Equitable Access to Basic Utilities: Public vs Private Provision and Beyond

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This article is based on an article in Poverty In Focus Number 18, August 2009 by Degol Hailu and Raquel Tsukada, from the International Policy Centre for Inclusive Growth (IPC-IG). It provides an overview of the broad challenges involved in making access to basic services equitable and universal.

More than 1 billion people globally are living in extreme water deprivation. Over 40 per cent of the world’s population also lack access to safe and clean sanitation services. About 1.6 billion people worldwide do not have access to electricity. Of these, 706 million are in South Asia and 554 million in Africa. While access to basic services should be a human right, it is also a public good with numerous positive externalities. The policy challenge that developing countries face is to increase the poor’s access to utilities while simultaneously reaping the benefits of the positive externalities.

Contents

The Overview

The Millennium Development Goal (MDG) for water is to halve the proportion of people without access to safe drinking water by 2015. The urgency of meeting this target is reflected in the UNDP’s Human Development Report 2006, which warns that more than 1 billion people globally are living in extreme water deprivation. Over 40 per cent of the world’s population also lack access to safe and clean sanitation services. The report also notes that “not having access to water and sanitation is a polite euphemism for a form of deprivation that threatens life, destroys opportunity and undermines human dignity” (UNDP, 2006, p. 5).


Similarly, about 1.6 billion people worldwide do not have access to electricity. Of these, 706 million are in South Asia and 554 million in Africa, despite large mining and industrial conglomerates enjoying cheap access to an enormous supply of electricity (see McDonald, 2009). The figures indicate how inequitable is access to basic utilities, both across and within countries.


Communities with the least access to utility infrastructure often live in slum dwellings and remote areas. Rapid urbanisation and informal settlements pose particular problems for water provision. The number of residential water connections has fallen in most unplanned urban settlements in the past decade. There are many obstacles that large-scale private providers cannot resolve without imposing exorbitant tariffs to cover costs. Those obstacles are two-fold in origin. First, technical difficulties such as the topographical location of informal settlements pose physical challenges. Second, lack of tenure for land and housing creates uncertainties. In these cases, market-oriented policies are not appropriate means of providing access to water in the slums of the developing world. They note that “there are serious doubts about the potential gains of both privatised network utilities (where planning and development challenges persist) and small-scale service providers (because of pricing and quality issues). Ultimately, these concerns can be resolved by investing in the expansion of the public water and sanitation network.”


While access to basic services should be a human right, it is also a public good with numerous positive externalities. The impact on the other MDGs, for instance, is clear. Making water, sanitation and electricity available empowers women by freeing them from the burden and dangers of carrying water, often over long distances, and allows them more time to attend school. The provision of utilities in rural Ghana reduces the burden of unpaid work. In addition, for women already engaged in remunerated activities, work time seems to have increased, which in turn has a gender-empowering impact. Additional public policies are needed to achieve that goal [reducing work burden], especially policies related to educational training and childcare facilities.


The policy challenge that developing countries face is to increase the poor’s access to utilities while simultaneously reaping the benefits of the positive externalities. For the past two decades, policy has focused mainly on private investment and foreign capital. Just as the “market failure” argument gave rise to public ownership of certain enterprises, so the “government failure” reasoning paved the way for privatisation. The latter was supported by developments in economics, which emphasised public choice, property rights and principal agent theories as justifications for private ownership.


A fiscal case was also made: gains from the sale of enterprises, savings from subsidising unprofitable companies and new tax revenues from the privatised firms would improve government budgets. Additionally, privatisation was seen as a permanent shift to a market economy—what the World Bank called “lock-in” in the 1990s. Unlike, say, changes in interest rates or exchange rates, which can be reversed overnight, privatisation was seen as a commitment to reform, one that sent the right signals to investors. The above arguments are well captured in a World Bank (2004) research report, which stated that: “In a globalised economy, poorly performing state-owned infrastructure providers were increasingly seen as constraining economic growth and undermining international competitiveness. Developing countries simply could not continue to absorb the fiscal burden of these enterprises. Around the world, it became evident to policymakers that the problems of public enterprises could be solved only by implementing radical structural changes and realigning the roles of the government and the private sector” (p. 35).


Under utility privatisation and commercialisation schemes, governments usually retain ownership of assets while inviting private contractors to run the operations and provide management services. While there are plenty of cases in which publicly managed utilities are marked by poor maintenance, wastage and uncollected bills, social welfare goals such as increasing the poor’s access to basic services can be organised successfully by public initiatives. As Vickers and Yarrow (1991, pp. 113–114) note: “public ownership may have the advantage if externalities are larger and the pursuit of personal agendas is more constrained, for example by a well-functioning political system.” For instance, large private enterprises can be highly inefficient, leading to a concentration of market structures. This is mainly related to a lack of competing firms and scarce capital. Such outcomes are confirmed by private investors’ interest in sectors with less competition, such as utilities.


The debate on private versus public provision of utilities is complex, but the guiding principle for the kind of provision preferred must be the initial level of access to water, sanitation and electricity. Where access is already high in developed and middle-income countries, privatisation may yield productive and dynamic efficiencies. Private providers have incentives to improve overall performance through new techniques and novel management processes. Where access to utilities is low and the focus is on increasing coverage of the poor in low-income countries and neighbourhoods, public provision makes sense. This is because of problems associated with affordability, how much cost recovery can be pushed, and regulatory capacity. The persistent challenge, however, is financing investment outlays. The options are reducing system losses such as water leakages; improved billing; domestic resource mobilisation; and external financing (both donor and private bond/equity financing).


Historical experiences are particularly enlightening. Privatisation had been relatively successful in the United Kingdom and the United States, because these countries embarked on private utility provision after achieving 100 per cent access to water and electricity by the 1980s. As David Hall and Emanuele Lobina observe, “the sewerage systems in Europe, the United States and Japan were not developed through full cost recovery from users; they were paid for by distributing the costs among the public, using taxation and cross-subsidy.” The overall evidence is that privatisation of utilities is not a solution where initial access is low and the objective is the coverage of the poor. This point is made clear from an experience in Bolivia: the private concessionaire and the government agreed on coverage targets to provide universal access in the city of La Paz and 82 per cent coverage in El Alto by 2001. The poor’s access to water connections increased, but the private company could not meet the targets. Inevitably, the limits of cost recovery and profitability had been reached. The tariff increases needed to connect the additional poor consumers were so high that they sparked public outrage.


Similarly, Argentina entered into a contract with the government to increase water metering up to 100 per cent. Fees were imposed for the installation of the meters and tariffs were increased. The result was intense public protest. In Mali and Senegal the poor have not benefited from privatisation, simply because they were not connected to the grid in the first place. The tariff hikes after privatisation affected them indirectly as a result of economy-wide effects. The concessions in Argentina, Bolivia, Mali and Senegal have all been terminated.


Contract cancellations and renationalisation are often the result of a policy that transfers risk to governments and end users. The focus in Sub-Saharan Africa has been to transfer investment, demand and currency risks in order to attract private investors. In industrialised economies, the transfer of risk to the private sector is considered essential if efficiency gains from privatisation of the delivery of basic services are to reach end users. In SSA [Sub-Saharan Africa], however, the emphasis is on reducing the risks faced by the private sector in order to encourage private investment. The upshot is always exorbitant tariffs and neglected infrastructure. This contrasts with the standard practice in developed countries, where risk is usually transferred to private providers at the time of privatisation.


One reason why private participation in the water sector has been successful in Brazil seems to be the transfer of investment risk. Contracts with the various government entities at the state and municipal levels clearly outlined the investment obligations of the private operators, particularly in low-income areas. The private operators had invested about U$500 million by 2004. The positive outcomes in Brazil are related to contract design... Most contracts stressed investment obligations, something relatively easy to monitor.


The limitations of public and private provision to increase the poor’s access to utilities have enhanced the role of community and small-scale water providers. The absence of economies of scale, however, means that water prices are typically high. Maintenance facilities are inadequate and there is no proper accountability for service interruption. The quality of small-scale providers’ supply is not always assured. Moreover, it is not easy to regulate community and small-scale providers, and neither is it possible to engage in cross-subsidy.


In India, community based water provision schemes are often poorly designed and implemented. Because of a lack of social cohesion, vulnerable groups are often excluded from decision-making processes.

Lessons Learned

What are the lessons?

The debate should move away from a narrow focus on public versus private to analysis of the constraints on public intervention, possible improvements, and the potential for alternative provision under a poverty reduction framework. Three issues seem to matter.

  1. First, where initial utility coverage is low, subsidy and cross-subsidy schemes are the best alternative. Another externality comes from connecting the poor to infrastructure networks though cross-subsidies. All consumers benefit if the cross-subsidy is designed in such a way that the poor cover the variable cost and make some contribution to fixed costs. Income-based targeting schemes, for instance, with a mix of some consumption-, age and geography-based targeting of beneficiaries, can be sustainable.
  2. Second, decentralised and locally based utility provision has been promising in the electricity sector. Geographically isolated communities, such as those in and around the Amazon, have benefited from locally managed electricity generating facilities. The difficulty has been expanding the traditional grid system in the densely forested areas. Following the ambitious Light for Everyone programme in Brazil, local renewable energy-generating services using photovoltaic, small-scale hydropower and biomass sources have become viable solutions.
  3. Third, where initial access to utilities is high and privatisation is considered, better contract design is needed to take account of political and social considerations. Risk must be transferred to private providers, not to governments and consumers. A human rights framework must guide the design and implementation of private provision based on the principles of availability, accessibility, acceptability and its quality.

Finally, utility provision can only succeed if effective regulatory and intuitional capacities are put in place to enforce contracts and ensure the efficiency of cross-subsidy mechanisms. Regulation is most effective when laws and institutions are stronger and are free of political influence. Regulation is also country specific, while technical skills, legal frameworks and dissemination of information to the wider public are essential.

References

Estache, A., J. L. Guasch and L. Trujillo (2003). “Price Caps, Efficiency Payoffs, and Infrastructure Contract Renegotiation in Latin America”, Policy Research Working Paper 3129. World Bank (Washington, D.C.).


McDonald, D. (ed.) (2009). Electric Capitalism: Recolonising Africa on the Power Grid. London, Earthscan and Human Sciences Research Council.


UNDP (2006). Beyond Scarcity: Power, Poverty and the Global Water Crisis. Human Development Report. New York, Palgrave Macmillan.


Vickers, J. and G. Yarrow (1991). “Economic Perspectives on Privatization”, Journal of Economic Perspectives 5 (2), pp. 111–132.


World Bank (2004). Reforming Infrastructure: Privatization, Regulation, and Competition, World Bank (Washington, D.C.) and Oxford University Press.

See also

Access to Water in the Slums of the Developing World

External Resources

Attachments

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