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Journal of Management & Public Policy, Vol. 2, No. 1 December 2010

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Towards Balanced Public-Private Co-operation in Urban Water

Management

Jarmo J. Hukka*, Tapio S. Katko**, Pekka. E. Pietilä***, Osmo T. Seppälä****

Abstract This review paper explores the experiences from various types of public-private collaboration in terms of water services provision and production over a longer time period. The first modern water systems in many countries were built according to the concession model, but the great majority had been taken over by local governments by the early 20th century. The experiences from the two extreme policies of the later 20th century – free water services, especially in developing countries, and privatization, particularly in Latin America, proved unrealistic. These and other recent findings imply the need of more realistic policies and assessing development in a wider context. The interests of citizens rather than those of private companies should be the primary concern. It is suggested that the ownership and modes of public-private cooperation should be decided by the municipality/community. Keywords: Water Services, Privatization, Public-Private Co-operation, Introduction Water – its availability, occurrence and quality - is one of the biggest current and future challenges of mankind. Currently some 1.5 billion people lack safe water supply and 2.5 billion are without proper sanitation. As for the future, FAO (2010) estimates that by 2025, some 1 800 million people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under stress conditions. Indeed, the provision of water and sanitation services is one of the cornerstones in reaching directly or indirectly the Millennium Development Goals (MDGs): especially MDG no. 7 – Ensure Environmental Sustainability (The Millennium Development Goals…). As the fresh book by Castro & Heller (2009) argues, the MDGs can only be achieved by better integration of the technical and social science approaches for improved organization and delivery of water and sanitation services. Water has several special features compared to other commodities. It is a satisfier of a basic need and a prerequisite for all economic activity. Water services – covering both water supply and sewerage/sanitation – are a natural monopoly, typically areally limited and highly susceptible to

* Adjunct Professor, Tampere University of Technology, Finland E-mail: [email protected] ** Adjunct Professor, Tampere University of Technology, Finland E-mail: [email protected] *** DTech,Tampere University of Technology, Finland Email: [email protected] **** MD, DTech, Finnish Water and Waste Water Works Association, Helsinki, Finland Email: [email protected]

mailto:[email protected]:[email protected]:[email protected]


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local conditions. Water services provision – having legal responsibility for arranging the services as local governments in Finland have – and production, which is taken care of by water supply and/or wastewater utilities, are very challenging because values and priorities vary from country to country, even within a single country. Water has been considered an economic as well as a public good but is not exclusively one or the other –it is actually a mixture of the two and many other features. And that mixture is not constant but varies by time and place. (Pietilä et al 2010a) The focus of this paper is water services. This review type paper aims at exploring the experiences from various types of public-private collaboration in terms of water services provision and production over a longer time period. First, we will present some historical experiences from the 19th century followed by two extreme policies of the later 20th century: free water policy vs. privatisation. Then we will look at more recent findings and experiences and discuss the various forms of public-private co-operation regarding urban water supply and sanitation as well as present a framework explaining how external supporters of each decade have introduced their fashionable policies to developing and transition economies. Historical experience from the 19th century The first modern water systems in many European countries, and particularly in North America, were built according to the builder-owner or the concession model. In most cases, however, the water and sewerage systems were soon taken over by municipalities. For example, by the early 20th century, 93 per cent of the systems in German urban centres were municipal, as were all the urban systems in Sweden and Finland (Wuolle 1912). In the USA water works were the first important public utilities and the first municipal service that demonstrated a city´s commitment to growth. In 1830, some 20 per cent of the 45 waterworks were publicly owned and 80 per cent privately owned. Yet, the share of public water works increased gradually reaching about 50 per cent in 1880 and 70 per cent in 1924 (Melosi 2000, p. 74, 119-120). In sewerage, on the contrary, private ownership has been very limited. New Orleans was the onlybig U.S. city that granted a sewerage franchise which turned out to be short-lived. (Melosi 2008, 97-98). The first sewerage systems in small towns were constructed in the 1930s. Based on the Public Works Act, these systems were built almost exclusively with public funds. Yet, private contractors were hired to design and build sewerage systems at the end of the 19th and the beginning of the 20th centuries (Keating 1989, pp. 100-102) as in Europe. In terms of water services, France has a unique history. Traditionally, French water and sewerage systems have been owned by municipalities. However, private companies have been contracted by municipalities to manage water and sewerage works for over a hundred years (Kraemer 1998, 335). The best known enterprise, the Compagnie Générale des Eaux (later Vivendi and Veolia Water), was founded by imperial decree as early as 1853 (Goubert 1989, 175). The very high number of municipalities in France is the reason behind the exceptional development. In 2010 there were about 36 500 municipalities of which 95 per cent had a population under 5 000 people (CEMR 2010). The average municipality has a population of only 1 800 people, yet there were some 16 000 water utilities and some 16 800 sewage utilities around


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2000 (Barraqué 2002). According to Barraqué (2005), French local authorities have historically built close relationships with private companies — to protect themselves from centralisation. From the management point of view, it is obvious that such a large number of municipalities creates pressure to arrange services by supra-municipal areas (Juuti & Katko 2005, 42). Furthermore, legislation has favoured the use of private operators. In spite of that, for example, the city of Paris took over the services in January 2010 after having bought them from private operators for 25 years. Currently, in France large private companies supply water to as much as 80 per cent of the population (Anon 2010). However, private operators are one fairly exceptional option for organising supra-municipal services. In many countries these services are organised by various types of public federations or companies, often on a wholesale basis. (Pietilä et al 2010b) There are also some interesting but controversial historical cases of private concessions – either planned or implemented. In Tampere, an old Finnish industrial centre, the industrialist William von Nottbeck (1816–1890) offered to build a water pipe at the request of the municipal authorities in 1865. He made several proposals whereafter he submitted his conditions for running the water supply. The conditions, explained in ten paragraphs, can be summarised as follows: the industrialist wished to reap the profits and make the town take all the risks. After consideration, the town decided not to accept his tender but instead started developing its own water works under municipal administration (Katko et al. 2002). In Helsinki, the capital of Finland, a 75-year concession was signed with a private businessman in 1871. However, he never took a step toward establishing a utility but sold the concession further to a German company making a fortune. Due to the economic troubles of the company during the recession in Europe at the time as well as the recently enacted municipal act in Finland, the city decided to buy back the concession. Interestingly, a decade later the same businessman won the horse-drawn tram concession –this time he tried to operate the service but was unsuccessful. (Juuti et al 2006) In some cases concessions appear to have become endless. In Barcelona and Venice, private companies have maintained concessions for over a century (Hall & Lobina 2004). In the former, the concession has run for over 140 years, since Societé General des Eaux de Barcelonne (Agbar) was created in 1867 as a Belgian Company. (Juuti & Katko 2005, 42). In October 2010, a judge in Barcelona ruled that no contract of concession exists, and that the concession is void due to the lack of the appropriate paperwork (Sauri 2010).Such policy may obviously lead to long-term path dependencies and lack of competition. Two extremes: free water policy of the 1960s and privatisation of the 1990s After winning their independence mainly in the 1960s, many of the Developing Economies in Africa introduced a free water policy imagining that they could establish a functioning water sector based on assumed economic growth and use of national resources. Professionals like Forbes (1971) and Viitasaari (1972) warned that it will not be possible to keep the systems operational unless cost recovery and water charges are introduced. Yet, the prevailing mental climate favouring ambitious development goals and political promises did not allow discussions


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on water pricing until the late 1980s. In the mid-1980s bilateral support agencies still used to think that the issue was too sensitive and should be left to the countries themselves and not taken up in annual co-operation discussions. Yet, gradually it became clear that the free water policy is not sustainable and alternative ways of covering costs had to be studies as in the case of Tanzania (Mashauri & Katko 1993). In the mid-1990s, to achieve the necessary cost recovery, international financial agencies introduced a radically new principle of privatisation of water services based on full privatisation (divestiture), concessions or long-term contracts. It was promoted in the name of the so-called “Washington Consensus” although one may ask whose consensus was it actually? In any case, experiments with private concessions and long-term leasing or operational contracts were carried out particularly in Latin America, but also in Africa and the transition economies. Despite the long tradition of privately managed water and sewerage services in France, the most dramatic privatisation of recent decades and years started in Britain, where Margaret Thatcher´s Government established a policy in 1979 of downsizing the public sector through privatisation (Rasinmäki 1997, p. 2). In 1989, this manifesto led to the full privatisation of the regional water authorities by turning them first into water and sewerage companies and then floating them as public-liability companies in England and Wales. (Hukka & Katko 2003, 11) The policy of the Thatcher Government was in glaring contradiction of the principle where services are managed at the lowest appropriate level (ICWE 1992). This principle was approved at the international conference in Dublin in 1992, and it was ratified at the Rio Conference (UNCED) later the same year. The quite similar principle of subsidiarity is one of the cornerstones of the European Union. Regional water authorities (RWAs) had been established in England and Wales in 1974 before the change in policy. Their boundaries followed the watershed areas. Originally these RWAs were owned and managed by boards nominated jointly by national and local governments (Summerton 1998; Gustafsson 2001a). However, local governments as owners were gradually kicked out. According to several sources (Castro et al. 2003, Green 2001, Kinnersley (1998), Okun (1992a), Okun (1992b), Semple (1993), the central government did not give RWAs permission to borrow enough funds before the actual privatisation which lead to an unbearable economic situation. It is, thus, evident that the real reasons for privatising RWAs were ideological (Hukka & Katko, 2003; 37-44), and the RWAs could have operated if reasonable conditions for financing of investments and operations had been created and maintained. Experiences from privatisation Fairly soon, around the year 2000, the privatisation policy followed in Latin America proved less than successful, or a failure, as shown by international evaluations (Annez 2006, PPIAF 2009) and researchers like Castro (2007, 2008), Castro & Heller (eds. 2009), Hall and Lobina (2009), Hall et al. (2010), Hukka & Katko (2003), Vinnari & Hukka (2007). ´ In 2001 the City of Tallinn sold 50.4 per cent of the shares in its water services company to international investors in order to secure investment funds. In the following years, the new


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owners took considerable amounts of money out of the company, while financing practically all investments with a loan from the European Bank of Reconstruction and Development (EBRD). Tariffs were also raised. To prevent such occurrences, the City Council should have been more careful in the preparation of the tender documents and the Services Agreement. The case of Tallinn demonstrates clearly how public strategic decision-making should be based on proper economic and social analyses in order to safeguard the interests of citizens, tax-payers, and water services users. This includes securing necessary investments for the construction and rehabilitation of critical infrastructure (Vinnari & Hukka 2007). Towards more realistic policies The experiences from the two extremes policies – free water services and privatisation – both imply the need of more realistic policies and assessing development in a wider context, such as the PESTEL (political, economic, social, technological, environmental and legislative dimensions) framework (Fig 1). The elements should be better integrated and balanced and they all should be properly taken into account. These two opposite policies – free water and privatisation – have proved unrealistic, necessitating the development of more sound water policies and reforms as part of a wider institutional framework.The role of institutions has been pointed out by several Nobel Laureates in Economics [e.g. Ostrom in 2009, Krugman in 2008, Stiglitz in 2002, North in 1990] as well as the fact that neoclassical economics cannot adequately explain development. Using the soccer analogy, D.C. North (1990) defined institutions as the “rules of the game” while organisations are the “players”. Institutional analysis has indeed proved to be useful in understanding the social interaction between infrastructure and natural resources, as shown e.g. by North (2005), Ostrom (1990), Ostrom et al. (1993), and Stiglitz (2006). Figure 2 shows simplified conceptual frameworks of four different models to provide and produce water and sewerage services: (i) Responsible public ownership (pluralistic; regulated municipal monopoly; private sector competition for non-core operations); (ii) French (mayoral-competition for regulated municipal monopoly rights; operator company vertically integrated in non-core operations); (iii) English-Welsh (dualistic; regulated regional private monopoly ; owner company vertically integrated in non-core operations); and (iv) Developing and transition economies (one-party system; centralised "unregulated" public monopoly; lack of private non-core service producers). As a general finding, we can say that many developing and transition economies are now developing models that resemble the “Responsible public ownership model” which include proper roles for local governments, citizens, the central government and the private sector. There are also other modifications that may include components of the above ones. In some cases, even in an urban setting, it may be possible that a utility is owned by the user association or the like: a private but not-for profit body.


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Until recently the international discussion on private sector participation has centred on two models: various forms of maintenance and operation contracts (“the French model”) and total privatisation (“the English model”; Fig. 3). Public-private partnership has generally been understood narrowly to cover only co-operation based on these models, while the most common form of public-private co-operation where public utilities buy goods and services from the private sector has been largely left out of discussion. The cases and examples brought up have typically represented large population centres such as Buenos Aires (6 million people) and Manila (11 million people). This is quite understandable, because large multinational companies are more interested in the large business opportunities offered by large populations. Smaller cities, towns and rural areas have been ignored. Figure 3 shows where decision-making power rests – the further to the right we move, the stronger the private sector’s say, and the further left we go, the more influence is carried by the public sector. Building of viable public-private co-operation In water services provision and production, the most essential thing is to be able to offer the customers or users safe, reliable, good quality and affordably priced services. Thus, in theory, one could argue that it is of secondary importance how the ownership or management of the organizations responsible for these services is arranged. On the other hand, we have various options between private profit-maximization and private not-for- profit co-operatives and the like. As for public utilities, some do not cover their costs fully while others make huge profits and are criticized for hidden taxation on behalf of their owners, the cities. In a historical perspective we can find good arguments for many of these alternatives while it is very difficult to find justification for private profit maximization keeping in mind the ultimate purpose of these services. National and local circumstances and the specific operational environment often largely determine the most feasible options. Standard solutions do not apply in most cases. It is therefore advisable to support so-called “institutional diversity”, which allows using different institutional and management options. Thus, co-operation and partnership between the public and private sectors should also be allowed to take different forms depending on the local situation. (Seppälä 2004) A case study from Tampere, Finland, shows that the city boards or utilities responsible for water and sanitation services have bought a large share of their goods and services from the private sector or other city departments from the late 1700s until 2000. Only from 1918 till 1946 did the share of bought services remain noticeably low which is explained by the relatively low investment rate at that time (Juuti & Katko 2005, 71-72). Instead of privatisation, it is better to promote public-private partnerships or public-private co-operation. Whatever option is selected, the principles and practices of good governance should be followed. The core business of a water and sewage utility should be conducted by a municipality-owned (public) enterprise. Support services (non-core services) can be bought from the private sector through continuous competitive bidding. (Hukka & Katko 2003).


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The examples above lead us to the fundamental question of the purpose and justification of water and sanitation services. Figure 4 shows a conceptual and general development framework for WSS services. The starting point should be the basic aim of these services – not necessarily profit making. In the selection of an implementation model or models, long-term experiences and the nature of the services should be considered, despite the heavy pressure and requirements of international stakeholders. In the end, everything depends on conscious value-bound selection, that is, which model the decision makers consider most viable and essential. Benefits can be reaped in the form of improved services and a better environment, or more affordable services. Discussion In the global context, water supply and sanitation services are provided by the public sector for an overwhelming majority of users in urban areas. Undoubtedly, private companies bring a lot of competence into the sector. Yet, as researchers we cannot help recognising that as supporters of international conferences and reviewers of scientific papers they constitute a risk to objective and scientific research being more or less politically or ideologically driven. A clear fundamental difference exists between the basic philosophies of public and private enterprises which should not be forgotten. The way water and wastewater services are organised is unavoidably a highly political decision in any society. (Pietilä 2006) For water professionals that is a real challenge: how to operate in such an environment in a balanced way expressing professional views as the basis for decision-making. As Seppälä (2004) found out, the WSS sector policies of donors and international organisations have evolved over a long time and seem to follow certain fashionable trends. As regards the role of the private sector in water and sanitation services,“fashionable policies” in many developed and developing countries throughout the 1990s pushed strongly for a dominant role of private companies in the management and even production of water services. As many examples later have shown, the results were not as successful as expected. The “privatisation fashion” has since faded and other fashionable policy themes have largely replaced it. Instead of private ownership, various forms of public/private co-operation and commercialisation should be favoured as has historically been the case in many of today´s developed countries. Competition should be introduced to various production activities, not to natural monopolies. Agreements, where the public sector bears all risks and the private sector reaps all profits, should not be made. On the whole, it is difficult to imagine that the private sector would like to invest heavily in water and sewerage services since they are capital-intensive and require long-term investments. We also strongly doubt that private funding would be cheaper than financing arranged by municipalities. In either case, the burden of such investments will be carried by consumers and citizens. Therefore, commercialisation and/or public-private co-operation should be favoured. The key issue may be whether a municipality or nation is patient enough to build its own capacity and manage the core operations of water utilities – possibly outsourcing the non-core operations, or part of them, to the private sector. The latest reported experiences already imply that the drastic change in favour of privatisation by international support agencies in the 1990s


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has proved a more or less unsuccessful attempt to take a shortcut tosuccess, instead of long-term capacity building and institutional development of the water sector and services. The biggest challenge of water management in many countries is related to aging infrastructure and the need to rehabilitate the networks that are invisible and in many cases very challenging to manage.The best possible services should be guaranteed to users and citizens while systems are being rehabilitated. For that purpose, we should try to develop collaboration modes which allow public utilities and private actors to contribute in the most appropriate way without forgetting the fundamental purpose of the services. Concluding Remarks Long-term experiences from water and wastewater services imply that, at least in some cases, over the years we have pursued erratic policies rather than engaged in fundamental strategic thinking and seeking the most suitable roles for various stakeholders. Water and sanitation bring value and a lot of indirect and non-financial benefits to society. At the end of the day, water services are a highly political issue at the local, national and regional levels, whether we like it or not. Whatever modes of public-private collaboration are applied, we should always analyse the available options and most feasible solutions to the conditions in question. The interests of citizens rather than those of private companies should be the primary concern. The same applies to public utilities in case they make excessive profits or do not produce proper services. One of the key principles of the European Union is the subsidiarity principle. It as well as the Dublin Principle emphasise that decision-making should take place "at the lowest possible administrative level." Therefore, we recommend that whatever ownership and public-private cooperation models are developed and applied to water and sewerage utilities, they will be decided by the municipality/community, not by the central government or, for example, the EU. Acknowledgements Language check-up by Jorma Tiainen, and the comments by the guest editor and the peer reviewers are highly appreciated. The financial support from Tekes (SerVesi) and Academy of Finland (decision no. 135843) is gratefully acknowledged. References Anon. (2010). Paris water back in public hands. CUBE. cupe.ca/privatization/paris-water-public-hands accessed 3 Nov, 2010.

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Fig 1 From a) free water policy of the 1960s and b) privatisation of the 1990s towards more balanced development within the PESTEL framework.


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Fig 2 The four main models for urban water and sewerage services: developing and transition economies, English-Welsh, French, and Responsible public ownership model (Hukka& Katko 2003, modified).

Fig 3 Main options for private sector involvement in water services production (Pietilä 2006, 121).


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Fig 4 Conceptual framework for water and sewerage services (Hukka & Katko 2003, 119).

Fig 5 Development trends and priority elements in international water policies for developing economies (Seppälä 2004, 83).

JUSTIFICATION FOR WATER & SANITATION SERVICES

A/459/99/JUSTSANI

• PUBLIC-PRIVATE PARTNERSHIP

• NATURAL MONOPOLY

LONG-TERMEXPERIENCES

NATURE OFSERVICES

• GLOBALIZATION• EU

INTERN. IMPACTSOPTIONS EFFICIENCY

REQUIREMENTS

SOCIETAL VALUES

J. Hukka/T. Katko/TUT

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