During the past months many debates evoked, civil society stood up and organized protests against the EU water privatization everywhere around Europe. Until today, 14 civil society groups have collected more than two million signatures against the privatization of public water ("Europas bürger laufen," 2013). Gabriella Zanzanaini, director of one of these fourteen organizations, commented on the liberalization plans “This really demonstrates how the Commission has lost touch with reality. Their ideological arguments are not based on substantiated facts and goes to the extreme of ignoring the democratic will of the people” ("Commission in favor," 2012). However also many members of the European Parliament say, that the public debate about the plans of the European commission has drifted away from real facts to simple propaganda. Due to these unequal opinions and the subjectivity of the debate, this paper will objectively review the EU water privatization plans and aims to find out if the potential privatization of water in the EU is favorable or not, taking into account its economic, social and ecological impacts on its various stakeholders.
New Public Management
In his book “Public Services and Market Mechanisms: Competition, Contracting and the New Public Management” (1995) Kieron Walsh observes that throughout the world there has taken place a huge shift from tradition public sector management to new public management, which is a model that strives to introduce market mechanisms to the management of public services. One of the most radical approaches to this model has been the radical application of privatization as a means to change the involvement of government to direct it towards regulation rather than the total withdrawal from its prior functions.
New public management is based on two strands, namely managerialism and public choice (Walsh, 1995). This paper will introduce the European Commissions approach to new public management and will carefully evaluate its outcomes, especially focusing on the combination of the two strands mentioned above.
In the following paragraph this paper elucidates the current European water market and its characteristics.
The long-term water resources per person vary a lot between the European member states. Furthermore the different countries face many different water needs, for example the dry Mediterranean areas posses big areas of agriculture, which require a high amount of water, however availability of water is rather small compared to northern European countries ("The european water," 2002). This is one of the biggest obstacles for the European water supply since there is a mismatch between water needs and availability of water. Another factor, which varies between member states within the European Union, is the population connected to public water and sewerage systems. Whereas in some countries, as for example Germany, more then 90% of the citizens are connected, in others like Hungary only 60% are.
Today, the still most common approach regarding the water and sewerage systems of the European Union countries is, that they are structured around municipal utilities. Anyways, the recent years have shown a trend that private investment increases due to established funding and subsidy improvements for private investors by the European Union. The most common involvements are following the design of public-private partnerships, which are in line with a general shift towards privatization in New Public Management. In these cases public authorities hand out contracts to private partners, which is supposed to increase efficiency, decrease bureaucracy and problems evoking from public choice (Walsh, 1995).
Reasons for Privatization Plans
The water privatization plans of the European Union are a very current, up-to-date topic, which lead to a lot of demonstrations as well as petitions against those plans.
In 2011, the European Union proposed a guideline on the award of concessions. Concessions are available in the Member States in different fields, from highway construction on waste management to water supply. In all the cases where the Member States' administrations do not want to work on their own but with the help of concessions - usually involving the private sector – a stronger set of rules for concessionaire is needed so that the selection is objective and transparent (European Commission, 2011). After strong protest against those concessions, which are feared to lead to a total privatization of water supply in the European Union, the EU-commission explicitly stated their reasons as being necessary to trigger the economy of the EU. The European Commission wants to ensure with its policy more competition in the European water market through an obligation for municipalities to invite tenders for the operation of water supply in Europe. This could actually indeed mean that in a few years more water plants will be operated by private companies. The Commission justifies this with familiar arguments; especially the aim to strengthen growth and employment is highlighted. This is based on the following theory that more space for private companies fosters competition. According to the EU commission, privatization leads to cheaper and better products, more consumption, higher growth and an increase in employment. The European Commission may even prove this effect chain with many examples and figures from a variety of industries. After all, the liberalization is one its successful projects that lead to the creation of millions of new jobs and a variety of new products, as the telecommunication industry in Germany proves (Pinzler, 2013). Especially with the regard to the financial crisis, which lead many European countries, such as Greece and Portugal, to accumulate an enormous amount of debt, the water privatization plans seem to be a plausible possibility for many states to repay their debt.
European citizens strongly despise the European Commissions’ plans and are actively offering resistance by already collecting signatures on the website ‘Right2water.eu’ for an EU referendum with the aim to not subject the supply of drinking water and the management of water resources to the internal market. If there are a million signatories until September, the citizens can call on the European Commission to deal with the issue – in February there were already more than 600,000 supporters ("Eu-Pläne zu Wasser-Privatisierung," 2013).
The following section mentions some of the most important impacts a water privatization in the European Union could have. These areas have been explicitly mentioned by Walsh (1995) as being influenced by the introduction of new public management.
One of the most cited advantages of private companies being responsible for water management is their increased ability to raise funds. Private entities have a greater financial ability than governments to finance investments due to the fact that private companies specialize in one area whereas governments have many different areas of involvement, most of them more important than water supply, that all require funding.
When returning to the areas of impact of a potential water privatization, it becomes clear that the superior ability of private companies to finance investments especially impacts the accessibility of water and the efficiency of private companies. Investments are primarily used to increase the infrastructure of the water industry, which in turn increases the accessibility of water. Furthermore, private companies, driven by the desire to make profits, aim to expand their business to as many profitable areas as possible, which provides us with another reason for an improve in the accessibility of water. The same reasoning applies to efficiency concerns. Financial investments increase expertise needed to repair and improve water systems leading to an increase in operational efficiency. Private companies, aiming at increasing revenues and profits, have a deep interest in increase efficiency through stronger monitoring of the management of the firm, especially in areas such as water losses, bill collection and labor productivity (Marin, 2009).
The area, which is of most concern to public and therefore also a major reason why the majority of citizens has negative attitudes towards a privatization of water, is its effects on tariffs. Although people fear a high increase in prices, theory suggests that exactly the opposite is a possible consequence of privatization. Due to increased competition when opening the market for private companies, supply will increase as well. The theory of demand and supply presumes that in a situation of excess supply, resulting from an increase in supply but a constant held level of demand, prices will decrease. A further result of an increase in competition is the upgraded quality of water. Since companies aspire to attract as many consumers as possible they are forced to not only compete for prices but also for superior quality, because without a high quality under conditions of perfect competition, consumers will most likely switch suppliers.
5.2. Negative Impacts
For the ease of simplicity we will start this section by starting with explaining the negative impacts of water privatization on tariffs. Even though theorists hypothesize a probable reduction in tariffs for water, recent examples demonstrate and opponents claim that prices will increase since companies will still operate in geographical monopolies. Past examples of privatization show that private water companies distribute the specific regions among themselves so that in the end every company operates in its own monopoly, allowing them to demand monopoly prices, which are substantially higher than prices under perfect competition. Furthermore, private entities are always accused of prioritizing their desire of making large profits, which goes hand in hand with price increases. With respect to accessibility, critics state that a privatization of water inhabits the risk of poor households not being served because they are not able to as much for water as wealthier citizens can. Furthermore, the possibility of bypassing under-represented and under-served communities exists due to the belief of private entities that serving those communities would not be profitable enough. Quality is a further major area of concern since it is highly important to consumers. Private companies intent to establish a high profit margin, which is most easily accomplished by raising prices without raising quality. Furthermore, the lack of competition due to regional monopolies prevents the loss of customers to other companies; therefore there is no need for companies to compete for superior quality. In addition, private water suppliers lack economic incentives to address long-term water problems and, without strong supervision, tend to understate to customers the size of potential problems (Gleick, Wolff, Chalecki and Reyes, 2002). In theory, there are no possible likely negative impact on efficiency except for the situation when priority is allocated to other privatization goals that seem to be more important at that specific time or when negative affects are unintended (Villalonga, 1999).
According to Gleick, Wolff, Chalecki and Reyes (2002), privatization of water bears much more potential risks that cannot be classified in one of these categories. One of those risks is associated with the fact that the privatization of water systems may be irreversible. Since the majority of contracts lasts for ten to twenty years, loss of management expertise, knowledge and other assets may be irreversible and are therefore forever lost. This irreversibility of a privatization of water should be of major concern to politicians since it underlines the fact that a water privatization cannot be treaded as an experiment.
The outlined positive and negative implications show that a privatization of water should be done deliberately and with much caution. We generally recommend the European Union to not impose a rule that leads to a European wide privatization of water, however in recent interviews with members of the European parliament explained that the new rule is simply giving concessions. However also for giving out these concessions, and in any water privatization case, we have three main recommendations the European Union and each member country should consider when giving water out of public hands. Firstly, countries need to continue to manage water as a social good to keep or increase the level of social welfare (Gleick, Wolff, Chalecki and Reyes, 2002). One of the problems that can be seen, reviewing comparable privatization cases as of Wales and England, is that a social exclusion took place and the number of disconnected households doubled due to the unprofitable region of the consumers. Any government or in this case the European Union needs to ensure that the basic human needs for water are met in all situations. When privatizing water the European Union and its members need to impose rules on the private companies, which guarantee each resident with a basic water quantity. The same accounts for natural ecosystems, which should also be guaranteed a basic water requirement. Furthermore it would be important that the European Union ensures, that social groups, which live in poverty and cannot afford the minimum quantity of needed water receive subsidies to keep water a social good. These subsidies should be given with caution, since in case they are given to the water suppliers to lower rates, there could be a lack of incentives for them for charging appropriate rates in the first place. Secondly, the member states and the EU need to ensure that sound economics are used in water management, meaning that water services are provided at fair and also reasonable rates. The past example of England and showed that the rates for water and sewerage increased by more than 46% within the first years, however profit margins of the private companies were almost three times as high then of water suppliers in other, economically comparable countries. These divergences should be avoided by setting-up clear rules and having mechanisms in place, which lead to sound economics. For example all tariff increases for consumers should be linked to agreed-upon improvements, these investments have to be held steady in case the rates do not decline again. Furthermore mechanisms need to be put in place, which guarantee that consumers do not only feel price increases in bad times but no decreases in good times, because all profits are given away in increased dividends. Last but not least we highly recommend the European Union and each member state that privatizes water, and this goes hand in hand with the previous two recommendations, to maintain strong government regulations and oversight. This includes that the EU and its members should retain a public ownership of their water sources to keep water a social good. Staying in control of the water sources is the best way to guarantee an equilibrium between social and economical concerns. To monitor the quality of water the EU should create regional agencies, which check and enforce water-quality laws and standards. Important in maintain oversight is that all the contracts are laying out all responsibilities of the private water companies in detail and that a clear dispute-resolution is stated in it before the privatization takes place. In addition the case of England of Wales, but also other previous cases of water privatizations, for example in Argentina and France, showed that the appropriateness of long term contracts of 20 years or even more is debatable, since alterations are difficult and sometimes really costly for the public. When privatizing water and giving out contracts, the regulatory organs should ensure that the water companies can not take advantages of regional monopolies and use them, to increase prices and neglect efficiency and quality.
Concluding, the EU should always have the duty to ensure that water will be continuously managed as a social good, secure its accessibility also for poorer household, and to maintain strong governmental regulations.
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School of Business and Economics
by Robert Tilch & Katharina Schmitz