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Privatization of Water

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Privatization of Water Print
water fountain with vending machine

There are some who argue that one way to increase the efficiency of water use is to put it under private (for-profit) control, so that markets determine where it goes, in what amounts, and what it will cost.  

Right now, the water industry is a hybrid mixture of public and private control.  

  • If you look across the spectrum of activity required to extract, treat, and deliver freshwater, you will find that usually some parts of the process are owned and/or managed by the public sector, some parts are contracted out to private companies and vendors, and some parts are an indistinguishable mix of subsidies, public-private investments, and market forces.
  • In some places the public sector (government) may have a monopoly because it controls treatment systems and pipes.
  • In other places, private industry may have a monopoly, as in areas where water vendors sell to households that are not reached by public utilities.  
  • Usually, it is a mix.  Incentives to invest in water are great for both the public and private sectors – for the public in terms of the large yield in human development from small improvements (see the Water, Health, and Nutrition section for more information), for the private in terms of money that can be made from distributing a valuable universally-used resource.

In this section...  


History of Privatization

  • Widespread privatization efforts grew in the late 20th Century when international financial institutions such as the World Bank and International Monetary Fund required countries seeking assistance to deregulate, abolish subsidies, and even sell much of their water systems and infrastructure to private investors.  
  • The rationale was that privatization would result in more efficiency and less corruption.  Private investors would have the wherewithal and the incentive to build, maintain, and upgrade expensive water facilities in order to turn a profit, whereas governments in many of these countries had been doing a poor job of stewarding their publicly-financed (and often starved) water industries.  
  • These privatization programs continue today in many heavily indebted countries which continue to seek loans and aid from international institutions.
  • It is estimated that around 15% of the almost 4 billion people in the world who do have access to clean water and sanitation get it from a private industry.

The Debate Over Privatization of Water

On one hand, many would say privatization has produced the intended benefits.

  • Many water systems in poor countries would not exist but for the private funding mandated by international lending institutions.  Cash-strapped governments simply had no choice but to outsource expensive up-front costs of providing water to their citizens.  Governments overwhelmed by development needs are often unable to efficiently manage the complexity of water extraction, treatment, delivery, and finance.
  • When people must purchase their water through the private market, cost serves an important conservation function.  People are less likely to waste a resource for which they are paying a market rate, as opposed to a rate heavily subsidized by the government.

On the other hand, privatization is often seen as having failed much of the world’s poor.

  • In their efforts to recoup often significant investments, private water companies usually increase prices on the water they provide.  In some cases, these price increases have been so hefty as to knock poor consumers out of the market entirely, leaving them, again, with no access to water because they cannot afford it even when it is physically accessible.
  • The UN Development Program notes that privatization has hurt many in the developing world, where poor people pay some of the highest prices for water.  For example, the poorest 20% of households in El Salvador, Jamaica, and Nicaragua spend up to 10% of their income on water.    
  • Privatization schemes often appear undemocratic in that they exclude the citizenry from the decision-making processes in what was formerly a public utility.  
  • Privatization often results in local job losses as multinational corporations and conglomerates both reduce work forces through improved efficiencies and transfer jobs to workers in other countries.
  • When profit is a motive in water provision, less lucrative services often suffer.  Efficiency dictates that resources go where they produce the highest return – this means poor rural areas and other hard-to-serve customer bases get lower priority.
  • In some cases, private companies have retreated from particularly poor areas where returns on investment have been low or from areas where local resistance and protests against privatization have made for bad public relations – see below.  In these cases, the cost of picking up the pieces is often higher for local governments than it might have been had the private companies not been there in the first place.
  • Cases in which privatization has worked well usually include special voucher programs whereby purchases for those unable to afford water are subsidized by the government or aid organizations.

Many argue that water is a human right and as such, it should not be treated like a commodity.  However, a number of sophisticated investors believe that water could become the “new oil,” and this view is spurring considerable investment in the industry.  

Going forward, it is unlikely that entire water systems will reflect a pure form of either private or public ownership.  Governments at all levels will likely still maintain a role in water regulation and management, no matter how the industry itself is funded.  The challenge is integrating all of the stakeholders so that water quality and access are maximized.

Case Study:  Privatization of Water in Bolivia

view of Cochabamba

Bolivia is South America’s poorest country and the site of one of the world’s most notorious and controversial water privatization programs.  

In the 1990s, under World Bank guidance, the water systems of some of Bolivia’s poorest regions were put up for sale to private investors.  In the area of Cochabamba, the winner of an uncontested bidding process was a subsidiary of the US company Bechtel.  The immediate effect of Bechtel’s water investment and management was, as promised, expanded access to water by many previously unserved communities.  However, when the company took over local wells and informal pumps as well as the public system infrastructure, many consumers were priced out of the market, unable to pay the increased water rates, which in some cases had doubled.

In 2000, riots broke out in Cochabamba as protestors filled the streets.  Violence shook the confidence of the local government and international investors.  Bechtel was forced out, resulting not only in chaos in water delivery in the area, but dealing a serious blow to foreign investment in the country.   

Undeterred, the French water giant Suez Company picked up a lucrative concession to provide water to the El Alto area of the Bolivian capital La Paz.  In 2005, however, residents of El Alto also took to the streets to protest high water rates, forcing the government to cancel the Suez contract.  In the wake of the ouster, tens of thousands of households were left with no water while the local government attempted to regroup on water delivery.

The Nation magazine featured the El Alto Water Revolt as a quintessential “consumer rebellion” – against the principle of water privatization, against the results of water privatization (high prices), and against the anti-democratic nature of water privatization.  

Bolivia’s example illustrates the complex problems inherent in applying private market solutions to what are essentially public sector problems.  The most successful solutions as water stress spreads globally will probably be those to which the public and private sectors both contribute.

See:

The Nation's "The Politics of Water in Bolivia"

The New Yorker's "Letter from Bolivia:  Leasing the Rain"

Frontline World's "Bolivia - Leasing the Rain"

 

Next:  Water and the Environment 


 
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