The Water Privateers
issue 207 - May 1990
The water privateers
Last year the British Government sold its water industry into private hands.
The policy was so universally unpopular it was hard to see who wanted it.
Geoffrey Baker uncovers the coterie of business interests behind it -
who are now exporting the model to the Third World.
Last year Ibrahim Abdulkareem wrote to his local West African paper complaining that his town's new water system had not worked for a year and that its dam had then collapsed. At the time the contractor who built the dam was buying up waterworks in the great British privatization race.
Ibrahim will probably go on waiting for his water. In a neighbouring state, 49 villages have waited years for a water supply from the same contractor - a supply for which their government has already paid around $50 for every man, woman and child.
Stories like this have not been heard in Britain since water supply was taken away from private contractors, in the nineteenth century. And there is a connection with Britain's decision last year to re-privatize. Ibrahim's contractor, who is a close confidant of Prime Minister Margaret Thatcher, belongs to a coterie of financiers and exporters that pressed hard for water privatization for business reasons.
Apart from this interest group, it is very difficult to find anyone in Britain who wanted water privatized. The public water industry had to be pushed, kicking and screaming, into the sale. In opinion polls, water privatization was universally unpopular. Even government supporters threatened rebellion.
In the annals of British domestic legislation, the story of water privatization is astonishing. At enormous political risk, the Government dismantled a public service that had lasted for six generations, together with a canon of water law representing the combined wisdom of some 47 previous governments.
From an international perspective, the move seems even more bizarre. There is nothing like it anywhere in the developed world. The French keep contractors on their toes by auctioning city water-supply franchises every 10 or 20 years. The Dutch have non-profit joint stock companies with city governments as key shareholders. Even the free-enterprise US leaves ultimate control with the municipalities. The British system is unique: privatization removes all local political control, sells the asset stock to shareholders, and actually requires the water company to make a profit.
Yet this controversial model for privatization is now being touted for urban water-supply provision in developing countries. The first privatization export contract is already in the bag. A consortium led by North-West Water will build an entirely private water system for the Malaysian city of Ipoh.
A dubious pedigree
The nearest parallel for Third World water privasization is, unfortunately, nineteenth-century Britain itself. Around 150 years ago, sanitary conditions in British cities were much like those endured today by the Third World urban poor. Water enterprises were usually incompetent and sometimes corrupt, providing piped or carted water to the few who could pay and safe water to no-one.
Waste disposal was even more haphazard. Sewage was allowed so collect in gutters to be removed by 'soil' contractors - but only when there was enough to make a profit. Life in the rapidly growing towns became intolerable. Cholera, drought, and scandal fuelled a debate about private profits and public health that went on for 50 years. Water and sanitation became central to the movement for civic improvement. Royal Commissions reported. And governments regulated.
Profit limitation was the first innovation in 1847. Cholera epidemics - that in 1848 killed 3,000 Londoners a week - led to compulsory filtration in 1856. In the 1890s repeated water shortages in London's East End finally forced the metropolis to take water supply into public ownership. Significantly, the next waterworks failure in the East End was in 1989 - with the industry on its way back into private hands.
For most of this century the public-service utilities evolved into a system of water boards and river boards staffed by civil servants and local politicians. The final phase was the 1974 creation of 10 regional water authorities responsible for the entire hydrological cycle from resource management to waste disposal. A few exceptionally efficient private water-works survived, required to return most of their profits to the customer.
When Margaret Thatcher came to power in 1979 nobody thought this organization of water supply and sanitation so poor that it would have to be abandoned. On the contrary, the principle of integrated river-basin management was widely admired, not least by the new government.
The turnkey era
During the early 1980s, British companies began to promote the vigorous sale of water systems in the developing world with full Thatcherite backing. Contractors went in for the 'turnkey' approach. Instead of waiting for a government to invite competing bids for a project, companies made the first approach with a ready-made project proposal. This reversed the normal business relationship.
'Turnkey' projects are extremely profitable because they bypass conventional tendering - eliminating competition - and cut out interference from funding agencies, consultants and even the client. They can also go badly wrong, as Ibrahim has discovered, but the contractor is often protected by government guarantees which ensure he gets paid. In turnkey projects the contractor is king.
By the mid-1980s, the new breed of turnkey water contractor had become a powerful force in the British water industry. Some belonged to a loose association called the British Water Industries Group (BWIG) which wanted water privatized.
BWIG took the line that British contractors working overseas were losing business to foreign competition, especially the French, because of lack of expertise in running water utilities. The relevant British management skills were locked up in the 10 water authorities which were not designed to operate commercially. These skills were superior to those of the competition because of the experience with integrated river-basin management.
It was also clear that some of BWIG's members coveted the water authorities as lucrative domestic markets. They looked across the Channel at the big French firms and they saw their rivals virtually running cities providing not just water and sewerage, but rubbish collection, street cleaning, lighting, funerals, even cable TV.
In 1986, the first draft of a water privatization law was published. It carried the stamp of a powerful but very narrow industry interest group, the exporting contractors. It upset almost everyone else. The proposal envisaged selling off the 10 authorities intact, preserving the principle of integrated river-basin management. This raised opposition from farmers, heavy industry and the European Community, all of whom objected to placing pollution control in private hands. A revolt in the public water service itself led to the replacement of difficult water-authority heads with free marketeers.
The new plan announced in 1987 split existing water-authority functions into 'utility' and 'regulatory', selling the services and creating a public-sector National Rivers Authority for pollution control and resource management. The newly-turned water authorities now protested vigorously against the loss of integrated management. Thames Water complained that fragmentation would lose it overseas contracts and knock £10 million ($16 million) off its flotation value.
The Water Authorities eventually backed down at the prospect of another round of sackings. But meanwhile trouble grew from another quarter. The British public, used to clean and cheap water for generations, were alarmed that privatization would make water cost more. The Government, whose case for all privatizations is built on efficiency and cost-reduction, wanted to shift the argument to pollution, to say that price rises were purely to do with water quality. Scare stories began to appear in the press.
Whether or not newspaper journalists were prompted onto the pollution track, they were soon responding to a growing public awareness that sewerage works were becoming decrepit and water supplies unsafe as government held down public expenditure. In 1987, a serious disaster took place in Cornwall when mistakes occurred at a treatment works and 20,000 people were poisoned.
At the peak of the environmental debase, Greenpeace recruited 4,000 new members a day and revelations from Friends of the Earth merited prime-time television. Conservation groups could attack water privatization with well-funded research, and did so.
After three years of bitter debate the water authorities were finally sold off last November. To ensure the flotation was a success the Government not only extinguished six billion pounds ($9.6 billion) in water-board debt, but paid over an extra 'green dowry' of £1.6 billion ($2.6 billion) so that shares could be sold at a knock-down price. So £362 ($580) of public funds per working person went into selling water short.
A model for nowhere
So what, in the end, does the British model of privatization have to offer the world? The magic ingredients of competition and efficiency are conspicuous by their absence. The purpose they masked - the opening up of new export opportunity for a handful of companies - does not seem to have reaped its hoped-for reward. The French companies, arch enemies of the contractors' lobby, have moved in to take the biggest slice of Britain's domestic water market.
Nonetheless 'privatization' continues to be held out in the developing world as a panacea for water systems. This is primarily an urban phenomenon because it is in towns and cities that the high-tech multinational contracting firms find profitable markets. But the philosophy is filtering into rural areas through agencies such as the World Bank. Descriptions of rural water-supply projects funded by aid nowadays contain the ominous phrase 'institutional reform', which means some degree of privatization.
Two years ago, the Ghana Water and Sewerage Corporation began removing the handles from pumps in villages that could not or would not pay new tariffs imposed under an IMF structural adjustment programme. The outcome was not more income for the Water Board, but more guinea worm in the villages as people reverted to their traditional polluted sources. Policies such as this were attacked by African Finance Ministers at last year's UN Economic Commission for Africa summit as 'wholesale, indiscriminate and doctrinaire privatization'.
Meanwhile, Ibrahim Abdulkareem is still waiting for his town's water supply to come on stream. It will be sad if, on top of all the other costs, his family's health pays its own heavy price.
Geoffrey Baker is a freelance writer specializing in water and environmental politics.