The business of water - Essay Example

THE BUSINESS WATER and The Business of Water The following research examines the privatisation of water companies and the subsequent economic implications of water private companies from 1989 to date. The context of the research is set on how water companies came to be privatised and the motivation behind the privatisation. Analysts argue that the issue concerning privatisation of water companies was not given as much attention as it deserved. However, “the turn of the century saw water privatisation viewed from the context of investments, prices and efficiency” (Lynk, 2003, p. 110). This research will pay particular attention to both developed and developing countries which have the greatest number of private water companies. However, empirical data is gathered in developing countries, Asia and Latin America regions. Introduction Since water companies began to be privatised, there has been an ongoing debate from both the political and social circles regarding the sustainability of private water companies. The debate has brought together political movements, labour movements and major corporations with each side having a conflicting opinion regarding privatising water services. Background According to Thanassoulis, there is a common pattern in developed countries regarding the improvement of water and sanitation services (2000, p.7). In many countries across the world, water provision services began as early as the 17th century. However, such services were only used by people of a higher social class and state departments such as the fire brigades. The subsequent development of urban centres saw an influx of people towards cities thus creating a water crisis. Water ceased to become an incentive but a requirement for almost every household in the urban areas. Despite the fact that the previous water and sanitation services were operated by private entities, municipalities and urban councils took over the provision of water services to address the rising acute water shortage. According to Ogden,(1995, p.200) France however maintained the status quo and private water companies continued to operate independently which explains why the largest water companies in the world are France’s Suez and Veolia. Those in support of municipalities taking over water and sanitation services argued that the state bodies had the ability to address the inefficiencies in water provision by private contractors. This was when water and sanitation service become public provision and were publicly owned. The municipalities bought the facilities that had previously been at the hands of private contractors and later built their own. Privatisation of Water Companies From the historical background, it is evident that water and sanitation services were mainly a public provision and thus confined to the public sector. However, the private sector had a little grip on the water provision industry. In a nation like France, the private water companies continued to dominate the water business sector going into the late 1980s. The span of dominance had grown so wide that the private water companies dominated the construction industry, waste management and other key sectors in public service. There is no single country in Europe that could match the dominance of the French private water companies. The French water companies also controlled some ownership in the English and Welsh companies until 1989 when the then Prime Minister Thatcher made a political decision to make public the two companies. Consequences of Early Privatisation One of the immediate consequences of public water companies was that private water companies no longer competed amongst themselves. The only source of competition that these companies had was from the public sector water and sanitation services companies who had little or no interest in competing with the private companies. In addition, most of the small private water companies were aware of the technical challenges they would face when in competition with municipal water services. Thus such companies formed joined mergers creating a form of oligopoly. To further compound the problem was that public water companies were protected against unfair competition through barriers to entry into the market. This was made possible through various legal provision between such companies and the local or national governments. Emerging Challenges in Water Service Privatisation A common trend in the water business is that private water companies and large water corporations are seeking to sell of ownership of the companies or pull out of developing countries in terms of operation. There are a few challenges related to such trends; A global private water multinational, Suez, announced its withdrawal from developing countries in Africa and East Asia. This decision was arrived at after the company failed to deliver substantive returns to its shareholders. The company pointed out that it would be counter-productive for it to continue investing in activities that were not self-sustaining and financing. The problems that the company faces include undervaluation of the currency, resistance to prices and over-optimistic targets by the company. However, these challenges were the same challenges that the company faced during its establishment stages. This is because, in previous years, the company encountered a major problem where poor households were incapable of paying for the cost of water supplied (Faraia et al, 2005). According to Bayliss and Hall (2000) a selective service is capable of being profitable but a universal service has little or no chances of being profitable. A few years earlier, Biwater Company from the UK withdrew from Zimbabwe citing among other challenges; low rate of returns. According to Crane & Matten, (2010) another major challenge affecting private water companies is that there has been a spirited fight against privatisation of provision services by consumer protection bodies and political lobby groups. The common argument for this resistance is water being an essential commodity should not be under the control of private individuals. In addition, consumer bodies argue that it is unethical to allow water as a vital resource to be used for profit-making since such a situation increases its vulnerability to price manipulation. The opposition by consumer for instance saw private water companies terminate their contracts in Cochabamba (Bolivia), El Alto (La Paz) and Suez (La Paz). It is such unpopularity related to privatisation of water that has made several countries such as Uruguay and Netherlands criminalize privatisation of water provision service. Carroll Pyramid of Social Responsibility Carroll’s pyramid is a representation of the social corporate responsibility which describes the major activities in relation to social responsibility and their order of importance. Economic responsibility is the most fundamental responsibility and is contextualized in the aspect of providing higher returns and economic value to investors. The legal responsibilities, on the other hand, dictate the legal framework under which an organisation operates in while the ethical responsibilities define the morality of the business operations. The philanthropic responsibilities, however, are discretionary which implies that such responsibilities depend on the willingness to perform philanthropic acts. In water privatisation, the public water companies appear to be more engaged in corporate social responsibilities than private companies. However, the approach taken by public water companies involve more philanthropic work than economic responsibilities. Private water companies, on the other hand, concentrate more on the economic responsibilities to their investors and are less likely to contribute much to the public social setting. Investing in Water and Sanitation Service Hall and Lobina (2002) state that water utility system require massive investment to set up. One of the main motivations behind privatisation of water companies is to increase the level of state funding and borrowing in developing countries. As stated by Baylis, the World Bank embarked on a campaign to privatise water services companies in developing countries in an attempt to enhance service delivery(2003, p. 507-531). This strategy was meant to attract big multinationals as developing countries would have opened up doors to new market potential. Private water companies have however continued to pull out of major contracts in developing countries raising questions about the availability of water utility market. In Africa and Asia, for example, only a limited number of households are connected to water services by private water services. Lobina and Hall (2001) point out “private water companies are allowed to ‘cherry pick’ selectively the profitable parts of the nation to deliver their services”. Such companies end up selecting the areas they feel profitable leaving the rest of the population without water services. Water Companies and Rules Regulating the Industry The provision of water and other related services is highly regulated due to concerns regarding monopolistic tendencies by water companies. It is in this regard that most countries regulate the practice of water trading. Several nations among them Ecuador, Philippines, Colombia and Morocco as success stories when it comes to water privatisation. However, the practice is heavily opposed in some nations such as the U.K, Bolivia, Brazil and Argentina. In countries such as Argentina and England privatisation of water companies have been greeted with acknowledgement and opposition to equal measures. There also other cases where water privatisation resulted in absolute failure particularly in Jakarta and Berlin where the privatisation of such services led to an almost near collapse of the industry. Most large companies, however, continue to provide the services in major countries. Some of the leading water service corporation that are privately owned include Biwater (see http://www.biwater.com/) and Suez (http://www.suez-environnement.com/) The Price Factor on Privatisation of Water Services As stated by Larner and Laurie (2010, p. 23), the opposition regarding the privatisation of water companies is often attributed to an increase in prices. The general public perception is that public water companies are more affordable and effective in terms of operability. However, prices for water services are often influenced factors such as relative cost and return on investments. Because the water as a natural resource is essential, water companies often have price monopoly. However, private water companies are often tempted to extract monopoly profits through an increase in prices. Efficiency of Private Water Companies “The economic merits of privatisation are weighed on the basis of comparative efficiency” (Hunk & Lynk, 2005, p. 375). According to recent studies, there is a general misconception that private water companies are more effective in service delivery as opposed to those in the public sector. The econometric evidence regarding the intrinsic efficiency of public water companies has never been supported by statistical evidence. In terms of water utilities, researchers have never found any statistical difference regarding the effectiveness of public water companies in comparison with private entities. A study conducted in the UK established that privatisation of water companies did not enhance service delivery nor did it increase productivity. However, there is a consistent pattern indicating that privatisation; if applied effectively, might offer the solution to some of the crisis facing water and sanitation service providers. According to Hukka and Katko (2003, p. 147) the technical advances within the water industry have not improved the situation either. Currently, most private water companies have failed to invest in research and development which explains their poor performance in both developed and developing countries. Conclusion Privatisation of water companies has been ongoing since the early 1980s. Currently, private water companies are at liberty to invest in the sector provided that the consumers are financially capable of paying for the services delivered. However, the market principles in the water business make it hard for private water companies to invest in more concrete long-term ventures. As it is, the concept of universal piped water to supply the growing demand has faced a lot of resistance from different quarters. To further make things worse is the fact that the lack of private investments in developing countries makes it hard for private water companies to invest in such nations. Prasad,(2006,p.670) is of the view that in developing countries, state institutions such as the municipalities have devised ways of using public finance such as donor funds to sustain their investments. Private water companies have also embraced this strategy to sustain their investment through extension of water services. There is a growing trend where companies prefer lease contracts as opposed to concessions as a means of injecting public finance funds into the water business. However, countries such as the UK have so many technical, fiscal, economic and cost constraints that threaten the sustenance of private companies. As stated by Estache & Rossi, (2002, p. 142) among these factors is the high cost of capital. In the UK, the change from equity to debt in the private sector means that private water companies can no longer enjoy the incentive of equity financing. Crane, Matten & Spence state that the changes in capital financing are the ones found to have offset the gains made by private water companies (2007). From the research, the case in England and France points to a situation whereby private water companies still have the ability to obtain monopoly profits. The prevailing conditions in the market further erase the efficiency gains by private water companies in Eastern Europe hence the private water companies hold no substantive advantage. Padgett asserts that empirical evidence and statistical research indicate that it is possible for a nation to benefit both economically and socially by managing water and sanitation services as opposed to outsourcing such services to private entities (2012). However, privatisation of water services still has two major benefits; one benefit is that such privatisation can be used as an alternative to public policy investment. According to Lobina & Motte, this is particularly effective in nations that have technical constraints in terms of debt and borrowing of public funds. In addition, financial institutions are making privatisation mandatory for lending (2005, p.300). It remains to be seen just how effective private water companies can address some of the concerns raised particularly monopolistic tendencies and selective service provision. References Bayliss, K. 2003, ‘Utility privatisation in Sub-Saharan Africa: a case study of water’, The Journal of Modern African Studies, vol. 4, no. 4, pp. 507-531. Bayliss, K., & Hall, D. 2000, Privatisation of water and energy in Africa. London: Public Services International Research Unit. September. Online at: http://www. psiru. org/reports/2000-09-U-Afr. doc.(May 20, 2002). Crane A & Matten D 2010, Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization, Oxford University Press, Oxford. 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Prasad, N 2006, ‘Privatisation results: private sector participation in water services after 15 years’, Development Policy Review, vol. 24, no. 6, pp. 669-692. Thanassoulis, E 2000, ‘DEA and its use in the regulation of water companies’, European Journal of Operational Research, vol. 127, no. 1, pp.1-13. Read More