Posted on 29-7-2003
World
Bank Wonders About Privatisation
By Michael M. Phillips, Wall St Journal
The World Bank , the apostle of privatization, is having a crisis
of faith.
What seemed like a no-brainer idea in the 1990s -- that developing
nations
should sell off money-losing state infrastructure to efficient
private
investors -- no longer seems so obvious, especially when it
comes to power
and water utilities.
Investors who once seemed eager to risk their money on Brazilian
power
plants or African sewers are pulling back. Commercial banks'
power-project
financing in the developing world and former Eastern Bloc nations,
which
peaked at $25.9 billion in 1998, totaled just $5.7 billion last
year,
according to Dealogic, a British data firm.
Consumers, feeling deceived, increasingly associate privatization
with
higher rates for them and higher profits for foreign companies
and corrupt
officials. Rate increases have spurred violent demonstrations
against a
water concession in Bolivia and private power plant projects
in Peru. A
2001 survey of 17 Latin American nations by Latinobarometro,
a Latin
American polling company, found that 63% of respondents felt
that
privatization of state companies hadn't been beneficial, up
from 45% just
three years earlier.
The result of this widespread disappointment is that across
Africa, Latin
America and Asia, some privatization contracts are being renegotiated
and a
handful of projects -- concentrated in toll roads, power and
water -- have
been canceled. Fewer new projects are getting off the ground.
Privatization hasn't always gone badly. Telecommunications deals
have
generally been much more successful than water or power projects.
When it
comes to phones, technology and privatization conspire to provide
the
public with service that is less costly and better. The advent
of
cellphones, for example, has made it simpler to introduce competition
to
improve what was once a state exclusive.
But water and power are tougher. They naturally lend themselves
to
monopolies, not competition. Why build parallel, competitive
sewer pipes or
power lines? And, since the public often views low-cost water
and light as
rights, not privileges, privatization has been the focus of
popular
discontent. The unexpected turn of events has left privatization
enthusiasts at the World Bank -- the main tool the wealthy nations
have to
influence economic policies in the poor ones -- wondering what
went wrong.
"There's certainly a lot of soul-searching going on," says Michael
Klein,
the World Bank's vice president for private-sector development.
Each case, of course, has its own idiosyncrasies. But an electricity
project in Armenia offers a typical problem case. In a recent
study of the
case, the World Bank found that its own staffers had radically
underestimated how much electricity prices would jump -- nearly
50% -- and
consumption would fall -- 17% -- when the national power company
was put on
commercial terms in preparation for eventual sale. In the end,
the
government didn't collect nearly as much new revenue as it had
hoped, while
the poor -- the intended beneficiaries of World Bank projects
-- grew
increasingly likely to fall behind in paying their electric
bills. Many
were left scrounging for wood to heat their homes, causing unforeseen
environmental damage.
The Armenia study landed with a thud at the World Bank; it implied
that
free-market ideology had trumped clear thinking when the World
Bank had
prodded the Armenian government to commercialize the power company.
"There
was never an actual policy that said you shall privatize everything
that
moves," Mr. Klein says about the World Bank's strategy over
the past
decade. "But some people interpreted it that way."
And that's how many countries interpreted the World Bank's advice,
which
carries the weight of the West behind it -- not to mention a
lot of cash.
The World Bank, for instance, pushed the Comoros Islands, off
Africa's east
coast, to put its power company under private management, an
arrangement
that ended in bitter squabbling. "We had no option but privatizing,"
says
Mahmoud M. Aboud, charge d'affaires at the country's U.N. mission.
"When it
didn't work, we ended it."
World Bank officials have now decided it doesn't matter so much
whether
infrastructure is in public or private hands. What matters is
that it be
run in a business-like manner, perhaps more frequently combining
public
ownership and private management. But above all, they now say,
bureaucrats,
investors and, yes, the World Bank itself must pay far greater
attention to
the fiery politics of privatization and especially to the effect
of rising
prices on the poor and disaffected. On average, the rates charged
by state
water companies in the developing world were so low that they
covered just
30% of their costs in the early 1990s, while power companies
recovered only
60% of
their expenses, according to World Bank figures. Governments
covered the
gaps, draining public coffers. When a utility is put under commercial
discipline, rates almost inevitably rise. "In the end, it depends
on how
politically acceptable commercial tariffs are in a country --
that's the
issue," says Peter Woicke, head of the World Bank's business-finance
arm,
the International Finance Corporation. "Somebody has to pay
for it --
either the users, or the taxpayers, or the donors . . . or future
generations." Mr.
Woicke predicts that in poor countries it will be some combination
of the
four footing the bill.
And when the World Bank sings the praises of private infrastructure
ownership or management, it will also probably preach louder
the virtues of
well-targeted subsidies to assist those who will no longer be
able to
afford the basics of life.
Michael M. Phillips michael.phillips@wsj.com
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