Blog 4 - A case for Privatisation of Water Provision in African Countries?
The issue of water provision is a key political concern to all countries in the world, not least countries in Sub-Saharan Africa. Privatisation can be described as a shift in ownership of the water supply organisations. In general, this means transferring provision of water supply to the private sector and away from the public sector although there are various implementations which have varying degrees of private sector engagement. These can range from short term (up to 5 years) service or management contracts to 20 year concessions to permanent divestiture arrangements. Currently, privatised water supply arrangements are most prevalent in Francophone countries in Sub-Saharan Africa, perhaps a lasting legacy of French colonialism in that it mirrors similar arrangements in France. The first part of this blog shall explore the case for privatisation and the accompanying concerns before looking at case study of Gabon to assess whether privatisation of water supplies is desirable in Sub-Saharan African countries.
On the one hand, it may be argued that privatisation is desirable for Sub-Saharan African countries on account of efficiency gains. Indeed the underlying theory behind privatisation being more desirable is that private companies are more inclined to provide a better product to attract a greater number of consumers in aid of chasing profits. In turn, a private company in theory is likely to be more efficient thus reducing costs which are subsequently passed down to consumers in the form of lower prices (Bayliss,2003). Moreover, it can also be argued that private companies can achieve economies of scale more easily (Samuel,1999) than public owned companies due to greater desire to reduce costs. Economies of scale occur when, due to large output, a firm actually incurs lower per unit cost for the good provided. As figure 1 shows, the Long Run Average Cost (LRAC) decreases with output (to a certain point). A small firm without significant output is likely to produce at P1,Q1 whereas a larger firm with greater output is likely to produce at P2,Q2 with a reduction in the price level. This is because, in theory, a larger firm with greater output is likely to achieve greater efficiency per unit produced than a smaller firm which in turn should see a reduction in price for the consumer.
However, in practice, it is vastly different; in order for privatisation to be beneficial to consumers in said nations, there needs to be effective regulation. Water supply can be argued to be a natural monopoly. A natural monopoly can be described as a market where the largest (usually the first) supplier in the market has monopoly power and thus competition is limited if existent at all and prices aren’t lowered per se by the market mechanisms. Water supply can be described as a natural monopoly due to high barriers to entry i.e large capital investment required which are restrictive of competition (Kirkpatrick et.al, 2006) thus making it impractical to have competition in water supply markets (Bayliss,2003) which begs the question: how much, if at all changes, from having the water supply state run? Apropos of market conditions, being a natural monopoly doesn’t mean privatisation is undesirable per se provided there is effective regulation of the companies involved in the market. However, most of the countries for whom this blog is applicable don’t have such capabilities. That is to say, many of the governments in said countries don’t have the capabilities to regulate the providers efficiently due to regulatory capture (Bayliss,2003).
As mentioned earlier, there have been countries where privatisation has occurred, namely Gabon with a fair degree of success. The nature of privatisation in Gabon was a 20 year concession to Vivendi, a French conglomerate, on the basis of a 17.25% price reduction (Tremolet and Neale,2002) in 1997. On the one hand, it can be argued that in Gabon, privatisation has been a success on the whole. Indeed, Tremloet and Neale (2002) report that there was an increase from 49.3% to 62% in Libreville (the capital) post privatisation which is far beyond the original target set out and billing rates increased to 93% also. Moreover, it also geared fruit for the Vivendi; with dividends rising to 20% in 2000 from 6.5% in 1999 and profits from the scheme rising to $6.89m in 2000 and $9.67m in 2001. Moreover, unaccounted for water (UFW) in Gabon was reported to be only 14% in 2002 (Bayliss, 2003). However, much of the success can be attributed to the fact that Gabon’s supply was in a respectable state pre-privatisation (Wohrer,1997) thus to label it indicative of private enterprise would be facile and disingenuous. Moreover, the investment also came as an electricity and water bundle (to attract foreign investment) (Samuel,1999) which means it can’t be held up too greatly as an example of privatisation success. Moreover, targets regarding quality and sanctions were left vague, and were still not in place five years after the start of the contract (Tremolet & Neale 2002). Although research has found that water had become clearer and less turbid in that time (Tremolet and Neale,2002).
To conclude, provision of water resources is a key political issue for all countries and it it is no different in African countries too. There are various arguments for privatisation of water supplies.The main case for privatisation is the efficiency gains made from taking control away from state ownership. In the case of Gabon, it is clear it has been somewhat successful on the whole with clear and marked improvement in both performance and quality of provision. The next part of the blog shall examine the case against privatisation focusing on the case study of Guinea, another sub-Saharan African country before concluding on privatisation in general for Sub-Saharan African countries.
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