Memorandum submitted by Public Services
International Research Unit (PSIRU)
PRIVATISATION OF BASIC SERVICES: CONCERNS
ABOUT DONOR POLICIES
Public Services International Research Unit
(PSIRU) is based at the University of Greenwich and monitors developments
in privatisation of basic services, including water and energy,
worldwide. Our main sponsorPSIis a global confederation
of public service unions. PSIRU has been monitoring the activities
of the World Bank and has been critical of the push for privatisation
of public services which is at the centre of many Bank initiatives.
These policies moved a stage further in February 2002 when the
Bank approved a "Private Sector Development" (PSD) Strategy
which, in the name of developing the private sector, proposes
to transfer greater responsibility for public services into private
hands. PSIRU has written a number of documents that are critical
of aspects of Bank policy in this respect, which form the body
of this submission (see also www.psiru.org). The main points are
1. Absence of risk transfer creates debt-like
In order to attract investors into infrastructure,
governments have to ensure that private firms are able to make
a commercial return and, in so doing, have created liabilities
that are more like debt than equity investment. For example, developing
country governments have had to provide take-or-pay agreements
with private power producers, guaranteeing to buy all that they
produce at a price fixed in USD for a period of up to 30-35 years.
This means that firms are insulated not just from currency risk
but also from demand, competition and technology risk. Similar
arrangements are being developed in the water sector. In such
circumstances of protected monopoly, profit maximisation creates
an incentive for firms to negotiate the most favourable contract
terms rather than to improve productive efficiency.
For governments, such financial obligations
create a debt-like burden requiring regular payments foreign currency.
The rigidity of these liabilities makes them in some ways more
onerous than debt while at the same time appearing to reduce government
borrowing. Firstly, once tied into a take-or-pay contract, there
is little scope for the government to respond to changes in circumstances
such as fluctuations in demand, technological progress or the
availability of cheaper competition. Secondly, in the event of
the government being unable to pay, there is no mechanism to reschedule
payments as with debt renegotiation. Rather, disputes usually
result in high cost litigation with the threat of collapse in
investor confidence, as in the case of the Dabhol plant in India.
2. Priority given to private sector interests
According to the PSD Strategy, the World Bank
is planning to base country assistance (and therefore lending)
strategies in part on an assessment of the investment climate
and investment climate surveys are to be carried out across recipient
countries. Such a move, which gives priority to the needs of the
private sector, will adversely affect social provisions.
There are some indicators of the priorities
of private firms in two surveys linked to the World Bank website.
These show that private firms want to be sure they will be paid
above all else. Other issues such as transparency and corruption
are of less significance as long as payments are secure. One survey
(the WBESsee footnote 75) found that regulations to protect
workers had a negative impact on private sector interests: "Over
half of firms in South Asia and Latin America rated labor regulations
a major or moderate constraint, as did nearly half of OECD firms."
Thus, governments could be penalised by the World Bank for their
efforts to protect workers.
The use of policy conditionality to coerce governments
into privatising their basic services is justified by the Bank
on the grounds that aid works better in a good policy environment.
There is, however, no consensus as to what constitutes good policy
and the use of conditionality in such a contentious areas undermines
the foundations of democracy which the World Bank claims to support.
4. BIAS IN
The Bank's pro-privatisation position has more
to do with dissatisfaction with the public sector in developing
countries than the merits of the private sector. Hence the Bank
is selective in its use of evidence, citing the best of the private
and the worst of the public sector to support its privatisation
policies. The reality is far more complex. There are many successful
public providers as well as privatisation disasters. Furthermore,
in industrialised countries, electricity and water were provided
by the state for many years because of economies of scale and
the social nature of these services.
By definition privatisation increases the number
of firms in the private sector but in developing countries this
often means handing long-term concessions to one of a handful
of MNCs, with questionable benefits for the domestic economy.
Rather than improving efficiency, the reality of MNC operations
in developing countries is one of short-term selectivity to enhance
Private companies initially focus on short term
revenue gains, which, in network industries such as water and
electricity, means improving billing and metering of services
and disconnecting illegal users while network extension and quality
improvements remain a lower priority for firms. Funds for capital
investment usually come from governments, donors and/or consumers.
Private firms are selective, only taking the components of an
enterprise that are most lucrative. Governments are left with
the less profitable aspects of service delivery and therefore
have less scope for social provision through cross-subsidy. Rather
than creating down and up stream linkages in the host economy,
MNCs will often use their parent company for consultancy and material
The PSIRU research points to a number of policy
Policy conditionality linked to the
privatisation of water and energy should be dropped immediately.
Sectoral priorities for public services
need to start with social needs rather than those of the private
There has to be a public sector option
in the evaluation of reform options. Rather than focusing on privatising,
more research is needed into incentive structures and why good
public sector models work when they do.
Where concessions in low-income countries
are supported either directly or indirectly by donor finance,
MNCs should be required to disclose details of their operations,
including transactions with parent company, outstanding debts
and proportion of these owed by government agencies.
Further documents concerning the "Privatisation
of Basic Services" were submitted with this memorandum. These
have not been printed. Copies have been placed in the Library.
74 For more information see "A PSIRU response
to the World Bank's `Private Sector Development Strategy: Issues
and Options"' Kate Bayliss and David Hall, October 2001,
"Private power investors in Developing countries-Survey 2002-Preliminary
findings' Ranjit Lamech & Kazim Saeed, The World Bank Energy
Forum 2002, 5 June 2002" and the World Business Environment
Survey, 2000. http://info.worldbank.org/governance/wbes/results.asp Back
See "Unsustainable conditions-the World Bank, privatisation,
water and energy" Kate Bayliss and David Hall, August 2002,