“The Effects of Water Privatization in Latin America”

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Master Thesis: International Financial Management

“The Effects of Water Privatization in

Latin America”

By

Christian de Wilde

Student number: 1236245

E-mail:

cj_de_wilde@hotmail.com

First supervisor: Dr. R. Joachimsson (University of Uppsala)

Second supervisor: Dr. C.L.M. Hermes (University of Groningen)

University of Groningen University of Uppsala

Faculty of International Business & Management Department of Business Studies, Ekonomikum Landleven 5 Kyrkogårdsgatan 10

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ABSTRACT

International financial institutions, like the World Bank and the IMF, have presented privatization as a new solution for failing public utilities. The aim of this research paper is to present the current conditions of the water and sanitation industry in five regions in Latin America and analyze if the presented solution has resulted in an improvement of the water and sanitation sector in Latin America. The results show that overall PSP resulted in greater efficiency in the municipalities, but that public opinion has been mainly negative. I believe that this is caused by the price increases and the inequitable access. The price increases and inequitable access make it more difficult for (poor) people to get access to water and a sanitation services which is of vital importance for survival and one of the most important aspects of the Millennium Development Goals set out by the international financial institutions. Given the way things are going those goals will not be met in 2015.

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INTRODUCTION

Access to safe drinking water and basic sanitation is of vital importance for public health, but access is still inadequate in many regions of the world. Over one billion people in the world do not have access to safe drinking water, and over two billion people do not have sufficient access to sanitation. In Latin America, 70 million people do not have sufficient access to water and 95 million people lack sanitation. As a result of this access to water and sanitation has become one of the most important topics in the development strategies of international bodies such as the United Nations, the World Bank and the IMF. That is why the Millennium Development Goals were set up. They aim to reduce thenumber of people without sustainable access to safe drinking water and basic sanitation by half by the year 2015. There are indications, however, that the goals are far from being met in most regions of the developing world.

There is a lot of debate about the best way to improve the efficiency of the state-owned utilities and increase the access to water and sanitation. One solution mentioned, privatization of water and sanitation services, is increasingly encouraged by powerful international financial institutions like the World Bank and the IMF. These institutions promote private sector participation as ‘best practice’ for developing countries.

However, the perception that privatization of water and sanitation services has mostly negative consequences for the population, especially the poor, is more and more becoming a widespread phenomenon in the popular press. This influences public opinion negatively. Public opinion is an important factor for politicians in determining the reform agenda. This is why it is important to research the real effects of privatization.

This paper aims to present the current conditions of the water and sanitation industry in five regions in Latin America and analyze if the presented solution has resulted in an improvement of the water and sanitation sector in Latin America in terms of efficiency, price, public opinion and access to water and sanitation.

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CHAPTER 1 PROBLEM STATEMENT

1.1 Background

In recent debates the privatization of water has generated much controversy. Most economists believe that adopting neo-liberal policies, like privatization, is socially beneficial. Despite of this there is also strong opposition in several countries. According to Carrera et al (2004, p1) “no other structural reform probably generates a so great a gap between public perception, on the one hand, and theoretical and empirical opinions from academia (and multilateral institutions such as World Bank, International Monetary Fund or Inter American Development Bank), on the other.”

The scale of water reform that most countries undertook in Latin America during the 1990s has been impressive and has been unparalleled in any other part of the world (Foster, 2005). Neo-liberal policies have been adopted to a greater extent than in other regions, in part because of conditions imposed by international financial institutions. Most large water concessions in Latin American cities have been financed at least in part by multilateral loans (Budds and McGranahan, 2003).

The move towards privatization can be explained as a result of the shift away from a state managed market and towards neo-liberal (free market) policies in the North from the late 1970s. The neo-liberal agenda was simultaneously adopted by international financial institutions (primarily the World Bank Group, the International Monetary Fund (IMF) and the Inter American Development Bank). Those institutions used their leverage as creditors to aggressively promote neo-liberal reforms to governments of indebted low- and middle-income countries. This often happened through structural adjustment policies that advocated the decrease of state spending and state investment.

In other words, the international financial institutions have presented privatization as a new solution for failing public utilities (Budds and McGranahan 2003, Gleick et al 2002). In about one third of the loans for projects the World Bank requires countries to privatize their water operations in some form before they receives funds (Critton, 2003). Shiva (2002, p91) states that “the World Bank is promoting privatization of water through structural adjustment programs and conditions. It is common for the World Bank and IMF to demand water deregulation as part of their lending conditions.” Countries

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with exorbitant debts are forced to privatize their water sector. This is contrary to what is agreed on the Bonn conference on water in December 2001. In the Bonn conference it is stated that privatization should not be applied as a condition of finance by any donors (Hall and Lobina, 2002).

Vaughan (2003, p15) states that “work by the OECD, World Bank and World Trade Organization clearly show that liberalization of services has led to price decreases, and other economic gains.” The question is now if this rhetoric also applies for the water sector.

1.2 Problem statement

The aim of this research paper is to present the current conditions of the water and sanitation industry in five regions in Latin America. The purpose of this is to provide additional elements to the debate about the neo-liberalistic measures that international financial institutions impose on countries in Latin America. As stated above the international financial institutions have presented privatization as a new solution for failing public utilities. By looking at the effects of water privatization in Latin America I want to research if this presented solution has resulted in an improvement of the water and sanitation sector in Latin America. The main question of the research paper is: What

are the effects of water privatization in Argentina, Peru, Colombia, Bolivia and Chile, and how are these effects related to the neo-liberalistic ideologies that international financial institutions impose on countries in Latin America?

This main question can be broken down into the following sub questions:

• What is privatization and what are the different forms of privatization in the water sector?

• What are the main arguments for countries for and against water privatization? • What are the effects of water privatization in Argentina, Peru, Colombia, Bolivia

and Chile?

• How are the Effects of Water Privatization related with the neo-liberalistic ideology that international financial institutions impose on countries in Latin America?

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The objective of this paper is to assess the available evidence, to identify the effects of privatization, and conduct a cross-country comparison in order to evaluate the reform experiences in five large municipal water utilities in Latin America. This paper is a contribution to a growing literature focusing on the effects of neo-liberal reforms in the water and sanitation sector in developing countries. The analysis of the effects, in relation to the influence international financial institutions have over developing countries, adds to the existing literature, because there are relatively few studies on the link between privatization and the influence from international financial institutions.

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CHAPTER 2 METHODOLOGY

2.1 Methodology

In this research paper a qualitative descriptive country case study will be conducted. A descriptive study is mainly “concerned with addressing the particular characteristics of specific subjects, either at a fixed point in time or at varying times for comparative purposes” (Gill and Johnson, 2002, p100). A case study is an examination of a case or multiple cases with the intention to generate general conclusions. Case studies lend themselves especially to generating hypotheses, rather than testing hypotheses (De Leeuw, 2001). From the outcomes of the country cases generalizations will be made about the effects of water privatization for the whole of Latin America. These generalizations will be linked with the neo-liberalistic ideology the international financial institutions impose on those countries.

Latin America is chosen because Latin America has awarded more privatization contracts in the water and sanitation sector than any other region. According to Argeñal (2004, p6) Latin America is a good regional study of the sector because “it has the most experience with private sector participation in the sector in terms of number of attempts, size of investment, and over the greatest length of time.”

Argentina, Peru, Colombia, Bolivia and Chile are chosen because most is written on those countries and their reform process. Within the countries predominantly urban municipalities are chosen because data in rural areas is not available. The time period of the cases is from the beginning of the reforms in the early 1990s till 2006. The international financial institutions that will be researched are the World Bank, the IMF and the Inter American Development Bank. These three are the largest and most influential financial institutions in the world and have used their leverage as creditors in the past to aggressively promote neo-liberal reforms to governments of indebted low- and middle-income countries. The effects of privatization are measured using the following indicators: Prices, Coverage, Unaccounted for Water, Productivity, Public Opinion and Access to improved water supply and access to improved sanitation. The indicators will be briefly discussed below.

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2.1.1 Prices (increase/decrease)

In the perception of many, privatization tends to drive up customer prices (McKenzie and Mookherjee, 2003). An analysis of the affordability of water and sanitation services is important because the increase in prices may make the system inaccessible to poor users in the long term (Berg and Holt, 2002).

There are some difficulties with comparing pre- and post-reform prices. Prices are often adjusted after the introduction of a private participation. Houses are often billed differently and the tariff structure is often revised. This can affect the actual price that consumers pay (Clarke et al, 2004).

2.1.2 Coverage (x1000 connections)

“Coverage is a key development indicator” (IBNET, 2007). Estimations of the population served by public water points can increase confidence in the water coverage measure. The reason why coverage is included is because an increase in coverage often means an increase in customer welfare.

However, Clarke et al (2004) argue that the increase in connections does not always have to mean a true increase in consumer welfare, because coverage does not say anything about the quality of the water. On the other hand, an increase in welfare due to water quality improvements does not have to mean an increase in coverage. Furthermore, single water connections can serve multiple households (Tynan and Kingdom, 2002).

2.1.3 Unaccounted for Water (% of production)

“This measure represents water that has been distributed but is lost before reaching the customer” (Berg and Holt, 2002, p4). According to Tynan and Kingdom (2002, p2) “this measure captures not only physical losses but also commercial losses, due to inefficient billing or illegal connections.” They furthermore state that “high levels of unaccounted-for water indicate poor system management and poor commercial practices as well as inadequate pipeline maintenance.”

Unaccounted for water has some problems as an indicator. The measurement can be inaccurate when there are low-quality metering systems (Berg and Holt, 2002).

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2.1.4 Productivity (Workers per 1000 connections)

Clarke et al (2004) state that “in general, it is difficult to compare productivity across countries due to problems related to making international comparisons regarding valuing capital and output.” But they argue that comparing productivity across countries without making assumptions regarding exchange rates can be done with one simple measure: The number of workers per 1000 connections.

Low productivity can be seen as a signal of poor institutionalized labor practices. Furthermore, a major component of operating costs are the cost of staff. Operating efficiencies can be achieved by reducing staff size (Berg and Holt, 2002).

2.1.5 Public opinion (positive/negative)

The process of privatization in the water and sanitation sectors has encountered strong public resistance. This resistance is now generally recognized as an important factor in the failure of reforms in this sector (Hall et al, 2005).

This indicator examines the role of the resistance. This role could be in the delaying, cancelling, or reversing of the privatization of water. The actors, the issues and methods of the opposition, and the results that the resistance has achieved will be analyzed.

2.1.6 Access to improved water supply and access to improved sanitation (1990 – 2006 in %)

Lack of access to clean water supply and sanitation has become a burning political, social, and economic issue in recent years. The data for the access to improved water supply and sanitation are derived from existing literature and the International Benchmarking Network for Water and Sanitation Utilities database (IBNET, 2007). The IBNET database is an initiative to encourage water and sanitation utilities to share a set of performance indicators. The IBNET database, however, shows the access to improved water supply and sanitation for the whole country instead of the municipal.

Improved water supply is measured as a percentage of households that have access to clean water. Improved sanitation is measured as a percentage of households

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connected to the sewerage system. This is an important indicator, because according to McDermott (2001, p1) “unsafe drinking water and poor sanitation alone are responsible for the loss of 25,000 lives everyday and it is currently estimated that one half of the population of the world’s developing countries suffer from some form of water-related diseases.” In addition to that, improved access to water supply and sewerage connections reduces child mortality (Galiani et al 2005, Shi 2000).

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2.2 Conceptual model

In this simple conceptual model there is an arrow going from the international financial institutions to Latin America. This arrow represents the neo-liberal measures the institutions impose on countries in Latin America. As mentioned before, it is common for the World Bank and IMF to demand water deregulation as part of their lending conditions. This is shown by the arrow that goes from Latin America to Privatization & Deregulation. The main areas of privatization are the capital markets, the energy sector, the water and sanitation sector and the telecommunications sector. In this paper the water and sanitation sector will be researched. That is why the water and sanitation sector has a closed line and the other sectors have a dotted line. They fall outside the scope of the research. The last arrow points to “effects”. There is a question mark behind effects, because this is the main aspect researched.

2.3 Structure

The paper is organized as follows. Chapter 1 gives some background information and the problem statement is discussed in this section. Chapter 2 presents the methodology used for this paper. Chapter 3 discusses whether water can be seen as an economic or social good. Chapter 4 presents the concept of water privatization and all its forms. Chapter 5 discusses the justifications and critiques of water privatization. Chapter 6 shows the role that international financial institutions play in this context. Chapters 7-11 present the effects of water privatization per country. In Chapter 12 the effects of water privatization will be discussed and in chapter 13 the conclusion and recommendations are given.

International Financial Institutions Privatization & Deregulation Latin America Energy Water and Sanitation Tele-communications Effects? Capital Markets

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CHAPTER 3 WATER: AN ECONOMIC GOOD?

Before discussing if water can be seen as an economic good it is important to know the meaning of the term ‘economic good’. Gleick et al (2002, p7) state that an economic good is “any good or service that has value to more than one person. This includes nearly all goods, including social goods. A good that is not economic is either without value or has value to no one but its owner.” According to Budds and McGranahan (2003, p95) an economic good “can be loosely defined as a good that can command a price in a market.”

Water is by many seen as an economic good. The notion of water as an economic good is mainly rooted in the so called Dublin Principle. There are four Dublin Principles. They are the outcome of the 1992 International Dublin Conference on Water and the Environment (Santiago, 2006). The four Dublin Principles are: (Savenije and Van der Zaag, 2002, p99)

1. “Water is a finite, vulnerable and essential resource which should be managed in an integrated manner.”

2. “Water resources development and management should be based on a participatory approach, involving all relevant stakeholders.”

3. “Women play a central role in the provision, management and safe guarding of water.”

4. “Water has an economic value and should be recognized as an economic good, taking into account affordability and equity criteria.”

Of the four principles the last one has caused the most debate and confusion. For the first time the United Nations typified water as an economic good. Conceiving water as an economic good justifies the shift from treating water as a public service to a good for which users should pay (Rogers et al 2002, Budds and McGranahan 2003).

International financial institutions, like the World Bank and the IMF, believe that managing water as an economic good will increase the access to clean water and sanitation. Furthermore, privatization of water is seen as an effective instrument to achieve better efficiency, because the market will allocate the water supply to its most efficient usage. When water gets subsidized by the state people have an incentive to

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overuse it. This can lead to short supply and inefficient use (Santiago 2006, Savenije 2001, Budds and McGranahan 2003).

On the other hand, seeing water solely as an economic good managed by the rules of the market may ultimately price poor people, which cannot afford clean water, out of the market (Gleick et al 2002, Perry et al 1997). This is not in line with the 2000 Millennium Summit, “where member countries of the United Nations unanimously agreed on a set of eight goals to reduce poverty by 2015, among which are reducing child mortality by two-thirds and cutting in half the number of households that do not have access to safe water” (Galiani et al, 2005, p84).

Summarizing, water is by many seen as an economic good. The World Bank and the IMF believe that managing water as an economic good will increase the access to clean water and sanitation and therefore stimulate private sector participation in the sector. Later on in this paper the effects of this will be discussed, like whether the privatization efforts have increased access to water and sanitation for the (poor) people in these countries.

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CHAPTER 4 WATER PRIVATIZATION

The purpose of this chapter is to give a theoretical background about the concept of water privatization. There are numerous ways to privatize water and in this chapter the different forms will be discussed.

4.1 The Definition of Water Privatization

There are many different definitions of water privatization, but in general they all mean the same using different words. Nickson (2001, p) states that the term privatization “is used to mean the transfer of ownership to the private sector. “ According to Gleick et al (2002, p3) “privatization in the water sector involves transferring some or all of the assets or operations of public water systems into private hands.” Budds and McGranahan (2003, p89) state the same in saying that “privatization refers to processes that increase the participation of formal private enterprises in water and sanitation provision.” But Budds and McGranahan (2003, p89) add that privatization does “not necessarily involve the transfer of assets to the private operator.”

According to Fauconnier (1999, p43) “full-fledged privatization designates an actual transfer of assets and operational responsibilities to the private sector, while all other variations are more accurately categorized under the name private sector participation (PSP).” Nickson (2001, pIV) says more or less the same by stating that “PSP refers to the involvement of the private sector in some form, at some stage in the delivery of services.” Over the last two decades there has been an increase in private sector participation (PSP) in the water and sanitation industry in both the developed and the developing countries. Bayliss (2002) believes that the concept of privatization and PSP are the same. Although they are important, small and informal operators fall outside the private sector scope of this paper. In this paper privatization or PSP mean the same and refers “to the transfer of some subset of public duties to private sector companies for a stated period of time” (Public Citizen, 2002, p5).

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4.2 Water Privatization in Latin America

In the 1960s most Latin American countries adopted a centralized approach for the provision of water and sanitation services because the provision of the services at the local level was unsatisfactory. The main reason for the new approach were the economies of scale that could be achieved by centralizing. In the 1980s it was acknowledged that the centralized approach had failed and countries began to abandon the centralized approach and returned responsibilities to the local level (Yepes 2001, Guasch et al 2003).

In the 1990s, nearly all countries in Latin American undertook major reforms of their water and sanitation industries. Chile was the first country that attempted to reform its water sector. The new legislation was passed in 1988. Three years later, Argentina began to experiment with PSP. Peru, Colombia, Bolivia and other Latin countries followed shortly with implementing ambitious new legislations in the mid-1990s (Foster, 2005). According to Foster (2005, p1), “by the end of the 1990s, nearly all countries in Latin America had completed reforms, had major reforms in process, or were actively considering reforms.”

The water and sanitation sector worldwide is dominated by a very small number of multinational water companies. The main companies are: Suez Lyonnaise des Eaux, Veolia, Sociedad General de Aguas de Barcelona, Thames Water and Benpres Holdings (Budds and McGranahan, 2003). The water services market in Latin America is also dominated by a small number of foreign multinational corporations. They often work in consortia involving local enterprises. According to Budds and McGranahan (2003, p108), the local private sector in Latin America “appears to be more consolidated than in other regions, either within consortia with multinational companies or, less commonly, independently. Another particular feature is that the region has several innovative contractual arrangements, such as joint ventures and cooperatives.”

The five multinationals discussed before, accounted for 45 per cent of private projects in Latin America during the 1990s (Kirkpatrick and Parker, 2005). A more specific example of this is given by Foster (2005). She argues that about two-thirds of the about twenty million urban water consumers in Argentina receive their water from consortia headed by Suez Lyonnaise des Eaux.

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4.3 Models of water privatization

There are several models and variations of PSP in the water and sanitation sector. The many variations can depend on the legal and regulatory frameworks, the operation responsibilities, the type of contract, the transfer of responsibility and the nature of the company (Gleick, 2002, Budds and McGranahan, 2003). According to Kirkpatrick and Parker (2005, p1496) “in practice, contracts under which private firms provide the services but government remains the ultimate owner of the water system and may remain responsible for some new investment, are commonplace.” They furthermore state that “while the forms of private participation in the water sector vary in the allocation of risk, duration of the arrangement and assigning of asset ownership, all involve some form of contract with, or regulation by, the public sector.” It is useful to understand the nature of some of the important models and the implications of these models for the challenges of PSP (The World Bank, 2006). The most important models are discussed below.

4.3.1 Service contract

The service contract is the simplest model of privatization. According to Budds and McGranahan (2003, p90) “service contracts are usually short-term agreements whereby a private contractor takes responsibility for a specific task, such as installing meters, repairing pipes or collecting bills for a fixed or per unit fee.” Under a service contract no ownership is transferred.

4.3.2 Management contract

With a management contract the government is still responsible for investment and expansion but it transfers some of the operation and maintenance responsibilities to private companies. With a management contract the private operator is risk-free and does not need to investment (Budds and McGranahan 2003, Hall and Lobina 2006). The length of the contract is often between three to five years. A management contract is often used as a transitional arrangement. This gives the government the time to prepare for a deeper form of PSP (The World Bank, 2006).

Management contracts are less challenging to implement than other contracts discussed below because the operator’s compensation does not depend on the customer

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tariff. On the other hand, management contracts do not offer the same potential for the government as other contracts do. Investments and improvements by the operator to increase operating performance are not likely because little risk is transferred to the operator with a management contract (The World Bank, 2006). The World Bank (2006, p7) argues nonetheless that “if the management contractor has flexibility to change the way the business is run and has incentives to improve performance, it may improve operating performance.”

4.3.3 Lease and Affermage

Lease and affermage contracts are comparable to management contracts. The difference is that with lease and affermage contracts the private operator is responsible for all operation and maintenance functions. Examples of these functions include billing and revenue collection. The private operator is not responsible for connecting households who were previously unconnected (Budds and McGranahan 2003, Hall and Lobina 2006). The difference between lease and affermage is technical. The World Bank (2006, p10) states that “under a lease, the operator retains revenue collected from customers and makes a specified lease payment to the contracting authority, which the authority can use to pay for investment. Under an affermage, the operator and contracting authority share revenue from customers. The operator pays the contracting authority an affermage fee, which varies according to demand and customer tariffs, and retains the remaining revenue.” The similarity of affermages and leases lies in the fact that in both cases the operator’s profits depends on sales and costs of the utility. Normally, this gives the operator an incentive to improve operating efficiency in order to increase its sales.

4.3.4 BOT contract

According to Hall and Lobina (2006, p13) “much private activity now takes the form of Build-Operate-Transfer (BOT) contracts to construct treatment plants and reservoirs.” BOT contracts are similar to concession contracts. The main difference is that with a BOT contract the private contractor is responsible for the setting up and managing of the infrastructure from scratch and that the government purchases the supply. BOT contracts are often used with Greenfield projects (Budds and McGranahan, 2003).

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4.3.5 Concession Contract

Like other contracts a concession contract gives the private operator the responsibility for the operation and maintenance of assets for a contracted period of time. With a concession contract however the operator is also required to invest in the maintenance and expansion of the system at its own commercial risk. In other words, the private company is responsible for all investments. (Budds and McGranahan 2003, The World Bank 2006, Hall and Lobina 2006) Concession contracts usually have longer terms. They normally last for 20 or 30 years. This allows the operators to recoup their investments. The government’s role is mainly regulatory (Budds and McGranahan 2003, Hall and Lobina 2006).

4.3.6 Divestiture contract

A divestiture gives the private operator the same responsibilities as a concession. The difference is that under a divestiture legal ownership of the assets are in the hands of the private operator. This is primarily done through the sale, by the government to the private operator, of some or all of the shares in the company (The World Bank 2006, Budds and McGranahan 2003).

4.3.7 Joint venture and Cooperatives

In addition to the above models variants are possible. This mainly depends on whether the operator is wholly or partly privately owned. The variations include joint ventures and cooperatives. According to Budds and McGranahan (2003) “a joint venture is an arrangement whereby a private company forms a company with the public sector, with the participation of private investors, which then takes a contract for utility management.” Engaging in a joint venture can be helpful for the operator securing an agreement to private participation. On the other hand it also signals to the operator the government’s dedication to the venture (The World Bank, 2006). A cooperative is a limited company. Domestic customers are also the members and they elect the administrative Board (Budds and McGranahan, 2003).

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CHAPTER 5 JUSTIFICATIONS AND CRITIQUES OF

WATER PRIVATIZATION

5.1 Justifications of water privatization

In theory, the privatization of water utilities should result in greater efficiency and effectiveness, because private operators manage more efficiently, invest more capital and are more technically advanced than their public counterparts (Seppälä et al, 2001). Overall, the justifications of privatization mainly include the arguments discussed below.

5.1.1 Greater Efficiency

The argument for PSP is often that private enterprises are more efficient than public enterprises. Budds and McGranahan (2003, p97) state that in the early 1990s “it was simply assumed that the private sector would be more efficient, due to the commercial incentives that would encourage private operators to seek the highest possible efficiency in order to maximize commercial returns and reduce possible losses from inefficiency and non-paying customers.”

The efficiency of a water utility can be improved by reducing the operating costs, improving work practices, increasing billing and collection and adjusting tariffs to reflect the cost of production. Proponents of privatization believe that through its ability to operate outside of political or bureaucratic constraints the private sector has an advantage over the public sector (Fauconnier 1999, Seppälä et al, 2001).

5.1.2 State Incapacity

The lack of state capacity can lead to weak performance and low payment levels for poor services. Public water companies tend to suffer from problems of overstaffing, loss of production due to leakages, inadequate collection, and illegal connections. Furthermore, state-run utilities can be subject to political interference and corruption (Budds and McGranahan, 2003). By privatizing the water sector the government can use its limited resources to invest in areas such as public health and education, where private involvement is not as feasible (Fauconnier, 1999).

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5.1.3 Access to Capital

Finance is usually the most important consideration for governments to involve the private sector. Seppälä et al (2001) label public owned water utilities as inefficient in securing required financing for investments. The public sector has difficulties to access the finance that is necessary to carry out improvements and expansion of services. The public sector often does not have access to sources of commercial finance, because it lacks creditworthiness. The lack of access to finance by the public sector can result in badly managed public utilities (The World Bank 2006, Budds and McGranahan 2003).

According to theory, privatization will generally build confidence among foreign and domestic investors that their activities will face less government interference. Fauconnier (1999, p44) argues that “this should increase the inflows of international investment and should help the economy expand, not only with additional capital resources but also with technology and management skills that may be lacking in-country.” Budds and McGranahan (2003, p100) however state that “the levels of annual investment needed for financing new water and sanitation infrastructure alone in low- and middle-income countries between 2002 and 2025 have been estimated at over US$ 13 billion for drinking water supply and US$ 17 billion for sanitation.” All the finance that is internationally contributed now represents just a small part of the needed resources, respectively US$ 3.3 billion and US$ 1.85 billion per year (Budds and McGranahan, 2003).

5.2 Critiques of water privatization

The critics of privatization believe that the arguments used for PSP seem reasonable in theory, but in their opinion they are unrealistic in real life (Seppälä et al, 2001). They argue that privatization strategies are not universally applicable and need to be adjusted to the needs and conditions of each nation individually (Fauconnier, 1999). The main points of critic are the lack of competition, inequitable access, high transaction costs and high prices.

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5.2.1 Lack of Competition

According to Seppälä et al (2001, p43) “water supply and sanitation systems are categorized as natural monopolies due to the nature of the required investments and technical systems.” In the capital markets, the telecommunications industry and parts of the energy supply industry attempts have been made to develop a regulatory system that promotes competition. Unlike the case of telecommunications and parts of the energy supply industry, where competition is feasible, competition in the market for water services is normally ruled out because of the scale of the investment in network assets that are needed to deliver the product. For instance, “the cost of moving water down pipes is far higher than the costs of transmitting telephone calls or distributing electricity” (Kirkpatrick and Parker, 2005, p1501). In other words, the nature of water restricts the amount of competition in the market and therefore the efficiency gains (Kirkpatrick and Parker 2005, Budds and McGranahan 2003).

The water and sanitation industry is often cited as a typical example of a monopolistic industry. The main characteristics are the large economies of scale, the rather slow pace of technical innovation and the limited amount of competition. Furthermore, the service is highly capital intensive (Yepes, 2001). In comparison with firms operating in a competitive market, monopolists often realize excess profits. This can happen because they have an incentive to overprice and under produce. In most circumstances, overpricing and underproduction go together in order to achieve higher prices (Kirkpatrick and Parker 2005, Budds and McGranahan 2003).

Budds and McGranahan (2003, p94) argue that “for water and sanitation networks competition is generally restricted to competition for the market rather than competition within the market.” This increases the importance of winning the contract or concession agreement.

5.2.2 Inequitable Access

According to Gleick et al (2002, p4) “one of the basic goals of any proposal to provide water services (publicly or privately) should be to meet explicitly the needs of under-served communities through an expansion of access to water or wastewater services.” Privatization can potentially worsen this, because corporations have a tendency to operate

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in the most profitable areas. An example of a profitable area could be a wealthy urban neighborhood. Consumers in these neighborhoods are more likely to have a higher usage, are better able to pay higher prices and infrastructure costs are lower. On the other hand poor communities have more difficulties in attracting corporations, because large investments are needed to expand and improve access. This can broaden the gap between wealthy and poor communities with respect to access to water and sanitation. A lot of people consider the government to be responsible for the basic well-being of its population. Therefore, in their opinion it is the duty of the government to provide basic public services (social goods) like water and sanitation (Robbins 2003, Fauconnier 1999).

5.2.3 High Transaction Costs

According to Seppälä et al (2001, p47) the “transaction cost theory emphasizes transactions and management of economic contractual relations.” Kenneth Arrow in Williamson (1985, p18) has defined transaction costs as “the costs of running the economic system.” These transaction costs arise from arranging the agreements between government and operator. This includes the organization of the bidding process, monitoring contract performance, and the enforcement of the contract terms (Williamson, 1985). Transaction costs also include losses caused by badly prepared plans and contracts. The main elements of transaction costs are uncertainty and the lack of information. The transaction costs are likely to get higher the longer the time period because it is difficult, even impossible, to foresee all future events at the time the contract is initially negotiated (Seppälä et al, 2001). According to Kirkpatrick and Parker (2005, p1502), “concession agreements in water are typically negotiated for ten or twenty years or more, therefore the contracts will need to permit periodic adjustment of variables such as price, volume and water quality during the contract life.”

Only a small number of international players usually bid for water concessions because pre-qualification criteria and risk restrict only few players to bid. The smaller the number of bidders, the less effective will be the competitiveness of the bidding process. This can result in sub-optimal decision making because parties act opportunistic to arrange favorable terms (Kirkpatrick and Parker, 2005). In addition, these contracts have to be renegotiated later on. According to Kirkpatrick and Parker (2005, p1502), “55 per

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cent of water concession contracts in Latin America were renegotiated significantly within a few years of being signed.”

5.2.4 High Prices

Opposition concerning privatization is mainly based on issues like prices increases, high profits for multinationals and job losses. According to Hall et al (2005, p292) “privatization of water and energy is seen as making prices higher than they would otherwise be, and profits, and senior management pay, higher than is justified, while at the same time cutting jobs and making the remaining workers less secure.” The lack of real competition is closely related with private water companies charging higher prices than the public operators (Seppälä et al, 2001).

5.3 The Debate

Despite, the positive sounds from the international financial institutions the debate about PSP in the water and sanitation sector has a predominantly negative character. In general, three groups of critics of neo-liberalism in the water and sanitation sector can be identified. First, academics who do not criticize the concept of PSP, but believe better regulation is needed. Examples are: Parker and Kirkpatrick. Second, academics who believe that, with the right resources, the public sector can be more efficient than private companies. Examples are: Hall, Lobina and de la Motta. Third, people and organizations who ideologically criticize PSP. Examples are: The Polaris Institute, Public Citizen, and some academics like Grusky and Fiil-Flynn.

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CHAPTER 6 THE ROLE OF THE INTERNATIONAL FINANCIAL

INSTITUTIONS

PSP in the water and sanitation sector is not a new phenomenon. The belief of the World Bank, the IMF and other international financial institutions that PSP is the sole solution for water problems is new however. From the 1960s-1980s the loans that the World Bank gave to developing countries were aimed at expanding and making the public water utilities more efficient. The central focus of the loans was on large infrastructure projects (Prasad 2006, Grusky and Fiil-Flynn 2004).

Neo-liberalism became increasingly popular in the 1980s. The idea that neo-liberalistic reforms, like PSP, should be implemented in developing countries was a result of the experience of privatizing water utilities in the West. During the 1990s, within a set of neo-liberal reforms, the World Bank and the IMF actively pushed PSP on to the water and sanitation policy agenda for the South and promoted multinational water corporations as the solution for failing public water utilities. Deregulation, privatization and trade liberalization became central issues in the policies of the World Bank and the IMF concerning the water and sanitation sector. These policies are also known as the Washington Consensus (Mulreany 2006, Grusky and Fiil-Flynn 2004, Prasad, 2006, Budds and McGranahan 2003). According to Peredo Beltrán (2004, p9) “these policies are promoted in Latin America mostly under pressure from the World Bank and the IMF, but they are also concretely stated in the rules of free trade agreements, particularly in the rules of the World Trade Organization's (WTO) General Agreement on Trade in Services (GATS).”

One of the most important reasons for the World Bank and the IMF to support privatization is to overcome corruption and decrease the lack of transparency that exists in public municipal enterprises. They furthermore argue that public systems are inefficient and that open markets are better in distributing and conserving resources (Peredo Beltrán, 2004). The World Bank (2004) believes that PSP is important for small countries because for smaller countries it is more difficult to raise funds from domestic public or private sources. Trade liberalization in the water and sanitation sector is widely advocated as a good way for smaller countries to get access to international private

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capital, technology and management expertise. Trade liberalization is also seen by international financial institutions as a means of achieving the Millennium Development Goals (Kirkpatrick and Parker, 2005). “The Millennium Development Goals aim to halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation”(Grusky and Fiil-Flynn, 2004, p3).

The World Bank, the IMF and other international financial institutions impose loan conditions on developing countries. Of all the international financial institutions the IMF is the most influential. “Noncompliance with conditions in IMF loans can influence not only the flows of IMF lending, but the IMF’s seal of approval which regulates access to multilateral credit, bilateral credit and aid, and private sector investment flows” (Public Citizen, 2002, p7). In 2000, a study conducted by Grusky (2001) showed that of 40 loans approved by the IMF, 12 included conditions that imposed water privatization and/or cost recovery requirements on governments. The concept of cost recovery is that all the cost of operation and maintenance of the water utility service are included in the fees that are collected from the consumers. In 2001, the World Bank imposed cost recovery measures in more than 80 percent of the approved loans (Public Citizen 2002, Barlow 2001, Barlow and Clarke 2004). ICIJ (2003) analyzed that of the 276 loans awarded by the World Bank in the water and sanitation sector, between 1990 and 2002, one third of the them required the country to privatize its water operations. In 2001, 50 per cent of the water and sanitation loans approved by the World Bank imposed conditions to governments to privatize (Public Citizen, 2002).

According to Baumert and Bloodgood (2004, p34) “as of April 2002, the World Bank was supervising 100 water and sanitation projects around the world, valued at an estimated US$5.3 billion or 22 percent of the World Bank’s infrastructure investments.” Izaguirre and Hunt (2004, p1) state that “in 2004, 28 new water and sewerage projects with private participation reached financial closure world wide. Latin America had 13 new projects, attracting investment commitments of US$1.4 billion, the region’s highest activity since 2001.” With only 5 per cent of the world’s water supply in private hands, the current water market is valued by the World Bank at close to US$1 trillion (Barlow, 2001).The promotion of PSP in water supply and sanitation continues (Prasad, 2006).

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CHAPTER 7 CHILE (SANTIAGO)

7.1 Reform in Chile

Chile was one of the first countries in Latin America to adopt a privatization program. The privatization program was part of the economic liberalization reforms that Chile adopted in 1974 (Fischer et al, 2003). According to Romano and Leporati (2002, p1) the water market reform took place “through a series of structural reforms, characterized by trade liberalization, privatization of public enterprises, deregulation of several markets and decentralization of various economic sectors.” The aim of the reforms was to make the use of water more efficient by privatizing the water market.

One of the reforms introduced was the 1981 National Water Code. The Code was created under a strong neo-liberal ideology. It was designed to support liberalization of the economy and economic development led by the private sector. In this free market framework government intervention was brought back to a minimum. According to Hearne and Donoso (2005, p57) “the 1981 Water Code maintained water as national property for public use, but granted permanent, transferable water use rights to individuals.” The World Bank sees the Water Code as a model of successful neo-liberal reform (Bauer 1997, Hearne and Donoso 2005, Budds 2004).

Since 1981 PSP in water and sanitation services has increased. This has reduced the role of the state even more. Foreign multinationals hold a large part of the water market. Gomez-Lobo (2001, p1) argues that “with the most important water companies having been privatized since 1998, private companies now serve 73 percent of urban clients.” These are basically two important multinationals active in Chile: Suez Lyonnaise in the Santiago Metropolitan area and Thames Water in the other regions. Chile did not privatize sanitation services. Privatizing these services would result in a big rise in price that would make it impossible for people to pay for it (Fischer et al 2003, Angélica et al 2004, Hearne and Donoso 2005).

7.2 The Santiago water utility

The state agency Empresa Metropolitana de Obras Sanitarias (EMOS) was set up in 1977. The area where EMOS is active “comprises Greater Santiago and twenty-one per urban

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localities covering an area of 450 square kilometers and about 5 million inhabitants, approximately 40 percent of the Chilean population” (Rivera, 1996, p16). It is the country’s largest water company. In the late 1980’s Chile intended to privatize EMOS, but it was instead reformed under public management. In the 1980s-1990s EMOS developed to “the best-performing water utility in Chile and quite possibly the best in Latin America” (Rivera, 1996, p25). In 1999, due to political pressure, EMOS finally privatized (Shirley et al 2000, Argeñal 2004). Argeñal (2004, p62) thinks that “Santiago makes a positive case study as it has been able to effectively use federal subsidies and harness the private sector through service contracts, in order to extend service to the poor and underserved.”

7.3 Indicators

7.3.1 Prices

Additional to the neo-liberal policies adopted in the 1980s the Chilean government gives subsidies to low income consumers and utilities. The subsidies to the low income consumers are based on the socio-economic criteria per household (Rivera, 1996). “Very poor consumers are charged only US$ 5 to US$10 for a connection which they can pay in ten installments, while other low-income families pay the full charge of about US$1000 in 60 installments free of interest” (Shirley and Menard, 1999, p71). There are other social policies to help poor families. Examples are loans and special payment plans for new connections (Rivera, 1996).

In 1990, a new pricing system was introduced in Chile. The water prices were raised to the true economic cost of the service. As a result of this the prices in areas with higher costs raised a lot, exceeding 500% in some areas. The increased tariffs doubled the prices of EMOS (Gomez-Lobo 2001, Fischer et al 2003). According to Noll et al (1999) and Shirley and Menard (1999) the pre-reform average price of M³ water was $0.09. The post-reform average price of M³ water differs between the different authors. According to Noll et al (1999) the post-reform price is $0.14. Shirley and Menard (1999) however keep it on $0.11 pre-reform and $0.30 in 1996.

Overall, it can be concluded that the reform resulted in higher real prices. The subsidies, however, compensate low income consumers.

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7.3.2 Coverage

As part of the reforms, the Chilean government provided subsidies to support water and sanitation services to poor households. The goal of the subsidy was to minimize consumption while increasing coverage (Hearne and Donoso, 2005).

In 1981 the number of connections was 650,000 for water and 550,000 for sanitation. After the reforms in 1996 these figures increased to respectively 1,050,000 and 1,000,000 (Shirley et al, 2000). According to Shirley and Menard (1999) the annual average growth number for new connections increased from 2.9 per cent pre-reform to 3.8 per cent post-reform.

7.3.3 Unaccounted for Water

EMOS has reduced physical water losses by restoring its old pipeline structure. This resulted in greater efficiency because breaks can be repaired faster and leaks are detected earlier. Mainly because of this the amount of unaccounted for water (UFW) declined significantly in Santiago (Thobani 1997, Shirley and Menard 1999).

According to Shirley and Menard (1999) the percentage UFW pre-reform was about 34 per cent. In 1996, UFW was below 22 percent and that is close to the international standards of 20 percent of production (Shirley et al 2000, Rivera 1996).

7.3.4 Productivity

The exact number of workers per 1000 connections varies between different authors. Rivera (1996) sets the number of workers on 2.1 per 1000. Shirley et al (2000) believe the number has to be lower. They argue that there are 1.76 numbers per 1000. Both authors however state that the amount of workers to water connections is low.

7.3.5 Public Opinion

The water reforms have been subject to a continuous debate in Chile about the effectiveness of the Water Code (Budds, 2004). There has been political opposition and opposition from the trade unions to PSP. This resulted in a series of strikes (Hall and Lobina, 2002). Almost all neo-liberals are enthusiastic about the adopted market model in Chile. No significant problems are recognized and the reforms are seen as a success in the

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press. The social and economic benefits for poor farmers are given as an example. Historically agriculture has been the main purpose for water use in Chile. However, the agriculture sector is the sector most concerned with the reforms. Chilean farmers want to hold onto their old ways of doing things. They heavily resist to selling water rights (Bauer, 1997). A lot of the neo-liberalists are economists with a strong connection with the World Bank. Bauer (2004, p5) believes that “it is important not to oversimplify the World Bank’s position on these issues since the World Bank is not a monolithic organization and it includes people with a certain range of viewpoints.” The neo-liberalists have not yet succeeded in changing the mentalities of the agricultural sector and others in Chile. Many people believe that water rights should not be treated as a normal commodity, by making it able to buy and sell it separately from land (Bauer, 1997).

The fact that EMOS “has been able to serve the poor affordably through direct subsidies, which has also improved service and expanded networks due to built-in incentives to serve all clients in the serving area, with no disincentives to go to poor neighborhoods” (Argeñal, 2004, p65) most probably had a positive effect on the public opinion.

7.3.6 Access to improved water supply and Access to improved sanitation

According to Angélica et al (2004, p11) “historical evolution of coverage of drinking water and sewerage levels shows 86 per cent for drinking water and 56 per cent for sewerage when the 1977 reform started. Such coverage increased to 98 per cent for drinking water and 81 per cent for sewerage coverage when the 1988 reform took place and the State companies were incorporated as public corporations.” Soon after the reform the market coverage for water reached 100 per cent. Sewerage coverage increased to 97 percent from 1994 onwards (Shirley et al 2000, Rivera 1996, Shirley and Menard 1999).

According to the IBNET database (see Appendix) the total access to improved water supply is 90 per cent in 1990 and 95 per cent in 2002. The total access to improved sanitation is 85 per cent in 1990 and 92 per cent in 2002.

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Angélica et al (2004) believe that gradual and sustained improvements and large investments are the main drivers behind the present high coverage of drinking water and sewerage in Chile and not the privatization process.

7.4 Summary of Effects

Chile (Santiago)

Indicators Prices Coverage Unaccounted for Water Productivity Public opinion Access to water and sanitation Effects Increased Increased Decreased Increased Negative Increased Table 1: Summary of Effects in Chile

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CHAPTER 8 ARGENTINA (BUENOS AIRES)

8.1 Reform in Argentina

Argentina’s economy was in a state of crisis in the 1980s. In order to tackle the crisis the government decentralized its authority to the 23 provinces in 1982. The reforms did not have the desired outcome and as a result of this, in 1989, the government declared a state of emergency. “Consequently, the government launched privatization with a strong sense of urgency” (Alcázar et al, 2000, p13). Almost all publicly owned companies were sold to the private sector. The government had already reformed the telecommunications, electricity, gas and airlines sectors, before reforming the water and sanitation sector in 1993. The main characteristic of the reforms in the water and sanitation sector was increased PSP in operation and financing of the water services (Estache and Trujillo 2003, Rivera 1996, Zerah 2001, Loftus and McDonald 2001, Alcázar et al 2000).

The World Bank and the Inter-American Development Bank had great involvement in the Argentine water sector during the reforms. The World Bank and the Inter-American Development Bank financed Argentina and gave advice about PSP in the water sector. According to Loftus and McDonald (2001, p183) “the World Bank funded and appointed a team of private sector technical and financial consultants from the UK to advise on the future of Buenos Aires’ water sector. The World Bank was also responsible for recommending and short listing companies after the submission of bids.”

8.2 The Buenos Aires water utility

Pre-reform the public company Obras Sanitarias de la Nacion (OSN) in Buenos Aires operations was managed inefficient, political interference was high, financial management was poor and only 55 per cent of the population in Buenos Aires had access to water services and only 35 per cent had access to sewerage (Abdala 1996, Rivera 1996).

The bidding process was competitive. The concession was awarded to whom could offer the largest tariff reductions. The belief was that the tariff could be reduced through more efficient operation. Five companies pre-qualified at first. This was soon reduced to three companies because two French companies undertook a joint bid and a

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Spanish company failed the technical proposal. The concession contract was awarded in 1992 to Aguas Argentinas with World Bank support. Aguas Argentinas is headed by Lyonnaise des Eaux-Dumez. Aguas Argentinas offered a 26.9 per cent tariff reduction. The company is responsible for the supply of all the water and sewerage services in Buenos Aires and 17 surrounding municipalities. The concession was the largest water concession in the world at that time (Cramps and Estache 1996, Alcázar et al 2000, Estache and Trujillo 2003, Rivera 1996, Loftus and McDonald 2001). The World Bank, the IMF, and other smaller banks supplied 97 percent of the US$1 billion necessary for the concession (Barlow, 2004).

In 1994, Aguas Argentinas came to the conclusion that the infrastructure was in worse shape than was estimated and wanted to re-negotiate the contract. After the negotiations Aguas Argentinas was allowed to increase the tariff with 13.4 per cent. This was about half of the original reduction. This caused public unrest because users felt that the tariff increase was unfair (Cramps and Estache 1996, Zerah 2001, Shiva 2002). In 1997 Aguas Argentinas’ revenues were US$217 million lower than budgeted. US$143 million was caused beyond the control of the company. As a result of this the company wanted to re-negotiate the contract again. As a result of the re-negotiations the bill for existing consumers increased by 19 per cent and the bill for new consumers decreased with 74 per cent. Furthermore, lower connection fees were negotiated, spread over a period of time. In 1998, Aguas Argentinas wanted another tariff increase of 11.7 per cent. After negotiations only 4.6 per cent was agreed (Alcázar et al 2000, Zerah 2001, Critton 2003). In 2004, the Argentine government refused to give Aguas Argentinas another price adjustment (Grusky and Fiil-Flynn, 2004). In 2005, Aguas Argentinas was again in negotiations with the Government with the intensions to increase the rates by 60 per cent. This increase was necessary because of the losses that Aguas Argentinas suffered in 2002 when Argentina froze the utility rates and the pesos devalued (Mulreany et al, 2006). In 2006, “After 12 years under private sector management, water supply and sewerage services in the Buenos Aires Metropolitan Area has been transferred to public sector management into a new state-owned company (Aguas y Saneamientos Argentinos SA) created by National Decree No. 304/06” (IBNET, 2007).

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8.3 Indicators

8.3.1 Prices

The reduction in price is often seen as the most important benefit of water privatization in Buenos Aires. As stated above the tariff decreased with 26.9 per at the very beginning of the concession. However, there has arisen some controversy over Aguas Argentinas’ prices. Alcázar et al (2000) believe that the customer was paying about 23.4 percent more for water services in 1998 than in 1992. Zerah (2001) believes that consumers pay 3.3 per cent more in 1998 then in 1992, but 66.3 per cent more then 1990. According to Loftus and McDonald (2001, p190) the former president of Argentina, Fernando de la Rua stated that: “Water rates, which Aguas Argentinas said would be reduced by 27 per cent, have actually raised a total of 20 per cent.” Several price increases before privatization allowed Aguas Argentinas to offer a 27 per cent decrease in costs, while in fact this decrease did not even cover the increases prior to privatization. According to Loftus and McDonald (2001, 190) consultants to the Inter-American Development Bank state that “this was a useful strategy for stemming possible opposition to the privatization process.”

8.3.2 Coverage

When the concession was signed in 1993, about 6 million people were connected to the water system and about 5 million to the sewerage system. In 1996, 570,000 additional people had been connected to the water system and 340,000 to the sewerage system. This is an increase of respectively 9 and 6.4 per cent (Rivera, 1996). In order to be able to invest in new connections the company wanted a tariff increase. This was turned down by the government and this resulted in a slower rate of new connections than had been possible (Critton, 2003).

8.3.3 Unaccounted for Water

Unaccounted for water was 45 per cent before the concession and improved to nearly 30 per cent in 1995 (Abdala, 1996), to 34 per cent in 1996 (Noll et al, 1999) and 1998 (Alcázar et al, 2000). This figure is still quite high compared to the 10 to 20 percent in OECD countries (Alcázar et al, 2000).

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8.3.4 Productivity

Workers per thousand connections was 3.3 in 1982, decreased to 1.5 in 1996 and increased a little to 1.7 by 1998. These numbers are comparable with other efficient companies in the sector, such as Thames Water in the United Kingdom (Alcázar et al 2000, Rosenthal and Alexander 2003).

8.3.5 Public opinion

In 1989 only 16.4 per cent of the people thought negative about privatization. This number increased to 33.3 per cent at the time the water concession was signed in 1993 and further increased to 51.9 per cent in 1997 (Alcázar et al, 2000).

Workers have been the most important opposition to privatization. The government recognized that they needed the support of the workers in order to led the reforms to be successful. Union leaders were guaranteed a seat in the privatization discussions and employees were offered a 10 per cent share in the privatized companies. Despite this, in November 2000, workers set up road blocks and striked opposing the latest measures imposed on them by the IMF (Loftus and McDonald, 2001).

8.3.6 Access to improved water supply and Access to improved sanitation

In 1992, access to water supply was 70 per cent and access to sewerage coverage was 58 per cent. In 1999, access to water supply increased to 82.4 per cent and sewerage coverage increased to 61 per cent (Loftus and McDonald, 2001).

According to the IBNET database (see Appendix) the total access to improved water supply is 94 per cent in 1990 and 83 per cent in 2002. The total access to improved sanitation is 82 per cent in 1990 and 56 per cent in 2002.

8.4 Summary of Effects

Argentina (Buenos Aires)

Indicators Prices Coverage Unaccounted for Water Productivity Public opinion Access to water and sanitation Effects Increased Increased Decreased Increased Negative Decreased Table 2: Summary of Effects in Argentina

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CHAPTER 9 BOLIVIA (COCHABAMBA)

9.1 Reform in Bolivia

In 1942 the idea that that local government should provide water services was first recognized by means of the Municipal Law. During the 1960s and 1970s, the provision of water services was the responsibility of local offices under central government. The first water service companies were created in 1964 (Nickson and Vargas, 2002).

There were strong pressures from the international financial institutions for the privatization of public companies in Bolivia as early as 1984. In 1984, the World Bank and other international financial institutions began to promote PSP as an alternative to the soft loans that were given to countries to finance the upgrading of their facilities. Privatization was furthermore a condition from the World Bank and the IMF for re-negotiating Bolivia’s foreign debt. “In 1985, Bolivia initiated significant economic liberalizations in order to tame hyperinflation and emerge from a deep recession. Despite success with early market-friendly initiatives, the country did not engage in sustained privatization until about a decade later” (Barja et al, 2003, p126). It took till 1997 till PSP was introduced to the water sector for the first time (Nickson and Vargas 2002, Peredo Beltrán 2004).

Under the Water and Sewerage Law, which came in action in 2000, municipal governments were held responsible for providing water and sewage services. Municipal governments had the choice to provide these services through private firms, municipal firms or other types (Barja et al, 2003).

An important aspect of the privatization of water services in Bolivia is the principle of cost-recovery. According to Nickson and Vargas (2002, p131) the principle of cost-recovery “involves the application of tariffs sufficient to cover existing operations as well as service expansion, improvement and sustainability.” They furthermore state that “tariffs in most municipal-operated Bolivian water utilities barely cover operational costs, leaving no surplus available to finance the investment required for expanding the network.”

“The Effects of Water Privatization in Latin America”

Master Thesis: International Financial Management