Privatizing essential services not always the right answer
Privatizing essential services not always the right answer
Henry Heyneardhi, Fellow Researcher, The Business Watch Indonesia,
Jakarta, heyneardhi@watchbusiness.org
Last September 2002, the World Bank launched a draft of the
World Development Report 2004, focusing on "making services work
for poor people". The Bank wrote that the theme is based on the
recognition that success in reaching the Millennium Development
Goals will depend not just on faster economic growth and the flow
of resources, but on the ability to translate those resources
into basic services.
It also said that too often, the delivery of services falls
far short of what could be achieved, especially for the poor.
Today, according to the United Nations in its fact sheets for
the World Summit on Sustainable Development (WSSD), two billion
people, or one third of the total world population, lack access
to modern energy services. Some 11 million children under five
years of age die each year in developing countries. Seventy
percent of these deaths are caused either by diarrheal diseases,
respiratory infections, malaria, measles or malnutrition.
In relation to water and sanitation, the World Commission on
Water for the 21st Century noted that 1.2 billion people, or a
fifth of the world's population, lack an adequate supply of safe
drinking water and over a third lacks adequate sanitation. These
statistics are projected to reach 2.3 billion by 2025.
How can this critical situation be resolved?
So far, basic services in most countries is generally managed
and delivered by public authorities, yet its management is
considered inefficient and ineffective. Service delivery,
especially in developing countries, emphasizes the supply side,
but unfortunately reaches only a limited group of beneficiaries.
Government subsidies are not able to support public agencies to
operate and maintain their assets independently for service
improvement and sustainability.
International financial institutions (IFIs) like the World
Bank and the IMF are thus promoting a new approach by
strengthening the role of the private sector in service
provision. The World Bank, for example, adopted a Private Sector
Development Strategy in February 2002 that legitimizes and
enhances private sector participation in infrastructure and
essential services.
The Bank is convinced that private sector participation in
provision is the best choice for delivery of infrastructure and
social service.
In addition, in March 2002 the World Bank launched its Water
Resources Sector Strategy, which stated that water management
should be commercially oriented, focused on beneficiaries, or
demand-based, indicating that water distribution depends on needs
(household, irrigation, industry, etc). Every water user is a
customer, and the water tariff should cover operational and
maintenance costs in order to eliminate subsidies (full cost
recovery).
Further, the Bank requires private sector participation in the
financing and development of water supply infrastructures. The
indebted governments are obliged to cooperate with the private
sector in the form of a Public-Private Partnership (PPP).
In Indonesia, according to the World Bank's document
Indonesia: Private sector development strategy issued in January
2001, the Bank will promote conditions for private participation
in infrastructure, especially for the next three years.
The emphasis will be on the creation of competitive market
structures and of independent, regulatory authorities, and on
helping with the privatization of state-run infrastructure
enterprises.
In regards urban water supply, the Bank will, through its
projects, continue to focus on improving the regulatory framework
for private involvement and on promoting investment in water
supply by private operators. Meanwhile, in the health and
education sector, World Bank Group will focus on creating an
adequate regulatory environment for private provision.
To ensure that the developing countries implement its policies
in practice, the World Bank, which usually states the same loan
conditions as those of the IMF -- known as "cross conditionality"
-- often includes privatization of public services in its list of
conditions. This kind of scenario is likely to happen in
Indonesia when the Bank pushes privatization of water management
through its Water Resources Sector Adjustment Loan (WATSAL).
Essential service provision is one of the government's duties
toward its citizens. Until the last decade, international
financial institutions have centered on helping governments to
accomplish this obligation, particularly in developing countries.
Only recently, these institutions are changing their policies,
and endorsing the privatization of service provision. This is a
fundamental engineering project with serious implications.
Privatization implies transfer of control from public to
private corporations, allowing an unbalanced bargaining power
between the corporation and the customers. Private management,
therefore, can arbitrarily raise the service tariff, shifting the
burden to customers to pay for business risks and taxes.
Second, unlike inadequate public services, impacts of a poorly
implemented privatization may be irreversible, especially to the
poor. Most privatization contracts are long-term, usually lasting
for 20 to 30 years. It is almost impossible to cancel these
contracts, even when the private operator shows bad performance.
Third, privatization also undermines accountability. Under
public entities, citizens have a democratic mechanism, for
example through their representatives in parliament, to push the
government in providing good and affordable services. Under
private management, however, there is no such mechanism.
Moreover, private firms may hide behind the principle of contract
secrecy to hinder public monitoring, and thereby prevent the
realization of transparency and accountability.
This does not mean that privatization is inherently bad (or
good). Like any other option, it has its strengths and
weaknesses. Privatization should thus be treated as one option
among many other alternatives in providing essential services,
especially to the poor. Further, IFIs should not push, nor
impose, the privatization of essential services through
conditions applied to loans, grants or debt relief.
Instead, the decisions as to whether we need to privatize our
essential service provision or to reform public service should be
democratically debated among our citizens. This also goes along
with the discourse disseminated by the World Bank on the
importance of popular participation in policy making, as stated
in the draft of the World Development Report 2004: "Strengthening
citizens' voice and participation in policy making can make
public spending more pro-poor and hold policymakers more
accountable for service outputs that affect poor people."
The real issue regarding essential service provision is not
public versus private, but whether citizens, especially poor and
marginalized people, receive affordable, quality service.
Criticism and resistance against privatization of essential
services are based on numerous empirical evidence, which show
that private sector participation in service provision tend to
raise the service tariff, thus lowering people's access to them.
In many cases, privatization has also failed to provide good,
quality service and is less effective than public service.
Therefore, privatization proponents must respond to their
opponents by providing arguments and evidence that privatization
is not only more effective than public service, but could also
serve social goals like equity and protecting the rights of
people.
Finally, through a rational, democratic and participatory
process, let the people determine their own choices and
decisions.