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PRIVATISATION
Why water must not fall into private hands Profitable and efficient Penang Water Authority is a model for the public management of water supply
by Charles Santiago
Aliran Monthly Vol 25 (2005): Issue 1
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In March/April 2005 the government will present two Bills to Parliament, namely the Water Industry Bill and the National Water Services Commission (SPAN) Bill. These bills, if passed by Parliament, will effectively set the stage for the full-fledged privatization of water supply in the country. The government, however, has announced that a parliamentary select committee will be set up to get public comments and feedback on these Bills. The National Water Services Commission will regulate the water industry including licensing, tariffs, and the capital expenditure of water treatment and supply firms. Water privatisation: its impact on people Why does the Federal Government want to privatize water? The government and the mainstream media tell us that the states have limited financial resources and thus they are reluctant or unable to maintain their respective water supply system resulting in the supply of dirty water and inefficiency in providing clean water supply. Simply put, the state governments are said to be inefficient and operating at a loss, and therefore the Federal government has to step in to provide water efficiently and effectively. Furthermore, Federal government intervention is perceived as crucial to avoid the possibility of a water crisis or scarcity in the country. Water privatization is not just about providing clean water and being efficient. It involves the handing over or the transfer of the management and control of water supply to private hands. Specifically, water privatization involves organizing the water supply system around the rules of the market - to generate profits, to increase stock values of privatized firms and to cater to other investment considerations. Underlying water privatization is the notion that access to water is no longer conceived as a human right or a social good but as an economic good, a commodity that can be bought and sold to the highest bidder. Essentially, water privatization involves transforming water - the source of life, a common good that belongs to all � into a profitable commodity. Furthermore, in a privatized environment, market forces and the profit motive take precedence over the fundamental needs and rights of human beings and society. With privatization, decisions relating to water provisioning or access to water will be based on profit considerations and not public health, social equity, and environmental sustainability. Handing over the management and control of water supply involves providing a legal infrastructure and a viable business environment for profit making. The state will have to provide an assurance on private sector rate of returns, namely profitability of their investments. Such an assurance requires organizing a pro- business environment for the water sector. This involves instituting �reforms� to existing institutional, legal and financial framework in which business can operate profitably. A key demand would be to have an accommodating policy on water tariffs. Reforms promoting a pro-business environment would cover:
Full cost recovery Privatization involves the implementation of full cost recovery in order for private sector investments to be economically viable. Under the full cost recovery strategy, consumers would be expected to meet the full operating and maintenance costs of water facilities and services. This means that all subsidies and cross subsidies would be eliminated. It would also involve tariff hikes, disconnections, the transfer of water from rural to urban areas, and from poor to rich neighbourhoods. Collectively, water privatisation would hit poor and vulnerable groups the hardest. Prepaid cards for the consumption of water guarantees full cost recovery. Water companies use prepaid cards as a means of improving the management and efficiency of the system. Under this system, water firms save on metering and billing costs, thus promoting payment convenience. The system eliminates tampering of meters and allows for self-disconnection. At the same time, it allows the firms to reduce their workforce. Consumers would have access to water only if they pay upfront. The experience in Cebu in the Philippines indicates that water from prepaid water meters costs about US$3 per cubic metre - higher than the rates in most other parts of the country. Also, these prepaid cards have an expiry date. The use of prepaid cards limits access of water to the poor, forcing them to also depend on other water sources, which could be contaminated. This has led to major disease outbreaks such as dysentery, cholera and other waterborne disease in the developing world. The use of prepaid cards, the increase in tariffs, and the disconnections result in the transferring of water from poor to rich neighbourhoods.It denies water to those who need it most. This situation, coupled with a general increase in the cost of living in the country, would burden the poor and vulnerable groups. In Malaysia, prepaid cards are at an experimental stage. These cards are being used by Tenaga Nasional as prepaid cards for electricity. Thus the use of prepaid cards for water (which is illegal in UK) should come as no surprise. When the distribution and access to water is organized around rules of the marketplace and the profit motive, only communities and individuals who can afford to pay for water services will have access to safe drinking water. Thus water privatization is about making money and not ensuring that that people and citizens have access to water. In fact there is a lot of money to be made in the water sector worth about RM 52-77 billion in terms of new business over the next five years according to one study. Resorting to the market The government - instead of ensuring equitable access to water, protecting existing water resources and catchment areas, promoting conservation, safeguarding the ecosystem and helping vulnerable groups - has decided to resolve water scarcity and provide clean water through the market mechanism. The government believes that the market mechanism is an efficient allocator of resources and therefore best positioned to distribute scarce water resources to the most productive and rational users. Thus the responsibility for water distribution is being handed over to the private sector. The underlying motivations in managing a private firm differ from the way the state manages a public enterprise. Senior managers in private firms organize activities and resources to boost share values and profits for shareholders. Senior management is beholden to the firm�s shareholders. In contrast, the state has an obligation to all citizens with varying interests. The state is responsible for ensuring a balance between equity, affordability and universal access of essential services. It needs a redistributive mechanism involving taxation, subsidies and cross-subsidies to ensure it has sufficient funds to meet these goals. Furthermore, the state needs to balance its provisioning obligations vis-�-vis other competing interests. Most of the state�s responsibility and functions do not apply to the private sector. Therefore, the same standards of economic performance cannot be applied between the private and public sector. It is difficult for the state to achieve a balance between efficiency with equity, affordability and universal access given its vast array of economic activities, social obligations and political commitments. The state, however, falls into the �efficieny trap� and decides to privatize its water utilities. From provider to regulator In transferring the management and control of water supply to the market, the government�s role as a provider of a basic human need and the guarantor of basic human rights is undermined. In this scenario, the state�s role is transformed from one of a service provider, guarantor of the welfare of people, to a regulator and risk absorber. In embracing privatization, the state is abandoning its social, developmental and constitutional responsibility to its people. It was the state�s development trajectory that ensured that the county enjoyed a national average for water supply coverage of 92.7 per cent, an enviable achievement comparable to First World nations. With privatization, access to water will be based on affordability and not on need; water would no longer be perceived as a human and constitutional right. The privatization of water resources is taking place at a time when the cost of other essential services such as healthcare, infant food, rental, food, petrol, transport and education is escalating. These rising costs are marginalizing the poor and other vulnerable groups. Water tariff hikes and increased discon-nections (due to non-payment of bills) as a result of water privatization would further burden the poor and other vulnerable groups in the country. In fact, as water becomes more costly and less accessible, poor families would be forced to make trade-offs between water, food, education, medicine and health-care. This would have an impact on the quality of life and standard of living of Malaysians, especially the vulnerable groups. The government has embraced the privatization of the water system as the appropriate policy option in managing water without an open public discussion with various stakeholders, including citizen groups, consumer groups, NGOs and trade unions. In fact, there has been very little transparency and no civil society involvement in decisions relating to the ongoing discussions on privatization A complete absence of civil society participation in the decision-making process goes against the will of the government and Prime Minister. In the 2004 general election, the Prime Minister called on the nation to �work with me and not for me�. But Energy, Water and Communications Minister Lim Keng Yaik�s complete lack of transparency in consulting civil society in the water management makes a mockery of the Prime Minister�s call. Voters have a right to demand transparent and accountable decision making. Voters� and civil society�s views should be central in the decision making on the management of water supply in the country. Human rights to water Access to water is a human right stipulated in various United Nations covenants, agreements and international law. It is both an implicit and explicit right. The Chairman of the European Council of Environmental Law, Alexandre Kiss, suggested that the right to water is one of the first substantive environmental rights recognized internationally. Water as a human right is explicitly enshrined in the Convention of the Rights of the Child (1989) and, implicitly, as a precondition in the �component elements of an adequate standard of living� as promulgated in the Universal Declaration of Human Rights (1948). Article 25 of the Declaration states: �Everyone has the right to a standard of living adequate for the health and well being of himself and of his family, including food, clothing�housing� (UN General Assembly, 1948). Clearly, Article 25 cannot be satisfied without access to water as an implicit right and a component element. This is because an adequate quantity of water of sufficient quality is required to maintain human health and well being in order to satisfy Article 25. The International Covenant on Economic, Social and Cultural Rights (ICESR) 1966 supports the notion of the right to water as an implicit right. Central to the ECOSOC rights is that governments have a legal obligation to ensure that their citizens enjoy the right to water. In November 2002, the United Nations Committee on Economic, Social and Cultural Rights in its General Comment No. 15 indicated that the right to water was a human right. International human rights laws require that governments take immediate steps, to realize the right to water. Thus, governments have a responsibility to respect, fulfill and protect this right. In fact, the General Comment unambiguously states that access to water is a fundamental human right, a right that is a prerequisite to the realization of all other human rights. The General Comment makes access to water a legally binding responsibility for which the state is held accountable. Clearly, from a human rights point of view, water as an essential public good takes priority over water as an economic commodity. Water resources, therefore, should not be subject to private management and full cost recovery. Privatisation would involve removing subsidies and cross subsidies and would burden the poor. It would remove the people�s social safety protection, which is the responsibility of the government. Water must be identified primarily as a public good, access to which is a human right. This does not mean that water should be provided free of charge. What is required is a mechanism that can ensure and secure the accessibility and affordability of water for all. Here, the state has an important obligation in ensuring that the country�s water resources remain in public sector hands. Water is such a basic requirement for human life and survival that society has to defend the use of water resources in the public interest. In a privatized environment, peoples� access to water will be a function of affordability; it would no longer be seen as a need or a right for the sustenance of life and livelihood. Specifically, the business decision to allocate scarce water resources between competing users will be based on affordability and profitability. Allowing private firms to exercise control over the distribution and access to water amounts to allowing them to control people�s access to water, their livelihoods and their right to life. Alternative strategy There are alternative options in organizing and managing water resources in the country. Specifically the government should consider a Public-Public Partnership (PUPs) approach in managing water resources in the country. The Public-Public Partnerships (PUPs) is an arrangement that ensures that water management continues to be under the control of the state and under public control. Perbadanan Bekalan Air Pulau Pinang (PBA)�s experience in water management could be a basis to organize PUP arrangements in the country. Why? At present, Penang state enjoys one of the lowest water tariffs in the country and the world. A 1999 comparative study of water charges in 65 cities and towns in 38 countries in Asia, Europe, Africa and the United States, indicated that Penang had the lowest water rates. Despite these low rates, the PBA recorded the highest profits among all water providers in the country. In the last few years, the company recorded profits between RM 40-50 million. Also, water is accessible 24 hours a day and reaches about 99 percent of the population in the state. The Non-Revenue Water (NRW) is the lowest in the country at 18 percent, a target attained one year ahead of schedule (2005). The company expects to reduce NRW to 15 percent by 2010. Its employee-to-connection ratio is about 1:373, that is one PBA employee for every 373 water connections. The PBA has attained a 99-per cent billing and collection efficiency - another national high. The company�s strong operating profit margin of 50 per cent owes a lot to its low NRW and good revenue collection rate of 99 percent. Furthermore, Penang is the only state in the country that provides an interest-free loan of RM 1,000 to poor communities for connection purposes. The PBA is the only water provider in the country that can boast cash reserves or its equivalent of RM 223 million. Currently, the state of Penang demonstrates a remarkable achievement of a 99 percent universal access to drinking water at the lowest prices in the country with a 98 per cent revenue efficiency. It is important to note that the efficiency requirements were met with no substantial tariff increase and with a subsidy and cross subsidy in place - a phenomenon that turns the privatisation logic upside down. This was because profits of the water utility were reinvested, and new infrastructure investments are self-financed. What are the critical factors that are responsible for the success of this �model� of water management?
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Water is a commons.... It cannot be owned as private property and sold as a commodity. How can one justify claiming water as their own through contractual agreement while letting another human being go thirsty? Water is a commons because it is the basis of all life. Water rights are natural rights and thus are usufructuary rights, meaning that water can be used, but not owned
