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Water Policty Part III: Water Privatization: Risks And Benefits

Updated: Jan 14, 2021

This is Part 3 of a four-part series on water policy. Click here to see Part 1, Part 2, and Part 4.*

As national and local governments work to provide their citizens with adequate, efficient water services, many have considered market-based approaches to their water needs. One such approach is water privatization, wherein ownership of water services is transferred from the public sector to a private corporation. Water is transformed into a commodity and increasingly subjected to the rules of the Price System of Exchange. Many governments find water privatization attractive because the costs of building and maintaining infrastructure can be substantial, and private corporations are often better equipped to mobilize sufficient capital for these projects.

Risks of Water Privatization

The biggest challenge with water privatization is to address the Price-based aspects of water without infringing on the water rights of the public and the environment. As I’ve mentioned in previous posts, this balance can be tricky to achieve in any water governance system. With privatized systems, however, the risk of instrumental considerations overshadowing substantive concerns becomes even greater.

An oft-cited example of the risks of water privatization comes from Cochabamba, Bolivia. In 1999, under pressure from the World Bank, the city’s water system was sold to a subsidiary of the U.S. company Bechtel. Within a few weeks, Bechtel took over local wells and water pumps and raised the price of water for household users by 200-300%. They expanded the water infrastructure to reach new parts of the city, but many residents couldn’t afford to pay for the water once it became available to them. Riots broke out over the price hikes, and the government declared martial law and cracked down on the protesters. Many protestors were arrested, dozens were injured, and one teenage boy was shot by the police. Finally, the government caved to the protestors and terminated the contract with Bechtel, returning the city’s water system to public ownership.

This case study is a cautionary tale about the risks of privatization, but it would be overly simplistic to declare that water privatization is universally negative. Sometimes, privatization can lead to improvements in water quality, price reductions, and expansions in water infrastructure and access to services. In Côte d’Ivoire, for example, a private entity called SODECI has been operating the water services for decades. SODECI has increased public access to water by over 50%, and they’ve committed to meeting the World Health Organization standards for water quality. A complex financing scheme allows SODECI to keep prices low for poor consumers, and the government maintains a comprehensive monitoring system. Although recent political instability has threatened the country’s water system, the public-private partnership seems to have survived and even prevented further water disruptions.

Principles for Effective Water Privatization

Drawing on the success of water privatization in Côte d’Ivoire and other regions, Meena Palaniappan et al. (2004) identified several best practices for water privatization projects. The authors believe that the best privatization agreements meet basic human and ecosystem needs for water by guaranteeing basic quantities for residents and  ecosystems. Furthermore, this basic water requirement should be subsidized for poor consumers to keep water affordable for everyone. Water rates for industrial users should be designed to encourage efficient use, and if necessary, rate increases should be tied to agreed-upon service improvements. Finally, the government should be an active player in any privatization arrangement. The authors believe that water sources should always be publicly controlled to ensure that water remains a social good. The government should establish clear and transparent contracts with water providers and monitor water quality and other pre-established performance criteria. And as much as possible, decision-making about the water sector should be democratic.

Thus, Palaniappan et al. propose that water privatization arrangements protect the Moral and Communal uses of water before subjecting the water to the logics of the Price System. Basic water guarantees for households and ecosystems, as well as public ownership of water sources, ensure that water’s status as a social good is protected. At the same time, the resources and Price-based priorities of private corporations can maximize water’s use as an economic good. When properly regulated, water privatization can improve water services while pricing water to encourage conservation and efficiency. Photos from Waterlat Gobacit References:

  1. Biggart, Nicole Woolsey and Rick Delbridge. (2004). “Systems of Exchange.” Academy of Management Review 29(1): pp. 28-49.

  2. Palaniappan, Meena, Peter H. Gleick, Catherine Hunt, and Veena Srinivasan. (2004). “Water Privatization Principles and Practices” in The World’s Water, 2004-2005 (Edited by P.H. Gleick et al.). Washington: Island Press.

*Special thanks to Ned Spang from the UC Davis Center for Water-Energy Efficiency for assistance on this series.


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