). The article suggests that the original contract negotiation (which bypassed local democratic institutionsnegotiated by the Moroccan Ministry of Interior) has likely contributed to these deficiencies (ACME-Morocco, 2 0 0 8 ). The article also points to significant contract capital violations: (1) under-expenditure, and that (2) 85% of Lydec’s actual capital expenditures comprised transfers to shareholders and “technical assistance” suppliers (ACME-Morocco, 2 0 0 8 ). ACME-Morocco (2 0 1 1 ) reports a preliminary investigation over the accusations that Casablanca’s mayor and Lydec CEO mismanaged public funds. The article criticizes the World Bank model of capital funding and investment being delegated to the foreign private operator, in contrast to the French model that includes public funding and investment (ACME-Morocco, 2 0 1 1 ). The Lahlou and ACME-Morocco articles comprise most of the non-proprietary accounts of the Casablanca water privatization case that could be obtained for review. Although these documents provide some discussion of water perform ance outcomes for this case, they do not provide a detailed account of the Casablanca contract terms and the analysis is brief without elaboration on the reasons for the identified privatization failures. 19 The article does not provide a direct citation for the study being referenced. It is indicated that the study was published by ACME-Morocco in November 2 0 0 7 although it could not be found in the ACMEMorocco website archives. 24 Olivier (2 0 0 9 ) notes that Casablanca’s households th at do not have property rights are not eligible to access water subsidies. Olivier discusses th a t Casablanca has a social tariff block of eight cubic metres20, but that it is not effective since in many cases multiple households share a connection. The author also explains that water authorities’ attempts to reduce the social tariff block to six cubic m etres were met with protests that returned the tariff to its original level (Olivier, 2 0 0 9 ). La Paz-EI Alto: In its coverage of the La Paz-EI Alto water privatization, Food and W ater Watch (2 0 0 6 ) presents an analysis of the results of an independent audit by Pozo y Asociados. The audit found that the w ater company’s financial statem ents overstated fixed asset investments. The audit concluded th at over US$ 6 million should be levied by the government for contract violations including concession underinvestment (Food and W ater Watch, 2 0 0 6 ). This report is important as it contradicts figures previously cited suggesting that the company was m eeting contractual targets. This report only focuses on specific contract violations though. In Lobina and Hall (2 0 0 7 ), the authors highlight that the La Paz-EI Alto concessionaire contract target interpretation included establishing low cost connections and using community groups, micro-credit plans and volunteers to increase profits (Lobina and Hall, 2 0 0 7 , p .26-27). The authors also docum ent results of the audit (mentioned previously in Food and W ater Watch, 2 0 0 6 ), bringing rise to the end of the contract, which showed that the company continued to earn an actual annual rate of return over 15% during the contract, overstating investment 20 A ‘social’ tariff block is the first level of consumption being provided at no cost per use. 25 asset claims, and resulting in a fine (after termination) by the regulator in 2 0 0 6 (Lobina and Hall, 2 0 0 7 ). Laurie and Crespo (2 0 0 7 ) find th at the service area under the La Paz-EI Alto contract consisted of the pre-existing network area and did not account for un-served areas at the contract’s outset. In examining the pro-poor terms of the contract, the authors find that the contract did not clearly specify the geographic coverage requirements necessary to ensure that poor un-served households would be connected to the network. Consequently, they link this finding to an alleged manipulation of the coverage figures by the company - a view supported by the superintendent and that contributed to protests (Laurie and Crespo, 2 0 0 7 , p .845). Furthermore, although the concessionaire used a pro-poor pricing structure based on consumption levels, a 2 0 0 2 household survey in La Paz and El Alto found th a t 64% of respondents claimed that prices were beyond their economic capabilities (Laurie and Crespo, 2 0 0 7 , p.847). The authors find that poor households were paying for w ater regardless of whether they used it, due to being charged average rates established by the company. Water meters were not installed despite being required by the contract (Laurie and Crespo, 2 0 0 7 , p .847). They also identify that the regulatory framework allows for negotiations between the regulator and company without any public participation (Laurie and Crespo, 2 0 0 7 , p .851). The authors conclude th a t the regulatory system is weak as reflected in ineffective negotiations with the company, including, for example that the company was not held to adhere to a new law calling for public consultation pertaining to rates (Laurie and Crespo, 20 0 7 , p .8 5 1 ). Finally, the authors identify problems with the dual roles of the regulator having authority to 26 grant and monitor the concession, and the World Bank being both an investor and administrator of concessions (Laurie and Crespo, p.852). Dardenne (2 0 0 6 ) suggests that cooperative partnerships to serve th e poor work provided capital financing is sourced elsewhere. The author identifies th at a portion of La Paz-EI Alto’s population was excluded from the concession, and highlights that El Alto has a high growth rate (5.1% ) and two-thirds of the population are under the poverty line. As a result, the 97% city water coverage claimed as of 2 0 0 1 was closer to 60% -65% (Dardenne, 2 0 0 6 , p.8). In addition to its positive view of the La Paz-EI Alto concession, M orales e t al. (2 0 0 6 ) finds that social tensions related to coverage and consumption were exacerbated by rising unemployment and decreasing income and quality of employment (Morales et al., 2 0 0 6 , p.50-51). Policy recommendations suggested include better contracts that consider the geography and distribution (Citing Konives, 1 9 9 9 ), a different water tariff system that includes cross-subsidies, and efficient regulatory norms and institutions (Morales et al., p.51). Guayaquil: Swyngedouw (2 0 0 4 ) discusses factors that have influenced the urbanization of water in Guayaquil, up to privatization. The author outlines Guayaquil’s historical background, illustrating how local interests, state and international financier power have constructed water scarcity. The author outlines Guayaquil’s geography, emphasizing that poor peripheral neighbourhoods developed quickly and ineffectively on the low lying estuary in the south, and the hills in the north - both with obsolete water and sewerage infrastructure (Swyngedouw, 2 0 0 4 ). The author also discusses the growing importance and authorities’ acceptance of tanqueros (private w ater 27 trucks) in serving primarily poor un-serviced areas. Swyngedouw extensively examines the relationships between interest groups, (the controlling of) nature, a chronically deficient management system, th e disproportionate emphasis on a productivist view, and the resulting problems leading to privatization (Swyngedouw, 2 0 0 4 ). Swyngedouw provides important insight into the role of societal classes in influencing the direction of policy in Guayaquil which does not support m eeting urban water service needs. Cesar Cardenas (2 0 0 8 ) with Observatorio Cuidadano de Servicios Publicos (OCSP, Citizen’s Public Service Observatory), a citizen’s watchdog for Guayaquil, has written a statem ent citing reasons that the w ater contract with the concessionaire, Interagua, should be terminated and replaced with an autonomous municipal service authority that includes consumer and citizen participation. Reasons cited primarily relate to a lack of contract compliance and legal infractions. Cardenas (2 0 0 8 ) highlights infractions such as water price increases that violate consumer laws and inequitably affect the poor, collection methods illegally based on estimated consumption, and sewerage services without secondary treatm ent (Cardenas, 2 0 0 8 ). Cardenas’ statem ent cites several concession failures but is essentially a summary statem ent, apparently based on the OCSP’s work. Food and W ater Watch (2 0 0 9 b ) concludes th a t w ater privatization in Guayaquil has failed having provided poor service and jeopardized public health, particularly that of children. This article references reports from the press as well as the OCSP. Again, this report is rather cursory. Along with Cardenas’ statem ent, these sources provide compelling evidence, although sources are not necessarily cited. 28 Joiner (2 0 0 7 ) outlines the Guayaquil water privatization’s social and environmental impacts, including specific case studies of Guayaquil neighbourhoods: Guasmo Sur, Isla Trinitaria, Flor Bastion and Mapasingue. The author concludes th at the water, sewage and drainage concession agreem ent was poorly written, relieving the concessionaire of clear, measurable performance and social obligations. For example, the author notes that the contract does not consider the need to exclude the non-functioning existing water network from coverage figures (Joiner, 2 0 0 7 , p.35). Furthermore, Joiner finds th at the initial and subsequent five year plans neither adequately accounted for social objectives to provide for or improve services in poor neighbourhoods, nor obligated Interagua to provide financial and technical resources to water and sewerage infrastructure activities (Joiner, 2 0 0 7 , Chapter 11). The author discusses OCSP’s inception in 2 0 0 5 , for increased transparency and accountability in the administration and regulation of public services. Joiner states that problems are, “deeply rooted in the government’s apparent ineffectiveness in addressing the social needs of the remarkably poor population (Joiner, 2 0 0 7 , p .1 2 ).” Joiner notes that consumers have been left outside the network water services due to Interagua’s inefficiencies. In reference to the regulator ECAPAG’s establishm ent, the author states, “No portion of the [ECAPAG] legally binding documentation mentions specific standards or measurements to evaluate these two [public and environmental health] goals (Joiner, 2 0 0 7 , p .20).” Joiner’s report is the most extensive assessment of the Guayaquil case. It does not provide any quantitative performance data or assessment though. The author’s examination of the privatization to date is critical of all aspects as pertaining to consumers, particularly the poor. 29 The literature reviewed in this section has generally viewed w ater privatization as a failure or highlighted failed aspects of the privatizations. These authors have identified specific water privatization failures and underlying contributing reasons, such as international influences, political issues, economic problems, w eak contracts, ineffective policy and regulation, and specific violations by companies. The reviewed literature has generally focused on individual cases though. Furthermore, governance is generally not included as a critical elem ent of analysis in many of these studies. 2 .3 Governance & Regulatory Issues - Lessons & Failures This section includes literature covering w ater governance and regulation specific to the water concession contracts and services for the six cases, a n d /o r that provides relevant examination of these topics for these cases. Generally speaking, this literature provides more focus on governance and regulatory issues with less emphasis on the nature of the contracts, political roles (including international influences) and performance outcomes, except where noted. Water governance can be defined as the relationship between governments, the private sector, political parties, civil organizations, NGOs, international institutions, and other relevant entities with power (Miranda e t al., 2 0 1 1 , p.4, citing Castro, 2 0 0 7 ). W ater governance is also “about dealing with uncertainty, conflict and corruption” (Miranda et al., 2 0 1 1 , p. 6). These authors distinguish between the view of water governance outside of cities, within cities, and a holistic approach accounting for ‘up-to-downstream’ factors (M iranda e ta l., 2 0 1 1 , p.9).21 21 For purposes of this thesis, urban water governance is considered in the context of state and other levels of governments’ responsibilities in maintaining and regulating urban water resources, services and the relationships between government, private sector contractor(s) and users of water. As water 30 Buenos Aires: Laborde (2 0 0 5 ) writes on the institutional framework of water tariffs in Buenos Aires. The author notes that the Argentinean economic crisis and Buenos Aires water company’s debt could not have been predicted or avoided. She refers to lack of public disclosure by the w ater company, a significant reduction in w ater tariffs of 26.9% for a utility already in debt, and the consequent inability to finance network expansion at the prevailing user rates, as well as the lack of accurate information at the tim e of the bid as the primary reasons for the company’s failure (Laborde, 2 0 0 5 ). This article discusses some legal aspects of the concession agreement and the complex tariff system. Porporato and Robbins (2 0 1 0 ) discuss the causes of the failure of the Buenos Aires water concession with particular focus on corporate governance. Drawing from the literature, the authors indicate the need for government participation in w ater governance due to externalities, the need for information due to externalities, and pricing difficulties (Porporato and Robbins, 2 0 1 0 ). The authors conclude th a t the Buenos Aires water privatization had a weak regulatory body with a poorly defined regulatory framework, and weak post-privatization governance mechanisms (Porporato and Robbins, 2 0 1 0 ). Engel et al. (2 0 1 1 ) identify lessons for water sustainability in th e face of the Global South’s continuing urbanization. The authors find that poverty was increasing in metropolitan Buenos Aires (30% in 1 9 9 5 ), and th at it is estimated th at about 30% of urban lands are made up of informal settlem ents preventing water and sanitation concession agreements are primarily concerned with services and infrastructure within specific boundaries, water governance is also considered within these parameters. 31 network expansion. Citing Jordan et al. (2010), the authors conclude that, “Governance issues, institutional weaknesses and lack of control m echanisms are responsible for the failure of the [Buenos Aires] concession” (Engel et al., 2011, P-30). Jakarta: The Jakarta Water Supply Regulatory Body (JWSRB, 2 0 0 9 ) reviews w ater privatization in Jakarta ten years after implementation. The study m akes several recommendations including engaging in adaptive regulation to support perform ance improvements, coordination between contract parties to allow for benchmarking, monitoring and evaluation, the need for participatory mechanisms that involve the public in decision making processes, and the importance of transparency of the JWSRB and stakeholders (JWSRB, 2 0 0 9 , p .1 4 4 ,1 5 0 ,1 5 2 ) . Nugroho (2 0 1 1 ), a board member of the JWSRB until 2 0 1 1 , finds the creation of JWSRB as an independent and impartial institution potentially influencing good w ater governance in future (as opposed to changes that would occur in its absence) (Nugroho, 2 0 1 1 ). Bakker et al. (2 0 0 8 ) argues that governance failures have created disincentives to connect the poor to w ater in Jakarta. The authors find that even at higher income levels surveyed, most households used a combination of w ater sources that did not include network w ater (Bakker et al., 2 0 0 8 ). The study concludes that all water providers should be subject to regulation with clear governance standards “such as accountability, transparency, participation, inclusiveness and the rule of law” (Bakker et al., 2 0 0 8 , p .1907 ). The article in general indicates that the water governance model does not effectively address the formal water network or informal vendor water. 32 Bakker et al. (2 0 0 6 ) highlight the spatial and social differentiation of w ater access in Jakarta. The authors identify historical precedence responsible for inequities in water provision that perpetuate poverty (through, for exam ple, sourcing alternative water at higher prices). The authors cite continuing disincentives to connect the poor such as: a culture of governance not prioritizing the poor in policy (citing Kusno, 1 9 9 7 , Woodcock, 2 0 0 5 ) and no legal requirements to service the poor, full cost recovery objectives (Taylor, 1 9 8 3 ), and no formal mechanisms to stop urban expansion even though water network expansion has been limited in scope (Bakker et al., 2 0 0 6 , p.18-19). Bakker et al. (2 0 0 6 ) identifies critical governance issues pertaining to water provision in Jakarta. Similarly, Kurniasih’s (2 0 0 8 ) review of the Jakarta water privatization highlights governance and regulation as fundam ental problems. Governance problems identified include legislation, and lack of tendering, public involvement, and transparency (Kurniasih, 2 0 0 8 ). Kurniasih concludes that the monitoring agency, JWSRB has limited authority and resources and is constrained by the w ater contracts preventing sanctions for non-compliance (Kurniasih, 2 0 0 8 , p.8). In conclusion, the author recommends a model of community-based water management, which is connected to Indonesia’s strong traditional roots (Kurniasih, 2 0 0 8 , p.17). Manila: Cuaresma (2 0 0 6 ) examines the w ater and sewerage service programs, specifically for the poor in Greater Manila, in order to determine lessons for regulation. The author identifies some loopholes such as high dependence on group taps and non-regulation of pricing. Cuaresma points out the need for regulation 33 conducted by an independent, trusted institution of government including public and civil society group participation. A Freedom from Debt Coalition (FDC, 2 0 0 5 ) paper discusses the failures of the West Manila concession (Maynilad). The FDC paper discusses a public health failure in 2 0 0 3 where 6 0 0 residents of poor communities became ill from gastro­ intestinal diseases, of which six died. An FDC requested laboratory test showed th at Maynilad’s w ater supply had E.Coli bacteria of more than 7 0 0 percent of the am ount allowed under the national standard (FDC, 2 0 0 5 , p.13). The authors find th at Maynilad’s concession fees payable to the government being converted to equity in 2 0 0 4 , acted to shift the company’s creditor debt obligations to the governm ent (FDC, 2 0 0 5 ). The paper illustrates that the w ater authority, Metropolitan W aterworks and Sewerage System (MWSS) incurred US$ 4 3 0 million in additional loans from 2 0 0 1 to 2 0 0 4 , and then arranged for a US$ 1 2 5 million loan from the World Bank, of which $ 3 1 million was to be provided to Maynilad company operations (p.9). The paper continues that a significant (50% ) water tariff increase and departure of th e local shareholder from the West Manila concession transferred the concessionaire’s debt obligations to the west zone consumers. The FDC concludes with regulatory failures: (1) the MWSS Board is comprised of presidential appointees, (2) the MWSS Regulatory Office’s (MWSS RO’s) m andate is limited to regulation of the contract, and (3) there is a conflict of interest given that the regulator and companies’ offices are in the same building (and that the contract includes terms that disallow such an arrangement) (FDC, 2 0 0 5 , p.14-15). Freedom from Debt Coalition (FDC, 2 0 0 9 ) examines the Manila privatization case in a ten year review, documenting and assessing contract issues, financing 34 background, regulatory (in) effectiveness and recommending the need for a comprehensive cost-benefit analysis. The report summarizes various impacts of the privatization including: corporate taxes being passed to the consumer, access by the poor being inhibited by connection charges, the poor having to access more expensive alternative sources, and concessionaires charging the resellers the highest rates for bulk water - which are passed on to the poor (FDC, 20 0 9 , p.5, 3 9 ). The report discusses the issue of ‘regulatory capture’, suggesting that the regulatory system, its mechanisms and people are susceptible to conflicts of interest and corrupt practices (FDC, 2 0 0 9 , p.38). The report reiterates previous com m ents that the government had to settle for only partial payment on additional debt obligations resulting from its dispute and termination of M aynilad’s agreement (FDC, 2 0 0 9 , p.36). The report discusses numerous court challenges made to attem p t to overturn actions taken by the water authority and companies to deem them agents of the water authority rather than classify them as public utilities (which implies various responsibilities to the public). FDC (2 0 0 9 ) concludes that the water authority’s (MW SS’s) actions have acted to ‘shield’ the companies from their accountability (FDC, 2 0 0 9 , p.48). Finally, Kumar (2 0 0 9 ) explores institutional designs for water privatization in a dissertation that includes a Manila case study. Asian Development Bank (ADB) official interviews indicated that the regulator, MWSS Regulatory Office (MW SS RO), is not independent from government (Kumar, 2 0 0 9 , p.211). Interviews also revealed the opinion that Manila W ater’s (East concession) practice of selling bulk w ater and taking credit for increased water coverage should be addressed (Kumar, 2 0 0 9 , p .221). The author finds that the rebasing exercise which controls tariffs and rates of 35 return puts limits on investment, limiting network expansion (Kumar, 2 0 0 9 , p .223). In reference to an implied lack of consumer participation, Kumar finds that accountability is the “the most serious concern” relating to the water privatization (Kumar, 2 0 0 9 , p.228). He concludes that w ater privatization can work but requires that the government must first build its technical and financial capacity (Kumar, 2 0 0 9 ). Furthermore, Kumar finds th at additional state preconditions for privatization are necessary; such as clearer laws, higher regulatory authority and potentially disallowing foreign company involvement (to address domestic public sensitivities) (Kumar, 2 0 0 9 , p .302-303). The sources reviewed on Manila in this section provide a general critique of the regulator, rebasing process, and court challenges. They provide only a general view of the exposed complexities of the established and lacking regulatory system. However, there could be more attention to the regulatory system's relationship to the changing contract terms and resulting outcomes. Casablanca Saadi (2 0 1 2 ) identifies various shortcomings and lessons of th e Casablanca \ water and sanitation concession. The author finds that the concessionaire has underperformed on its contract obligations during the first ten years, and th a t the governance model limits social accountability (Saadi, 2 0 1 2 ). As with a few previous authors covering this case, such as (e.g. Lahlou, 2 0 0 8 and ACME-Morocco, 2 0 0 8 ), Saadi reports on audit findings showing company connection installation and investment targets underperformance (2 0 1 2 , p. 3 8 2 ). The audit also identified reporting gaps relating to unbilled revenues (Saadi, p .385). Saadi concludes that power imbalances between levels of government, as well as the company’s 36 experience as a global power, prevent social accountability (Saadi, p .3 8 6 , 3 9 2 ). Finally, this author also identifies that pricing objectives to alleviate issues for inhabitants of Greater Casablanca are not addressed in the recent renegotiation of the contract (Saadi, p.386). This author has provided some critical assessm ents of the Casablanca privatization where no other academic literature has been identified. Guayaquil: An International Finance Corporation/Multilateral Investment G uarantee Agency (IFC/MIGA, 2 0 0 8 ) Ombudsman report outlines the mediation between Guayaquil’s water provider, Interagua, and citizens, in response to a com plaint by OCSP and another Guayaquil NGO. The key issues raised in the complaint included: residential water cuts, lack of service expansion, contractual non-compliance, and public health problems due to improper water treatm ent (IFC/MIGA, 2 0 0 8 ). Interagua agreed to remedy the situation with respect to affected users, including forgiving customer debts and flexible payment plans. The IFC/MIGA report concludes that a future dialogue has been opened and proposes subsequent m ulti-stakeholder meetings (IFC/MIGA, 2 0 0 8 ). Carrillo et al. (2 0 0 6 ) finds th at the Guayaquil water privatization needs a network expansion focus without direct (additional) costs to neighbourhoods. The authors point out that the regulator, ECAPAG, initially controlled water prices, but th at an increasing number of complaints arose for poor service with increased charges (Carrillo et al., 2 0 0 6 , p.9-10). The authors identify a 6.1% reduction in w ater coverage between 1 9 9 4 and 2 0 0 4 in rural parts of Guayaquil (Carrillo et al., 2 0 0 6 ). While the authors find a lack of improvements in water services during the initial years of privatization in Guayaquil, they caution that water privatization cannot be 37 identified as the cause of these performance results (Carrillo et al., 2 0 0 6 ). In reference to the regulator’s water pre-privatization role and the focus on providing services to poor neighbourhoods, Carrillo et al. (2 0 0 6 ) conclude that: ...less emphasis needs to be placed on whether the provider of th at good is public or private and more emphasis needs to be directed at improving their institutional capacity to provide those services in an efficient, transparent and accountable manner, (p.56) This report provides some insight to the Guayaquil privatization; although the regulatory framework is not viewed as an elem ent of privatization. The literature reviewed in this section raises issues relating to governance and regulation for several of the six case cities. The specific topics have varied by objective and method. The primary gaps identified within this group of literature relate to elements of governance and regulation, with less or no focus on contract terms, contextual influences affecting the contract model and renegotiation (e.g. international influence on governance), an d /o r service outcomes. 2 .4 Summary Comments on the Literature Reviewed The literature reviewed in this chapter spans a variety of subtopics generally examining the six water privatization concessions on an individual basis. A significant portion of the literature has concluded th at specific water privatization cases have been a failure, or that various lessons have been learned from the privatization experience to date. As the objective o f this thesis is to draw robust lessons from the critical examination of w ater privatization, comparative multiple case studies are particularly relevant. However, very few comparative studies were identified and reviewed in this chapter. Studies such as those of the Public Services International Research Unit (PSIRU, Lobina and Hall, Hall e t al.) examine different 38 types of privatization, while generally advocating for public water provision. The ideology inherent in these studies is that private sector involvement and related formal international influences are simply inappropriate. Collectively this source’s body of literature may critically examine w ater privatization by case, but this is not readily apparent based on the individual reports reviewed. Additional studies were identified that do not provide value to this thesis, such as Marin (2 0 0 9 ), which focuses on the ideological objective of determ ining what the private sector’s role should be rather than asking whether the policy direction to date has been successful. Individual case literature has generally focused on specific issues such as water tariffs, poor households, or contractual issues. The available literature reviewed does not consistently critically examine th e six w ater privatization cases in a comprehensive m anner that outlines the term s of the contracts, the governance model’s elements and effectiveness, the ‘contextual’ factors (e.g. Political and international factors, and economic crises), and w ater privatization outcomes. Moreover, the literature is generally lacking analysis of these factors across comparable case models in the Global South. As mentioned in Chapter One, this thesis follows a systematic approach to compare the six water privatization cases from various aspects related to contractual terms, regulation, governance, water coverage as well as external and contextual factors. The following chapter provides some historical background for each of the six water concession cases. 39 CHAPTER THREE: CASE BACKGROUNDS The six water concessions examined in this thesis were initially negotiated as 2 5 - to 3 0 - year agreements. Five of the six concessions include sewerage service commitments within the contract scope.22 The concession implementations have involved ongoing legislative and policy reforms, contract renegotiations and terminations, water network expansions, related capital and technological upgrades, as well as various disputes. Companies have been responsible for obtaining and providing all necessary capital investment. The following sections provide background on the case cities and their respective nations, including the lead up to and implementation of w ater privatization, and key relevant aspects of the arrangements. These cases include Buenos Aires, Jakarta, Manila, Casablanca, La Paz-EI Alto and Guayaquil, respectively. 3 .1 Buenos Aires, Argentina (1 9 9 3 - 2 0 0 6 ) Argentina is a former Spanish colony, becoming an independent republic in the 1 9 th century. The country has gone through periods of military rule, including from 1 9 7 6 to 1 9 8 3 . In the 1 9 7 0 s , w ater sector responsibilities were decentralized to provincial governments. The city of Buenos Aires has been an autonomous district since 1 8 8 0 and was granted autonomy in a 1 9 9 4 constitutional am endm ent. Buenos Aires is one of South America’s largest ports, with navigable river waters to the north-east part of the country, accessing Brazil, Uruguay and Paraguay. Buenos 22 Sewerage services may comprise household sewer connections, drainage systems, sewage treatment, and sanitation services (such as septic tank de-sludging), as well as related capital infrastructure. Jakarta's agreement has excluded sewerage services. 40 Aires’ economy consists primarily of services (76% financial, real estate, advertising, and hotels) and manufacturing (16%). Following a period of increased unemployment and high inflation, Carlos Menem was elected President in 1 9 8 9 , and with IMF support, passed a law allowing him sole authority to pass a privatization decree for public utilities. The Government fixed its exchange rate and negotiated bilateral agreements to promote and protect foreign investment (Laborde, 2 0 0 5 ). In December 1 9 9 2 , with direct loan and advisory support from the World Bank, a 3 0 year w ater and sewerage concession was signed for Buenos Aires with Aguas Argentinas, a consortium headed by Lyonnaise des Eaux-Dumez (Now ‘Suez’) with additional minority ownership from its Spanish partner AgBar, as well as Banco de Galicia, Vivendi, company employees, and Anglian Water. In 1 9 9 4 , the World Bank’s International Finance Corporation (IFC) acquired a 5% share. At the tim e, much of the water and sewerage system was over 6 0 years old and was experiencing shortages and interruptions. The intention of the privatization was to obtain private financing for physical infrastructure, and to reduce related public deficits (Galiani et al., 2 0 0 5 ). Aguas Argentinas offered a w ater tariff reduction of 26.9% to secure the contract. The contractor committed to increasing water coverage to 100% from 70% and sewerage coverage from 58% to 95% . Information regarding the existing infrastructure was unavailable or not forthcoming during the bid process, although there was a contractual stipulation th at the government was not to be responsible for the quality of information provided to the bidding process (Alcazar et al., 2 0 0 0 ). Initial contract term s put limits on consumption charges per user which were to be authorized by the new regulator, Tripartite Entity of Works and Sanitation Services’ (ETOSS). Within the first year, tariff 41 rate increases were approved, prior to rate reviews prescribed by the contract (Laborde, 2 0 0 5 ). The institutional framework included national, provincial, and city level officials co-governing the regulator, ETOSS. ETOSS was widely considered to be a weak institution from its inception. The previous non-transparent and complex w ater tariff structure remained. ETOSS was later moved under Ministry of Environment authority, which removed it from contract renegotiations which took place beginning in 1 9 9 7 . Tariff regulations were changed. Improvement charges for customers were added prior to agreed-to service expansion and quality improvements. Service compensation was to be based on a fixed U.S. dollar exchange rate. At the tim e, ETOSS warned national authorities that the company had only met one-third of infrastructure expansion targets and spent only one-fifth of the sewage connection investment target. In the late 1 9 9 0 s contract renegotiations permitted w ater tariffs increases. However, in 2 0 0 1 -2 0 0 2 , a four-fold devaluation of the Argentine Peso led to tariffs being frozen. From 1 9 9 3 to 2 0 0 2 , average residential water tariffs increased 87.9% , while the corresponding Consumer Price Index had increased only 7.3% (Castro and Azpiazu, 2 01 2).T h e w ater company had incurred U S $ 7 0 6 million in foreign financial debt, thought to be primarily from outsourcing activities (Laborde, 2 0 0 5 ). In 2 0 0 6 , the concession agreem ent was rescinded due to contract failure. Public cases against the company and its partners occurred in Argentinean courts. The concessionaire claimants sued the Argentine Republic in the International Centre for the Settlem ent of Investment Disputes (ICSID) on the basis of failing to adhere to previously agreed tariff adjustments, among other complaints. In 2 0 1 0 , th e ICSID 42 ruled partially in favour of the concessionaire claimants on matters relating to fair and equitable treatm ent of the com panies’ investments (International Centre for Settlem ent of Investment Disputes, 2 0 1 0 ). 3 .2 Jakarta, Indonesia (1 9 9 8 - ) Indonesia is a former Dutch colony, gaining its independence after the Second World War. President Suharto ruled the country under a military regime from 1 9 6 6 until the late 1 9 9 0 s when he resigned bringing back a democratic republic. Indonesia’s economy consists of agriculture and manufacturing with a rise in natural resource sectors - forestry, oil and gas, and minerals. Indonesia’s colonial past has had great influence on the structure of Jakarta, where the infrastructure developed in the late 1 9 th century around the wealthy colonial settlem ents. The governm ent has been highly centralized. As of the early 1 9 9 0 s , the World Bank was advising the Suharto government to privatize water, and with it cam e reforms for decentralization of government involvement in water. In 1 9 9 0 s , Pam Jaya, the city owned water utility for Jakarta, was running a t a loss, had an aging infrastructure, and little access to additional capital financing. The utility was being regulated under city government supervision. In 1 9 9 5 , President Suharto started the process toward w ater privatization in Jakarta (and other jurisdictions that followed). In 1 9 9 8 , with support from the World Bank, two 2 5 year private water concession agreements were negotiated and implemented, dividing the city into two concession areas. These agreem ents included all water services, but excluded network sanitation services. The West Jakarta concession is held by a partnership led by Suez (PT Pam Lyonnaise Jaya or Palyja). Thames W ater (UK) initially led the East Jakarta water concession partnership. The West concession 43 initially included Sigit as a partner, a Suharto family company. The East contract included the Salim Group, linked to a Suharto associate (see for exam ple, Bakker et al., 2 0 0 6 ). As of 2 0 0 7 , the West concession’s ownership consisted of Suez 51% , Astra International 30% and Citigroup 19%. In the East, Thames withdrew and Acuatico took over 95% share of the water services, with Alberta Utilities holding 5% (referring to the utility as Aetra).23 The Jakarta water concessions have been controversial from their inception given a lack of improvement in services and public consultation with significant w ater price increases. A formal transition included authority to close private w ater wells. Initially, the private companies earned revenues by billing Pam Jaya (which continued as the city’s water authority) based on w ater volumes sold. The Asian financial crisis (1 9 9 8 ) brought a significant devaluation of the Indonesian Rupiah putting th e w ater authority deeper into debt. At the sam e tim e, the Suharto government fell. Despite pressures to return to public control, the concessions were renegotiated in 2 0 0 1 . The international companies purchased the local shares, adjusting compensation terms, and influencing subsequent water price increases. The concession agreements protected the companies’ rates of return (22% guarantees) through foreign exchange, interest rate and tax protections. Furthermore, service coverage and non-revenue water targets were reduced. Corresponding water tariff increases occurred amidst lobbying from non-governmental organizations, newspapers and the public (Argo & Laquian, 2 0 0 7 ). The concessionaires extended w ater networks to the edge of poor neighbourhoods; then local leaders arranged for private contractors to extend w ater 23 Information on ownership is reported by various sources. See, for example, JWSRB (2 0 0 9 ). 44 to households or standpipes. Many of these poor areas are informal settlem ents in hazardous zones - riverbanks, along canals and streams, on flood plains, in garbage dumps, and along railroad tracks (Argo & Laquian, 2 0 0 7 ). Jakarta’s water model principles are based on achieving full cost recovery with a fair return on investment (ROI), including: consumer affordability, dem and management, simplicity, and transparency according to W yatt (2005), although this view is contested. The contracts did not outline clear monitoring roles for Pam Jaya or the Jakarta W ater Supply Regulation Body (JWSRB) which monitors the contracts, customer issues, and administers autom atic w ater tariff increases. In addition to previous infrastructure and privatization loans, to facilitate necessary legal and regulatory changes and physical infrastructure, the World Bank's Water Resources Sector Adjustment Loan (WATSAL) was arranged in 1 9 9 9 . The Indonesian Government was slow to m eet conditions of this loan, such as complying with irrigation management decentralization in its eventual Water Resources Law (2 0 0 4 ). Significant protests occurred in response to the new law, including the People’s Coalition for the Rights to W ater (KRuHA) filing a case in opposition of the Law in the new Constitutional Court; arguing that it is contrary to Constitution term s to turn over the government's responsibilities to the private sector. The legal case was specifically attempting to prevent a 4 0 % w ater rate hike. Argo and Laquian (2 0 0 7 ) reported: The court ruled that the companies were not allowed to raise their tariffs 'until they can provide better services and proper information to the customers about their operations' (p. 2 3 9 , citing Hudiono 2 0 0 4 , Jakarta Post). The companies also procured private financing. For example, Palyja initially received US $ 6 1 million in loans from European and Asian banks, and has continued 45 to roll over its loan obligations through a bond issue on the Indonesian Stock Exchange and a more recent Asian Development Bank loan intended for capital expenditures. 3 .3 Manila, Philippines (1 9 9 7 - ) Metropolitan Manila is the Philippines’ political and economic centre, and its principal port, accounting for one-third of the country’s GDP. The city has a diverse economy including various industrial-related goods from chemicals to textiles, coconut oil, tobacco, food-processing, and financial and publishing sectors. The Philippines was a colony of Spain, and later the U.S. until World W ar II, which included Japanese occupation. The Philippines gained independence as of 1 9 4 6 , experiencing democracy until 1 9 7 2 when Ferdinand Marcos ruled under a dictatorship that ended in 1 9 8 6 . Marcos' reign involved highly centralized control of various sector services that would have otherwise been controlled by the private sector (Dumol, 2 0 0 0 ). As of 1 9 8 6 , President Aquino started reforms to privatize public services, which were later continued by her successor Ramos. As of th e early 1 9 9 0 s , water and sewerage distribution authority, coupled with aging systems, were being decentralized to local government levels. As of 1 9 9 5 , the W ater Crisis Act was used to fast track private sector participation in the water sector (PSIRU, 2 0 0 5 ). W ater privatization plans were introduced to relieve debts from previous IFI loans from the Asian Development Bank, World Bank, and Japan Bank for International Cooperation (JBIC). The World Bank designed and advised on a water concession bid and contract process. In 1 9 9 7 , the Philippines entered into the largest w ater privatization in the world, when separate contracts were negotiated for East and West M anila. In 1 9 9 7 , 46 the privatization of Manila's Metropolitan Waterworks and Sewerage System (MWSS) involved the water authority contracting two private sector water and sewerage concession agreements for East and West Manila. Maynilad Water, owned by Suez and a local company, Benpres, controlled by the Lopez family, became the contractor for West Manila. Manila Water, a partnership between UK-based United Utilities, Bechtel (USA), Mitsubishi Corporation (Japan) and local company Ayala, negotiated a water concession agreement for East Manila. Ownership structure in Manila W ater has altered since its inception with Bechtel and Edison (Italy) selling their respective shares in International Water Ltd. to the other two companies in 2 0 0 3 . In West Manila, water prices increased four-fold between 1 9 9 7 and 2 0 0 3 ; however, Maynilad could neither m eet service objectives nor achieve profitable status, which led to contract am endments and court disputes. As of 2 0 0 2 , Maynilad gave early notice of contract termination. In 2 0 0 4 , the government took control of the West concession, bought out the private company shares in 2 0 0 6 , and in 2 0 0 7 DMCI Holdings and Metro Pacific Investments Corporation successfully bid for an 84% stake in Maynilad Water, replacing the previous concessionaire (see for example, FDC, 2 0 0 9 ). M anila’s water concession model continues today with the w ater authority and its regulatory office overseeing the contracted services (e.g. Negishi, 2 0 1 0 ). 3 .4 Casablanca, Morocco (1 9 9 7 - ) Casablanca (Arabic: Ad Dar al Bayda) is Morocco’s largest city, economic centre and key port for African-European trade. Most of Morocco was part of the French Protectorate over the first part of the twentieth century, with Spanish occupation in the north, including the Strait of Gibraltar. In 1 9 5 6 , Morocco gained its 47 independence and transformed into a constitutional monarchy. The southwest area, identified internationally as part of the country, is referred to as Western Sahara, and remains a disputed territory. Morocco’s economy relies on agriculture, industry and manufacturing, and tourism and services. Agriculture accounts for 20% of GDP and employs 40% of the labour force. Morocco is the world’s largest exporter of phosphates (The Heritage Foundation, 2 0 1 2 ). Casablanca is Morocco’s main financial centre, and port, and is reliant on industrial activity, manufacturing and tourism. In 2 0 0 6 , Morocco became the only African nation to enter into a bilateral agreem ent with the United States. During the 1 9 8 0 s , Morocco received loans from the IMF to initiate austerity measures. During the m id -19 90’s the country decentralized its river basin management. In 1 9 9 7 , Casablanca’s water distribution services were privatized, contracting the consortium Lydec (Lyonnaise des Eaux Casablanca), through a 3 0 year concession agreement. Lydec is operated by Suez and its subsidiaries (60% shareholder, later 51% ), with additional shareholders, private Moroccan companies RMA Watanya (15%), Fipar Holding (20% ), and equity subscribers on the Casablanca Stock Exchange (14% , IPO 2 0 0 5 ) (MEED, 2 0 0 5 ). Initially, the Moroccan private shares were held by French and Spanish utility companies. The scope of the concession agreem ent included water, sewerage, and electricity provision, and later included additional cities (Rabat, Tangiers, Tetouan). The contract also included terms for w ater reservoir expansion. The concession contract was awarded without competitive tender. As Casablanca is prone to flooding, drainage network m anagement was included in the contract scope. Casablanca’s water and sanitation 48 regulatory framework includes municipal level regulation.24 A technical com m ittee made up of municipal and state government and company representation oversees the contract. The Casablanca service area initially included an estimated population of 3 .5 million inhabitants. One-third of this population, and the greater city area of about 4 .5 million, lives in illegal settlem ents25, which were primarily outside the city’s water network at the beginning of privatization (Lydec reports; UN-HABITAT, 2 0 0 8 ). Suez (under former names) had previously provided water services during the first half of the twentieth century, during French and Spanish occupation of Morocco. Casablanca’s domestic water tariffs differ based on separate subcontracting operators’ supply costs.26 In 2 0 0 0 , Lydec borrowed $ 8 0 million in Moroccan Dirhams from Moroccan banks to finance network expansion during the first five years of the concession. The company later initiated a public stock offering on the Casablanca Stock Exchange. W ater decentralization has continued in Morocco with full decentralization of Moroccan w ater m anagem ent being initiated by the national government in 2 0 0 2 . Several public and private entities provide w ater services across the country, including a public national entity supplying local regions (See, for example, Jamati, 2 0 0 3 ). In 2 0 0 6 , Casablanca’s social water tariff block was reduced from eight to six cubic metres, but protests influenced reversal of this decision and related tariff increases. A year earlier, the World Bank supported the National Human Development Initiative (INDH), focusing on subsidizing basic services for poor 24 Although city power supply is included in the contract, this service aspect is not directly referenced. 25 This is generally consistent with slum population figures at the beginning of the contracts, as shown later in Table 5.1. 26 Detailed documentation or reference to subcontractor arrangements or tariff structure could not be identified. 49 households. Almost 8 0 0 ,0 0 0 Casablanca inhabitants were eligible for the program’s water and sanitation subsidies. In 2 0 0 8 and 2 0 0 9 , following an audit, th e concession contract was renegotiated limiting the rate of return, revising tariff conditions (removal of automatic increases), and re-establishing investm ent targets (Saadi, 2 0 1 2 , Olivier, 2 0 0 9 ). 3 .5 La Paz-EI Alto, Bolivia (1 9 9 7 - 2 0 0 5 ) The La Paz-EI Alto urban metropolitan area is the second largest city in Bolivia. El Alto developed as a suburb of La Paz and is today referred to as a satellite city (collectively described as La Paz-EI Alto herein). Most published statistics still disaggregate these two parts of the urban area. Bolivia has a high prevalence of poverty and inequality. As of 2 0 0 2 , La Paz had almost 30% of the population below the poverty line, and high inequality (Gini Coefficient of 0 .5 7 8 ), while El Alto has experienced over 60% in poverty and more than 25% of the population in extrem e poverty (Morales e t al., 2 0 0 6 , citing the Bolivian National Institute of Statistics (INE)). Bolivia’s economy primarily consists of mining, agriculture and m anufacturing. Bolivia has the world’s second largest tin deposits. La Paz-EI Alto’s economy includes production of food, tobacco, clothing, various consumer goods, construction materials and agricultural tools. Its economy is also dependent on an increasing informal economy. In the 1 9 8 0 s , Bolivia went through periods of hyperinflation and then macroeconomic policies for stabilization. In the 1 9 9 0 s , structural reforms continued, including IFI debt relief and related conditions under the Heavily Indebted Poor Countries (HIPC) initiatives. In the late 1 9 9 0 s and into the 200 0s, econom ic shocks persisted. Some suggest that weak fiscal and financial sectors combined with only 50 modest growth in exports have left Bolivia vulnerable to shocks (e.g. Morales et al., 2 0 0 6 ). In 1 9 9 7 , La Paz-EI Alto’s water and sewerage services were privatized through a concession contract with France’s Lyonnaise des Eaux(Suez), replacing SAMAPA (the Municipal Autonomous Service for the Provision of W ater and Sewer Services), the city’s water provider until th at time. The concession agreem ent included specific connection targets, particularly to expand services in El Alto. The concession was regulated by a national government body. Direct financing for the concession process and transfer were supported by the World Bank. As th e water concession fell short of expansion targets, coinciding with economic problems ailing La Paz-EI Alto’s poor, protests began as of 2 0 0 3 , leading to the President’s resignation. In 2 0 0 5 , after further civil protests, the Bolivian government agreed to term inate the water concession, which officially ended in January 2 0 0 7 . As a side note, and as mentioned previously, after the initiation of the concession in La Paz-EI Alto, a concession agreem ent was awarded to a consortium led by Bechtel for Cochabamba, Bolivia. The contract led to immediate significant increases in water rates, but was met with mass social protest which resulted in the contract being almost immediately rescinded. 3 .6 Guayaquil, Ecuador (2 0 0 1 - ) Guayaquil is Ecuador’s largest city, in the province of Guayas, on the southern coast. More than 75% of the city’s population has migrated over the last 5 0 years. The fast growth caused the city to develop without urban planning, leading to many informal settlements (Joiner, 2 0 0 7 ). Part of Guayaquil’s geography includes low lands prone to flooding, which along with a rainy climate, add to the hardships of a lack of water and sewerage services for Guayaquil’s poor (Joiner, 2 0 0 7 ). 51 Ecuador was under Spanish rule prior to the 2 0 th Century, before various political phases leading to military rule from 1 9 7 2 to 1 9 7 9 . In the 1 9 8 0 s , Ecuador was under democratic rule, but with numerous tumultuous periods of presidential turn over. Ecuador has also had a history marred by ongoing military conflicts due to border disputes with Peru, until the late 1 9 9 0s. Ecuador’s economy is heavily dependent on the export of natural resources, particularly oil, and agricultural commodities. In the 197 0s, the oil boom provided a direct financing source and incentive for loan agencies to support w ater projects. A new public water company was established for Guayaquil in 1960. Several transitions of authority between national and municipal level control occurred up until the amalgamation and shift of w ater and sewerage utilities to regulatory roles in the late 1 9 9 0 s leading up to water privatization. Private consultancy and engineering companies were involved in w ater and sewage planning as of 1 9 6 1 and again in 1 9 7 8 . W ater treatm ent and main pipeline expansion work occurred in 1 9 6 3 and 1 9 6 8 . However, as of 197 4, 75% of w ater in Guayaquil was provided by private water tankers or community taps (Swyngedouw, 2 0 0 4 ). Following the oil price crash in the early 1 9 8 0 s , the World Bank financed a water loan in 1 9 8 7 . The loan was suspended in 1 9 8 9 due to breach of required terms for utility management streamlining and improving operational efficiency. The loan was resolved a few years later, as the Ecuadorian Government and Guayaquil utility began the steps required by the loan agreement. In 1 9 9 2 , Ecuador began several economic reforms, pushing modernization legislation through its Congress. The intent was to modernize infrastructure and open the door to privatization of water, electricity and telecommunications. In 1 9 9 7 and 1 9 9 8 , an economic crisis 52 resulted, congruent with the Asian and other regional economic crises and El Nino impacting Ecuador’s agricultural economy. Oil prices plummeted, the Ecuadorian currency (sucre) fell into hyperinflation, unemployment increased, income fell and the country defaulted on its foreign debt (Wikipedia, 2 0 1 2 , citing numerous sources). By 1 9 9 9 , the banking sector collapsed leading to semi-dollarization and then fully replacing Ecuador’s currency with the US dollar. In the process, the governm ent bailed out the financial sector. W ater privatization was planned for Guayaquil by the early 1 9 9 0 s but political instability (6 presidents over 6 years) in the late 1 9 9 0 s delayed public service privatization. As of 1 9 9 4 , water and sewage utilities were merged to create Empresa Cantonal de Aqua Potable y Alcantarillado de Guayaquil (ECAPAG). This was seen as positive and necessary given the interconnectedness of the provision of potable water and an adequate rainwater drainage system (Joiner, 2 0 0 7 ). As of 1 9 9 5 , ECAPAG had already made the decision to contract w ater and sewage services in its master plan for services. The concession bid process was guided by a loan agreement with the Inter-American Development Bank, which included transitioning ECAPAG to a regulatory body. After the bid process resulted in potential bidders being disinterested, given the aging water, sewage and drainage system, unstable environment and initial capital requirements, ECAPAG and Banque Paribas (company advising on the project) decided to soften the requirements to generate interest (Joiner, 2 0 0 7 citing BPD). In 2 0 0 1 , Guayaquil’s water and sewage systems were privatized with a concession agreem ent with International W ater Services consortium led by Bechtel Corporation. The resulting company, Interagua signed a 3 0 year concession agreement. Although, the initially intended contract was to include necessary capital investment by the 53 company, the resulting contract neither obligated the company to m eet specific targets, nor to specifically adhere to laws ensuring that services are provided to all citizens within the concession area (Joiner, 2 0 0 7 ). In 2 0 0 5 , Observatorio Ciudadano de Servicios Publicos (OCSP), a local NGO, was started to monitor the conduct and compliance of Interagua and ECAPAG. A Guayaquil poll of 4 0 ,0 0 0 inhabitants conducted in the sam e year showed th a t people felt the need for guaranteeing the rights of all citizens and increased public participation, although it is noted th at the sample was not representative of the whole population (Carrillo et al., 2 0 0 6 ). Complaints relating to service quality came from poorer areas, such as Guasmo Sur and Suburbio Oeste. In 2 0 0 8 , Bechtel sold the majority of its shares in Interagua to Proactive Medio Ambiente (Company with Ecuadorian and Colombian parent shareholders). 54 CHAPTER FOUR: COMPARATIVE QUALITATIVE ANALYSIS 4 .1 Qualitative Approach In this chapter, a qualitative analysis is conducted across the six w ater privatization cases. Key elements like the nature of the contracts, governance and regulatory frameworks, contextual political and economic factors, and privatization outcomes are examined. Qualitative information sources include literature sources referenced in Chapter Two as well as additional public information. These sources include academic articles, government agencies (water utility, regulatory and statistical departments), NGO and civil society, and IFI and regional developm ent bank sources and reports. Sources not identified as reports specifically primarily consist of website resources. Online World Bank and International M onetary Fund (IMF) resources have been accessed as well in reference to sections pertaining to these institutions. In assessing the w ater privatization cases, two key points must be noted. First, the six urban water privatization cases have been chosen as prom inent examples of such cases implemented in the Global South. Second, w ater privatization has been promoted and established based on expected improvements over public provision, such as expanding w ater access and increasing capital investment. Consequently, water privatization’s performance is assessed relative to prior public provision models and the contractual targets established under privatization. The nature of the privatization contract is critically examined individually and then comparatively across cases to identify patterns. The state’s ability to im plem ent and enforce agreements with the private sector is contingent on an effective 55 governance and regulatory framework. Contracts, governance and outcomes can all be affected by political instability, economic conditions and related external agents. Accordingly, the chapter is organized around these key qualitative elem ents for the six cases. It must be emphasized that the qualitative information available for analysis is limited by a lack of available direct source information on the contract terms, implementation, governance and regulation, contextual factors, contract performance and related events. Specific data on Casablanca, as well as La Paz-EI Alto and Guayaquil cases have been more difficult to identify and access. There is also a general lack of transparency pertaining to the comprehensive conditions of IFI loans. Also, access to certain online resources, such as the Indonesian advocacy groups People’s Coalition on the Right to W ater (KRuHA) and AMRTA Institute for water literacy, is sporadic in nature. Consequently, information gaps exist for all of the cases to varying degrees. Table 4 .1 provides a comparative high level summary for the six cases. It can be seen that all of the cities, except La Paz-EI Alto (and the country of Bolivia), are port cities. Similarly, each of the port cities suffer some level of flooding due to low lying areas and /or a lack of appropriate city and sewer drainage systems. Of the port cities, only Jakarta’s concession agreem ent excludes sewerage from the privatization scope. 56 Table 4 .1 Case Comparison: First Ten to Fifteen Years of Privatization Category Buenos Aires Jakarta Manila Casa. La Paz-EI Alto Guay. Port city Yes Yes Yes Yes No Yes Lacking drainage infrastructure Yes Yes Yes Yes No Yes Privatization continues today No Yes Yes Yes No Yes Water tariffs increase before privatization Yes Olleta, 2007 Yes Kumar, 2009 n /a No Laborde, 2005 Olleta, 2007 Yes Kumar, 2009 No World Bank, 2009 Yes Laurie & Crespo, 2007 n /a Yes Carrillo et al., 2 0 0 6 Sector preparation: decentralized >= 5 years before privatization Competitive bid process (final stages) Yes Olleta, 2007 Yes Negishi, 2010 No ACME, 2008 Partial Metro Metro Main city Dardenn e, 2 0 0 6 Bakker et al., 2006 MWSS RO, 2003 Hatem, 2007 Yes Olleta, 2007 Yes JWSRB, 2009 Yes Kumar, 2009 Informal water supplier arrangements permitted n /a Yes Argo & Laquian, 2007 Yes ADB, 2008 Investment targets Yes Olleta, 2007 Yes JWSRB, 2009 Yes Kumar, 2009 Yes ACME, 20072011 Yes Company ref. to subcontra ctors (unconfirm ed) Yes Saadi, 2012 No Laurie & Crespo, 200 7 Partial Metro Laurie & Crespo, 2007 Darden ne, 2006 Yes No Joiner, 2007 Population covered by concession Yes (Not confirme d) Yes (City gov.) Argo & Laquian, 2007 No Bakker et al., 2006 C ity / Prov. Intended water price increases Yes Olleta, 2007 Yes JWSRB, 2009 Yes ADB, 2008 Yes Olivier, 2009 Original network expansion targets Lobina & Hall, 2 0 0 7 n /a Yes Tiepolo, 2007 City/ Suburbs Joiner, 2007 Yes (soft terms) Joiner, 2007 Yes Swyngedou w, 2 0 0 4 No Laurie & Crespo, 2007 Yes Carrillo et al., 2 0 0 6 n /a n /a 57 Table 4 .1 (Continued) mu gM mu h h iiii Buenost, A ir e s ^ i Standardized subsidy programs Yes Dardenn e, 2 0 0 6 Compensation mode Revenue Alcazar e ta l., 2000 Yes FWW, 2009a N o* Ardhiani e & Zamzami ,2 0 1 0 Volume Argo & Laquian, 2007 Yes JWSRB, 2009 Contract compliance terms noted Yes Solanes, 2006 Water governance arm's length? , Guayaquil! {' No Yes Carrillo et al., 2 0 0 6 Revenue FDC, 2009 Yes Olivier, 2009 Hatem, 2007 Revenue Saadi, 2012 Revenue Morales et al., 2 0 0 6 Revenue (Unconfirme d) Yes FDC, 2009 Yes Hatem, 2007 Yes Foster & Irusta, 2 0 0 3 n /a Kurniasi h, 2 0 0 8 n /a n /a No Alcazar e ta l., 2000 Solanes, 2006 Part Laborde, 2005 Olleta, 2007 No Argo & Laquian, 2007 No Kumar, 2009 Cuaresm a, 2 0 0 6 Part/lncr easing? Nugroho, 2011 No Kumar, 2009 No Saadi, 2012 ACME 20072011 Part Saadi, 2012 Yes Laurie & Crespo, 2007 No Laurie & Crespo, 2007 Yes (Dollarized) Tiepolo, 2007 Yes Carrillo et al., 2 0 0 6 Negotiating level National Olleta, 2007 National JWSRB, 2009 National Kumar, 2009 National ACME, 2008 W ater governance levels Multiple Olleta, 2007 Compensation tied to US$ or Euro W ater governance decentralized? No* No Morales et al., 2 0 0 6 Nickson & Vargas, 2002 National Laurie & Crespo, 200 7 National Laurie & Crespo, 2007 No Joiner, 2007 Part Joiner, 2007 National Joiner, 2007 Multiple Multiple Multiple Multiple Joiner, Nugroho, FDC, Saadi, 2007 2011 2005 2012 JWSRB, Lahlou, 2009 2008 Dedicated Contract / service Dedicate Not Dedicate Water dep’t Committe regulator d Carrillo et d specified e regulates Olleta, initially Laurie & al., 2 0 0 6 FDC, ACME, 2007 JWSRB, 2005 2007 Crespo, 2009 2007 Water governance Yes No No n /a Yes Yes legislated regulator? Solanes, Bakker Kumar, Joiner, (Implied) et al., 2007 2006 2009 Morales et al., 2 0 0 6 2008 * Supplemental subsidy programs have not been noted as vital to the concession agreement. Note, n /a denotes not available or applicable. The sections that follow provide a detailed qualitative examination of th e key elements or parameters of the cases. 4 .2 Nature of Contracts This section compares the water concession contracts across the six cases, identifying and describing trends and noting specific terms. The cases are compared over a period of observation of approximately eight to 1 3 years depending on the case. Most of the analysis in this section pertains to the immediate lead up to and terms of the contracts upon privatization except where explicitly noted. Pre-Contract Situation As alluded to and mentioned in the earlier chapters, the World Bank has played a leading advocacy, promotional and technical support role in facilitating at least five of the water privatizations.27 These roles generally reflect loan conditionalities which are generally determined in the World Bank’s practices, rather than being explicitly stated in project loan agreements. The World Bank’s involvement in these cases has included: loan financing for water and sewerage system infrastructure leading up to the w ater privatizations; technical and advisory support for liberalization, decentralization and privatization policy reforms; technical studies (i.e. pertaining to operating and infrastructure deficiencies); and institutional restructuring preparation and implementation necessary for privatization. 27 The World Bank’s water concession bid process role was not confirmed in Casablanca's case. 59 Water tariffs increased within two years prior to w ater privatization in five of the cases.28 Such price alleviation appears to have been instrumental for promoting and facilitating public acceptance of privatization. Privatization Support Financing Numerous types and levels (i.e. national to local) of financing facilitated policy and water-specific reforms and improvements leading up to privatization. Funding continued during the privatizations, to serve additional reform supports, w ater resource management, infrastructure, and social programs (e.g. subsidizing w ater connection charges). Both before and during the privatizations financing has come from the World Bank, IMF, regional development banks, additional foreign and domestic commercial lending institutions, and in a t least one case - state funding (tax subsidy provided to support capital works in Guayaquil). Casablanca is th e only w ater case to not involve World Bank financing support during the immediate lead up to and initial years of the privatization. Concession Process Buenos Aires and Manila solicited multiple contract bidders in the final stages of their concession bid processes. The other four cases either lacked competitive concession processes or resulted in single bids. Jakarta and Casablanca concession contracts were directly awarded. La Paz-EI Alto and Guayaquil water privatization offers encountered difficulties in eliciting bids, eventually resulting in single qualifying bids that led to the concession agreements. These two concessions were designed to solicit bids based on the number of new w ater connections to be installed and the resulting network coverage. For Buenos Aires, Manila, as well as Jakarta, the primary 28 No reference to pre-privatization rates was found for Casablanca. 60 contract bid criterion was lowest w ater price (although Jakarta directly negotiated its term s with pre-selected companies). It is apparent in these cases that concession bid processes being based on lowest water price has contributed to competition for the contracts. Conversely, bid criteria with a greater focus on explicit or implied capital investment requirem ents appear to have detracted from contract competition in the other three applicable cases. Contract Terms, Geography and Scope International consortiums, comprised of multinational corporations, contracted for the water concessions in all cases. Due to legislative limitations, Jakarta and Manila concessions were initially arranged to include domestic company majority ownership, although the foreign consortiums have managed operations over the duration of privatization. Five of the six cases initially involved Suez S.A.29 as a lead partner. All six cases (eight contracts, as Jakarta and Manila both comprised two concession areas each) were developed and implemented as w ater monopolies with 2 5 to 3 0 year terms. All of the concessions, by definition, are comprehensive water distribution system leases30, negotiated to include operations, m aintenance, administration and capital planning and investment responsibilities. 29 As indicated previously, this multinational corporation’s involvement was as Lyonnaise des Eaux in a few cases, later merging to create Suez S.A., and more recently splitting into GDF Suez and Suez Environnement. 30 In five of the cases, concessions have included varying levels of sewerage system responsibilities such as network and/or septic tank household sewer connections and wastewater treatm ent plant construction and operations. All of the cities have drainage systems which include some level of raw untreated sewage running through drainage systems and open canals. 61 In all cases, the longterm leases have been owned by private sector consortiums.31 The concession area w ater networks, to have been expanded, cover the respective urban areas to varying insufficient degrees. Each of the cities has experienced significant deficiencies in network coverage where many of the peripheral urban areas are generally represented by slums. The negotiated concession area boundaries have been noted as missing significant peripheral populations in some of the cases. For example, as highlighted in Chapter Two, Buenos Aires and La Paz-EI Alto concession boundaries have missed significant populations (15% or more) from network expansion plans (Dardenne, 2 0 0 6 ). This issue has also been noted in Casablanca’s case, particularly in reference to a lack of property rights inhibiting inclusion in the w ater concession. In Jakarta and M an ila’s cases, peripheral areas fall into other municipalities’ authority. The case cities have all had urban slums comprising between approximately one- and two-thirds of urban populations at the privatizations’ inceptions.32 Overall, the initial observation with respect to geographic scope is that such significant particularly peri-urban populations were very likely not adequately addressed when originally establishing the contract parties’ obligations. Performance Targets33 All of the agreements include targets for increased water service expansion over the full term of the concession. The concessions agreements also generally 31 Of course, this does not preclude public institutional investors from being shareholders in the individual companies or transferred water utility companies (as applicable). 32 Refer to Table 5.1. This data is used as a general reference only, as some figures do not appear representative of the case cities and/or rapidly declining trends appear contrary to other qualitative source reports. 33 Note that sewerage, wastewater treatm ent related targets are not directly assessed within the comparative analysis except where exceptional notice is made. 62 have or require specific shorter term (i.e. five an d /o r ten year) performance targets. The criteria for service expansion have included geographic and population coverage of the respective water and sewerage networks. In most cases, water and sewerage connection objectives are separately articulated. The degree to which contract term s have clearly specified network expansion terms is unknown. As indicated in earlier chapters, contract renegotiations reduced or removed specific expansion targets in the cases of Buenos Aires, Jakarta and Manila. In the other three cases, network expansion is based on either a calculated proportion of geographic network coverage, numbers of household connections, or specific populations requiring w ater service access. In at least three cases, Jakarta, M anila, and La Paz-EI Alto, perform ance targets are explicitly identified as intending to achieve universal (100% ) w ater coverage: Manila - after 10 years, Jakarta - after 2 5 years, and La Paz-EI Alto - after five years, as per original contractual terms. Jakarta and Manila contracts do not clearly mandate household connections as the primary mode of domestic w ater access (i.e. permitting public taps to m eet coverage targets). Moreover, in these two case agreements as well as those of Casablanca and Guayaquil, informal third party water providers are either allowed or not explicitly banned within the concession service areas.34 These contractual terms, or lack thereof, have significant bearing on the nature and geography of water access. Moreover, these circumstances also have implications for whether water concession term s are being adequately fulfilled as intended. Only La Paz-EI Alto appears to have explicit household network connection 34 No information found on Buenos Aires or La Paz / El Alto. 63 targets mandated by the contract, which were intended to specifically target increased services for un-served poor households in El Alto. In at least half of the cases, M anila, Jakarta, and Casablanca, concessions have included provisions to reduce w ater losses (also referred to as non-revenue or unaccounted-for water). In two of these cases, Manila and Jakarta, as well as Guayaquil, terms were also included to address w ater pressure where it has been identified as an issue for water service continuity and quality. Water quality is noted as a key target in two of these cases: Manila and Guayaquil. Sewerage connection targets are separately defined to varying degrees for the five applicable cases (excludes Jakarta). Investment Targets Five of the six concession agreem ents have clear investment targets for the companies. However, La Paz-EI Alto’s contract specified water connection targets without corresponding investment levels. M anila’s contracts have included term s requiring concessionaires to repay prior debts held by the public w ater company. Contract renegotiations for Buenos Aires, Jakarta and Manila have resulted in reduced investment commitments. Casablanca’s case is the only example of domestic currency also being used for capital works financing initially, without any noted indexing to a foreign currency. Jakarta and Manila are also noted as raising funds in local investment m arkets within the first ten years. W ater Pricing Terms Manila is the only concession noted as including an original target for ongoing water price reductions. Such changes are managed by the “rebasing” exercise 64 discussed by Kumar (2 0 0 9 ) in Chapter Two. This is also one of the three cities which included price as the primary bid criterion. It appears th at all cases have a form of increasing block water tariff (i.e. escalating price per volume), with different categories of residential and commercial customers paying differing w ater rates. Five of the six cases have involved charges to customers for new water connections regardless of residential customer class. Only Guayaquil has categorically waived charges for new connections (tied to a state subsidy). In two other cases, Casablanca and Buenos Aires, social water tariff programs have been im plem ented to subsidize the first block of water consumption for eligible households. On this point though, program eligibility may not have been adequately addressed within the contracts. This point was alluded to earlier in Chapter Three by Saadi (2 0 1 2 ) and Dardenne, 2 0 0 6 , with respect to these respective cases. At least four of the cases, Buenos Aires, Jakarta, Manila, and Casablanca, have included contract term s for periodic water rate increases or reviews. W ater pricing is a term regulated by the contract and government agencies authorized to review and approve w ater price decisions. Each concession varies with respect to the level of reference to and resulting implementation of procedures and regulatory processes for w ater tariffs. In three of the renegotiated cases (excluding Casablanca), the new term s have allowed for new and ongoing w ater price increases (particularly for Jakarta and Buenos Aires). Price increases have been facilitated by negotiating higher guaranteed rates of return. Contract terms do not appear to include obligations th at address or regulate pricing for third party (i.e. re-sellers) water markets. In at least three cases, Jakarta, Manila and Guayaquil, vendor water accessed through reselling and other sources 65 was a significant residential water provision mechanism at the outset of privatization. These secondary markets charge higher rates per volume but do not require any network connection infrastructure. Also, in Casablanca’s case, subcontractors have been mentioned as providing services although little is known about pre-privatization water vendor markets. Compensation Terms In five of the six cases (excludes Guayaquil), service compensation has been fixed to specific foreign exchange rates, and foreign capital controls have been relaxed effectively transferring financial risk to government authorities and consumers (subject to pricing regulation). Four of these cases have involved contract renegotiations to further affect these term s (excluding La Paz-EI Alto). Ecuador moved to using the US dollar as its domestic currency prior to Guayaquil’s concession agreement implementation. Jakarta’s concession agreem ent is the only example of company revenues being based on water volume sold rather than sales revenues. This contract term was emphasized by Argo and Laquian (2 0 0 7 ) in Chapter Two. In this case, there has not been an apparent control mechanism to ensure that appropriate levels of capital investment and corresponding network expansion a t least partly define the method of sale. Consequently, this puts an inordinate am ount of pressure on th e w ater authority to increase prices to transfer risks to customers. All of the concession agreements include provisions for guaranteed or expected levels of company return. 66 Compliance Terms Buenos Aires, La Paz-EI Alto, and Guayaquil are identified as having (or having had) defined sanctions for contractual non-compliance. La Paz-EI Alto’s penalty terms were clearly defined while the other two cases have been noted but not confirmed. No such terms are initially apparent in the other three cases. The contract renegotiations that took place have essentially acted to relax or remove compliance terms.35 Collectively, the renegotiations were made in several iterations over a number of years. Overall, only one of six cases, La Paz-EI Alto, is known to have explicitly articulated contract sanctions which are directly linked to underperformance of water and sewerage connection installation targets. Contract Terminations, Disputes & Ownership Transfers Buenos Aires and La Paz-EI Alto contracts were eventually term inated. In both cases, terminations appear to have been instigated by the state. Although in Buenos Aires’ case, the dispute over the government freezing water prices and reversal of exchange rate protections left the company in a situation th at could not be mutually resolved. Both cases have involved some level of legal threat and continuation to the World Bank’s International Centre for the Settlem ent of Investment Disputes (ICSID). Jakarta and Manila have both had various court and arbitration panel disputes leading to and subsequent to renegotiations. Concession ownership changes have been permitted in all six cases during the first ten years of privatization. In three cases (all five companies), M anila, Jakarta and Guayaquil, majority company shareholders have changed. In the cases of Buenos Aires, La Paz-EI Alto and Manila (East), the World Bank became part 35 It is not known whether these changes were formalized or simply allowed by regulating authorities. 67 concession owner. In East Manila, Manila W ater’s major shareholder Ayala Group is a multinational investment group with local colonial history. Manila W ater has now recently become the major shareholder in West Jakarta’s water concession company. All other majority concession shareholders are also multinational corporations. Jakarta’s only domestic tie, Astra International, is a company originating in Indonesia but now subsidiary to foreign holdings company Jardine Matheson (Hall and Lobina, 2 0 0 9 ). Overall, it appears that there are few, if any, capital control barriers to transferring majority ownership / operator. Also, as relating to investments mentioned above, there is no consistent method of capital financing with private and publicly-traded companies obtaining capital financing from and distributing dividends to various sources. Government oversight of such transfers has been noted in two cases (Guayaquil and West Manila). 4 .3 Governance and Regulation This section focuses on governance and regulation, comparing reformed water governance institutional roles and levels of responsibility to identify trends and differences as relevant to the privatization outcomes across the cases. The objective is to capture any trends in legislation, procedures, governance structures and respective roles in governing the contracts and regulating the related services. Regulation is primarily examined through the established regulatory bodies responsible for water service regulation in the respective cities. Therefore, environmental and public health regulations are only examined in so fa r as these mechanisms are known to be integrated with reformed urban water service regulation. 68 Pre-Concession Reforms In the years leading up to and continuing during the concessions, all cases have involved policy reforms and government restructuring to facilitate w ater privatization. Policy reforms have included liberalization36, decentralization, and privatization reforms to accommodate w ater privatization. In three of the cases, Indonesia, Philippines and Ecuador, water and sanitation sector decentralization (to regionalize water management) began at least five years prior to the w ater privatizations. In Argentina and Bolivia, reforms were part of broad privatization initiatives across several sectors th at were implemented in only three to four years. Bolivia is the only country which has been noted to include fiscal decentralization, although water sector decentralization for the La Paz-EI Alto privatization is not apparent. Water decentralization began in Morocco just two years prior to Casablanca’s privatization. As mentioned earlier, in five of the six cases, the World Bank provided funding predicated on national and regional level policy reforms to facilitate decentralization, liberalization and privatization.37 The Bank provided direct assistance or supervision in the designs and implementations of policy reforms and the subsequent and concurrent water concession processes. In the case of Jakarta, a water law required by the World Bank took six years to implement. Legislative changes accommodating water privatization have prioritized recognition of water’s multiple purposes and types of users. This may potentially contradict pre-existing constitutional definitions of water access. 36 Liberalization, in this context refers to policy changes that permit foreign investment and operation of a utility, and relax restrictions on their activities. 37 For Morocco, the World Bank’s first loan following the immediate lead up to Casablanca’s water privatization occurred ten years after the privatization. 69 Governance Model, Contract Regulation and the Regulator As noted in Table 4.1, all of the concessions were negotiated by national-level authorities. Five of the six governance models were developed with multiple levels of government involvement - national level ministries holding specific contract and environmental mandates; multi-level board representation for regulating authorities; an d /o r high-level officials appointing respective directors. La Paz-EI Alto’s water privatization was highly centralized, stemming from reforms, restructuring and implementation at the national level, with no resulting authority at the local level. Ecuador’s model is also highly centralized as the concession agreement for Guayaquil was arranged by the President’s office and signed at the Inter-American Development Bank’s (lADB’s) Washington (DC) offices. Guayaquil’s mayor is the only local representative on the water regulator’s board. However, irregularities have been noted, such as the National Comptroller’s Office not being used for financial oversight of the water concession. M anila’s water governance is also centralized as the president appoints the water authority board members. Buenos Aires’ governance model included the national government overseeing the concession with all three levels of government represented on the regulator’s board. Casablanca’s governance model includes national oversight with municipal representation. Finally, Jakarta’s water governance model has the city’s water authority reporting to the local government (governor and local assembly).38 Three water governance models, Buenos Aires, Manila, and Guayaquil began with a city-specific water regulatory body. As alluded to in Chapter Two, Casablanca’s regulator is noted as being structured as a com m ittee rather than a dedicated 38 The water concession agreement is for DKI Jakarta, which is formally a province. 70 department. Jakarta’s governance model initially included only the w ater authority (without dedicated regulatory duties), creating a regulatory office for monitoring purposes only after renegotiating contracts three years later. Lastly, Bolivia’s national water authority also acted as regulator for the La Paz-EI Alto w ater concession. In all cases, the regulatory body does not appear, by design, a t a rm ’s length from the government, which has promoted varying levels of political influence or interference. Only Jakarta appears to have this influence isolated to the local authority (Only after presidency changed shortly after privatization) while all other cases have national level departments or presidential office representation th a t have been in a position to supersede local authority to regulate the water contracts and services. All cases call into question the regulator’s m andate and authority to regulate network expansion, quality an d /o r water pricing. In some cases, these duties are split between more than one departm ent39, or roles are conflicting, or can be superseded by national offices. In half of the cases, Buenos Aires, Jakarta and La Paz-EI Alto, governm ent bodies have been identified as having authority to exercise contract sanction measures. La Paz-EI Alto’s water concession is the only case with clearly defined and communicated fines for non-compliance, although it is also the only case with no local level regulatory authority. None of the cases have been identified as including regulation over subcontracted or vendor w ater supply and services. 39 Generally, governments are noted as having separate ministries responsible for the contracts, environmental and public health. 71 4 .4 Contextual Factors This section comprises external factors closely relating to and affecting the water contracts and respective governance models. Contextual com parative analysis includes an assessment of external entities, political and economic factors impacting or supplementing water privatization contracts, services and governance models. Pre-Privatization Facilitation The IMF and World Bank have had a history of extending loans beginning before the 1 9 9 0 s in all six cases. The two institutions generally work together with the World Bank providing sectoral reforms and project loans, while the IMF focuses on fiscal stabilization and monetary policy efforts. This appears indicative of the lead up to these cases, as previously described, with a significant role for the World Bank in five of the six cases40 in national liberalization and specific privatization reforms, particularly of public utilities and in water resource management. Such reforms and related loans are generally justified by the increasing urban pressure on w ater resources, public utilities and their scope and quality of services in all six cases. The five of six cases involving significant World Bank involvement also have been viewed as fiscal crises at national and /or local levels preceding the water privatization reforms. W ater privatization is a loan assistance condition in at least four of the cases 41 Regional development banks have also provided varying levels of assistance to the w ater concession processes, although there is no specific identifiable trend across cases. The World Bank has provided significant direct facilitation in five 40 In Casablanca’s case, no direct involvement by the World Bank has been confirmed relating to the concession process specifically. 41 Unconfirmed for Indonesia and Morocco. 72 cases’ concession bid and contracting processes. This role has encompassed designing and facilitating the concession bid process (which have included bid criteria and a pre-qualification process), the contract model, concession promotion, and implementation until the signing of the agreem ents. Technical studies are also confirmed to have preceded some concession processes with the World Bank funding an d /o r subcontracting consultants to undertake these studies. The Role of Economic Crises The IMF financed national loan packages for Argentina, Indonesia, the Philippines, Bolivia, and Ecuador either just prior to an d /o r during the w ater privatizations. Loans were also provided to Morocco although this was more than a decade prior to the water privatization in Casablanca. The primary five bailouts all included significant currency devaluations which sparked debt repayment issues. In Argentina’s case, the IMF was directly involved in calling for relaxation of currency controls preceding a devaluation that prompted rescue loans. Only Morocco has maintained currency exchange rate controls during the water privatization.42 Political Instability & Influence All of the case countries can be viewed as politically unstable to varying degrees. Indonesia was considered highly corrupt in the 1 9 9 0 s due to the centralized military-led government. Im m ediate economic circumstances contributed to President Suharto’s exit, supplemented with a bailout by the IMF. Perceptions of corruption have only marginally changed though 43 Bolivia experienced frequent turnover of its presidency leading up to w ater privatization. Ecuador is viewed as 42 Various supplemental documents have been accessed for this section at www.imf.org 43 In fact, perceptions of corruption have worsened (i.e. 1 9 9 9 to 2 0 0 7 , according to Transparency International, 2 01 2). 73 increasingly corrupt. These factors have contributed to a lack of competition for each of the water concessions during the bidding processes. Moreover, in reference to the renegotiations which were experienced in the other three cases (as well as for Jakarta), no formal governance mechanism was apparent in allowing for the contracts to be reopened. Buenos Aires’ regulator was moved to the environm ental ministry to remove it from contract renegotiations. As mentioned in Chapter Two (FDC, 2 0 0 5 ), M anila’s regulator has an informal relationship with and physical proximity to the water concessionaire. Guayaquil’s contract cannot be effectively regulated due to performance targets not being requirements of the contract. 4 .5 Privatization Outcomes Contract Performance Based on the original contracts, all companies have failed to achieve their respective water network expansion targets in the first ten years of privatized operations. In five of these cases, based on original terms, the lack of expansion targets has essentially constituted a breach of contract. In the sixth case, Guayaquil’s targets are not stipulated as required by the contract. As previously indicated, five of the six cases’ concession agreem ents44 include corresponding investment targets, while La Paz only specified connection installation targets without corresponding investment level required. Guayaquil’s concession only included a soft target for investment levels for the first ten year plan which has not formally carried into subsequent plans. In the other four concession models, the companies have under-invested relative to original contract terms. However, contract 44 Referring to Jakarta and Manila as one case each given that the contract model is the sam e for both concession areas in each respective city. 74 renegotiations for Buenos Aires, Jakarta and Manila reduced respective contractual water coverage targets.45 These renegotiations resulted in a lack of clarity in revised targets and related terms, which have made it difficult to assess w hether subsequent terms and performance have been adequate. Both Manila and Jakarta have not reached original non-revenue w ater targets established to reduce water leakages. It has been suggested that such losses represent increased theft of water. Manila and Jakarta have used bulk w ater sales at the water network’s periphery towards achieving w ater coverage targets. As indicated earlier, it is not clear whether contract terms formally allow such informal network extension. Moreover, increased w ater prices from informal w ater sales amongst predominantly poor populations will likely lead to increased th eft of water, particularly given that alternative w ater sources are not formally permitted.46 Overall, four of the six cases are noted as continuing subcontracting and/or informal vendor water arrangements to service areas within the concession area scope th at are not serviced by network infrastructure.47 Contractual performance failures have consistently occurred from the outset for all contracts. Subsequent contract renegotiations have acted as a perform ance disincentive given that water coverage and necessary capital investment targets were reduced. In four cases, Buenos Aires, Jakarta, La Paz-EI Alto, and Guayaquil, elevated prevalence of water-borne diseases have been noted. Specific water and sewerage infrastructure issues have been noted as public health hazards in three of these 45 Including sewerage targets for Buenos Aires and Manila. 46 Casablanca has also been noted as permitting subcontracting of services although no data was found. Refer to Table 5 .1 for slum population information. 47 No information found on Buenos Aires or La P a z / El Alto. 75 cases, Buenos Aires, Jakarta, and Guayaquil; as well as Manila. There is no identifiable trend across cases to date to reasonably assess whether w ater privatization has improved water quality though. W ater Tariffs and Access for the Poor As noted in Chapter Two by several authors, in five of the six cases (all except Casablanca), nominal water tariff increases have been a t least implied as prohibitive for customers at particular times during the privatizations (See Table 4 .2 ). The cases initially had varying levels of water price regulation. After renegotiations took place for some of the cases, further w ater price changes were permitted. In three cases, Buenos Aires, Jakarta, and Manila, w ater pricing has been found to be prohibitive to users in general. In cases where alternative sources are available (Jakarta, Manila, Guayaquil), vendor water has been accessed at much higher prices, or, when w ater cannot be afforded, water is accessed without an official connection or sources are contaminated. La Paz-EI Alto is the only case known to have effectively required w ater coverage to poor areas, despite un-served areas comprising significant proportions of poor neighbourhoods. The World Bank has been noted as funding w ater subsidy programs focused on the urban poor a t different tim es during privatization in all of the cases. However, none of these programs have been identified as sufficient to substantially support the companies in m eeting their contracted service coverage or corresponding investment targets. The Casablanca program appears to involve substantial numbers of poor households, although as previously noted, w ater connection installation figures presented by the company have been questioned in general. 76 It appears that the initial concession bid processes including low-price criteria put immediate subsequent upward pressure on prices in the cases of Buenos Aires, Jakarta and Manila which also contributed to the renegotiation of contracts. In two of these cases, Jakarta and Manila, as well as Guayaquil, w ater vendors have continued to serve poor areas with bulk water access informally extending networks, charging prohibitive pricing. No known regulatory mechanisms have been identified for vendor water in these cases. At the same tim e, the concession companies have reported water coverage increases that imply network expansions through bulk w ater sales. 4 .6 Qualitative Summary The qualitative analysis of the six cases in this chapter has revealed the general failure of water privatization. The failures pertain to various overlapping aspects of water privatization including: (1) inadequate contracts with ambiguous terms, (2) lack of effective governance and regulatory oversight, (3) political interference, corruption and lack of accountability, (4) preference of international interests over domestic public interest48, and (5) unfavourable economic situations and political instability-that have exacerbated the problems with such concessions. Table 4 .2 shows a summary of these and various additional findings. A key comment regarding these findings is that privatization has been more highly analyzed and publicized than the previous public water model. As a result, the concession agreem ent obligations and promises to improve upon previous service metrics have acted as a proxy for privatization’s success. 48 Although use of domestic financing sources to some degree in three known cases, Jakarta, Manila and Casablanca, may be viewed as serving a domestic interest. 77 From this critical context, the qualitative analysis generally shows privatization to be a failure thus far. However, Casablanca’s recent renegotiation of the w ater concession shows signs of potentially remedying performance deficiencies apparent during the first ten years of this concession by limiting the company’s rate of return and restoring investment shortcomings. Furthermore, it has been reported very recently that fines have been levied for under-performance, although the company has publicly disputed these findings. This case is the only partial exception to the generalized findings. 78 Table 4 .2 Summary of Privatization Concessions Structure and Perform ance Category Buenos Aires Jakarta Manila Casa. World / Regional Development Bank Facilitation Yes Olleta, 2 0 0 7 FWW, 2 0 0 9 a Yes Argo & Laquian, 2007 Yes Argo & Laquian, 2007 n/a La Paz /E l Alto Yes Morale s et al, 2006 Majority Ownership Change? n /a Yes Hall & Lobina, 2009 Yes FDC, 2009 No n /a Yes IF A / MIGA, 2008 Original contract expansion targets met? No Castro & Azpiazu, 2012 No Ardhiani e& Zamzami ,2 0 1 0 JWSRB, 2009 No Public Citizen, 2003 No Saadi, 2012 ACME 2007201 1 No Laurie & Crespo , 2007 n /a Joiner, 2007 Cardena s, 2 0 0 8 Original contract investment targets met? No Castro & Azpiazu, 2012 Lobina & Hall, 2007 Olleta, 2 0 0 7 Yes Alcazar et al., 2000 Olleta, 2 0 0 7 No (Implied) JWSRB, 2009 No FDC, 2009 No ACME, 20072011 Saadi, 201 2 n /a Lobina & Hall, 2007 FWW, 2006 n /a Yes Hall et al., 2 0 1 0 Yes FDC, 2005, 2009 Yes Saadi, 201 2 No No Excessive foreign currency expenditures? Yes Laborde, 2005 Yes Argo & Laquian, 2007 Yes/ n /a Argo & Laquian, 2007 Yes Lahlou, 2008 ACME, 20072011 n /a n /a Excessive company debt? Yes Laborde, 2005 Solanes, 2006 n /a Yes/ n /a Chia et al., 2 0 0 7 n /a n /a n /a Contract renegotiated? Guay. Yes Swynge douw, 2004 79 Table 4 .2 (Continued) Category Buenos Aires Jakarta Manila Casa. Vendor / subcontractor water continues? n /a Yes Argo & Laquian, 2007 Yes ADB, 2008 Significant water price increases? Yes Olleta, 2 0 0 7 Castro & Azpiazu, 2012 Yes Argo & Laquian, 2007 Disputes and public protest? Yes ICSID, 2 0 1 0 Yes Argo & Laquian, 2007 Bakker et al., Economic or financial crisis followed by additional IFI loans? Yes Solanes, 2006 Yes Argo & Laquian, 2007 Yes Argo & Laquian, 2007 FDC, 2005 Yes Argo & Laquian, 2007 MWSS RO, 2003 Yes, Argo & Laquian, 2007 Yes Hatem, 2007 (‘Subco ntracto rs’, unconfi rmed) Yes Saadi, 201 2 Effective concession process and contract design? No Solanes, 2006 No Argo & Laquian, 2007 No FDC, 2009 n /a Evidence of regulatory enforcement? No Porporato & Robbins, 2010 No Argo & Laquian, 2007 No ADB, 2008 Yes* Saadi, 2012 No Guay. Yes Joiner, 2007 Yes Laurie & Crespo ,2 0 0 7 n /a Cardena s, 2 0 0 8 Yes Darden ne, 2006 Morale s et al., 2006 Yes/ n /a Morale s et al., 2006 Yes IFC/MIG A, 2 0 0 8 No Laurie & Crespo , 2007 No (after term ’n) Lobina & Hall, 2007 Yes FWW, 2006 No Joiner, 2007 Yes/ n /a Tiepolo, 2007 Y e s** FWW. 2007 n /a Yes Yes Tiepolo, Argo & Laquian, 2007 2007 MWSS RO, 2003 Note, n /a denotes not available or applicable. Split answer indicates differing observations for each concession area or differing answers for each part of the respective category. * 1 5 years into privatization, relating to first ten year performance. Water quality or sewerage health hazards? Yes Alcazar et al., 2000 Engel et al., 2011 Yes Kurniasi h, 2 0 0 8 Yes Olivier, 200 9 ACME, 201 2 La Paz /E l Alto n /a * * Performance fine has been noted as of 2 0 0 6 . Details unknown. 80 Active Concessions Although the four active privatization cases, Jakarta, Manila, Casablanca, and Guayaquil still have many years remaining in their contracts, it appears th a t the revised contracts and existing governance frameworks constrain potential future successes for Jakarta, Manila and Guayaquil. This point is demonstrated by various summary points presented in Table 4 .2 . For example, these three active concessions have all changed majority shareholder operators within ten years of privatization. These concessions all permit vendor supply arrangements which are not regulated under the concessions, yet are used to account for company water coverage target successes (which are supposed to be regulated?). Additionally, the World Bank concession process and agreement design, and contract renegotiation of price controls and alleviation of performance targets; appear to have solely favoured the companies. These findings point to a critical lack of service criteria and accountability in the concession models. It appears that the renegotiations for Jakarta and Manila were approved to appease the companies. As alluded to earlier, Jakarta’s government’s weak contract position led to further alleviation of company responsibilities in the 2 0 0 1 renegotiations. M anila’s renegotiation effectively weakened contractual requirements. The concession terms for Guayaquil alleviated much of the accountability for the company by not mandating coverage targets. Such evidence suggests that any future changes to remedy contractual shortcomings in any of these cases to favour of the states an d /o r general public would be difficult to renegotiate without violating the term s of the existing contracts. These factors have constrained state autonomy and capacity to favourably resolve water service needs to benefit the general public and slow or stop related 81 capital outflows. As noted, of the four remaining cases, only Casablanca has shown potential signs of regulating the company to provide effective service within a limited rate of return in the future, although the company has not yet acknowledged its shortcomings to the degree of complying with contract sanctions. 82 CHAPTER FIVE: QUANTITATIVE ANALYSIS This chapter examines quantitative data on water connections and coverage, consumption and pricing across the cases before and after privatization to the extent possible given the available data. Given severe data limitations and reliability, the examination falls short of a proper quantitative analysis. As a result, this partial analysis is only meant to supplement the qualitative analysis in the previous chapter. 5 .1 Data Sources and Definitions In addition to various case reports, a few major sources for quantitative data across the cases are used in this chapter. The latter include Marin (2 0 0 9 ), the International Benchmarking Network for W ater and Sanitation Utilities database (IBNET, 2 0 0 5 -2 0 1 1 ), and UN-HABITAT (2 0 0 8 ) and United Nations (UN) Statistics Division (2 0 1 2 ) information. UN-HABITAT's State o f the World's Cities 2 0 1 0 /2 0 1 1 (2 0 0 8 ) is used for comparative city populations and slum populations. UN Statistics Division (2 0 1 2 ) is used for some population information. As concession area population estimates differ by source, and in some cases do not align with the city or metropolitan area boundaries, water supply coverage and populations served data are also used to cross reference and establish reasonable estimations for population figures during the relevant years of analysis. Population figures are estimates of the populations of the water concession areas. Where noted, population figures may be re-estimated to capture populations thought to be missed by registered population figures. Num ber o f Water Network Connections figures represent the number of w ater connections known for individual years for the respective w ater case cities. The 83 number of water connections from one year to the next provides an annualized measure of performance without taking population into account. Disaggregated residential connections are provided and analyzed only where noted. Population Served figures are estimated figures for populations served by the existing water connections for each case city by year. Population served acts as a flow through figure for calculating w ater supply coverage. Water Coverage figures represent the percentage of total population estim ated to be served by the existing water connections (Population served divided by total population in the respective concession area) for each year. Water Consumption is the volume of w ater sold, expressed in millions of cubic metres per year. The figures are converted into w ater consumption per capita as a proxy for household consumption, which is generally a larger proportion of total w ater consumption compared to commercial and industrial users of potable w ater resources. Average Water Price is generally expressed as the average price paid for access to each cubic metre, or other specified measure, of potable water. 5 .2 Data Limitations and Qualifications Several constraints emerged while attem pting to obtain water coverage (and/or network connections, population and household size data as applicable), consumption and pricing data over tim e and across cases: (1) Full data sets for comparison are not available, (2) Methods of determining these variables differ by location and source, (3) Many officially-recognized figures appear void of scrutiny and simply align with contractual targets, (4) Most figures do not distinguish between 84 residential, commercial and institutional data figures49, and (5) Very few figures were identified for years before water privatization. This limitation is especially apparent with respect to water consumption (Section 5.5). As a result, as indicated above, the method has involved close scrutiny of source data to attem pt to use the most reasonable data in each case. Official population estimates from national censuses and the UN tend to underestimate metropolitan figures quoted by various literature sources. Such higher estimates are based on geographic and social realities in these cities. Urban peripheries mostly comprise poor populations in each of these cities. They are significant in proportions, lack property rights and the ability and rights to be counted officially. As a consequence, they also get left out of the services and figures quoted to determ ine the water concession city and population-served contract param eters. Across all cases, urbanization trends are simply contradicted by outdated census information. There is a need to acknowledge and recognize the real populations th at make up the significant informal settlem ents and areas generally described as slums. See Table 5 .1 for the estimated proportion of urban slums in case countries. A significant limitation in acquiring meaningful data relates to the complexities of the respective water rate (tariff) structures. Average water pricing and consumption is not consistently disaggregated to residential levels. W ater block tariff structures generally charge different rates to specific categories of residential, commercial and institutional customers, as well as varying levels within residential categories. Consequently, in some cases, the data is not available or only available 49 Companies approached directly indicated that such disaggregation was not available. 85 from limited sources for very few years of observation. Moreover, the consistency of the average all inclusive w ater tariff calculation methods cannot be verified. Table 5 .1 Proportion of Urban Population Living in Slums Year Argentina Indonesia Philippines Morocco Bolivia 1990 1995 30.5 31.7 54.3 5 0.8 4 7 .2 4 3 .7 3 7 .4 35.2 6 2.2 58.2 2 4 .2 13.1 54.3 5 0.4 4 2 .3 13.1 4 8 .8 2 00 0 2 00 5 32.9 26.2 5 0 .8 4 2 .6 3 4.4 2 6 .3 2 00 7 2 3.5 2 3 .0 Ecuadc - 2 1 .5 - Source: UN Habitat (2008) Note. Ecuador data only available for 2 00 5. 5.3 Water Connections Although attempts were m ade to acquire disaggregated residential household connections and consumption data, very few figures could be found. In the few cases where residential figures have been identified, it has simply been for specific years and does not necessarily permit comparative analysis. Consequently figures used in this partial analysis comprise domestic, commercial and institutional connections and consumption. Nonetheless, household and group tap connections typically make up a large proportion (i.e. over 70% ) of all w ater connections. W ater connection figures for each city are adjusted to a baseline of 1 0 0 at year zero. From the adjusted connection figures, average annualized rates of change are calculated for the specific reform periods. This data and respective calculations are represented in Figures 5 .1 and 5 .2 , respectively. 86 Figure 5 .1 W ater Connection Trends 200 180 o 160 140 120 Buenos Aires Jakarta 100 ■Manila 80 La Paz / El Alto 40 Source: Constructed from data provided by Alcazar et al. (2 0 0 0 ), AySA (2 0 0 5 -2 0 1 0 ) (Buenos Aires); JWSRB (20 09 , 2 01 1 ), Bakker et al. (2006), Tutuko et al. (2 0 0 1 ), Shofiani (2003) (Jakarta): MWSS Regulatory Office (20 03 ), Altmann (2 0 0 7 ) (Manila): Foster and Irusta (20 03 ), Food and W ater Watch (2 0 0 6 ), Chia et al. (2007)(La Paz-EI Alto) The connections figures are generally referred to as registered or official connections. They are implied as a proxy for household w ater access although it is not verified whether any of the presented figures comprise only household connections. Furthermore, geographic expansion of the respective w ater services is implied but disputed in specific cases. The disputes relate to documented evidence that in Buenos Aires, Jakarta and La Paz-EI Alto cases, by example, installed water connections within existing network areas are used to achieve increased w ater coverage targets. 87 Figures 5 .1 and 5 .2 simply account for the numbers and changes in reported water connections installed each year as a measure of raw performance without accounting for population changes. Viewing Figure 5.1, the confluence of data points at Year 0 (X Axis) and Connections 1 0 0 (Y Axis) represents the beginning of privatization for each of the four cases shown. It can be seen that all four cities are experiencing growth in the number of w ater network connections both before and after privatization. Buenos Aires shows a steady climb during the four years of public w ater provision preceding the 1 3 year period of w ater privatization, during which a slight additional increase in the trend is temporarily apparent (approximately years 2 - 4 of privatization). The trend then shows a marked increase during the second phase of public water (years 1-4 shown in the right hand columns of the figure). Jakarta’s line prior to privatization is based on an average (specifically for years -1 0 to -1). This increase accelerates during privatization (particularly years 3 - 5 ) then steadies again similar to the pre-privatization trend. Manila shows significant increase in the trend, particularly after year 6 of privatization although no data is available for the preceding public period. Finally, La Paz-EI Alto’s increasing trend steadily increases both before and after privatization, lowering slightly after year 5 of privatization. Figure 5 .2 shows the average annual rates of change of water connections for w ater network connections, calculated based on the same data presented in Figure 5 .1 .50 The trends accentuate the previous observations noted above. Buenos Aires clearly experienced growth in connections early during privatization. This rate of 50 The figures at each respective year represent the average rate of change for the specific water provision model type to that date. 88 increase then steadily declined. Buenos Aires’ second period of public w ater provision then brings a renewed increase for the few observed years. Jakarta experiences an initial increase in the rate of installation during privatization which then declines to a level similar to pre-privatization. La Paz-EI Alto shows a tapering of increases after privatization, which fall below pre-privatization levels. M anila clearly shows an initial increase followed by further surges, but without comparison to the pre-privatization period. Figure 5 .2 Average Annual Connections Change per Water Model Buenos Aires Manila La Paz / El Alto Source: Average annual connections changes are calculated based on data presented in Figure 5 .1. For the three cases showing years of public provision represented visually in Figures 5 .1 and 5.2, the average rate of annual change, adjusted to the year of 89 privatization, is higher for the public model.51 Note that all four cities have reported disputable figures, relating to some of the w ater connections alleged as being installed within the existing networks rather than in expansion zones. Despite such issues, the results of annual increases in numbers of water connections slightly favour the pre-privatization era. The importance of this finding is constrained as no comparable financial information on water supply cost per unit has been accessed as a metric for ‘efficiency’. In light of such limitations, w ater connections installations before and after privatization are compared from the perspective that the private m odel’s contractual expectations are that it outperform the previous public model (as discussed in Chapter Four).52 These issues are discussed further in later sections of this chapter. 5 .4 W ater Coverage The water coverage trends for five cases53 prior to and after privatization are shown in Figure 5.3. A variety of sources are used, as indicated, either providing figures directly an d /o r from which coverage rates are calculated to establish trends. In Buenos Aires, water coverage trends follow a very similar line to the previously noted connections trend. The results between w ater model periods are very similar, and then climb significantly during the second period of public provision. Jakarta appears to be increasing coverage a t a higher rate until about Year -5 before 51 Buenos Aires 3.53% (1.67 using prior public period only) vs. 1.77, Jakarta 6.29 vs. 5 .9 1 , La Paz / El Alto 6 .9 1 vs. 5.70. 52 Outside of the context of contractual expectations, it is difficult to generalize the reasonable level of expected annual rates of connections installations (e.g. In terms of the capacity to expand the water network during privatization). 53 Casablanca is excluded due to significant data discrepancies preventing the estimation of any reasonable trend. 90 privatization and then steadily increases a t a lower rate of change for the remaining years, with the exception of a slight increase just before and after privatization. M anila’s trend shows slightly declining w ater coverage before privatization which then steadily climbs thereafter. La Paz-EI Alto’s trend reflects alternating levels of coverage increases each year until a few years into privatization after which coverage declines. Guayaquil’s water coverage makes little change before privatization and then experiences decline. These declines (and declines in coverage in general) primarily relate to population rate increases exceeding water connection installation rates. Figure 5 .3 W ater Coverage Comparison 1.2 0.8 BUENOS AIRES ■ 0.6 JAKARTA MANILA LA PAZ / EL ALTO 0.4 «=0= GUAYAQUIL 0.2 » •> ' y i ,> , > . o A- o V w 01 4-* BUENOS AIRES 0.6 H B —JAKARTA 0.5 - n * - M A N IL A 0.4 -# H *L A P A Z /E L A L T O -O -G U A Y A Q U IL 0.3 ro 5 0.2 0.1 9> ' A> AS AS AS AS .A .A AS AS Year Sources: Constructed from data provided by Marin (2 0 0 9 ), AySa (2 0 0 5 -2 0 1 0 ), UN (2 0 1 2 ) (Buenos Aires): Schouten and Halim (2 0 1 0 ), Bakker et al. (2 0 0 6 ), JWSRB (2 0 0 9 ) (Jakarta); MWSS RO (2 0 0 3 ), Negishi (2010), David (2 0 0 0 ) (Manila); Morales et al (2 0 0 6 ), Food and Water Watch (2 0 0 6 ), U.S Department of State (2009); Chia e t al. (2 0 0 7 ), Laurie and Crespo (2 0 0 7 ) (La Paz-EI Alto); Tiepolo (20 07 ), Swyngedouw (1 9 9 7 ) (Guayaquil) Coverage Summary Table 5 .2 summarizes figures from the preceding three Figures (5 .3 - 5 .5 ). The original version (5.3) weighted averages show th at the public model has outperformed privatization at a ratio of about 4:3 (1.2% vs. 0.9% average annual coverage changes). The first alternate version (2) results suggest very close results between the public and private model, 1.1% vs. 1.2% weighted average annual 96 coverage increases, respectively.57 The additional alternate version (3) figures suggest that the public model coverage increases are more than 3:1 over th e private model (1.1% vs. 0.3% annually on average). The original version data from Figure 5 .3 comprises the most conservative estimates based on either official coverage data and /or have passed some level of audit or research scrutiny. In four of the five cases’ (all except Manila) public models have outperformed privatization based on water coverage. Table 5 .2 W ater Coverage Versions - Average Annual Changes Per Model WATER COVERAGE VERSIONS Average Annual Changes Per Model (%) PRIVATE PUBLIC jYrs Alt (2) Alt (3) Original Ait (2) Alt (3) Observed Original City ! r i 179% Buenos Aires 1. 1% 1.1%: Jakarta 2.1% , Manila 2.8% -0.3% ,' - 1 1.9%/ i -0.3% -0.3%! La Paz / El Alto 2.5% 2.5%" Guayaquil _ 0.0% _ _____ r~ 1 1 I , -0.4% , / 2.5%! ' : ' | 0.0% / s 8 8 10 10 10 7 7 7 8l_ 8 8 11 ■ I 0.8% 13 13 13 10 10 10 A f 1.3% 0.2%i i 1.4% 1.8%' - . I 1.2%j '' '' I 1 1.9% -0.5% -0.3% -1.5% 1.7% r 3 ! -1.5%! el . . . . 0.9% 9 10 1.9% I 9 I 5 1.............. 9 -1.9%’ 7 2.0% 11 11 Weighted Avg Chg* 1.2% 1.2% ; 1.1%; * Weighted average based on the number of years of observation per case. jYrs [Observed 3 I 1.3% 0.3%i I ! As many of the cases have contradictory figures available, it is relevant to have examined the degrees to which changes to the observed data points im pact the above results. Alternate version (2) includes some questionable assumptions, although the alternate version (3) as shown in Figure 5 .5 and also reported in Table 5 .2 includes assumptions which either adjust population to higher estim ates, adjust for household size discrepancies, an d /o r adjust for reported connections 57 Noting the previous issues raised as to the validity of this particular version of figures. 97 installations not all being an ‘expansion’ of the existing network58. This latter version of figures illustrates an even greater differential between the public model and privatization coverage changes on average (as per Table 5 .2), although the overall results still show that the same four of five cases’ public models outperformed privatization based specifically on w ater coverage changes. Connections and Coverage Data Limitations Casablanca has been entirely left out of this analysis due to discrepancies between reported figures and the anecdotal evidence that an audit has occurred refuting connection installation and coverage figures cited by the company. La Paz-EI Alto's concession figures have included results of audit figures to better capture the actual results of water privatization during the concession term . The large discrepancies between company claims and audited figures beg the sam e questions of the performance.data for the other cities. In the case of Buenos Aires, the remunicipalization of the water services highlighted a discrepancy relating to th e final figures a t the end of privatization - beginning of new public services. Despite there being active civil society groups in the other cities, no known third party audits or estimations have been made for Jakarta, Manila or Guayaquil. 5 .5 W ater Consumption W ater consumption figures are identified for all of the case cities to varying degrees, whereby IBNET (2 0 0 5 -2 0 1 1 ) filled in gaps where other available sources were not identified. However, in all cases, the years of observation are limited, and specifically to years after privatization started. Different methods are used in the arriving a t the scope and estimation methods across cases. Nonetheless, this brief 58 As adjusted for La P a z / El Alto for Alt.Version (3). 98 analysis is conducted to help identify any particular trends or insights into privatization effects on consumer welfare as feasible. Residential consumption figures are not commonly identified. In many of the cases, household m eters are still not consistently installed to ensure the availability of disaggregated residential l figures. Total consumption is generally used as a proxy for residential consumption with the provision that any differences in results are examined closely. i Water consumption per capita trends are plotted over the privatization years for each of the cases in Figure 5 .6 (Year of Privatization = 0). Buenos Aires’ w ater consumption per capita shows as relatively constant over the few available years (years 7 - 10). It can be seen that Buenos Aires’ w ater volume consumed per capita is more than double that of the next nearest concession (Manila East). 'Jakarta’s consumption level begins to climb initially and then slowly decline after th e first two years of privatization. From the beginning of the concession, the drop represents about a 11% decline (or about 19% from its peak). Manila W est’s consumption also initially increases (by over 20%) then slowly declines after year 2 back to its original level. Casablanca’s water consumption level can be seen as dropping over 3 0 % during privatization.59 La Paz-EI Alto’s consumption trend reflects a slight decline I over four of five of the observed years. The year 6 figure (Approx. 1 5 .3 3 cubic metres), however, may be a data error, particularly given that the level of daily i consumption implied is just over 4 0 litres per day per capita.60 Guayaquil’s brief three year trend shows a 10% decline initially and then a return near to its previous 59 Note that as no figure was specifically identified for Year 7 of privatization, this missing data point is reflected by a break in the trend line. 60 As the data represents aggregate consumption, the figures imply an even lower residential level of consumption. This would be particularly alarming given that the absolute minimum requirement for basic needs is considered to be 5 0 litres per day. 99 i level as of year 4 of privatization. Finally, Manila East shows an increase of over 50% consumption during the years of observation. Figure 5 .6 W ater Consumption61 Water Consumption Over Privatization 160 140 > m 120 - ♦ — BUENOS AIRES E JAKARTA 2 100 EL ro u v a c o a. - n i p - MANILA WEST 80 -♦ ♦ -M A N IL A EAST -♦♦-CASABLANCA E 3 w — O 40 -H — GUAYAQUIL 1LA PAZ / EL ALTO C u YrO 10 Sources: Constructed from data provided by IBNET (2 0 0 5 - 2 0 1 1 ) (Buenos Aires); JWSRB (2 0 0 9 ) (Jakarta); MWSS RO (2 0 0 3 , 2 0 1 1 ) (Manila); LYDEC, 2 0 0 6 (Casablanca); IBNET (2 0 0 5 -2 0 1 1 ) (La PazEI Alto); IBNET (2 0 0 5 -2 0 1 1 ) (Guayaquil) Four concessions can clearly be seen as experiencing declining levels of consumption during privatization. One of these cases, Manila, also includes an increase - in the East Manila concession. Buenos Aires shows rather constant consumption over its few years of observation, and Guayaquil shows a slight decline over three years of observation. 61 Volumes converted to cubic metres per year where necessary. Note that 36.5 cubic metres per year is approximately equivalent to 1 0 0 litres capita per day. Also, note that commercial and institutional consumption is included in the figures. 100 Additional Consumption Insights The Manila West, La Paz-EI Alto, Casablanca and Jakarta (by year 9 of privatization) consumption levels, are extremely low in term s of per capita volum e, as implied for domestic basic needs. In the case of Casablanca, water production and related constraints have been previously noted by the company (e.g. LYDEC, 2 0 0 6 ) which may contribute to the declining low levels of consumption reached by year 8 of privatization. Alternative private well and indirect network vendor source supply also act to complicate understanding the degree to which the formal water network w ater consumption figures, for most of the cases, accurately represent domestic w ater consumption behaviour. Consumption Caveat Consumption per capita as represented by th e figures in this brief analysis can only be estimated in most cases. The reasons are that the only information th a t can potentially be established as known from the start of privatization for most cases is the number of water connections. This is due to a lack of household m etering in many cases. Even then, the varying inherited network conditions, circumstances and chosen strategies associated with water delivery method (i.e. individual household, shared household, public water connections, and transfer of responsibility a t network connection points to third parties.) complicate understanding established figures and estimation methods as an accurate reflection of per capita consumption. Moreover, the data in Figure 5 .6 represents domestic, industrial, commercial and institutional consumption. Although, it has been generally noted that residential consumption represents a major portion of aggregate consumption, changes in the other modes of consumption may contribute to changes in the observed trends. 101 5 .6 W ater Pricing As water pricing for Manila has differed between the two concession areas and the concessions have been identified as having different situations and levels of success, these prices are shown separately. W ater prices (tariffs) are adjusted for comparison using the general Consumer Price Indices (CPI’s) for each country (from United Nations, 2 0 0 6 and 2 0 1 0 ). All nominal prices are divided by th e respective year’s general CPI for each country. W ater price data is then converted to a base of 1 0 0 for the first observation, generally one year prior to the first data observation, beginning a t year 0 of privatization or later as applicable. All of the nominal price data is based on quoted or average residential w ater pricing. Water prices during privatization as available are shown in Figure 5 .7 . All cases begin at adjusted real prices of 1 0 0 in year 0 , except for Buenos Aires which begins in year 4 of privatization. Buenos Aires’ trend shows real water prices increasing by more than 30% then dropping again to near original levels (due to hyperinflation). Jakarta’s trend shows relatively stable prices then an increase of more than 30% by year 7. Manila W est’s real w ater prices initially drop, increase significantly, then double as of year 8 onwards. Manila East prices initially decline by almost 60%, then slowly rise surpassing initial levels by year 6 and increasing to more than 50% original levels by year 11. Casablanca’s real price rates are relatively stable, declining slightly over the observed period (due to inflation rates slightly exceeding the reported nominal w ater price increases). La Paz-EI Alto real prices slowly drop by almost 30% over nine years. Finally, Guayaquil’s prices increase dramatically and taper off at an almost 100% increase over the brief five years of observation. As observed, three cases (four companies) have resulted in significant 102 real water price increases (Jakarta, Manila West and East, and Guayaquil). Buenos Aires fluctuates significantly but returns to similar levels as year 4. It is unknown how this relates to levels at the beginning of the concession, although it is suspected that earlier levels would have been lower given initial nominal price increases and lower preceding inflation levels. Casablanca is the most stable in terms of real prices, and La Paz-EI Alto is the only case experiencing significant real price decline. Figure 5 .7 W ater Pricing Comparison 250 §200 BUENOS AIRES JAKARTA 2> 150 MANILA WEST MANILA EAST CL CASABLANCA iilO O *-® »LA P A Z/E LA LTO — ♦— GUAYAQUIL 50 Source: Constructed from data provided by Post (2 0 0 9 ), Simpson (2 0 0 6 ) (Buenos Aires); Bakker et al. (20 0 6 ), Santono (20 05 ), JWSRB (2 0 1 1 ) (Jakarta); MWSS Regulatory Office (2011) (Manila); Olivier (2 0 0 9 ) (Casablanca); Morales et al. (2 0 0 6 ) (La Paz-EI Alto); Carrillo et al. (2006) (Guayaquil) Note. All figures adjusted using CPI (UN 2 0 0 6 , 2 0 1 0 ) and to base of 1 0 0 . 5 .7 W ater Consumption and Pricing Examining the combined results of the previous tables, it can be seen that consumption during privatization has remained steady or declined as real prices have risen in Buenos Aires, Jakarta, Manila West, and Guayaquil. In Casablanca and La 103 Paz-EI Alto though, consumption has declined while real prices have also dropped. Manila East experienced a large initial reduction in real prices which may contribute to consumption increases discussed earlier. Generally speaking though, it can be seen that Manila East is the only example of consumption per capita rising during privatization. It cannot be said whether real price is influencing consumption or vice versa. This partly relates to a lack of supply cost information as mentioned earlier. Elasticity of Demand Comments A few specific considerations should be mentioned in attempting to understand the effects that price increases may have had on consumption in these cases. The quantitative data analyzed above has various limitations. First of all, consumption has not been isolated to domestic consumption. As a result, it cannot be known the exact proportion comprising domestic consumption for each case. As noted in Chapter One, basic needs consumption has been articulated as equivalent to 5 0 litres of water per capita per day. It is possible in several of these cases that the domestic proportion of consumption has remained or is nearing levels where demand is highly inelastic for a proportion of the population. A further point here though is that average price and consumption figures were used in the analyses in this chapter. As many categories of customers are being aggregated in these average figures, it is difficult to truly understand the price elasticity of dem and62. Secondly, as alluded to earlier, little can be said about water demand specifically given the lack of comparable information on w ater supply costs. Finally, as mentioned in the Consumption Caveat section earlier, comparable data which sheds 62 Price elasticity of demand can be generally described as the responsiveness of quantity dem anded to changes in price. 104 light on consumption behaviour relating to alternative sources is not understood and outside the scope of direct analysis here. W ater Conservation and Efficiency Comments It can be theoretically argued that higher prices promote water conservation. Although no direct information has been found to support this objective in these cases, it can be seen that nominal prices (as discussed in earlier chapters) as well as real prices (as analyzed in this chapter) have generally risen during privatization. At least, we can say that prices rose unanimously for Buenos Aires, Jakarta, M anila and Guayaquil. As was found by Argo and Laquian (2 0 0 7 ), as discussed in Chapter Three, middle and upper classes were most affected by resulting price increases in Manila. This could easily be implied as a conservation incentive. Theoretically any efficiency improvements achieved by privatization would be reflected in either water connections or coverage performance outcomes or lower prices. W ater connection and coverage outcomes have been discussed. However, in the case of pricing, higher prices may be desirable to give incentive for conservation. In light of the foregoing considerations that complicate understanding dem and elasticity, a further point in the context of efficiency and this quantitative analysis specifically is that the reasons for the resulting nominal prices changes are not well understood. 5 .8 Partial Quantitative Analysis - Summary This section has included a partial quantitative analysis to shed light on w ater privatization’s success relative the preceding public model, and to exam ine any potential consumer impacts as potentially identified. Review of water connections data for four available cases, Buenos Aires, Jakarta, Manila, and La Paz-EI Alto, 105 before and after privatization, suggests that privatization has not generally outperformed the public model. W ater coverage analysis for five available cases, all except Casablanca, reflects that public w ater distribution primarily preceding w ater privatization has marginally outperformed the private model overall. M anila’s water privatization is the exception, showing improvements over the public model which was showing as remaining constant in years preceding privatization. However, as it was identified in previous chapters that M anila W ater (East Manila) has used informal w ater access to reflect improvements in its coverage; and as it is implied that the previous public coverage figures only represented formal network coverage, these qualitative findings contradict and raise questions as to the validity of M anila’s quantitative coverage results. In five of six cases (Manila having been analyzed as two parts of one case) water consumption per capita has declined or remained constant over privatization. Only M anila’s East concession has shown consumption increases during privatization. Price analysis has shown that four of the six cases have experienced real price increases during observed periods. These prices may relate to corresponding consumption changes although various considerations limit understanding the direct relationship between water pricing and consumption for these cases. Further analysis of how prices have impacted consumer behaviour for the population served by water networks during privatization would require additional review of the underlying nominal prices and how inflation impacts respective consumer goods and services baskets. Furthermore, the brief review of prices is limited in that water prices have been directly tied to foreign currencies (US$ or Euro) 106 in some cases potentially acting to further increase or contradict real prices as quoted.63 Generally speaking, the connections and coverage analyses have provided more information on privatization’s outcomes relative the public model given that they shed some light on both the served and un-served populations. Consequently, Buenos Aires, Jakarta, La Paz-EI Alto and Guayaquil water privatizations have not been found to outperform public models. Although M anila’s trend reflects an outperforming private model, the validity of these findings is questionable. Finally, no data was available to provide insight into Casablanca’s w ater coverage trend. 63 For example, Laurie and Crespo (2 0 0 7 ) suggest a 35% real price increase for La P a z / El Alto contrary to figures analyzed in this chapter provided via Morales et al (20 06 ). 107 CHAPTER SIX: CONCLUSION AND DISCUSSION 6 .1 Summary of Results This thesis’ primary objective has been to answer the question of w hether urban water privatization has worked in the Global South. Six key prom inent cases of water privatization have been identified and examined using a mixed methodology, primarily focused on qualitative analysis, supplemented by a partial quantitative analysis. The results show that w ater privatization has generally failed to exceed the levels of water access that were achieved by the public models before it. As the prior public model is less analyzed and publicized than the private model though, w ater concession agreement performance has acted as a proxy for privatization’s success. In this respect, the privatization is generally considered to have not worked to date. The partial exception to this finding is that Casablanca’s case shows som e promise based on a ten year review and subsequent renegotiation. The supplemental quantitative findings reflect similar results between w ater coverage and connection installations before and during privatization. However, they also suggest that the initial pace of improvements begun to decline after the early years of privatization. M anila’s available coverage information acts as an exception suggesting that reported water coverage has far surpassed stagnant results reflected in connections and coverage data figures prior to privatization. These results are refutable though given West Manila’s recorded failure (during which w ater services were temporarily transitions to public control again) and East Manila taking credit for coverage increases resulting from bulk w ater sales64. Given that informal vendor water resellers are not regulated by the w ater concessions, it seems counterintuitive 64 From Chapter Two, as highlighted by Kumar, 2 0 0 9 , citing interviews with the Asian Development Bank. Also, Bakker et al., 2 0 0 8 , made suggestions that informal water supply should be regulated. 108 that such results can be considered appropriate contractual performance inclusions. Also, Manila, as with Jakarta and Buenos Aires, appear to have signed w ater concession contracts that were not sustainable or that they intended to renege on. Overall, it appears that water privatization contracts have failed based on com panies not being held accountable for performance and corresponding investment targets due to either ill-defined or ambiguous term s, or th at terms were later altered. These failures relate to ineffective governance frameworks, with either poorly adm inistered or non-existent legislative policy, which either did not or could not avoid corruption or collusion. Companies had the opportunity to verify the accuracy of information and various conditions relating to the case cities upon expressing interest in the privatization bids or the direct contracts. In either event, four of the case cities have involved significant contract renegotiations. Buenos Aires and Jakarta renegotiations appear to have only benefited the companies. M anila’s revisions allowed for limits in rate of return at the expense of previously m andated performance targets. Casablanca’s renegotiation is the only one of four which included elem ents to improve the company’s accountability. In another case, Guayaquil’s privatization was implemented without mandating clear performance targets in the concession agreement. Nonetheless, the company’s selling of ownership in the concession following a fine in 2 0 0 6 should be viewed as an accountability failure. It is not known whether the current company owners have improved water access significantly or taken on past liabilities for the original company’s shortcomings. Water privatization has failed in all cases to varying degrees, reflected in disputable water access improvements which have not clearly been intended to expand geographic access to water. These situations have included contradictory 109 interpretations of water access calculations and the use of various cost-saving methods which have included informal w ater distribution channels in four of the cases (Jakarta, Manila, Casablanca65, and Guayaquil). La Paz-EI Alto’s contract was terminated partly due to the company’s underperformance, effectively misinterpreting network expansion terms. Buenos Aires’ concession was eventually terminated due to the stand-off between network expansion and the need for higher prices to make the company profitable in the face of hyperinflation. Capital investments have underperformed and been spent in predominantly foreign currencies in four of the cases (all except La Paz-EI Alto and Guayaquil for which such terms are unknown), leading to inordinate levels of foreign technical consultancy fees. In each of these cases, there is question as to whether the reported foreign expenditures validly added to the respective capital infrastructure stocks. Consequently, the water privatizations have generally failed to m eet originally negotiated contractual performance and investment targets, as based on the available evidence to date. There is secrecy in many cases surrounding the w ater privatization models, their implementations, and operations. The governments, legislation, political cultures, IFI, regional development banks, and bilateral parties, companies and negotiated contracts are all influential parties and factors to varying degrees at particular stages in such secrecy. All cases reflect a general lack of open communications and diplomacy that includes the lack of an open dialogue with the general public - to have ensured that privatization results not only appear to m eet originally intended objectives, but are achieving them . 65 As previously noted, there has been reference to subcontracting in Casablanca although the details of these arrangements are unknown. 110 The four active privatized w ater models still involve public protests and a pressured progression towards accountability reflected in recent fines. Jakarta, Manila and Guayaquil still appear to formally lack accountability to m aintain a trajectory of network improvements and expansion though. This is reflected in the allowance of unregulated informal vendor w ater provisions, which appear to be included in reported coverage rates for M anila, as discussed above, as well as Jakarta. Guayaquil has little or no accountability for network expansion. Casablanca appears as the only potential exception given recent renegotiations with positive elem ents for network provision. The future will tell as to whether these parties will continue to mask, repair or term inate their respective urban water models. 6 .2 W ater Governance Lessons Various lessons from the implementation of water privatization in the six studied cases have become apparent. This section summarizes some of the critical issues observed and provides recommendations for alleviating such issues. Clear and Measurable Performance Targets First and foremost, contractual agreem ents between governments and private sector parties require close inspection and an attention to detail that will not allow for varying interpretations and complex disputes down the road. As various levels of government and the general public are all stakeholders in water services, it is essential that these parties all have representation that facilitates the opportunity to review and provide input to the contract before negotiation with the service contract party. Ill The resulting contract must have clear, measurable and intentional performance targets with very clear, enforceable, sufficient and monitored sanctions for non-compliance. The contract must specify the requirement of access to documents by all respective levels of government, regulator and independent auditor. Controlling Investment Terms Foreign equity and debt issues, investment expenditures and distributions appear to mitigate performance when not regulated from the outset in the contract. It is necessary to openly define cost of capital, capital infrastructure sourcing, currency of trade, technical consultant fee percentages, as well as dividend distribution timing and percentages. These contractual term s need to be explicitly set during negotiations with clearly aligned penalties for non-compliance. Countries in the Global South in particular should be focused on raising capital in local markets where feasible. Although examples of this have now become apparent in some of the case cities (Jakarta, Manila and Casablanca), it is still important to consider such capital raising issues in the context of cost of capital to prioritize necessary capital works accordingly. There is an increasing admission that the private sector is not necessarily capable of financing sufficient capital for such arrangements. Any notion of a best practice contract would have determ ined this fact up front and potentially avoided such a costly reform to water governance. Exchange rate risks must be mitigated by the state. Consequently, such risks should not be borne solely by the state and public. Clearly, this is a negotiating item, however it would appear in several of the six cases that the government was to bear the risks of exchange rate fluctuations. Such a circumstance cannot possibly be 112 favourable to a publicly-provided water model financially dependent on domestic currency. Water Pricing Regulation It is critical that terms of price regulation are specified clearly in the w ater contract to inform and gain public acceptance and avoid future conflicts. Moreover, an appropriate water pricing regime with a progressive increase per w ater volume is necessary, as a matter of recognizing the incremental costs of water and encouraging conservation. Such a pricing model should not penalize the poor, charging average rates per volume greater than the same rates for high volume users. Any resulting model implies that higher volume consumption subsidizes lower volume users. It cannot be denied that without such provisions, additional societal costs would be and are necessary for public safety, public health and existing apparent urban infrastructure planning. Water Monopoly Model A water monopoly may be the most practical way of transferring services to the private sector, but the evidence shows that it has not worked better than the public model, acknowledging Casablanca’s potential future success stem m ing from its renegotiation and East M anila’s debatable coverage methods. The inordinate level of power of the multinational companies demonstrated in (three of the four) renegotiations, disputes, and a general lack of accountability by all parties, suggests that a better model must exist. Such a model may be the public model. It is clear though that an incentive for effective and sufficient investments is critical. This point is the source of water privatization’s failures and has also contributed to the terminations. 113 It is not clearly evident th at the private sector has demonstrated superior technical capacity as reflected in the six cases to date. Moreover, local factors such as historically inherited city infrastructure, deficiencies, w ater supply and quality issues, and other elements of the urban environment, flooding and other clim ate related issues ail should have been incorporated into the appropriate w ater model to suit the local conditions. This does not appear to be the case. Instead a one-sizefits-all model was essentially implemented in all of the cities.66 W ater privatization, as implemented in the studied cases has various implications for effective governance. Corporate Due Diligence The companies had the obligation of directly researching (1) Infrastructure conditions, (2) Physical parameters within and outside of the planning area, and (3) Relevant urban planning data in the service expansion zones, as applicable. If imposed timelines were too rigid, the bidders would have scoffed. It is not apparent that such issues arose publicly. Instead, private negotiations, involvement from bidder host countries, and a general lack of competition for the contracts was th e case. Such a lack of due diligence implies collusion or a backroom trust in the World Bank-led process, perhaps expecting future renegotiations once needed. Water Governance W eak governance models and a lack of appropriate corresponding exercisable policy have left governments in increasingly compromised positions during w ater privatization. This has engendered backroom deals and nasty legal disputes. 66 Little is known about Casablanca’s water contract. It is similar to the others although the World Bank did not necessarily play a key facilitating role. 114 Notwithstanding other elements of best practice recommended in this chapter, addressing such issues of governance and policy up front can reduce subsequent disputes and m ake the w ater model more effective. It is not clear though th at the negotiating national government actors did not intend to essentially transfer accountability for water provision to the new private actors. Transferring w ater responsibilities has allowed the fiscal reasons for w ater price increases to bypass public debate making the multinational companies the centre of attention. In several of the water cases, there have been corresponding accusations and legal cases of corruption. Implementing measures of public consultation in the w ater concession contracts acts to establish or restore public confidence, and also m akes the company more responsive to customer needs. The governance fram ework should include an auditor and regulatory model which are transparent and responsive to public concerns. These elem ents need to be addressed in legislation, operating policy, and specified clearly in w ater contracts and revisions of contracts. Communication requirements should also be addressed in policy accordingly. The governance structure, its components and exercisable policy are necessary to reduce corruption and increase transparency and accountability. Public Consultation Clearly, public consultation and participation are often seen as arduous and slow down processes, as reflected in these cases. However, meaningful input from the general public, including significant interest groups such as the vast urban poor, must provide solutions that are more sustainable than those made with little or no public input. Avoiding protest requires involving the people, however divided they may be. The water models, as discussed, did not account for any input from the 115 general public. They were preconceived and implemented without any significant structural changes. These scenarios essentially guarantee one of two future directions: (1) the public protests until a new model is implemented, or (2 ) th e public is ignored and controlled to a degree th at does not fully handicap the current w ater models. Of course, improvements are possible under the current models, however, with no clear framework for accountability ensures that parties will continue to act for their own self interests. The W ater Privatization Myth Private sector participation in the w ater sector cannot resolve all w ater supply issues for urban cities in the Global South. The efficiency argument is misplaced as water provision is a complex service delivering an essential resource within the context of various urban services in rapidly changing urban settings. Furthermore, ‘privatization’ as a definition may be misleading given the extent to which states involve themselves in advocating for, investing in and ensuringthe success of companies. For example, French water companies have been noted as depending on the French government as a major shareholder, implying a blurring of lines between privatized and public water provision (See, for example, Hall and Lobina, 2 0 0 9 ). This is particularly relevant given the immense presence of Suez S.A. (in five of th e six privatization cases). International Influence and the Lack o f Autonomy The circumstances in at least five of the six study cases have involved international pressures to decentralize the urban w ater sector (implying a decrease in transfers to support services) and provide options for financing operations and necessary water network expansions. Being policy handcuffed by the World Bank 116 and IMF ensured that the model would be self-financed (or continuously push in th at direction) which assured that network expansion would underperform initial promises, particularly given the extent of th e urban poor in these cities. A history of loans and related conditions have ensured that w ater privatization would be carried out based on a homogenous model which limits state autonom y to positively influence policy or the services without fully deregulating prices. Even then, there is little evidence that water access would look much different than today’s results. Allowing companies to increase prices without any regulation would simply allow existing consumers to be charged excessively. This may result in reduced consumption in the case cities, implying elastic consumption, although realistically those that cannot afford increased prices will likely seek alternative modes of w ater access. As indicated earlier though, little can be said of th e elasticity of dem and on average based on the partial quantitative analysis. The World Bank and IMF are part of an international umbrella which is presumably accountable to nation states albeit inequitably. The collective nation states under the UN umbrella would need to agree on changes to the World Bank’s role (and WTO and IMF). Is this possible? Who would police them? International governance requires the collective nations to ensure accountability. As structured today, the ICSID, MIGA, and the direct investment which the World Bank has engaged in in these cases, all am ount to various conflicts of interest without any accountable recourse. There is no mechanism for state protection against the companies. It appears that the nations involved in each of the six cases are not in a position to negotiate or dictate any terms with the World Bank. If this was the case, appointing an independent mutually agreed arbitrator with international transparency would be 117 a potential starting point. A large step further would relate to re-evaluating the concept of a w ater monopoly for one city. Along with regional development banks and various bilateral actors, the World Bank and IMF have pushed for international private sector firms to engage in w ater privatization activities in the six cases. Regulatory reforms have been directed towards decentralization and to minimize oversight as to not inhibit the private sector’s ability to function profitably. Direct consequences of related actions have involved capital flight, underinvestment, and the general lack of accountability already mentioned. Companies have not generally been held accountable as contracts were renegotiated in three of the cases. In turn, governments have not been accountable to their populations by agreeing to the overarching concession models. The IFI’s are not accountable agents in any substantive way. This is reflected in the ICSID set up, and more so in the contradiction between a said commitment to alleviate poverty while engaging in facilitation of agreem ents th a t do not appear to be beneficial to the affected populations. Only two methods of regaining autonomy are apparent for affected states: (1) Reduce debts to effectively term inate structural adjustm ent agreements, or (2) Examine and potentially challenge the legality of respective loans. W ater for the Poor The prevalence of the poor in th e six study cases suggests th a t a model such as water privatization based on w ater monopolies is an overly simplistic approach to a very complex set of issues relating to urban w ater access. The goal of extending water to the general public let alone poor households is a monumental task in each instance. Innovative solutions are needed that allow for the poor to access 118 alternative sources of w ater and enable subsidization that is not driven by a w ater monopoly provider. The best solutions for provision of w ater for the poor will need to circumvent the standard policy and be driven by th e local community and specifically involved interest groups. Urban Development Clearly, these cases dem onstrate the complex economic, political, social and technical challenges of providing potable w ater to an increasingly sprawling urban landscape. Urban planning and developm ent must theoretically be integrated with the water model to ensure that efficiencies are gained in th e trajectory of developing the urbanized region. This also helps with social accountability. The six cases all reflect undeveloped areas of the city whether central or peripheral; and often people settle in precarious settings as noted of Guayaquil’s hillside or under bridges in Jakarta. The continued forces of urbanization require that water networks are developed as part of larger urban plans. Generally speaking, the removal of cross-subsidies acts to com partm entalize services. If privatization can work, it would require very explicit contractual term s and operational processes necessary for the collaboration between the com pany and various public departments to ensure, for example, that urban planning and development functions are positively affected. The majority of evidenced historical examples of successful economic and social (i.e. community or urban) developm ent involve significant government leadership. The direction of the examined w ater models though is represented by government control without the necessary leadership. The water privatizations in all six cases have involved national government oversight with varying levels of regional and local level im plem entation. 119 These levels of government involve varying elected and appointed offices with competing objectives which further complicate w ater privatization’s role in urban planning. Democratic Rule No one would openly dispute that democracy is a necessary elem ent of an open economy and a healthy private sector. Consequently, more power needs to be observed in the voices of the masses. This is not apparent in any of th e six w ater privatization cases to any substantive degree. Public protests contributed to the termination of two of the concession agreements. As noted above, a public participation component is needed to sustain an effective model, w hether or not w ater governance is privatized. Interestingly, a lack of transparency in urban w ater reforms and privatization complicate national and urban accountability as reflected in democratic processes. 6.3 Limitations of the Study This study has encountered various limitations stemming from information not being readily available within the public domain or through requests. Although the existing academic literature researching the individually covered cases is growing, it is still difficult to access critical documents such as the privatization contracts. Moreover, temporal datasets could not be directly accessed for water connections, coverage, consumption, and pricing data before and after water privatization for each of the cases. Consequently, information was accessed through existing academ ic literature, regulatory reports and the companies to conduct the partial quantitative analysis. However, many contradictions exist between sources of information, requiring extended scrutiny. For example, official data in several cases has been 120 unaudited data which cannot be trusted. Furthermore, a lack of information on w ater supply costs prevents extending analysis and commenting further on the elasticity of demand, for example. An additional issue relates to the information available on urban populations, particularly slums and growing peri-urban populations. Som e of the cases, such as La Paz-EI Alto and Buenos Aires, have noted issues of the formal concession areas not comprising the full urban metropolitan area. These cases, as well as Guayaquil, are noted as having a peri-urban sprawl which is difficult to understand in th e context of understanding, defining and calculating water coverage. A lack of contractual clarity and audited data also made it difficult to identify w here water connections were being installed in existing rather than new concession areas. 6.4 Further Research Further research on w ater privatization can take a few related directions. The circumstances giving rise to and controlling the w ater privatization model implemented in at least five of the six studied cases include dominant international influence and controls. It is not only important to understand these controls, but also the pathways associated with transitioning the current models to either: (1) m ake privatization work or (2) re-municipalize the w ater model. This is relevant in understanding factors associated with state autonomy over water. Another related area of study includes a focus on the financial constraints th at brought about the implemented w ater privatization models. A better understanding of these forces is critical, but also studies focused on pathways to fiscal austerity while maintaining ambitious urban water provision goals. Understanding international accountability as housed in agreements, circum stances 121 and expectations between nation states, the World Bank, and other international actors specifically relating to urban w ater privatization is essential in knowing whether there are alternative pathways to resolve failures stemming from w ater privatization. Many or perhaps all of the studied cases involve governments th a t are affected by their historically implemented structures and events. Studying m ethods of reducing corruption as a lead up step to implementing water resource reforms affecting urban cities would be a valuable area of study. Yet another potential area of study involves effective water governance as relating to urban planning and development in the context of water privatization. W ater privatization, as implemented, is not effectively integrated with urban planning and development functions. 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