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Business-Managed Democracy » Government » Privatisation » Investment Capital |
A major rationale for privatisation has been to increase government revenue and raise capital for infrastructure development. But the increased government revenue has often turned out to be little more than a mirage. In affluent countries
tend to outweigh any financial gains from the sale of the services.
In poorer nations, a major argument for privatisation was to provide foreign capital for much-needed public infrastructure. In these countries a lack of capital combined with subsidised services for the very poor ensured that government owned service authorities were debt laden. The new flood of foreign investment, however, has often not provided the much needed capital for infrastructure expansion.
The need for private capital has been reinforced by the new consensus of the 80s, the Washington Consensus, which discourages governments from having balance of payment deficits. Therefore in order to service debts, nations required “immediate current account surpluses.” This imperative was reinforced by international organisations such as International Monetary Fund (IMF), which imposed limits on Domestic Credit Expansion in 1976 and called for tighter budgetary controls and monetary targets. This arrangement meant that governments were less able to fund capital intensive infrastructure development, upkeep and renewal using government capital raised through loans.
The private sector has been slow to invest in new infrastructure. The World Bank's World Bank’s Public Private Infrastructure Advisory Fund (PPIAF) admits that there have been “no clear investment gains” from the involvement of private companies in water provision and the Bank's Water and Sanitation Department notes that private money has only contributed 10 percent of water and sewerage investment in the last decade.
A private water company has little incentive to expand water infrastructure to provide drinking water to poor areas where householders will not be able to pay rates that will give them a decent return on the company's investment. Consequently not only have the larger companies such as Suez and Veolia withdrawn from water projects in developing nations but private companies are now only participating on water projects on the basis of fee for service with no investment requirements on their part.
The water connections made as a result of private investment need to be offset by the number of disconnections that private companies have made as a result of non-payment. “In Nelspruit and Dolphin Coast disconnections may have exceeded new connections, and in Jakarta there is evidence that some ‘new’ households may already have been disconnected.“
The Public Services International Research Unit (PSIRU) found that “Only in Latin America can the private sector be said to have contributed significantly to the extension of water connections – and research has demonstrated that these achievements were no better than the public sector.“ No investments have been made in South Asia by provide companies to extend water connections. Because of misplaced expectations that the private sector could deliver increased water supply, foreign aid has been significantly reduced which has more than offset the actual investments made by private water companies to this end.
“In sub-Saharan Africa, 80 percent of the major water privatization contracts have been terminated or are the subject of disputes between the public authorities and the private operator over levels of investment.“
Even in the UK, where water prices are set on the basis of promised investment in a five year period, actual investment often falls short. For example, in the period 2000 to 2005 “capital expenditure was 9 per cent lower than the assumptions made when the price limits were fixed at the start of the period“. The same was true of the preceding 5 year period.
Many forms of privatisation rely on user fees for private company investment returns. This is particularly onerous for the poor who cannot afford to pay the full cost of water and sewerage. In consequence, private companies do not extend their services to poorer neighhbourhoods where ratepayers are unlikely to be able to pay the high rates they need to make a profit.
| Form of privatisation | Source of company income | Control over tariff structure | Investment in infrastructure | Length of contract | Control over assets |
|---|---|---|---|---|---|
| Operation/ Management contract |
Fee for service | Remains with state | Responsibility remains with state | Varies | Remains with state |
| Lease/Concession | User fees | Private company with state oversight | Private company takes partial responsibility | 10-30 years | Remains with state |
| Full asset sale | User fees | Private company with state oversight | Private company takes full responsibility | Permanent | Private company gains assets |
In developing nations, where sewerage is necessary to prevent cholera and diarrhoeal diseases that kill 2 million children each year, sewerage are being held up because of lack of public investment. Private investors are not interested in making such investment unless ratepayers can pay full costs or governments are willing to subsidise them. Full cost recovery from households is too expensive for poor or even middle income neighbourhoods, as it was in developed nations when their sewerage systems were established (many affluent nations still use taxpayer funds to subsidise sewerage systems). However, the development banks and other international institutions are insisting upon full cost recovery from users, despite the unreasonableness of such a demand and the health consequences that follow:
The private sector has failed to deliver any significant investments in sewerage (or other urban infrastructure) in the south in the last 15 years. By contrast, some major developing countries are already achieving significant extensions of sewers in cities through public finance.
In the case of electricity, private companies can charge higher prices if electricity is in short supply. Blackouts and price spikes increase as a result of lower reserve levels of generation capacity caused by the perverse incentives of the market system that give greater profits to private generating companies during times of electricity shortages. These perverse incentives not only discourage investment in new generation capacity but encourage withholding of electricity during times of peak demand to send prices higher.
What is more, it was the unwillingness of private companies to take on the risks associated with building capital-intensive electricity infrastructure that led to government provision of electricity in many countries in the first place. For private companies the biggest risk in building new generation facilities is that they will cause wholesale electricity prices to fall. In a public system, this risk of lower returns to taxpayers who pay for the infrastructure is balanced by the lower prices to electricity ratepayers, usually the same people.
In Australian, the national electricity market provides little incentive for generators to invest in new capacity because undersupply keeps pool prices high and the standby plant necessary to ensure system reliability erodes profits. Also, existing generators can drop prices when potential competitors are seeking finance for generation facilities. It would take a brave company indeed to risk investing in generating infrastructure that may be needed in three or four years time, but that is how long it takes to get a plant up and operating.
When bankruptcies are threatened governments have to be prepared to step in and bail out private companies so as to secure essential public services. Taxpayers have been caught having to bail out companies when wholesale electricity prices went up, as in California, and when they went down, as in the UK.
The British government was unable to stand by and watch British Energy go bankrupt leaving its eight nuclear power plants sprinkled around the country-side, sitting idle with no-one to decommission them. The government therefore ended up committing some US$20 billion to rescue it, taking a 65% stake. It is now owned by French state-owned Electricite de France (EdF).
Taxpayers clearly get the worst of both worlds. They no longer reap dividends from public service utilties when they are profitable, but they still have to pick up the bill when they are not. The reason for this is simple to understand: electricity and water are not commodities that consumers can choose to take or leave depending on price and supply; they are essential services upon which lives depend.
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