Blog 5 - The case against Privatisation of Water Provision for African Countries

The provision of water is a key political issue for all countries and especially so in many African countries. In the previous blog, a case was made for privatisation of water supplies in African countries, specifically drawing upon the case study of Gabon -  an example where privatisation has been a  relative success. This blog shall make the case against privatisation using the case of Guinea as an example before drawing a conclusion of the case for privatisation as a whole. 

Figure 1: (https://www.economicshelp.org/blog/3201/economics/profit-maximisation/)

It may be argued that privatisation is not the best means of supplying water to African countries because there is limited evidence to suggest it improves provision or cost effectiveness. Sceptics of privatisation argue that water supply is a natural monopoly - a market whereby one firm or producer dominates the market because the barrier to entry into the market is so high due to the scale of investment required (Kirkpatrick et.al, 2006). Due to the high barriers to entry in such markets, it is argued by cynics that the lack of competition in the market reduces efficiency and increases costs to the consumer: Assuming the firm supplying the water is a profit maximiser, the firm's aim is to produce where marginal revenue (MR) is equal to marginal cost (MC) however the price charged is where MR=MC=AC (average cost) at P1, Q2 thus yielding a deadweight loss to the consumer signified by the red triangle which also signifies the profit gain for the producer. 

Moreover, it may also be argued that due to the nature of the water supply market mentioned above, the government involved in privatising may fall hostage to regulatory capture. Regulatory capture occurs when a regulatory body i.e a government ends up acting in producer rather than consumer interests. This may well occur in Sub-Saharan African countries as said governments are looking to source foreign investment into the countries thereby causing a conflict of interest when attempting to regulate. As a result, the profit motive for the supplying companies and the need to return adequately to investors may in fact lead to price rises (Bayliss, 2003). In addition, regulatory capture is in fact hardly surprising. Given the nature of foreign investment, it is hard to attract such without an incentive for foreign companies thus leaving governments prone to corporate interests.

Such fears about extra cost to consumers are exemplified in the case of Guinea. Guinea privatised its' water supply by giving a 10 year lease to the company SAUR in 1989 (Bayliss, 2003). Privatisation on the whole hasn't been an appreciable success with costs rising from $0.12 pcm pre-privatisation to $0.83 pcm post-privatisation (ibid.), unaccounted for water (UFW) falling from 50% to only 47% and collection rates falling from 75% to 60% (Kerf, 2000 and Menard and Clarke, 2000). Moreover, the Guinean government fell foul of regulatory capture - the Guinean government failed to pay its’ bills down at 10% collection rate in 1993 (Bayliss,2003) however the private operator didn’t disconnect in hope of maintaining good relations. This in tandem with the lack of an independent judiciary made proceedings opaque and outcomes erratic in nature (Menard & Clarke, 2000 in Bayliss,2003)

So is privatisation desirable then? There are cases where it has had some success i.e Gabon as detailed in the lat blog and cases where it simply has not i.e Guinea. Privatising water provision and any success or failure it is likely to yield is predicated largely on antecedent conditions of the country which it is targeted. That is to say, Guinea's water supply (and economy in general) was in complete disarray before privatisation with the utility being under funded and over staffed thus being largely labour and resource inefficient (Bayliss, 2003) whereas Gabon was in relatively good shape and run by a wealthy company (SEEG) according to Francois Wohrer (1997). This would appear to suggest that context is more indicative of the fortunes of privatisation initiative than the matter of fact itself. That is to say, the conditions of a market and its' infrastructure are seemingly greater determinants than making blasé generalisations en masse about an initiative in itself.  Furthermore, due to the nature of the market of water provision, it is imperative that a privatised water supply can be efficiently regulated. As alluded to above, there is a very high chance of regulatory capture with such initiatives mainly due to the fact that many African countries don't have particularly transparent or efficient political and judicial systems thus corruption and ineffective enforcement of any regulation is a considerable concern for any privatisation initiative.

In conclusion, the provision of water is a key political issue for African countries and failure to provide adequately will likely have drastic socio-economic and thus drastic political consequences. It is nigh on impossible to advocate a sweeping position for or against privatisation of water provisions. To that effect, there are strong arguments for it (covered in the first part of the blog) and strong arguments against it covered in this blog. In terms of economic theory, the bone of contention is whether any reduction in cost gained through economies of scale are passed on to the consumer in the form of lower prices. What is apparent is that it is imperative that in order for privatisation to be successful there needs to be effective means of regulation and a strong and stable foundation from which to privatise. In essence, if any given government has the wherewithal to efficiently regulate and the existing infrastructure is in good condition then privatisation seems more desirable an option. Given the context of much of sub-Saharan Africa, in the final analysis, I suggest that, on balance, privatisation of water supply and provision isn't desirable as an initiative.