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.