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Primer: The New Economy of Water

Tackle this complex issue in a primer on the dynamics of water privatization.

"Food and water are basic rights. But we pay for food. Why should we not pay for water?"
Ismail Serageldin at the Second World Water Forum, The Hague

"Water should not be privatized, commodified, traded or exported in bulk for commercial purposes."
Maude Barlow, International Forum on Globalization

 

New voices are beginning to be heard in the debate over water, and new ideas — good and bad — are being considered. One of the most powerful and controversial of these new ideas is that water should be considered an "economic good" — subject to the rules and power of markets, multinational corporations, and international trading regimes.

In the last decade, this idea has been put into practice in dozens of ways, in hundreds of places, affecting millions of people. But despite the growth in private water systems, little research has been done on the benefits and pitfalls of privatization.

Privatization can bring needed money and expertise to antiquated or inadequate water systems. On the other hand, poorly planned privatization has many pitfalls. Ensuring fair access to water — especially for the poor — can be a challenge. Private water providers have little incentive to protect the environment, to work towards greater efficiency in water use or to consider the impact of their decisions on communities "downstream," those who share the same water source.

There are ways to protect against these problems, but the checks required — public involvement, strong government oversight, and transparent contracts — are often hardest to come by in the places most likely to be drawn to privatization as a solution.

Water as a "public good" and the global water crisis

Since water is essential for life and can only be protected by communal action, the provision of water to individuals, families, and communities has long been considered a public good — and thus a core responsibility of government.

Clean, safe, and inexpensive water has allowed farms, business, and families to thrive and in many countries, including the United States, people expect safe drinking water to be distributed to everyone at low or subsidized prices.

But despite intensive efforts, more than 1.2 billion around the world still lack access to clean drinking water. Nearly 2.5 billion do not have adequate sanitation services.1 And over 5 million people, mainly children in Africa and Asia, die every year from preventable, water-related disease.

The World Bank estimates that the developing world will need over $60 billion per year for water infrastructure, although some independent analysts believe that the intelligent use of resources could slash that figure. In the United States, the cost of upgrading and maintaining the existing drinking water system could be as high as $250 billion over the next 30 years, according to a study released by the American Water Works Association in 2001. Europe, like the United States, faces concerns over old water infrastructure and growing pollution that require, in some cases, extensive investment.

Why Privatize?

There are several reasons why cities, towns, and even nations consider water privatization.

In the developing world, privatization is often driven by financial and technical concerns. Proponents of privatization argue that the private sector can mobilize capital faster and cheaper than the public sector, and that private companies can offer the level of expertise required to manage safe and efficient water delivery systems for millions of people. Privatization opponents challenge this belief.

Because some nations in the developing world have millions of poor customers without service, privatization efforts are argued to be socially beneficial. The problem, in the view of opponents, is that nations in the developing world are often ill equipped to negotiate fair contracts and poor people sometimes bear the brunt of fee increases.

In Europe, where water privatization has a longer history, privatization efforts were driven by ideology at first, particularly by the belief that smaller government is better, but privatization is increasingly seen as commercially beneficial and pragmatic.

In the United States, financial concerns over aging infrastructure and inefficient utilities sometimes spur municipalities to consider privatization. The ideological stance of decision makers, backed by a cadre of free market think tanks, has also played a role.

The commercial interests of European water providers, who own most of the large private water companies, also must be taken into account as a driver of privatization.

Forms of Privatization

Private involvement in water supply has a long history. Indeed, in some places, private ownership and provision of water was the norm, until governments began to assume these responsibilities.

France, for example, has used mainly private water providers for over one hundred years and England has used a largely private system since the late 1980s. But despite some early adopters, major international efforts to privatize water systems and markets are still a relatively recent phenomenon, with major transfers taking place only over the past ten to fifteen years.

By the end of 2000, at least 93 countries had partially privatized water or wastewater services,2 including Argentina, Chile, China, Colombia, the Philippines, South Africa, Australia, the United Kingdom, and Central Europe, but less than ten percent of all water is currently managed by the private sector.

It's important to understand that there are many different possible forms of privatization. Privatization can be partial, leading to so-called public/private partnerships, or it can be complete, leading to the total elimination of government responsibility for water systems. Private companies can merely manage and operate the system, or they can own the infrastructure outright. Rarely in the United States are private companies allowed to buy the actual water itself, but in other nations the rights to the ownership of water are sometimes offered for sale.

At the largest scale, private water companies build, own, and operate water systems around the world with annual revenues of more than $300 billion, excluding revenues for sales of bottled water.3 At the smallest scale, private water vendors and sales of water at small kiosks and shops provide many more individuals and families with basic water supplies than they did 30 years ago — but often at high prices and, in the developing world, with suspect quality.

The Players

There are a handful of major international private water companies, but two French multinational corporations dominate the sector: Vivendi SA (soon to be called Veolia Environnement) and Suez Lyonnaise des Eaux (soon to be called Ondeo). These two companies own or have interests in water projects in more than 120 countries and each by their own claims provide water to around 100 million people.

Despite Vivendi's dominant position in water privatization, water activities are a small part of the larger company, Vivendi Universal, which was created in December 2000 when it merged with the Seagram Company to form a global media and telecommunications company. The total annual revenue from the interlocking subsidiaries of Vivendi in 2000 exceeded $37 billion, of which more than 25 percent came from the water business.4

Suez is active in more than 100 countries and claims to provide 110 million people with water and wastewater services. Of the 30 biggest cities to award contracts between 1995 and 2000, 20 chose Suez, including Manila, Jakarta, Casablanca, Santiago de Chile, and Atlanta. Suez also purchases stakes or full interests in other water companies: with its $1 billion purchase of United Water Resources, it became the second largest manager of municipal systems in the United States, just behind American Water Works. Suez also purchased Nalco and Calgon in the United States for $4.5 billion, making it the biggest provider of water treatment chemicals for both industry and cities. In 2000, Suez reported profits of 1.9 billion euros on sales of almost 35 billion euros: of this, 9.1 billion euros (or 27 percent) of revenues came from their water businesses. 5

Other companies also have major water interests, including Thames Water and United Utilities in Great Britain, Bechtel and Enron in the United States, and Aguas de Barcelona in Spain. To add to the complexity, however, many of these companies have interlocking directorates or partial interests in each other. For example, in spring 1999, Vivendi purchased U.S. Filter Corporation. United Utilities of the UK has joint ventures with Bechtel. United Water Resources in the United States is partly owned by Suez Lyonnaise des Eaux.

The Risks of Privatization: Can and Will They Be Managed?

The move toward privatization of water services raises many concerns, and in some places, such as Cochabamba, Bolivia, water privatization has caused violent opposition and deadly conflict.

And even in the United States, major efforts to privatize water systems, like Atlanta's attempt to turn over operations to United Water, have proved problematic. After complaints about slow service and poor water quality on the part of the city, and claims by United Water that the system was in worse shape than projected, both parties parted ways.

In large part, opposition arises because of doubts about whether purely private markets can address the many different social, environmental and political aspects of water. Some problems with privatization include:

  •  Higher prices for water that worsen economic inequities and prevent poor people from getting basic service;
  •  Improper protection of water quality and the provision of dirty water;
  •  Environmental destruction or harm to downstream water users;
  •  Wasted water and neglect of efficiency and conservation programs;
  •  A failure to protect public ownership of water and water rights;
  •  The transfer of assets out of local communities and to multinational corporations.

Privatization, as discussed above, also can bring significant benefits — from expert technical knowledge and improved access to capital to costs savings from more efficient management and operation. In the best cases, more efficient operation has allowed people without access to be hooked up to centralized water systems.

But the problem remains that those cities, states, and nations with the biggest water problems and the strongest incentives to privatize are often the least prepared to deal with the many potential problems of water privatization.

1 World Health Organization. 2000. "Global Water Supply and Sanitation Assessment: 2000 Report." World Health Organization and United Nations Children's Fund. (Available in full.)
2 Brubaker, E. 2001. "The Promise of Privatization." Energy Probe Research Foundation, Toronto, Ontario (April). (Available in full).
3 Gopinath, D. 2000. Blue Gold. Institutional Investor International Edition. February. Government.
4 Market Guide 2001.
5 Suez website, www.finance.suez-lyonnaise.com.

Adapted with permission by POV from "The New Economy: The Risks and Benefits of Globalization and Privatization of Fresh Water" by The Pacific Institute.





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