> ... Investment demand rose 8% in the past year
> to a record 640 million tons (double the 2003 level), with ETFs
> providing a big lift, at a time when global mined output fell 3% to
> 2,471 tons, which was a 10-year low. Moreover, average production
> costs continue to rise and establish a rising floor under the gold
> price ...
Hmmm, starts encouragingly, but then bogs down in supply problems. So
why the investment demand increase? A global financial crisis brewing,
as was signalled the last time it hit $850/oz?
> And opportunities for the
> world's water companies are rising inexorably – a conference on
> underinvestment in water resources took place in Barcelona last week.
>
Sure there are investment needs but aside from China and Saudi Arabia,
who's privatising these days? Below is a section of a report I'm nearly
done coauthoring, where we (no doubt over-optimistically) predict the
end of the craze:
***
During the worsening financial situation across much of the Third World in the wake of 1980s-90s debt crises, many fiscally-constrained states were encouraged by multilateral institutions to look to the private sector for capital injections, technical solutions and management expertise. With the global water sector under pressure to rapidly modernize infrastructure and eliminate backlogs, and with fewer state resources available, larger municipalities across the world experimented with a variety of private sector relationships. Transnational water industry lobbies successfully promoted the private sector option and attempted to establish long term lucrative markets for conventional infrastructure inputs. The largest firms – see Table 3 - soon became household names in many Third World countries, including Suez (France), Thames (UK), Saur and Veolia (both France).
Table 3. Largest private sector water and sanitation firms 2004
Source: Davis 2005: 177
Since then, however, many pilot projects fell into crisis. The private sector’s high expectations fuelled an overambitious strategy that will have consequences for the water sector in the longer term. For example, the PSIRU (2006: 49) observes that even the World Bank agrees now that, ‘Ultimately, many of the adjustments in public financing and Overseas Development Aid largely reflect the fact that the expectations of private sector participation in the financing of infrastructure needs were overoptimistic.’ The result – as shown in Table 4 and Figure 17 – is an overall decline in financing availability for water projects, although the British government in early 2007 announced its willingness to again fund public sector projects, reversing its recent bias to British water company expansion and the Adam Smith Institute.
Table 4. Waning finance for water projects
Source: PSIRU 2006: 49
Figure 12. Number of water/sanitation public-private partnership projects
Source: Cashmore et al. 2006
Some of the more contentious private sector interventions have demonstrated that for private sector management to be effective and accepted requires an appropriate institutional, legal and regulatory environment. In her comprehensive review of private sector participation, Davis (2005: 175) concludes:
Where the need for investment in urban water and sanitation infrastructure coexists with a relatively affluent customer base, as well as a stable political and economic environment - namely Europe, North America, and a handful of middle-income countries of the developing world - privatization is likely to continue its gradual spread.
The situation is different in the developing world, due to currency fluctuations that adversely affect profit repatriation, ill-designed contracts, higher levels of corruption, and more intractable conflicts, as the Camdessus Commission reported. These relate to structural oppositions between public and private sector constraints and objectives, including profit motive, customer poverty, access needs, grid weaknesses, and the relative power of public service labour unions. In China, as shown in Figure 18, private participation has advanced especially rapidly.
Figure 18. Private investment in water/sewerage projects in China
Source: Cashmore et al. 2006: 16
Elsewhere, however, the trend appears to have peaked, as noted in Figure 19. ...
As a result, by the early 2000s, it had become clear to the large firms that earning profits by selling water was in many cases excessively difficult. Private sector investments in Third World utilities dropped in 2001 to half the $120 billion level of 1997. Water proved the least rewarding utility sector (as observed in Figures 20 and 21), compared to telecommunications, electricity and transport.
Figure 20. Private investment in infrastructure by sector and region, 1990-2002, US$ billion
Source: Camdessus Commission, 2003
Figure 21. Degree of cost recovery
Source: Camdessus Commission, 2003
Part of the problem is financial, but that is not the only obstacle to private investment. As expressed by Mike Curtin of Bechtel Group, ‘We have agreed to take the commercial risk, but it is the political risks that kill you. My fear is that the private sector is being driven out of the water sector’ (Bloomberg 2003). By early 2003, Suez was recording serious commercial and political problems across the world, as British journalist Nick Mathiason (2003) reported:
Suez, the biggest water company in the world, is reducing its exposure in developing countries by a third. It already had plans to reduce costs by E340 million this year and a further E68 million next year and now intends to cut deeper. Not surprisingly in a harsh macro economic climate, the company now favours ‘currency risk exempt financing’, having had its fingers burnt in Argentina and the Philippines... Likewise, Saur - the third biggest water firm - has in the last two years withdrawn from a contract in Mozambique while Vivendi, the second biggest player in the world, has expressed concern about the financial viability of servicing the poor in developing countries, preferring locations where customers or governments can guarantee payment.
According to David Hall of the Public Service International Research Unit in London, Suez also suffered intense protests and criticism in Casablanca and Jakarta. In December 2002 it pulled out of Manila due to massive losses and in January 2003 was pushed out of Atlanta, the US’ largest water commercialization. The company’s chief executive, Gerard Mestrallet, committed to ‘reduce investments’ in the Third World. The failure of Argentina to pay agreed profits in hard currency meant Suez would ‘prepare to depart’ (Hall 2003). In March 2006, The Guardian reported:
Last week Suez said that it was now impossible for it to work in Latin America. In an interview with The Guardian, Jean-Louis Chaussade, the chief executive of Suez Environment, which has major contracts in Argentina, Bolivia and Haiti, said: ‘We are not a political organization, but how can we do our job if the political system in countries changes its mind so often?’ (Vidal 2006).
In summary, where the majority of people are poor, where institutional and regulatory environments are weak, and where short to medium economic prospects are uncertain, it is unlikely that privatization will ‘fix’ the water sector, with few clear incentives for continued engagement emerging on either side from a decade of experience and experimentation. Cashmore et al. (2006: 23) argue, for example: ‘The track record for privatization is decidedly mixed, from both a financial and public policy perspective. And operational efficiencies typically expected to be achieved through consolidation and greater economies of scale are not always a sure thing in this sector.’ Indeed, international water companies have begun to withdraw from the South, especially in the face of heightened resistance fuelled by pricing concerns.