Water Supply & Sanitation: Private vs Public Sector

Today, about 2.6 billion people live without basic sanitation and nearly 1.1 billion live without access to safe drinking water. Around 13% of the world population still defecates in the open. The  diarrhoeal diseases that result from poor sanitation kill more than five million children every year and 9% of these deaths happen to be of children aged less than five years. Up to 50% of malnutrition is attributable to poor water, sanitation and hygiene, as are many neglected tropical diseases.

Death and disease due to inadequate sanitation not only burdens a country's healthcare system, it also causes a huge emotional and financial cost to families. Children drop out of school and fail to reach their potential, especially young girls. Moreover, research shows how poor sanitation has a substantial impact on the economy as well. Countries with poor access to sanitation are losing significant proportions of their GDP – in India, this figure is over 5%.

It thus stands to reason that we need better sanitation for a better economy, a better society and a better world. The question is: how do we achieve that? Moreover, which sector should cater to Water Supply and Sanitation (WSS)? Private or Public?

Economists champion public sector involvement in cases of market failures and unequal distribution of economic outcomes. The prime justification for public provision of WSS is market failures such as natural monopoly, externalities, and public good characteristics. A sole profit-oriented producer of a good with declining long-term average cost will restrict output to monopoly level, thereby leading to a social welfare loss. Thus, government intervention is essential to restore efficiency. Moreover, the positive externalities gained from use of WSS further strengthens this argument. It is the responsibility of the government to not just focus on efficiency (the primary focus of profit-oriented enterprises) but also to make sure that distribution is provided to all, without any disparity. 

However, experiences from the past have shown that public-owned utilities have not always been successful both in developed and developing nations. This has been especially so in the latter case owing to various non-market failures.

Public WSS services have remained lacking on grounds of efficiency. Large proportions of the population have little or no access to public WSS services, while the remaining who receive it often face issues of poor quality, characterised by frequent breakdowns and unreliable supply. 

Simultaneously, these water utilities barely have enough to cover operational costs, leaving no surplus available to finance the expansion of networks, eventually leading to a downward spiral in customer service. This results in the consumer's reluctance to pay higher tariffs ultimately leading to a deterioration of assets and squandering of financial resources. This descending cycle attracts political interference and furthers the velocity of the fall. 

Secondly, divergence of personal gains of employees from the social goals and absence of reliable measures to hold such officials accountable further exacerbates the deplorable functioning of such organisations. These organisations become hotbeds of corruption and maladministration. Hence, there have been growing views in favour of privatisation for increased competition and better efficiency. Furthermore, WSS does fulfil the prerequisite of a private good by being rivalrous in nature, and the additional benefits associated with its consumption generates a stronger incentive for individuals to pay higher for obtaining better quality services.  

The private sector has long played a role in the water sector, particularly in the industrialised economies. Historically, water supplies in many cities of the US were provided by private players until the government reverted the ownership to itself. The WSS services are entirely provided by the private sector in countries such as the UK, France, Philippines, etc. 

Owing to the principal role of Water and Sanitation, such countries do have in place mechanisms where the government has oversight over the private sector. It accomplishes this through models which outsource management and supply of WSS while retaining public ownership, or by providing concessions against contracts, or through the presence of a regulatory agency. The only exception is France where there exists no sort of supervision by the administration. Private sector involvement in such a key area of the economy presents numerous risks for the former, such as commercial, financial, technical, legal and political risks. 

Commercial risks involve the fear that the private investors may not be able to recoup their investment and make a profit, while technical risks pertain to insufficient knowledge about the state of installations resulting in operational failures. Legal risks occur as a result of contractual disputes, while financial risks relate to currency devaluations and convertibility of local to foreign currency, especially when foreign borrowings are used to finance services. Political risks stem from governments' changing policy in the course of implementation of the contract or due to their reluctance in charging higher tariffs.  

An example to illustrate the risks posed could be seen in the case of Argentina. Water privatisation in Argentina began in 1992, where certain concessions were awarded by the administration to private companies. Post 2001, all concessions were terminated under the leadership of a different government on the basis that the contracts were not fulfilled by the providing company. The private companies conceded to their failure in meeting the targets, but argued that a freeze in tariffs at the time of the devaluation of the Peso during the Argentine economic crisis violated the contract, and thus, made it impossible for them to achieve the set targets. In July 2010, the International Centre for the Settlement of Investment Disputes (ICSID) ruled in favour of the private concessionaires and entitled them to compensation. Thus, there were losses faced by both the private companies and the government, with no winners in such a fight. 

Private sector participation (in such areas) has generally been touted as the solution to the pressing need of huge capital investments in the water sector. However, the ability of the private sector to actually invest in water infrastructure is doubtful. As per the Global Water Partnership, estimates of the total investment needs for new water infrastructure amounted to $180 billion per year for the period of 2000–2005. However, according to historical data, total private investment in WSS has averaged $3.3 billion per year, i.e. only about 1.8% of the annual investment needs of developing countries. In Asia, the annual average private investment of $1.9 billion in water (World Bank PPI database) accounts for 7.9% of the total financing needs of the region.

Another claimed basis for involvement of private players is increased competition so as to improve the overall efficiency. However, the investment level in the distribution networks is massive relative to the size of the market, which obscures the potential for direct product market competition in developing countries. The entry to this market is often done on contractual basis from governments but factors like political risks, long payback periods, huge sunk costs and high degree of non-transparency while awarding the contracts deter private sector participation. Additionally, there has not been any substantial data to evidently prove the productive efficiency of the private sector in sanitation. 

Lastly, one of the most important arguments in favour of private sector participation is the expansion in the scope of services due to the huge resources it brings with it. However, this theoretical abundance is difficult to translate into actions in the developing economies for the following reasons: 1) On the demand side, the unwillingness of the consumers to pay cost-recovering tariffs (maybe due to unawareness of the benefits of WSS); and 2) on the supply side, neglect of the poor by profit-oriented firms which pursue only the wealthy section to recoup their large investments. Moreover, rural areas have scattered populations that often present technical, organisational, and financial sustainability issues, thus proving to be unviable for private companies. As per data, private investments have appeared to have benefited the relatively wealthier countries due to the lower risks associated with them in ways such as market friendly policy and institutional environments, high household incomes, effective regulatory mechanisms, etc. 

To illustrate, in the period 1990–2005, of the total  investment of $46.2 billion in WSS, the upper middle, lower middle and the lowest income nations captured 56%, 43% and 1% respectively.  Thus, one can conclude that provision of water supply and sanitation is not a game of either-or, rather an affair where the nation needs to create an enabling environment that can harness innovation and good governance for achieving success.


Khushboo Pandey

An Economics student endeavouring to comprehend the Economics & Finance world.

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