"Water, water, ev'rywhere, and not a drop to drink"...unless you've got the cash? -------------------------------------------------------------------------------- --------------- http://pubs.acs.org/subscribe/journals/esthag-a/34/i15/html/08christ.html August 1,2000/ Volume34, Issue15/ pp.340 A-345 A Copyright © 2000 American Chemical Society GLOBAL FRESHWATER SCARCITY Is Privatization a Solution? Declining world water supplies may hinge more on improper water management than too little water. KRIS CHRISTEN At meetings on population growth, one is always confronted with maps showing little red dots representing birth rates around the world. Over the years, the density of these dots has grown with such dizzying speed that many question how the world's finite freshwater resources can be expanded to provide these teeming masses with adequate drinking water, while at the same time keeping pollution in check and leaving enough water for viable Currently, about 20% of the world's population lacks access to safe drinking water, and about 50% lacks adequate sanitation, according to the United Nations Environment Programme (UNEP) (1). The problems are most acute in Africa and West Asia, but insufficient water is already a major constraint to industrial and socioeconomic growth in many other areas as well, including China, India, and Indonesia. If current consumption patterns continue, UNEP concludes that two out of every three people will live in water-stressed regions by 2025. In fact, freshwater scarcity is already so severe that the International Council for Science's Scientific Committee on Problems of the Environment ranks it second only to climate change as the most pressing environmental issue of the 21st century. This crisis is not the result of too little water to satisfy the needs of a growing population, but rather a consequence of poor water management, according to a report by the World Commission on Water (2). The report's most immediate-and most hotly debated-solution is to usher in full-cost pricing of water services, coupled with subsidies for the poor, to encourage privatization of water utilities. Nongovernmental organizations, particularly unions representing workers in water treatment, sanitation, and distribution plants, and many groups in developing countries disagree, steadfastly rejecting the report, which was unveiled at the World Water Forum in March in The Hague, the Netherlands. They argue that access to water is a basic human right, not an economic commodity, and therefore, it should be free. For the many governmental representatives present at the ministerial portion of the forum, however, water pricing is seen as an eventual necessity. Basic needs for the poor have to be met, but governments are realizing past practices will not work and that they cannot deliver services when the cost of doing so cannot be recovered, said Eveline Herfkens, Dutch minister for development cooperation. Making the case for privatization Most governments heavily subsidize water services-including domestic and industrial water supplies, wastewater treatment, and irrigation-and most water utilities in developing countries are still financed and run by governments. In most cases, "they're run very inefficiently, tariffs don't cover their costs, they're overstaffed, they typically lose half their water through leaky pipes, and they generally provide unreliable and rationed service," said John Briscoe, senior water advisor for the World Bank. Consequently, the service has to be subsidized with the result that the poor are marginalized and not connected to the system, forcing them to buy water from vendors at exorbitant prices. Even in the industrialized world where countries have been moving toward full-cost pricing, subsidies remain common (3). To bring about the needed changes, the World Water Council (WWC) , an international water policy think tank that appointed the World Commission on Water, estimates that total investment in the water services sector will have to more than double from its current $70-$80 billion per year, of which governments contribute roughly $50 billion, to $180 billion per year. Most of this money will have to come from private investments, as many governments, particularly in the developing world, just do not have the budget to improve their water and sewage infrastructure. See sidebox, "Rate of water utility privatization worldwide".** Because water is so heavily subsidized worldwide, the degree of cost recovery in the sector is only 25%, said Ismail Serageldin, a World Bank vice president who chaired the WWC report. As a result, water utilities cannot attract private investment, and innovations in water-saving technologies have been stalled. The agricultural sector, which commands the lion's share of the global freshwater supply-more than 70%, mainly for irrigation purposes-holds the greatest potential for water savings, according to the International Food Policy Research Institute. Agricultural demand for water is projected to increase sharply to feed a growing world population, but other sectors will demand more water for their development as well. Water might then go toward higher value uses such as industrial operations and municipalities, which could hamper the food supply. Private investors bring management expertise and funds, but to attract private money, an adequate revenue stream has to be guaranteed, said Gérard Payen, CEO of French-based Lyonnaise des Eaux, one of the biggest water companies in the world. "If it comes from government sources, the private sector faces too big of a risk," and hence the money should come from the users, Payen said. Higher water prices could also stimulate companies to implement cleaner production methods that consume less water, along with closed-water cycles, which would go a long way toward conserving water, said Klaus Töpfer, UNEP's executive director. Strong opposition to privatization Curt Carnemark, World Bank Unions and many groups in developing countries, however, adamantly oppose privatization because they fear it might allow unscrupulous companies to gain more control over water allocation, further marginalizing the poor. "Privatization is a hopeless irrelevancy," said Mani Shankar Aiyar, a member of the Indian parliament. "If we allow privatization, we have to enable private suppliers to recover their economic cost and make some profit. We may get an efficient system as a result, but with a per capita income as low as in India, not everyone can afford it." Pointing to India's recent scandalous experience with the cellular phone industry in which a company threatened to pull out during India's war with Pakistan if India did not agree to reduce the licensing fees, he asked, "How will multinational corporations fulfill their social obligations in the water sector if they can't do it in the telecommunications sector?" Others voice concerns that privatized utilities could amount to little more than "cherry picking" operations in which the private sector goes in and installs distribution networks only in areas where customers are able to pay reasonable rates. This is where contracts are extremely important, said Alain Mathys, a project director in Lyonnaise des Eaux's technology and research division. "Most of our contracts in developing nations specify targets for service coverage in low-income areas within a certain time frame," Mathys said. "If we're able to provide water services to the poor, we also gain access to the rest of the city." Richard Heckmann, CEO of the French-based Vivendi Water, noted that water treatment and distribution is never going to be free. "This issue of whether water is a basic right and should be given away doesn't understand that there's a cost to [its distribution] that must be borne either through taxation or through private industry." Ecosystems need water too While neither supporting or rejecting privatization per se, environmental organizations call the WWC report and its framework for action revolving around this solution "fundamentally flawed." When people negotiate water resources, they negotiate the whole ecosystem away, leaving nothing left over for nature, said Richard Holland, director of the World Wildlife Fund for Nature's living waters campaign. "What they fail to recognize is that protecting water sources is a key starting point for ensuring freshwater supplies for drinking and food production." Conservation groups are concerned that increased investment in water supplies for large cities could lead to the development of new water resources or the transfer of water resources from one part of the country to another or from one river basin to another, with major detrimental environmental impacts. Building on WWC's recommendation for integrated water resource management at all levels, WWF and the World Conservation Union (IUCN) call for much more emphasis on small-scale, local approaches to land and water management that allow development objectives to be met at the same time as protecting the environment. These include proper use of intercropping methods, rainwater harvesting, and choosing crops that better match soil types. "These are small-scale things, but once you start multiplying them up in a particular basin or at the country level, you can actually start using natural resources in such a way that livelihoods improve," Holland said. Establishing other incentives such as tax breaks for water conservation techniques and the abolishment of perverse incentives-such as subsidies for water-intensive crops in water-deprived areas-are other techniques to be developed and used, said Ger Bergkamp, IUCN water resources specialist. Likewise, conservation groups recommend the establishment of water reserves to deal with uncertainty and ecological functions, valuing water more realistically (Environ. Sci. Technol. 2000, 34 (8), 1381-1444), and reducing point source and nonpoint source pollution. South Africa has already put such a reserve in place. Kader Asmal, this year's winner of the Stockholm Water Prize (Environ. Sci. Technol. 2000, 34 (11), 247 A), was instrumental in establishing the reserve. The concepts behind it are "steeped in human rights and an understanding of the need to acknowledge our dependence on a healthy environment, as well as a clear understanding that the water reserve is fundamental to long-term security," said Guy Preston, special adviser to Ronnie Kasrils, South Africa's minister of water affairs and forestry. Getting past the impasse Privatization as a potential solution to the water crisis came about as a result of the management failures of large government, according to Briscoe. "For many years, we've financed public systems, always trying to improve performance through more training and setting certain conditions," he said. "It hasn't worked very well." He gave the example of Manilla in the Phillippines where the objective was to reduce the amount of unaccounted for water from an unacceptably high level of 50%. "After five loans, the amount of unaccounted for water was at 60%," Briscoe said. Even worse, access to municipal water supplies decreased from 82% to 64% in African cities over the past 10 years, with the poor paying between 20% and 40% more for water than the rich because they are cut off from the public system, Töpfer said. Thus, to get the efficiencies that private industry can offer, while at the same time trying to fulfill governments' social responsibility to the poor, the World Bank and UNEP are advocating public-private partnerships. The idea is that utilities should be accountable to the users they serve; they should have incentives for being efficient; and there should be regulatory frameworks for ensuring that the interests of the utility, government, and users are balanced. The most effective mechanism for getting these notions operating is the entrance of the private sector, which "we see as hugely beneficial because it will usher in regulation," Briscoe said. Public systems are not regulated, but typically with the entrance of the private sector has come the need for regulation. "We see this as a mechanism for accountability where there was none before," he added. But wholesale privatization is also not the answer, according to Briscoe. "The public sector sets performance standards and makes sure private companies perform according to contract," he said. "In none of these cases are assets sold to the investor, merely delegated to the private sector for a certain amount of time." Where to go from here The main challenges highlighted in the March ministerial declaration of The Hague include meeting basic human needs; securing the food supply; protecting ecosystems; sharing water resources; managing risks such as floods, droughts, and pollution; and putting a price on water services that reflects their true cost. Ministers set goals, such as halving the proportion of people without access to sanitation or safe drinking water by 2015, to meet these challenges, but many meeting participants had hoped for more. "What we were left with was that people interested in drinking water and sanitation talked to each other, the agriculture and irrigation sectors talked amongst themselves, and people interested in infrastructure talked to each other, but nobody has tried to take the more difficult step of actually trying to reconcile the contradictions among the various viewpoints," Holland said. For example, the food security group called for an increase in water allotted to agriculture, while the nature conservation group found that current practices are already unsustainable and called for a reduction in water allotted to agriculture, Bergkamp said. WWF has called for a review of the WWC report and framework for action to ensure that targets better meet the drinking water, food, sanitation, and energy needs of all those little red dots on population charts, while at the same time conserving the environment. Meanwhile, demonstrations against the World Trade Organization meeting in Seattle late last year, as well as at the annual World Bank and International Monetary Fund meetings in Washington, DC, in April, are helping to ensure that business as usual will no longer be tolerated. References Global Environment Outlook 2000; United Nations Environment Programme, Earth Scan Publications, Ltd.: London, 1999. World Water Vision: Making Water Everybody's Business; World Water Council, Earth Scan Publications, Ltd.: London, 2000. The Price of Water: Trends in OECD Countries; Organization for Economic Cooperation and Development, OECD Publications: Paris, 1999 -------------------------------------------------------------------------------- Kris Christen is an assistant editor for ES&T. ------------------------------------------------------------------------------- - **Rate of water utility privatization worldwide Water utilities have been privatizing at an increasing rate over the past 10 years, but private utilities still constitute only a small percentage of the water supply and sanitation market. Of the $70-$80 billion invested in the water sector annually, no more than 5% comes from private investors, according to the Global Water Partnership, an international network of stakeholders in water resources management. Moreover, the market is dominated by just eight major players, the three largest basedin France, and the remaining five based in the United Kingdom. In England and Wales, the water and wastewater infrastructure, as well as the water resources, is completely privatized. Most systems are based on the French model, however, in which local authorities retain ownership of the water resources and infrastructure but bring in private contractors to operate and build new facilities. This approach works best in countries with good governance, good laws, and no corruption, which is not the situation in most developing countries, said John Briscoe, senior World Bank water adviser. Because private operators are most interested in consumers with relatively high incomes, most private sector investment in infrastructure has occurred in Latin America and southeast Asia, Briscoe said. Latin America has been particularly conducive to privatization because of large-scale urbanization that requires an extensive infrastructure, as well as governments' efforts to adopt laws facilitating the liberalization of their economies, noted Alain Mathys, project director in Lyonnaise des Eaux's technology and research division. Likewise, the governments of Indonesia, the Philippines, and Thailand have adopted regulatory frameworks to enhance democratization and the development of their economies. Privatization in Africa, on the other hand, is the least advanced, Mathys said, because of the lack of laws giving private investors some kind of guarantee that they will see a return on their investments. In the United States, roughly 95% of water and wastewater utilities are run by municipalities, but more cities are looking at privatization as a potential option, according to Lou Ann Baker of United Water Services, one of the largest investor-owned water services companies in the United States. Most of the U.S. water infrastructure is aging and in need of costly repairs or replacement. With chronic funding gaps, some local governments are betting on the private sector to bring their systems back into compliance and keep rates down. [See pie chart at http://pubs.acs.org/subscribe/journals/esthag-a/34/i15/html/08christ.sbr.html] [Non-text material has been snipped.] -------------------------------------------------------------------------------- ----- Robert F. 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