Promoting privatisations with development aid

By Peter Niggli, Director of the Swiss Coalition of Development Organizations (Alliance Sud)

The World Bank considers the governments of poor countries incapable of running public utilities worthy of the name. Only private companies could be entrusted with efficiently operating infrastructure services (power, water, etc.). The Bank is therefore compelling developing countries to privatise state-run utilities and transfer the responsibility for improving public services into private hands. Switzerland’s State Secretariat for Economic Affairs (SECO) too now wishes to use development aid funds to promote such a policy.

In the message accompanying the blanket credit line VI soon be tabled in Parliament, the State Secretariat for Economic Affairs (SECO) of course makes no reference to this World Bank policy. It cites shortage of capital as the reason why developing countries should privatise – for decades now, a stock justification for the most varied of aid strategies. According to SECO, the development of poor countries is being hampered by an «acute lack» of infrastructure. They are unable to come up with the requisite capital, however, and additional private means must therefore be mobilized. The upshot is that infrastructure development is best left to so-called Public-Private Partnerships (PPPs).

At first glance, the facts would seem to speak for PPPs. There is no shortage of anecdotes concerning unsuitable, shoddy public services in the mega-cities of the South that exclude the poor. And it is beyond dispute that the governments in poor countries are strapped for cash. Upon second examination however, it turns out that the same factors weighing negatively on the government-run infrastructures in developing countries are also affecting the PPPs.

State-subsidized privatisations

Let us examine the «capital shortage» argument. SECO suggests that thanks to PPPs, the capital available for infrastructure is increased, because the State’s contribution is matched by additional private capital. Besides, argues the World Bank, PPPs make it possible to transfer the risk from taxpayers in poor countries to rich private companies. A look at actually existing PPPs reveals a different picture: the developing countries and – increasingly – donor countries and institutions are practically paying the capital contribution of private parties under various guises. Moreover, the private «partners» are contriving to have their risk almost completely guaranteed by governments. The following paragraphs offer a rapid overview of the most frequent practices:

• In the fields of power and water supply, many PPPs guarantee the (mostly foreign) companies minimum revenues in dollars. In this way, the private partners transfer not only the business risk to the public sector but also the entire currency risk. Enron, for example, had procured such preferential conditions for itself in India before the company’s managers moved to prison. The state concerned – Maharashtra – had to make back payments for «lost» revenue, because the power output exceeded real demand. In other cases, companies have arranged to be guaranteed a profit margin – e.g. EMOS, which supplies Santiago de Chile with water and in which the French water concern Suez has had a controlling interest since 1999.

• It is consistent with commercial risk coverage that in most cases only those public companies that have previously delivered profits to the government actually find «private partners». Hence the World Bank observed in 1995 that the companies hitherto privatised in Africa had not been a burden on public finances, but the opposite – although one of the World Bank’s main arguments in favour of privatisation is of course that of relieving the treasury of unprofitable companies. In actual fact, many governments compelled to privatise by World Bank conditionalities are still finding themselves stuck with unprofitable public companies years after they have been able to part with profitable ones. In many cases, it is when privatisation candidates are endlessly waiting for buyers that they are really ruined, because no-one in the government bothers about them any more.

• When private infrastructure companies raise rates, as they most often do, it frequently elicits strong reaction from the affected population. The World Bank is therefore now prepared to consider subsidizing sensitive prices, in some cases, for the most needy population groups. These rate cuts must of course be borne by the State – the private companies cannot be burdened in this way! For the future, SECO envisages helping to finance such subsidies over a «transition period» – the word «transition» suggesting a certain shortness of time. In reality, the «transition» could last a very long time, however. Africa’s per capita income has been stagnating since 1982, and that of the poor has even been falling. Should SECO therefore have in fact subsidized water rates for the poorest – e.g. in Ghana’s capital Accra – for 20 years of «transition» and with no end in sight, so that a US company could be spared any political problems?

• Moreover, public capital is required when it comes to making state-run companies «fit for privatisation». The way it works is that existing infrastructures are restored and overhauled at government expense before the private «partner» takes over the business. Here too, SECO can envisage using development funds to help state-run companies finance the dowry being demanded by private suitors.

• After all these risk minimisation measures, there is still a residual risk, which private companies appear unwilling to accept. The government must therefore bear it. For this purpose, SECO (and the World Bank) are contemplating, inter alia, investment risk guarantees. And if this is not enough, then there are multilateral, publicly funded or co-funded credit funds available that participate in PPPs, e.g. the African Infrastructure Fund or the Infrastructure Development Finance Corporation in India, which SECO wants to help finance. Through these funds, it hopes to be able to participate in «model projects» that «offer greater security to participating private investors».

This whole cascade of public funding for private investors denotes an attempt to lure them into countries and industries in which they would never invest a single dollar on their own steam and at their own risk. After all, SECO observes with regret that Swiss companies have hitherto shown very little interest in PPPs in developing countries.

It can more than justifiably be asked therefore, why the considerable amounts of public monies from the «beneficiary» State (often new World Bank borrowing) and from development aid that are behind PPPs are not invested directly in the restoration, reform and improvement of the public sector in these countries, and private enterprises left out of the picture.

Weak State – strong regulator?

The message accompanying the line of credit shows that SECO is aware of some of these problems. This is why it insists that in parallel to PPPs, the State’s capacity as regulator must be strengthened. The World Bank too stresses that in regulating private infrastructure companies, lean governments would have to shoulder new and substantial responsibilities. According to the advocates of privatisation, only a strong regulator could guarantee that private operators of natural monopolies would act in the public interest. «Strong» regulatory authorities in Western countries, for example, have the power to issue and withdraw operating licenses and, whether partially are entirely, to determine the conditions of competition, prices and basic services to be provided by private infrastructure operators.

The hymn in praise of the strong regulator is of course at odds with the World Bank’s opinion whereby public services in developing countries can only thrive through privatisation. Governments that are incapable of running water and electricity works could not be expected to understand how to regulate corporations such as Enron or Vivendi. However, if they are capable of learning to do the latter, then nothing explains why they should not also learn to do the former. In other words, it is just as difficult to rehabilitate and improve publicly owned, problem-ridden infrastructures as it is to develop regulatory bodies to guarantee that the private operation of natural monopolies in developing countries remains in the public interest.

As regards the regulator, it must also be borne in mind that developing countries are not only supposedly lacking in capabilities, but often in power. The balance of power between Lesotho, Malawi or Bolivia and a major international corporation is so unequal that even a regulator decked out with all the legal trappings can regulate very little. For example, after protracted efforts, Ghana found only one corporation that was prepared to operate the telecommunications network privately. In Ghana’s case therefore, the most severe penalty that a regulator could impose – withdrawal of the concession – becomes an empty threat. Someone faced with the choice between just one or no telephone company at all will think long and hard about how strict a regulator he can afford to be.

«Development» despite popular resistance?

Swiss development cooperation agencies must ultimately ask themselves whether in future they wish to impose «development» despite resistance from the direct «beneficiaries». The number of mass strikes, demonstrations, riots and insurrection-like protests against the blessings of public-private partnerships has grown steadily over the past two or three years (cf. examples on pages 7–8). For this year alone we have identified 12 such incidents in a partial count. The Parliament must ask itself how it will explain to the Swiss population – which normally rejects privatisations in referendums – the imposition of assistance for privatisation. Given the manner in which the Federation and the development organizations have thus far conducted development cooperation, this will simply not do at all.

Public-Public Partnerships as an alternative

Partnerships between Government and private sector (Public-Private-Partnerships PPPs) are at their most problematic when it comes to major infrastructures and when multinational corporations enter the picture. It is these enterprises that have their risks almost completely covered by governments and which are able to thwart any local regulator with ease.

Small-scale public-private partnerships are another matter: small, mostly new water supply systems, electricity grids or other public utilities in rural areas or small towns. In this context, there are numerous positive enough experiences of cooperation between local private firms, local authorities and local residents. The Swiss Agency for Development and Cooperation (SDC) is supporting such mini-PPPs in some countries, and in its opinion, fairly successfully.

SECO is aware of this fact. The message accompanying the SECO line of credit IV leaves open the question as to whether such partnerships should be supported, although the de facto division of labour with SDC actually rules this out. SECO will not get around the large and problematic PPPs unless it makes fundamental corrections to this point in the programme. The direction of that correction is already given in the message and needs only be built upon.

It in fact contains the suggestion, if necessary to support not only PPPs, but also the rehabilitation or improvement of entirely government-operated infrastructure enterprises. In this connection, SECO speaks of possible «public-public partnerships» – a kind of learning from public institution to public institution. It is recalled in this context that for years now, the infrastructure companies of the city of Zurich have been cooperating with public enterprises in the Chinese city of Kunming and are demonstrating the potential of such public-public partnerships. This suggestion did not figure in the first draft of the SECO message and obviously results from the round of consultations and from criticism within the administration.

Contact: Peter Niggli