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To privatise, or not to privatise, water

By Jaya Jose

Watershed management expert Vijay Paranjpye sorts out the tangle over water privatisation, and insists that privatisation of public utilities can be resorted to only if the government completely fails to manage the utility, and if private management is going to make the utility cheaper for the people

The issue of water privatisation is being debated - and opposed - worldwide, even as the US $7 trillion-worth global water industry thrives on the growing number of people without access to potable water. The number of people without access to potable water is expected to increase to 3 billion in the next 25 years.

In India, a major daily recently reported the country's first private water supple scheme on the semi-perennial Sheonath river near Durg town in Chhattisgarh where an individual entrepreneur is supplying water to local industries (see India's first private water supply scheme is apparently a success ).

Jaya Jose spoke to the noted Pune-based watershed development expert Vijay Paranjpye about the issues surrounding water privatisation. Paranjpye feels privatisation of water should be resorted to only if the government is completely incapable of efficiently managing the public utility and if privatisation is able to reduce the costs incurred by the public.

After teaching development economics and finance for 23 years, Professor Vijay Paranjpye opted out of the formal education system to work with voluntary organisations committed to conservation and the sustainable development of water resources. He has been closely associated with WWF (India), the Gandhi Peace Foundation, Econet and the International Rivers Network San Francisco, USA for the last two decades. He has advocated dispersed and domestic processes for watershed development and community forestry, and as a logical corollary, has opposed mega-dams. He has worked as a subject expert on the economics of water at the International Water Tribunal, Amsterdam (1992) and was invited to give an oral testimony on the Sardar Sarovar Project before the US Congressional hearing in Washington DC (1989).

As Executive Director of Econet (1993-2000) he networked with voluntary agencies working on resettlement and rehabilitation and disaster management and prepared conservation and management plans for national parks and heritage sites. In recent years, he has been functioning as President and Founder of Gomukh and Gangotree Trusts which specialise in scaling up watershed development work to the level of integrated river basin management and organic farming.

Excerpts from the first part of the interview:

Defining privatisation of water

One needs to understand what privatisation is before one jumps into it, because it has many facets. You can't reject it or accept it outright without getting to the core of privatisation and understanding why it is being challenged and opposed.

First, it is necessary to differentiate between ownership, privatisation and contractual arrangements pertaining to water.

For me privatisation is related to: 1) the ownership of the water source and 2) decision-making on whom to give it to and whom not to give it to, ie how to distribute it. If these two are not part of the arrangement then it is not privatisation.

If the Pune Municipal Corporation or any other municipality decides to delegate a part of its responsibility for water - augmentation, distribution, drainage system, effluent treatment -- to a private concern, then that in itself is not privatisation of water. That is privatisation of a service.

Surface water vs groundwater

All surface water in India is a public or social good as we call it in economics. In other words, it is owned and controlled by the State. Groundwater on the other hand, according to the Constitution and existing laws of the land, is a private good. This is an anomaly, but such anomalies and contradictions do exist in India and in fact everywhere. Although groundwater is the result of the same source -- ie surface water -- once it goes under the ground on my property it is my water, even by law. So if I pull out my water and decide to sell it, that is also privatisation. But then this is not what goes under the name or implications of privatisation.

Thus groundwater is already in this sense in the private domain. Surface water is in the public domain.

With respect to works related to water impounding -- say dams -- there are lots of private contracts given for the construction of dams. This is not privatisation of water. It's a delegated, contractual relationship where a particular contractor may build a certain part of the dam/ canal/spillway, just as say sections of the Mumbai-Pune highway are parcelled off to private builders. This cannot be called privatisation of roads or transport.

When the ownership of the resource is transferred and the right to distribute or not to distribute it in a particular fashion is transferred to a private organisation, then that can go under the label of privatisation.

Water as a social and economic good

Conceptually there is another aspect of water -- water as a social good. The concept of water as an economic good comes in when you price it. Till you price it, it is not an economic good; it is a social good.

So water flowing in the rivers, people using it for domestic purposes (drinking or bathing), is not an economic good in this sense. I hold the view that till such water is impounded, regulated, improved or in any other way added to in terms of value - either by the government or any private party - it remains a social good.

When say a municipal corporation invests in water either to improve its quality or its availability, a price is charged - but the price is not for the water but for providing the service.

If for example water is purified, then of course the intrinsic quality of the water changes - because it is another commodity and therefore that can be called the price of water itself, on which there can be taxation. Thus, all bottled water is heavily taxed.

Co-operative ownership/use of water

The co-operative ownership/use of water - still priced, still used by a definite group of people -- should also not enter the discussion on privatisation.

Thus a group of farmers in a catchment invest together in harvesting or impounding water within their village catchment. They use it on their farms or for domestic purposes. This use requires that they charge a price (predetermined by the members of the farmers' group) because they have to invest in providing the water. I would call this co-operative ownership of water and the group of farmers have a right not to let out a part of it or some of it to others.

Or if a society of water users or irrigators is formed along the canal, paying a price and getting a certain volumetric quantity of water which they decide to price among themselves, excluding others from using it, then too in a sense this is not privatisation.

Privatisation of a service

The privatisation of a service function is not privatisation. When a company has been asked to purify water given by the government, to lay in a distribution system, regulate and decide who should get and not get water, the quantity to be given etc and when there is a predetermined, differentiated price structure negotiated between the government and the private company then this is not privatisation. Because the government holds the right to decide who must be given water and what kind of differentiated price structure should be imposed, in negotiation with the company.

This negotiation could, for instance, state that 25 per cent of the city population belongs to slum areas and so they should be given water at a flat rate of xyz, which is affordable to this poor segment. The difference between that flat rate and the marginal or cost of providing water is recovered from the rest of the population who can afford to pay. If this decision is taken by the government and accepted by the private company then this in effect is not privatisation of water, it is privatisation of a service.

On the country's first private water supply scheme on the Sheonath river in Chhattisgarh

In the case of the Sheonath water supply scheme, your first case where a private company is asked to manage water (where I haven't seen the contract and the nature of the contract has not been mentioned in the newspapers) only when we see the contract will we know whether it has been privatised or not. The reason being if the ownership and control over the water for a particular period of time is handed over to a private company then alone it is privatisation, otherwise it is a contract.

If the contract states that the private party can do what it likes - price water and decide who to give it to or not - then it means that ownership and decision-making related to distribution are transferred. This would truly be privatisation.

My perception and understanding of privatisation of water is if a company is handed over a 100-year lease of a water source. For instance a soft drink manufacturing company or a water bottling company is given the rights of a stream for x number of years and the party can do what it wants with the water - sell it, own it at a price or at a royalty given to the government -- then this is handing over the ownership of water to the company. If the company wants to price it in a particular fashion it can do so, provided it pays a price to the government.

Water as a public utility

Now why and where does the entire debate on privatisation get muddled? In principle all public utilities (water included) should be publicly owned and managed. Taxes are being collected for them and therefore the government has no business handing over the public utility to anybody else.

Only if the government is incapable of efficiently managing the public utility -- ie if it is proved that there is no way to reduce this inefficiency in the public system - then privatisation can and should be resorted to, and only if privatisation is able to reduce the costs incurred by the public.

Public services are extremely corrupt and inefficient and therefore the costs are high. If a private company can provide exactly the same service at half the price, then there is a legitimate argument for privatisation.

But public services have never been attractive to the private sector

However one must remember that such public services have never been very attractive to private companies at any point of time in history. There may be no buyers, especially when a private company is motivated by the dictum of making a profit out of the business of water. Take an example. Around 60 per cent of the Maharashtra population still lives in the rural areas but I have not heard of any major company saying we will manage the rural supply system. The reason being, getting the price for the service the company provides is going to be very difficult. Finally, providing water in rural areas is a very messy business. So private companies will rarely, if ever, come and say we will manage the drinking water supply system for a district.

So with 60 per cent of the rural populace gone, what remains is 40 per cent of the urban population. Of this, 25 per cent or so live in slums. Now if a private company were to provide drinking water facilities to a slum it would be nice, but not attractive, as the slumdweller would be able to pay a very small price. The profit margins for the private company would not be worth it and so they will not make a proposal of this kind to supply water to a slum population. With 25 per cent of the urban populace gone, what is left is another say 20 per cent of the urban population that can afford to pay and industries where the private company or multinationals will be interested.

The uproar over privatisation

Public policy in India has been to provide a public utility service to the commercial sector and the tax-paying population at a price that covers the cost of providing the service and to give subsidised water to the poor. If exactly the same function is contracted to a private party, this in my opinion is hardly privatisation because it's exactly the same function that is being handed over.

If the function of cross-subsidisation through prices so that water is made available to the poor and slum areas in the urban areas at an affordable rate is to be transferred to a private company at a price which is equal to or less than what it costs the government, I have no problems with it.

Take the case of Enron. If the Enron power project in Maharashtra had been able to provide electricity at a price at which the public sector was providing it, or less, as a consequence of highly efficient use of energy (ie loss of wastage or advanced technology), then there would have been no hue and cry against Enron. Because they would have been provided a service at a price which is equal to or less than what the public sector can provide. That is not what they did. They went up to I think Rs 7.50/ Rs 8 per unit and that is why there was an uproar against the company.

Resistance to privatisation comes when you allow a private company to decide what price to charge, which in effect excludes large sections of the population. Privatisation has been resisted by people only in circumstances where 1) the prices charged exclude people from the public service and 2) the prices charged are much higher than the public service was willing to provide it at.

There is a public outcry when people feel they have paid taxes for provision of the service, that there is a public mechanism for equating the prices that can be paid by the poor and the rich - ie differentiated price structure, which is the norm everywhere.

Under the garb of privatisation, resource ownership is transferred. That is when the company starts excluding people and deciding what they want to do and what prices to charge, because of loopholes in the contract which in turn cause civil society groups to protest against such privatisation initiatives.

Once you accept the principle of price differentiation, and accept that poor people should be given water at a price they can afford since it is an absolutely essential commodity for human existence, then the issue becomes clear.

When is privatisation feasible?

I would personally not be in favour of privatisation as long as it can be shown that the existing services can be made more efficient and that the costs can be reduced purely by increasing efficiency and reducing corruption.

If reforms are not possible, or not desirable for some reason, or if reforms cannot play a role in reducing the inefficiency of the public water distribution system or corruption in the system absolutely, then only should one go in for privatisation of water.

But this should be under a strict contractual arrangement operating on the basis that water as a public utility must be available to all, with no exclusions. Differentiated prices for water thus supplied can be permitted, negotiated and then decided.

(To be continued. Part II of this interview will discuss whether privatisation of water is possible in a country like India and the World Bank and IMF conditionalities on water privatisation)

InfoChange News & Features, September 2002