Privatisation and the Failed Promise of Free Market Theory in Water Services Provision: Towards Developing an Alternative Theoretical Framework
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1 Paper for the April 2-3, 2003 Mexico City Conference: Privatisation and the failed promise of free market theory in water services provision: towards developing an alternative theoretical framework Eric Gutierrez April 2-3, 2003 Abstract: Privatisation – or the practical method of taking what is ‘public’ and ‘socialised’ and making it ‘private’ – is the main instrument of neoliberal theory for the free market to prevail. While the instrument itself has been resisted, little has been done to contest the applicability of the underlying theory on water supply provision particularly in developing countries. This has resulted in the overselling of private sector involvement and the exaggeration of its benefits by the global donor community, leading to the blanket promotion and enforcement of private sector participation as the main element of water sector reforms in poor countries. This paper is an attempt to demonstrate not only the limits of free market theory as it applies to water supply provision, but also the inapplicability in poor countries of managing of water as an economic good using market-like and market-friendly instruments, where prices function as the chief mechanism that guide decisions on allocation, distribution and consumption. Cost recovery, subsidies and pricing mechanisms, as presently conceived, are generally insensitive to the complexities of poverty. Water markets typically don’t exist or else are highly imperfect in developing countries. Furthermore, certain structural conditions – laid down by government action – are needed to make privatisation work. As such, a new theoretical approach is necessary – one wherein economic value and human rights can be reconciled, which measures costs in more poverty-sensitive ways, and which can be ‘accountable’ to the contexts on which it is applied. This new approach finds greater resonance in sociological theory and institutional economics. It moves away from methodological individualism and treats social institutions, rather than individuals, as the basic unit of analysis. Instead of assuming an ‘invisible hand’, it looks at how co-ordination emerges from organic solidarity. It also looks at the social embeddedness of economic transactions. Finally, it looks at the dynamics of collective action – how collective acts establish relations of rights, duties, no rights and no duties. Eric Gutierrez is currently Policy Officer of WaterAid (www.wateraid.org.uk), an international nongovernment organisation which is the United Kingdom’s only major charity dedicated exclusively to the provision of safe domestic water, sanitation and hygiene promotion to the world's poorest people. This paper is developed from Mr Gutierrez’s masteral dissertation on social and political theory at Birkbeck College, University of London. Mr Gutierrez used to work as a researcher and investigative journalist for nongovernment organisations in the Philippines. Draft only, not for citation please. Contact: [email protected] 2 1. Introduction he privatisation of water is the subject of what is arguably the most contentious debate in current development discourse. Political battles on this issue are being fought from T the halls of international conferences to the streets of cities where governments are increasingly reliant on private sector participation. At the core of these battles is a spectrum of positions, characterised by two fundamentally-opposed approaches1. On one hand is the idea of managing water as an economic good in an environment using market-like and market-friendly instruments, where prices function as the main mechanism that guide decisions on allocation, distribution and consumption. On the other is the idea of managing water as a common good, the property of all, to which access ought to be considered a human right that is respected, protected, promoted, and enforced by states and governments. In between these two are other approaches that strive to achieve a balance between the proposition of water as an economic good and of water as a human right. There are many reasons why water privatisation has become highly contentious. Firstly, ‘privatisation’ is an intensely political phenomenon that creates new roles and new rules between state, market and civil society. There is a tendency to depoliticise PSP as simply a normal commercial transaction between a user and service provider, similar to the relationship between a plumber and a household owner. This is because ‘water privatisation’ is often referred to only in its technical sense of ‘full divestiture’ (or the transfer of ownership of assets from public to private), and is differentiated from the much more limited ‘private sector participation’ or PSP, ie forms of contracting like service contracts, leases, or concessions (See for example Blokland, et. al. 1999: 14). However, the reality is that “in shifting responsibilities from government to market, privatisation potentially alters the institutional framework through which citizens would normally articulate, mediate and promote their needs” (Feigenbaum and Henig, 1994: 185-187). Hence, it becomes intensely political. Secondly, privatisation is contentious because it leads to the creation of private property rights as a solution to resource management problems. Common pool resources like rivers, springs or groundwater have long been subject to overexploitation and misuse by the rational individual, leading to the ‘tragedy of the commons’. The conventional solution is to impose centralised government or state regulation, or to privatise the ownership and provision of the resource (Hardin, 1968). Where privatisation is the option taken, a license to use water is created, which is a form of property ownership, or a usufruct in legal terminology. A most developed example of such system is the arid southwestern United States, where “whiskey is for drinking and water is for fighting”. Here, not only is a legal system well developed, there also is a sophisticated market for water licenses. The legal system is developed around the doctrine of ‘prior appropriation’ where priority in accessing water goes to those with a superior right, ie an older license. And a ‘Water Bank’ (www.waterbank.com) has been established, where for example, a farmer whose water license provide for an excess 5,000 gallons of water a day may ‘deposit’ this excess to the bank so that it can be ‘loaned’ to others who may need it, who are then charged with the corresponding ‘interest’ rates (Interview, Turner: 2001). As such, privatisation has been met by a great deal of opposition, like in recent major international conferences,2 and in street confrontations as in Cochabamba and South Africa. While the opposition is spirited and sustained, there is however a basic limitation – the free market theory underlying privatisation has not been sufficiently contested, nor have 1 The term “approach” as used in this paper is interpreted to mean as the theory as well as its application in practice. 2 This includes the March 2000 Second World Water Forum in The Hague, the December 2001 International Freshwater Conference in Bonn, and the August 2002 World Summit on Sustainable Development in Johannesburg. Draft only, not for citation please. Contact: [email protected] 3 alternative frames been considered and put forward. This is due partly to the pervasiveness of neoliberal thinking around the world, and partly to the retreat of socialism and welfare statism. The idea of politics and the political process providing the solutions to social problems has today been replaced by the pervasive desire to let markets or market-like and market-friendly processes resolve the problems. This paper argues that this needs to be challenged and the role of both politics and markets reviewed. Water services provision provides an interesting case. Thus, this paper has two objectives – first, contest the applicability of free market theory on water provision in developing countries; and second, present a frame for developing an alternative. This alternative, as shown in figure 1, can be described as a sociological, context-sensitive approach using the theoretical underpinnings of institutional economics. Figure 1: Different Frames in Water Resource Management and Water Service Management Water Resource Management Water Service Management Typical Problems Typical Problems • Natural water scarcity • Failure of public utilities • Overuse and overexploitation leading • Leaks, illegal connections, weak to scarcity billing in urban systems • Pollution • Lack of provision in rural areas A state-centred solution: A state-centred solution: • Centralised government or state • Reform the state through the creation regulation of autonomous public bodies that operate like a private business A ‘free-market’ solution: A ‘free-market’ solution: • Privatise ownership or provision of • Full divestiture, private sector the resource participation or various forms of contracting An environmentalist solution: The proposed alternative: • Integrated water resources • A sociological, context-sensitive management approach using the theoretical underpinnings of institutional economics. Most critics of the free market economic approach offer quite a limited critique – their attacks are focused mainly on profit-making and the excesses of multinationals. The intensity of these attacks at first seems inappropriate, given that the entry of multinationals into water Draft only, not for citation please. Contact: [email protected]