EU faith in private water finance shows ignorance

In response to recent criticism of EU water aid policy
commission officials said it is "essential" to get the private sector involved
due to its "huge spending power" and the "knock-on effect" of other corporate
investors following in the footsteps of water company pioneers to bring jobs
and prosperity as well as basic infrastructure to deprived regions.

This shows an alarming ignorance of reality, which is that the private water
companies have not invested, and will not in future invest, in water in
developing countries - a fact well known for some years to all observers of the
sector.

The multinational companies themselves have been criticising this kind of
naivety since 2002, when the chief executive of SAUR complained to the World
Bank of "unrealistic" beliefs "that the private sector has unlimited funds" and
insisted that "The scale of the need far out-reaches the financial and risk
taking capacities of the private sector." The same message was strongly
endorsed by Thames Water the following year.

The clearest statement was published in January 2003, when the company most
active internationally, SUEZ, announced that: "SUEZ' exposure to emerging
countries, as measured by capital employed, is expected to be reduced by close
to one third." Far from investing their "huge spending power" the private
companies have been disinvesting for over four years now.

Suez' latest annual report confirms that this withdrawal is now almost complete
"Thanks to divestments carried out in 2005 and 2006 (withdrawal from Latin
America, sale of the North American waste services business, partial sale of
Palyja in Jakarta, etc.) and the early-2007 sale of its Bolivian operations,
SUEZ Environment has completed its geographical shift, anchored around a strong
European base and a deep international footprint; namely the water business in
the US, waste services in Australia, and water and waste services in China,
North Africa and the Middle East."

No investment will remain in water services in Latin America, sub-Saharan
Africa, or south Asia. The companies are now only interested in short-term
management contracts with no investment commitment.

Even before this withdrawal, the private companies had failed to deliver
investment to contribute towards the UN's millennium development goals (MDGs).
In all of sub-Saharan Africa and Asia, over a decade of private sector
investment succeeded in connecting at most half a million people. Many
advocates of the private sector are now hoping that private contractors in
developing countries may emerge as operators of services, but these local
entrepreneurs do not have "huge spending power" and are not expected by anyone
to be significant investors.

The lack of private sector investment has damaged the prospects of achieving the
MDGs in water, but this shortfall was made even worse by donors clinging to
policies based on the false assumption that the sector is led by private sector
investment. Between 1998 and 2002 investments in infrastructure in developing
countries by donors and development banks fell from $15 billion to $8 billion.

A World Bank review concluded that "Ultimately, many of the adjustments in
public financing and ODA largely reflect the fact that the expectations of
private sector participation in the financing of infrastructure needs were
over-optimistic." A World Bank strategy paper in 2003 acknowledged that this
required a change of approach "the recent decreases in private sector interest
in infrastructure show that reliance on the private sector alone will not be
sufficient to guarantee a scaling-up of infrastructure service provision."

At the same time, however, the European Commission was pressing ahead with
formulating the EU Water Initiative (EUWI) based on the principle that it
should aim at leveraging private finance. It was very successful at gaining
public plaudits for its bold promises of billions for water in developing
countries in 2002 and 2003, but it has so far delivered none of these promises.

A review by WaterAid and Tearfund concluded that "Not a single extra person has
received safe water or sanitation through the Initiative. Separate but linked
efforts to increase funding for water and sanitation through the EU Water Fund
have similarly failed." Their review also identified that one key reason why
these initiatives had failed was because of an "ideological bias to private
finance" seeing the main function of aid as "leveraging" private finance.

Unlike the World Bank, the European Commission has never admitted that reliance
on the private sector to provide public water services may be unrealistic,
unjustifiable and even harmful. This cannot be due only to the use of advisers
with positions in private companies. The European Commission, it seems, prefers
to cling to its ideological belief in markets and the private sector, rather
than acknowledge the evidence that it urgently needs to support public sector
development of water services. Those without clean water find it less easy to
escape reality.

The author, David Hall, is director of Public Services International Research
Unit at the University of Greenwich