EU faith in private water finance shows ignorance

27 March 2007
The EU’s insistence that water aid should involve the private sector ignores the evidence that such companies will not invest in water in developing countries. Instead of this unrealistic focus on the private water companies, the Commission should support public services, writes David Hall.

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