This essay will demonstrate the fundamentals of market environmentalism and its application to the water supply industry. The relative merits of private and public ownership shall be considered and the key characteristics of each identified. The arguments of both these methods will be examined by demonstrating their application in both transition and developed economies. Subsequently we will determine whether market environmentalism can be a success or not.
Anderson and Leal (2001) define market environmentalism as 'a mode of resource regulation that promises both economic and environmental ends via market means' (Bakker, 2005, p.543). It is an example of the neoliberalism of nature, introduced in the late 1980s with the privatisation of formerly state-owned businesses. Market environmentalism consists of three concepts: privatisation, commercialisation and commodification. These are interrelated processes and some argue that all three need to be present for market environmentalism to be successful. Privatisation is the change in ownership from the public to the private sector. Commercialisation is the change in resource management that introduces commercial principles which are used to profit maximise through increased efficiency and return on capital utilised (Leys, 2001). These are two distinct processes and although interrelated, neither will ensure the conversion of resources to commodities. Lastly, commodification is the creation of an economic good for the purpose of placing a value on it. Castree (2003) in his work on the commodification of nature argues that the three concepts of market environmentalism have been combined and can be used interchangeably. I disagree with this statement because the terms are independent and they have their own specific definitions that are not equivalent.
I understand water supply to mean the provision of drinking water, rather than the water industry which consists of the water supply and waste water. In this essay, we are only interested in the supply of water, although the quality of waste water does influence this.
The UK regional water authorities in England were formed in 1974 and were subsequently floated on the London stock exchange in December 1989. At this point, combined, they had over 50,000 employees and assets valued at over £28 billion. The privatisation entailed a change in ownership, financing, and regulatory structure of the industry; consequently ten regional water authorities became public limited companies (plcs) (Saunders and Harris, 1994, Bakker, 2002). Recently a number of these have been acquired by overseas water companies, private equity players and larger asset management businesses.
There are three types of economy: the developed, developing and third world. In developed countries regulations and standards regarding water quality are very stringent. There is careful planning that goes into the infrastructure of the water supply and preparation for unforeseen circumstances such as droughts, by creating reservoirs. In the UK, the majority of households are metered, enabling the companies to monitor water usage and bill the consumer accordingly. The Office of Water Services (Ofwat) is the national regulator in the UK and sets the standards and return on capital (currently 6.6%). This is opposite to the situation in third world countries, where water supply is very basic with unmanaged boreholes in the ground.
Since the Dublin International Conference on Water in 1992, the management of water as an economic good has been promoted as a solution to the challenges facing urban water management in developing economies. This new approach has been associated with private sector participation where the World Bank (WB) is particularly active. The WB granted the Bolivian Government a US$13.3m low-interest loan in 1990 in order to finance development programmes (Nickson, 1998). The International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD) have also favoured privatisation (Paddon, 1998). Private sector investment is expected to facilitate and enhance efficiency. However, in practice, privatisation creates issues, (Lobina and Hall, 2000): such as management inefficiencies, restricted competition and corruption, excess pricing, excess profits and low water quality, together with problems in delivering development objectives.
There are three approaches that can be taken by countries with regards to the management of their water supplies. They can either be run by the public sector, governments can look to the private sector for investment or a combination of the two, in the form of Public Private Partnership (PPP). Wolf (1979) said that 'the choice between public and private is a choice between the imperfect alternatives'.
Transnational corporations are enjoying significant opportunities for expansion. However, the assumption that private sector participation is the only possible choice for investment can be challenged. For example, in developing countries, private sector involvement in the water supply often conflicts with the public interest, which may mean that investment is harder to attract, and Publicly Owned Enterprises (POEs) are not necessarily less efficient or cost effective than private companies (Hall, 1998) which implies that governments can just as easily commodify a resource but may not be so good at managing it.
The challenges relating to water are most prevalent in the developing world and have been characterised by conflicting public policy, a lack of consensus on the economic value of water, property rights, poor regulation and enforcement, corrupt governance and little long-term planning (Rodriguez, 2004). The solution as seen by many of the transition governments is to incorporate private sector participation. This is based on the assumption that the entire sale of assets creates the best opportunity for improvements. Despite this there have been few success stories and limited public support (ibid). Developing countries are experiencing rapid population growth and this is not matched with an equivalent provision of water. As a consequence of the public sector's inability to cope with this growth, many governments are looking to the private sector for remediation (Al-Hmoud and Edwards, 2004).
Privatisation is used because it is generally more effective at raising capital for projects and because private companies seek long-term goals, enabling more sustainable investment which may be deemed more beneficial for water supply compared with state-ownership. The capital raised is used specifically for the water supply and does not get influenced by short-term political pressures. The public sector reviews projects year on year and frequently objectives differ.
Some private companies may see market environmentalism as an opportunity for continued profit by raising prices for consumers (Harvey, 2003). This is a clear reason why regulation is imperative to ensure successful implementation of market environmentalism. The argument for increased efficiency and lower regulation costs is mirrored by Ashford (1991) and others.
In the UK, three regulatory agencies were created: the Environment Agency, the Drinking Water Inspectorate, and Ofwat (Bakker, 2002). Ofwat was established in 1989 when the water industry in England and Wales was privatised and is the economic regulator for the water and sewerage industry. It aims to ensure that water companies provide a good quality service at a fair price as well as protecting consumers, promoting value and safeguarding the future. The 'price-cap' regulation method is the core of the economic regulatory framework administered by Ofwat. Price caps are calculated by the regulator every five years in the 'periodic review' process, and set in advance (Ofwat, 1998).
European directives have also influenced the water supply, with various implementations dictating the cleanliness of the environment and water quality. As part of the Drinking Water Directive (DWD) they set standards for drinking water quality at the tap using forty-eight parameters which member states are obliged to regularly monitor and test to ensure the water in the EU is healthy and clean. World Health Organisation (WHO) guidelines are used as the basis for the DWD. The drinking water quality runs in three year cycles and the results are presented in a report summarising the quality and any improvements required (European Commission, 2007).
Private Sector
In France, the water market is dominated by three companies: namely Vivendi, Suez-Lyonnaise des Eaux and SAUR/Bouygues (Lobina and Hall, 2000). These companiess are also big players in influencing the water supply in the developing nations for commercial reasons.
The private sector is not always efficient. Once a contract is granted, a company will behave in a monopolistic way until the contract is renewed. Prior to contract renewal, there is an incentive for the company to be competitive in order to keep the contract, such as reviewing prices and quality due to competition from other companies. In 1994 the Trinidad and Tobago Government delegated the management of water and sewerage authority (WASA) to a subsidiary of Severn Trent. By 1997, there had been no significant improvement in the management of WASA, leading to the termination of the contract in 1999. In Puerto Rico, the water management was delegated to Compañia de Aguas (subsidiary of Vivendi) in 1995. The company was criticised in 1999 for 'numerous faults, including deficiencies in the maintenance, repair, administration and operation of aqueducts and sewers' (Lobina and Hall, 2000, p.37). In addition to this the operating deficit increased to $241.1m.
Private companies can also demonstrate collusive behaviour and corruption in order to exploit their position. A subsidiary of SAUR/Bouygues was awarded the concession in 1987 for the entirety of the Ivory Coast without it going to competitive tender (Nickson, 1996). As there was no competition at the time of contract award the company was able to control price and quality to their best advantage which was not in the best interests of the consumer.
As a result of privatisation, consumers often experience a rise in tariffs which seem unjustified. In 1998 'Subic Water' (subsidiary of UK-based Biwater) increased rates to industrial customers in the Philippines by 400% from P6 to P32.26 per cubic meter (P = pence), with the prospect of further increases to P39 by April 1999 without any evidence that this was reflecting increased operating or management costs. Where companies solely pursue profit, this can lead to reduced expenditure on maintenance and other costs which can affect the quality of water (Lobina and Hall, 2000). In Tucuman, Argentina, Aguas del Aconquija (subsidiary of Vivendi) were granted a 30-year contract. Subsequently water tariffs doubled and the proposed investment programme was not implemented. Consequently the quality of supply was impaired so much that the water turned brown (ibid).
Market environmentalism is seen as a way for governments in developing countries to cut costs and for a short period of time become more efficient (Kettl, 1993). In recent years, private companies have been reducing their involvement in asset participation and have been opting for service contracts and reducing their equity involvement (net private flows are decreasing). In developing countries privatisation can be seen as a risky strategy, especially with such a valuable resource like water because the delegation of power to multinational corporations (MNCs) and the resulting loss of accountability is problematic. If consumers feel they are being cheated out of their entitlement, it can create highly volatile situations, such as the water fights in Cochabamba, Bolivia during 2000, where consumers were not receiving any of the water they had paid for (Watson, 2003).
The UK adopted market environmentalism for several reasons. One of the issues with the state-run system was that pipes and sewage networks were not maintained due to lack of public investment. Water supplies were provided by local authorities until 1974, but the system was fragmented and inefficient not the least because there were 1,400 local authorities. In the 30 years prior to this as a result of amalgamations forced by the Government in order to increase efficiency, there was a reduction of suppliers from 1,186 to 150. Hence, when the Conservative Party came to power in 1979 there were many issues, and for political reasons, investment in infrastructure was further reduced in order to keep public spending as low as possible. Consequently, there was a decline in both river and tap water quality in Britain (Pearce, 1982). The reason for privatising the water industry was to raise funds, attract inward investment and subsequently aim to improve the infrastructure. But as a result of this market environmentalism there was a lack of co-operation between the utility providers (including Southern Water and Thames Water), who continued to work independently. They did not create a national network infrastructure due to disparity in water quality between the regions and this could be seen as a direct result of lack of regulation in the industry. Further, Ofwat suggested in 1996 that Yorkshire Water needed to address their policies regarding the failure to maintain a continuous supply, and control flooding, and likewise in 1995, North West Water, rather than investing in necessary infrastructure, appeared to be more interested in satisfying their shareholders. Between 1991-1996 infrastructure in the UK received a £31 billion investment in an attempt to improve the water quality in line with the latest EU regulations (Kinnersley, 1998). A further £8 billion was invested to improve the water quality of sewage treatment work discharge (DEFRA, 1999). This is a feat which the state could not achieve because raising such sums solely for water is not feasible.
Public Sector:
In 1961, a state-owned company called Servico Nacional de Aguas y Alcantarillados (SANAA) was created and made responsible for the water supply in Honduras. Prior to 1994, the water supply was inefficient due to poor management. In an attempt to correct this, it was restructured through decentralisation, contracting outwards and reductions in staffing. Since then SANAA has been recognised by the United Nations (UN) as a model project (Lobina and Hall, 2000). The restructuring under public ownership has improved operating efficiency without imposing the economic and social costs associated with water privatisation showing that retention of public sector involvement can be highly successful.
In Holland the bulk of the twenty-five water companies are public limited companies (plcs). The level of provision is good, with high water quality being provided at an affordable price (US$1.26/m³), and the performance of these Dutch companies relates to the framework set up in order to support them since they are not interested in excess profits as shareholders, who are the municipalities themselves, are not concerned with maximising the return on their investments (Lobina and Hall, 2000).
Municipalities are responsible for the control and management of the German water industry where there are around 6,500 utilities compared to the 15,000 in 1957, and as a result of this restructuring, the WB has estimated savings of up to 50%.
In Sweden, the majority of water facilities are municipally owned. The Swedish water companies appear to enjoy considerably lower costs than those of the UK, possibly by not seeking excessive profits. Stockholm Vatten AB is a prime example of the Swedish municipal model suggesting that public provision can be preferable for financial and economic as well as social and environmental reasons.
Water costs: a comparison between Swedish and English cities, 1995
Water company
Ownership
Cost to customer
Cost of operation
Capital maintenance
Return on capital
Stockholm
M
0.28
0.17
0.03
0.09
Manchester
P
0.91
0.40
0.20
0.31
Bristol
P
0.83
0.48
0.19
0.15
Gothenburg
M
0.38
0.11
0.05
0.21
Kirklees
P
0.99
0.52
0.31
0.15
Hartlepool
P
0.73
0.35
0.08
0.29
Helsingborg
M
0.42
0.42
0.05
-0.05
Waverley
P
0.82
0.48
0.22
0.12
Wrexam
P
1.25
0.57
0.35
0.32
Swedish average
0.36
0.23
0.04
0.08
British average
0.93
0.48
0.2
0.23
Notes: M = municipally owned; P = privately owned; cost per cubic metre of water delivered, purchasing power parties, US$.
Figure 1: (Hall, 1998, p.128)
It can be seen that the average cost of water in Sweden (0.36) is considerably lower than in Britain (0.93). Hence a state-run system is more efficient in some developed nations. Whilst it is hard to dispute the empirical data above, I would contend that Britain should not revert back to its state-run system. We must take into account, for example, the differences in climate, topography and populations of the respective countries. England and Wales have an average rainfall of 920mm which is considerably higher than the 535mm received in Sweden. At first glance, it would seem that Britain is at an advantage but has a population of over 60 million compared to Sweden's 9 million. The impact of a larger population has other implications, such as more complex and higher maintenance and delivery costs given that in the UK the highest demand for water is in the South East whereas the maximum precipitation is in the South West and Scotland. One of the key decisions which influences a country's decision to privatise that Lobina and Hall fail to take into account is the strength of the economy and the capability of the infrastructure.
Concluding Thoughts:
This essay endeavours to demonstrate how the decision to adopt market environmentalism is complicated and contentious. Rodriguez (2004, p.107) says 'the way to face it remains unclear' as each situation is different. There is no universal model and any solution must be tailored for each specific case as there are large differences between developed and developing countries.
Privatisation has been shown to be effective at raising capital for long-term investment, it carries risks, especially in transitional and developing economies. It can lead to difficulties in regulating MNCs and adverse monopolistic behaviours which are not in the interests of the consumer. There are several reasons for the possible failure of privatisation of the water supply in developing countries. These include management inefficiencies, restricted competition and corruption, excess pricing, excess profits and low water quality and problems in delivering objectives. If private businesses are able to achieve profits so easily, then why wouldn't governments try and seek them for themselves? As shown in Trinidad and Tobago, Puerto Rico, Ivory Coast, Philippines, and Argentina, privatisation of the water supply has not worked. However, the UK is example of where it has been successfully implemented. From what has been argued here, it is clear to see that regulation is highly important in determining the success or failure of privatising the water supply.
POEs appear no less efficient than privatised water companies and the ability to run POEs is not reserved merely to developed countries, but transition and developing nations are also able to run them, as illustrated by Honduras. State involvement is required in the best interest of the consumer; it avoids the exploitation of consumers and prevents companies seeking to gain excess profits.
With regards to the arguments proposed throughout this essay, market environmentalism has not been successful because there are several studies of where it has not been effective. This is not to say that privatisation does not work. If pursued for the right reasons and with adequate regulation, would the situation be any different in these countries?
If some countries are able to keep the water supply in the public sector and benefit from it, besides being better at attracting inward investment, what are the benefits of putting the water supply in the private sector? On the basis that neither private nor public work particularly well independently, maybe the solution is a combination of the two. A PPP would use the assets of private and public sectors, thus would have the ability to raise capital and embody management structures that are in the general public interest.
