Contexto local

Despite the fervent promotion of private sector involvement by institutions that have adopted the market-oriented development approach, there is a whole set of literature that heavily critiques the neoliberal ideology and policy agenda. International agencies such as the World Bank, the IMF, and the World Trade Organization (WTO) become prime targets of such criticism. The “unholy trinity” is accused of enforcing “ a virtually synonymous set of neoliberal economic policies” all over the world at the behest of a Washington-Wall Street alliance (Peet 2003).

Many challenge the proponents of neoliberalism with the argument that private sector participation does not necessarily constitute a cure for the poor records of the public sector. When it comes to development, particularly the betterment of the lives of the poor, the private sector has its own shortcomings that might undermine such a cause.

In addition, PSIs/PPPs might prove to be incapable of either curing the illness of the public sector or fully overcoming the limitations of the private sector. Such market-based reforms, as many argue, have attracted overly-optimistic hopes based on unrealistic assumptions (Bayliss 2000); and many private participation policies have “not live[d] up to the ambitious expectations of its promoters” (Bayliss and Kessler 2006, 7).

3.3.1 Profit Orientation

The biggest argument against private sector involvement in previously publicly-managed industries is that the private sector is profit-driven, responding only to market signals and incentives. Such a quality might be good news for firm efficiency, but it is also a curse for corporate social responsibility. Indeed, members of the private sector have seldom tried to hide such a propensity for profit at the cost of social equality. For example, commenting on their concerns regarding the financial viability in developing countries, representatives of Veolia, a prominent TNC in the water sector, state that profits depend on “sufficient and assured revenues from the users of the service,” by either excluding the poor or by receiving guarantees of payments for the products or service (Bayliss 2000; Dwivedi 2010).

Many perceive that preferences for private sector participation taken by

international agencies are driven by the goal to further the interests of donor countries’ own private sector than the interests of the recipient countries (Bayliss 2000). It is accompanied by the argument that private businesses have shifted strategies to do

business in developing countries in order to take advantage of new resources and markets that have opened in the developing world; this, in return, drives a shift of business

Global South (Natsios 2009; Runde, Carson, and Coates 2011).In addition, it is argued that low domestic economic strength would prevent the private sector in the host nation from participating, leaving the game almost exclusively for international investors (Commander and Killick 1989).

In the exact same vein, Bayliss (2000) argues that low domestic savings and weak capital markets will prevent the domestic private sector from participating, thus

increasing reliance on foreign investment. For example, many feared that during the 1990s, when countries in Latin America, Asia, and Africa were experiencing market- based reforms in the water and sanitation sectors, international development agencies would pave the way for a handful of water TNCs based in the Global North to penetrate the markets and structure of the receiving countries and communities (Budds and McGranahan 2003; Schulpen and Gibbon 2002). Indeed, in a study of Latin America water PSI/PPP projects, Castro (2008) finds that prequalification processes limited bidders to a very small number of North-based water companies. For example, in Buenos Aires, only four bidders were qualified. In Cochabama, Bolivia, and Cartagena,

Colombia, there was only one bidder for each, respectively (Castro 2008; World Bank 2006b). In addition, bilateral donor governments seem to push for involvement of major companies based in their own countries. For example, it is reported that the US President pressured the government of Mozambique to give a major gas exploration concession to Enron, with hints that US aid may be affected if the Mozambicans chose not to oblige (Bayliss 2000).

3.3.2 Perceived as Anti-Poor and Unpopular

public counterpart, would extend more access to basic utilities, goods, and services to the urban and rural poor, others have observed that private sector involvement is perceived as intrinsically unpopular and anti-poor (Birdsall and Nellis 2003; Brocklehurst 2002). It is often recorded that private enterprises supplying market demands fail to provide public goods to those who could not afford them; and much evidence suggests that private companies are reluctant to extend services to low-income communities (Budds and McGranahan 2003). For example, in a 2002 World Bank-sponsored presentation, the CEO of SAUR International—another major water TNC—clearly stated that the goal of universal connection to all users was “unrealistic” (Talbot 2002).

Studies have shown that many public-private partnership contracts in utility industries exclude low-income populations—including the poor neighborhoods on city peripheries and rural residents— from the coverage area. In some cases, the poor are not included in the original contract; on other occasions, they are excluded from renegotiated contracts; and in several cases, the battle of inclusion and exclusion creates continuous tension between the public and private participants (Almansi et al. 2002; Budds and McGranahan 2003; Nickson 2001a, 2001b; Trémolet 2002). Even World Bank-sponsored studies admit that without proper mechanism to guarantee the private actors’ ability, obligations, and financial incentives to serve low-income households, the goal of reaching out to the poor has rarely been successful from a commercial perspective

(Komives 1999). For example, the La Paz concession, which was designed to be pro-poor, was operating at a loss only three years into the contract, principally due to a lack of demand for new connections and low domestic water consumption (Budds and

that in many private sector participation programs, the situation regarding the distribution of assets and income has been worsened by these market-oriented reforms. In addition, a comprehensive evaluation by a panel of external experts on IMF adjustment polices suggests that due to flaws in design, some PSI/PPP programs end up having adverse consequences for the poor, either directly through reducing incomes or indirectly through decrease in social service provision (Botchwey et al. 1998). Cornia, Jolly, and Stewart (1988) concur and speculate that some of the PSI/PPP programs hurt the poor mainly through reductions in public expenditures on health, education, and other social services.

In their seminal work, Campbell White and Bhatia (1998) find that many African countries fail to mitigate the social impacts on some of the most vulnerable portions of the populations that were affected by PSI/PPP projects. In the same line of argument, Buchs (2003) observes that PSI/PPP projects generally have the tendency to overlook wider social objectives; instead, too much focus is given to economic activities and gains, which further undermines the popularity of private participation programs. Finally, private participation does not exclude room for corruption, a point elaborated on below: corruption scandals involved in PSI/PPP projects have led to a major perception problem about the credibility of PSI/PPP programs. That said, it is not surprising to see relevant studies show that although PSI/PPP could bring benefits in many economic aspects, the perception continues to decline among the public (Birdsall and Nellis 2003; McKenzie and Mookherjee 2003).

In addition, it is important to note that among the world’s poor populations, women are usually in a particularly more disadvantageous situation than men. For example, as Chapter Eight shows, in water governance in Ghana, on community and

family levels, female members of a certain family or a certain community suffer more from water scarcity than their male counterparts. There is clear evidence that adult female and young girls shoulder more burdens related to water consumption on the family level and have less input in water governance on the community level. The predicaments of women and girls in water-related matters, such as loss of time in managing small businesses or attending school (due to time required to fetch water) and physical

weariness (and sometimes, bodily harm) caused by water-collecting activities, were never addressed by the partnership under the PSI/PPP reform scheme. Therefore, it is safe to say that, if a certain PSI/PPP project does not improve the situation of the poor in the host community/country, the female component of the population tend to undergo more suffering from the non-impact of the PSI/PPP than the men do.

3.3.3 Limited Fiscal Outcome and Capital Injection

As elaborated in the previous sections, private sector participation is promoted due to its expected ability to improve the fiscal outcome of the firms and host governments, as well as to bring in investments to the cash- and capital-strapped public enterprises. However, on the contrary, Buchs (2003) suggests that PSI/PPP is less of an economic booster than an exercise in damage limitation. On the one hand, PSI/PPP has had a minimal one-off impact on the budgets of many countries, at least in the short run, for a variety of reasons; additionally, the impact on tax revenue has been mixed at the microeconomic level (Buchs 2003). On the other hand, the legend that the private sector would bring in much- needed capital flow is somehow quite unsubstantiated.

Consider the following. On the issue of bringing positive fiscal outcomes, it is argued that PSI/PPP could contribute to governments’ financial flow mainly through two

channels, including sale proceeds and increased tax revenue. Regarding sale proceeds, there does not seem to be any significant evidence suggesting that governments would gain considerable amounts of financial flow after sales of previously publicly owned enterprises and firms. In developed countries, not much has been sold, most sales are partial, and governments maintain considerable control. Bortolotti and Faccio (2009) study 141 firms in OECD countries that went through the largest PSI/PPP wave in the 1990s, and find that at the end of 2000, governments retained control of 62.4 percent of post-PSI/PPP firms. In civil law countries, governments tend to retain large ownership positions and in common law countries, golden shares are usually preferred. In the developing world, the seminal work of Campbell White and Bhatia (1998) shows that PSI/PSP projects did not have any substantial impact on government financial flow in the 1990s: “[t]herefore, the objective to raise government revenue has not been met… On a cash basis, government revenue was not significantly raised… all in all the government benefited from financial relief rather than from cash money.” In addition, PSI/PPP

projects in developing countries face particular problems, including the overestimation of asset values (thus the over-expectation of proceeds generated by sales) and winning bidders’ inabilities to fulfill their financial obligations (Makalou 1999, 20).

In terms of government revenue through taxation, PSI/PPP projects show mixed impact on tax revenue at the microeconomic level. Buchs (2003) argues that on the one hand, PSI/PPP programs are supposed to generate more tax revenue for the government, as firms and enterprises become more profitable and efficient and less likely to benefit from weak auditing and tax collection efforts than public enterprises and firms. For

Jones, Jammal, and Gokgur 2002). On the other hand, PSI/PPP programs could potentially transform the tax base from “a large, easy-to-tax public sector to a largely informal private sector” in which “many prove more skillful at evading taxes” (Buchs 2003; Davis et al. 2000).

On the topic of investment boost, despite such a claim by actors in the international development arena, the predicted substantial finances mobilized by the private sector “has simply not materialized,” assert Budds and McGranahan (2003), and it would be a “serious mistake” that private sector participation will attract sufficient

finance to play a major role in leading development in many of the world’s poorest corners.

Domestically, local investors are often wealth-constrained in developing countries; their wealth is relatively small compared to the value of the enterprises with reform

agenda towards broadened ownerships. If no foreign investment is involved, facing such wealth-constrained domestic investors, the government optimally retains a significant proportion of shares in the reformed firm (Lewis and Sappington 2000). This leads to the limitation of private capital injection and of private partners’ incentives to operate the firm efficiently. Internationally, lack of global investor interest, due to instability or limited markets in the host countries, has become a “major stumbling block” in many failed attempts to establish private sector participation in unattractive places or industries (Bayliss 2000). For example, even during the heyday of PSI/PPP in the mid-1990s, both the World Bank and UN reported in 1995 that PSI/PPP-related flows represented less than five percent of all foreign investment in Africa, which is low both in relation to expectations in Africa and in comparison with other developing regions of the world—

“the fruits have failed to meet the expectation raised by the flowers” (Makalou 1999). In other words, the volume of private investment realized in developing countries does not suffice to fulfill the objective of using PSI/PPP as a catalyst for private sector

involvement (Buchs 2003).

Even in cases in which private companies show a willingness to be involved, many ask for government subsidies and investments from international agencies to minimize corporate risks. Others try to scale down from deeper forms of involvement, such as divestiture and concession, to lesser involvement without risking company’s own capital reserve, such as lease or management contract (Dwivedi 2010; Hall 2002). For example, surveying the water and sanitation sector of the Global South, Budds and McGranahan (2003) conclude that the majority of the funding in the water and sanitation sector will continue to come from the public sector at least at present and in the

foreseeable future. Swyngedouw (2005) concurs that international development agencies and governments, especially those of the developed countries, provide “numerous

financial and other incentives to lure private companies and foster private sector involvement,” providing guarantees of post-PSI/PPP profitability in order to pave the way for PSI/PPP projects. For example, the World Bank insured International Water’s concession in Guayaquil, Ecuador, to the tune of eighteen billion US dollars against all sorts of risks, including political instability. The Buenos Aires water concession sued Argentina over the loss of income and profit after the collapse of the Argentinean Peso.

Then the issue is as follows: if international agencies and the public sector continue to be the major funding source while investment from the private sector (particularly capital from international corporations) remains limited, this ultimately

defeats the purpose of involving the private sector in the first place.17 3.3.4 Selection Bias

As indicated in Chapter Two, selection biases exist widely in partnerships facilitated by international development agencies. Such biases are manifested in four folds: the choices for regions, countries, target populations, and enterprises.

An IMF-sponsored study concludes that private sector involvement with public institutions tends to be more common in countries where “aggregated demand and market size are large” (Hammami, Ruhashyankiko, and Yehoue 2006). On the global level, although many developing countries—particularly the Asian ones—have successfully integrated into the global economy and attracted significant investment while actively participating in global trade, many countries in Sub-Saharan Africa, the Middle East, and North Africa continue to rely heavily on development assistance (Binder, Palenberg, and Witte 2007). Little interest is shown to the least developed regions of the world; as Makalou (1999) observes, until 1995, less than ten percent of private sector participation, in terms of amount of proceeds gained through PSI/PPP projects, took place in the

Middle East and North Africa, Sub-Saharan Africa, and South Asia combined.

Furthermore, there is a favorable tilt towards Asia and Latin America in terms of foreign investment flow, particularly in the forms of private sector participation or

public-private partnerships; within each region of the world, certain countries are favored over others. Private investment and involvement are concentrated in countries with larger

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

17 _{Swyngedouw (2005, 96) argues that the “tendency to leave the network/infrastructure part of urban water}

economies and populations and higher levels of urbanization (Budds and McGranahan 2003).

Within each country, certain strata of the population are more likely to benefit from private sector involvement, as companies tend to be attracted to the urban and relatively higher income populations (Graham and Marvin 1994). For example, in the water sector, several multinational water companies have openly stated that low-income populations do not represent an attractive market and involve too great a risk; thus, these companies showed little interest in serving such communities. Kicking back the

responsibility to the public sector and international aid agencies, the CEO of Saur once asserted that the affordability of the poor in the South did not represent the levels of investment needed and that the public sector should be responsible for providing for them (Budds and McGranahan 2003).

In addition, within each country, certain industries are more likely to attract the participation of private interests than others. Small- and medium-sized companies are likely to attract local entrepreneurs, while large companies in “strategic sectors” have “almost invariably been taken over by foreign investors. As a rule, the larger the transaction value, the higher the involvement of foreign investors” (Buchs 2003; Craig 2002).18 However, the large size of the enterprises does not necessarily guarantee

sufficient interest from the private sector to participate in joint partnerships. Many large, but indebted and low-performance, enterprises in the developing countries find it

extremely hard to attract investors, as the potential private partners are not interested in “loss-making businesses” (Bayliss 2000; Wallace 1997). For example, most African !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

18 _{Low domestic savings and weak capital markets will prevent the domestic private sector from}

enterprises that successfully formed some sort of public-private partnerships in the early 1990s were financially solvent businesses, which did not impose any budget drain on government resources in the first place (Campbell White and Bhatia 1998; Kikeri, Nellis, and Shirley 1992). Meanwhile, loss-making companies remained with the governments and the public sector. In the end, only “promising” utilities are cleared for PSI/PPP while smaller and less profitable utilities remain public and require continuous subsidizations from the government (Swyngedouw 2005, 95).

3.3.5 Not Achieving Targets

Many posit that private sector involvement has achieved neither the scale nor benefits anticipated, despite the heavy campaign that has championed it in many developing countries, put forth by a cluster of international development agencies in the 1980s and