Privatization and Competition – We’re Being Driven Down Wrong Road — PART TWO

IN Part 1 we considered whether the planned introduction of competition to LUCELEC and the creation of legislation and a regulatory regime to facilitate this was meaningful.

We noted that no evidence had been presented to suggest that the introduction of competition to Lucelec would be beneficial to consumers, and discussed the findings of the UWI research body, CaPRI*, that the size of generating plant and the high cost of fuel were the principal factors affecting the high cost of electricity in Jamaica.

We saw that the cost of electricity in St. Lucia was lower than that in Jamaica although the issue of size must have a significantly greater impact on St. Lucia’s cost of generation than would be the case for Jamaica, and questions whether the introduction of competition to Lucelec takes consideration of this issue of the size of the market.

With the repeated failure of efforts at privatization of water utilities in the Caribbean over the last 20 years, the discussion questions whether much of this failure is not as a result of a focus on financial modelling, or financial engineering, at the expense of the technical issues that affect the utilities.

In commencing our discussion on private sector participation in the development of public infrastructure, and of water utilities, we first take a look at how such a focus on financial modelling has affected other industry

“Taking your eye off the ball”
Surprisingly, there are a number of similarities between the development of WASCO over the last 20 to 30 years and the experiences of the motor car industry in the United States during the latter half of that period. On the face of it they may be two completely different industries, but the decline and resurrection of the car manufacturing industry is instructive.

In general, the car industry in the US went into decline with the perception that imported cars at similar cost to those produced in the US were of a higher quality. Coupled with this was an inability of US manufacturers to first recognize and then to adapt to changes in market demand as US consumer preference shifted.

Finally, the coup de grace to the US car manufacturing industry was a philosophical shift to the concept of “value added”, a construct which suggested that there was more value to be derived from higher level functions such as the design, marketing and financing of the purchase of vehicles than there was to be derived from the manufacturing of them. The rest is history, and while the US car manufacturing industry has been revived, the city of Detroit, the industry hometown, has not been so lucky.

It is not by coincidence that during this period the US also saw a rapid expansion of the “Financial Services” sector, fuelled in large part by the growth in output of MBA qualified persons as well as technological transformations in Computing and in Informatics. As freshly minted MBA graduates were absorbed into the top echelons of industry, they by and large brought with them their newly acquired management and finance skills, and emphasis on manufacturing simultaneously declined. It is reported for example that during that period, General Motors, one of the big 3 US auto-makers, became widely and jokingly referred to as a finance company which also manufactured cars. GMAC, the then finance division of GM, had much greater revenue than the car manufacturing division.

None of this is to disparage either the Financial Services sector or the value of the MBA, but highlights the consequences of a shift in focus from manufacturing to services at the time. Further to filing for bankruptcy in 2009 following the financial crisis, a restructured GM emerged profitable, and is currently ranked among the sixty most profitable companies in the US of the 500 companies ranked by Fortune magazine. GM’s new finance arm, GM financial, was however reported as representing only 17% of GM profits in 2013. The company had refocused on the manufacture of vehicles.

WASCO is a manufacturing organization. Considering only the aspect of water supply, WASCO in effect manufactures potable water from raw water sources, and sells it to consumers via its distribution network. No amount of “financial engineering” can fix WASCO until that core business is addressed, and Leadership, not Management, will be required if we are to drive down a different road. But even here we are restricted, not by any deficiency in our ability to produce and to train leaders, but by our need for finance. This need for finance ultimately drives us to the World Bank and its policy of privatization, a policy which has not served us at all well.

A Look at Early Private Sector Involvement

With the drying up of grant funding from traditional donors, St. Lucia has had to turn to development finance institutions for financing of its infrastructural development, and to a large degree, this has meant approaches to the Caribbean Development Bank and to the World Bank. For WASCO, this has meant an implicit acceptance of a changing view of the value of water, and in effect, of privatization. This change in view of how water is valued, from being almost universally considered a public good to its current consideration by the development finance institutions as an economic good, and the impact of this change, will be examined in a subsequent discussion.

Whenever though there has been a suggestion that WASCO should be privatized, the impression also conveyed is that this is a means of getting rid of a long-festering problem, a problem which, somehow, the private sector will solve. But privatization is an emotive term and readily divides communities into those who support and those who oppose the idea, particularly so in the water supply industry. In response, those who promote the principles underlying privatization have sought to smoothen its edges and so make it more palatable. Now we speak of Public Private Partnerships (PPPs or 3Ps), or of Private Sector Participation (PSP) in the development of public infrastructure.

While sounding like an advanced concept, private sector participation in the development of public infrastructure is however nothing new. In developed countries, municipal corporations (regional bodies responsible for public works) traditionally raised finance for infrastructural works through the issue of bonds, purchased of course by the private sector. And St. Lucia has a long history of private sector participation in its development.

Somewhere in the archives of WASCO there is a document, now probably more than 40 years old, which makes reference to a covenant between the then Central Water Authority and hotels in the north of the island. That document indicates that the covenant gave first rights to the hotels, for water to be conveyed by a new pipeline to be constructed to the north, presumably in exchange for contribution by the hotels to the cost of construction of the pipeline – private sector participation in development.

The Rodney Bay Marina and Pigeon Island causeway development during the 1970s are further examples of participation by the private sector in our development. And LUCELEC, the outstanding example with which we all interact on a daily basis, and of which we can all be proud, is proof that private sector participation can be beneficial. What then accounts for the “bad” name that is attached to privatization in general, and to the privatization of water utilities in particular?

Looking backwards, the first major privatization of water utilities took place in the UK in 1989 when legislation to this effect was introduced by the Conservative Thatcher government. Widely opposed at the time, the government was accused by the opposition of selling off the nation’s crown jewels for much needed revenue, while the public shuddered at the concept of private ownership of their water supplies. The pretext for privatization was that this was necessary to encourage efficiency and to mobilize the capital required for future expansion of supplies, but the overriding principle was that of ridding the state of public corporations, the philosophical position of the conservative government of the time.

While some argue that privatization of the UK water utilities was successful, the principal benefit expected by the consumer, that of lower prices, never materialized. Instead, prices rapidly escalated, and today, prices are controlled by strict regulation, not by competition. What then accounts for the continued adoption of an approach which at best is of dubious benefit to public utilities?

Part in Thursday’s VOICE will examine the World Bank’s policy of privatization, the use of the Caribbean for the purpose of designing strategies for implementation of this policy, and the resulting continued adoption of this policy in the region.

*All information referenced, with the exception of the minor reference to an archived CWA document, is in the public domain and available on the internet.