Today We Learn About: Water Privatization in Argentina

Access to drinking water and sanitation facilities is a primary human development goal for all nations that wish to improve the lives of its citizens.  Drinking water is hard to come by in nature on the scale that it is used in any country.  Currently all developed nations have infrastructures such that it is relatively easy for individuals throughout the inhabited areas to access clean drinking water and human waste removal.  In Argentina, the utilities that service drinking water and sanitation have had poor performance for several decades before the government decided to privatize roughly thirty percent of the municipalities. While water and sanitations are public goods, when governments fail to provide adequate service, privatization may have positive externalities during a short transition period (given accountability and contract length) until the political environment is stable enough to maintain utilities to optimize for human development.

The next section will deliver a brief description of common/ public goods in a neoclassical framework as well as information on global development goals.  The following section will explain the state of sanitation and drinking water before privatization.  Third there will be a detailed explanation of water privatization in Argentina.  The essay will end by discussing the past versus the present and the optimal state of drinking water access followed by conclusions.

In order to increase human development water availability must be seen as a public good, one that is non-excludable and non-rivalruos.  Neoclassical economics classifies goods by the ability to control who has the right to use a good and whether one person using a good prevents consumption by another.  Water delivery and sanitation are both excludable because in order to have access a home must be hooked up and the home must pay for the water used.  Drinking water is rivalrous because there is a limited supply of natural drinking water; a utility service needs to provide for waste disposal and water cleansing and delivery.  However for increased development, governments need to treat access to drinking water as a public good.  In order to improve the well being of citizens water should be non-excludable in the access, homes should be able to be hooked up even if they are of low income.  Water and sanitation facilities should also be plentiful enough to supply the population and therefore non-rivalrous.  Drinking “water is not just a commodity but a common public good” (Szollosi-Nagy, 2002) that every nation needs to strive to deliver.

The UN Millennium Declaration made eight years ago set forth eight goals for global development and six of them relate directly to access to clean drinking water.  Water can be argued as the most important molecule needed to sustain life and limited access to it renders drastic affects such as hunger, disease, child mortality, maternal health and environmental sustainability (UNESCO).  All of the problems previously mentioned are still issues in Argentina that can be addressed rather simply by improving the infrastructure and supplying city peripheries and rural areas with water and sanitation. While privatization has improved these factors over the previous management, more needs to be done in order to done in order to be on par with the rest of the developed world.

In the 1970s and 1980s Argentina was following an Import substitution model that required a lot of investment by federal and local governments.  After the budget for investment in manufactured goods there were little funds left to invest in water and sanitation development or maintenance, or most other utilities for that matter.  The pipes that carried water and sewage were degrading and becoming hazardous, while people on the outskirts of cities in newly settled areas could not get hooked up to receive water or send waste.  No new treatment plants were built and the older facilities were not able to handle the increase in demand. “After this long period of negative net investments, huge capital inflows were needed to improve both the quality and access” to water utilities (Galiani, 2002).  Devaluation of the Argentine peso and feeing foreign investment made it impossible for the state to fund such encompassing investments.  The public sector was not able to make the reforms needed for development in times of economic and political turmoil.  In order to eliminate debt the IMF and World Bank required that the government privatize state operates services, the money was all funneled towards servicing debt rather than assist citizens.  The private sector was able to access foreign investment in various multiple credit markets given that they offered a positive return to investment.  The step towards privatization was on one hand forced but given the scenario it was the only option to increase investments in water utilities.

The state reform law under President Menem in 1989 (Olleta, 2007) started federal privatization of social industries, yet water and sanitation sectors (except for Buenos Ares) were “controlled at the local level, and therefore, the decision to privatize is a local one.” (Galiani, 2002).  This independence from federal privatization shows that local governments recognized the need for capitol investment was such that they would act against the cultural norms to pursue alternate funding.  Several concerns emerge when goods that people need to live become controlled by the private sector.  First is that the private sector may supply sub optimal service quality given that firms take into account profitability rather than health externalities.  Second is that privatization would hurt the poor if firms only invest in high-income areas; people who need improved service the most would be denied.

Research on child mortality, coverage area and water quality has shown that private water utilities have produced a series of coverage expansions and have kept up with the quality of water mandated in contracts (Galiani, 2002).  The private sector increased the efficiency of the water utilities and used that decrease in excess spending to increase coverage and quality. The private sector was able to decrease child mortality by five to seven percent (Galiani, 2002) in a short amount of time, the rate of water borne disease also decreased with improved quality.  Lower income citizens close enough to new pipelines had the opportunity to get connected and pay for the connection over time.  Efficient business strategy also helped determine which technologies to import and decide where to implement facility updates in order to handle increased demands.

Concerns over privatization are valid but it must be realized that firms need to operate within the bounds of the contracts and as long as local governments have available monitoring and an established legislature for enforcement.  Privatized water utilities in Argentina operated efficiently enough and increased their market enough to make a profit and continue capitol investment. But that is not to say that the private sector is the best way to achieve social goals, it is an efficient way to build a foundation or blue print to success.   The private sector did not achieve optimal quality and complete coverage, what they did was out performing a failing public sector business model.

Shortfalls in the private sector were mainly due to the limits on profitable investments, signifying a key contradiction in private sector ability and social demand. Private sector goals do not meet social development ones, including increasing per capita GDP in the middle class.  Efficient business models save money for the firm and allow for investment in newer technology but cut over 7200 jobs (Olleta, 2007) in the process.   Profit maximization also limited privatization to take root in metropolitan areas, where small investments can effect a lot of people.  This left roughly forty percent of the population of Argentina who live in smaller communities too far to run pipeline cheaply and too small for individual treatment plants out of luck for foreign capitol. Without the possibility for a large return on investment those in most need were denied what they need to sustain their lives given the pollution from both ISI plants and more modern plants under private enterprise.

Considering the municipalities under private water and sanitation utilities, the improvements made have surpassed the previous public utilities in all measures but they have fallen short of optimal social benefit. Prior to privatization the prices for service was raised by sixty-two percent (Olleta, 2007), an inflated price that represented corruption and excess spending, but private firms failed to lower prices to a level that represented the real value before the inflated price.  The firms lowered it enough to keep people out of the streets protesting and still make a large profit.  Pricing was brought to the forefront in 2001 when the supplier for Buenos Ares “Aguas Argentina had been fined US$ 600,000 for overcharging consumers” (Hall, 2002). Prices were steadily increased in increments ranging from eight to twenty five percent (Hall, 2002) from the early to late 90s in order to attract investors.  Another issue with pricing was that while the poor were given the opportunity to get connected to water and sewage, “new users were unable to pay on time the connection charges introduced in 1994” (Olleta, 2007).  Moral hazard urged poor folks to order connection even though they could not afford in the long run because its better to have water now and be punished later rather than to get sick and die.  By the mid 90s the increase in prices by a quarter caused poor areas to spend about nine percent of income on water and sewage (Olleta, 2007), increasing the poverty rate.

Pricing is not the only area that private utilities failed to create optimal social benefit; the building of new treatment facilities that were assumed in original contracts were delayed and re-proposed in many areas.  One proposal was for a pre-treatment plant that would actually increase pollution rather than building a two stage series of treatment facilities that would cost more.  The most troubling facility problem was the delaying of construction of contractually obligated sites in order to increase future profit (Olleta, 2007).  By delaying construction and having demand rise, the total value of the plant opening in the future was reported to be greater than the profit if it was opened on time.

The private sector was successful in some areas but failed to meet the social development goals that Argentina needs.  Private investment surpassed the ability of the previous public sector by increasing the area of infrastructure as well as meeting required water quality and lowering disease/ child mortality rates.  Technology introduced increased efficiency drastically and the education given to employees to both run and manage the utility was indispensable to future efficiency.  The business models used also provided the groundwork for the utility to run with less corruption and more accountability within the firm’s day to day operation.  The private sector was not optimal when it came to decreasing poverty and increasing per capita GDP.  Foreign capitol is mainly uninterested in human development and does not want to use money for anything other than making more money.  Prices were raised and service, while better than in the previous regime, were not optimal.

Private water and sanitation utilities ended up being better for the people than the previous model but only in the short run.  The investments made by the private sector were steps that the public sector in Argentina could not accomplish.  By allowing those who required efficiency to make money Argentina opened themselves up to the capitol investment that they needed and the education in efficiency that could be used for a long time to come.  Now what needs to take place is for the private firms to be transferred to the public sector, and using the lessons learned in the last twenty years the public sector can act similarly and strive to have zero profit.

While it is “essential to recover the costs of providing people with water in order to manage the demand,” water and sanitation can be delivered at a price that would be equal to the cost; including the cost of future investments.  Small towns could receive the clean water needed to fight negative externalities such as pollution from other industry and the poor would be more likely to afford water if overall profit was a non-issue.  The public utility should have little or no problems receiving funds if they can continue to operate efficiently and keep status as safe borrowers.  Argentina is an excellent example of how private sectors can succeed to some extent when the governments or other co-op public sectors fail, but only in the short run.  Long term social development needs to stipulate clear contracts that are just long enough for private investors to recoup costs  (they can see it as a safe investment that does not require high payoff since if is low risk).  The contracts must also stipulate clear methods for accountability throughout the firm and have methods to enforce the contracts.  After the benefits of privatization have been utilized then the public should reclaim the common good and increase investment that has high social benefit and decrease profit to zero.

    Galiani, Sebastian, Paul Gertler, and Ernesto Schargrodsky. Water for Life: The Impact of the Privatization of Water Services on Child Mortality. 31 Aug. 2002. Universidad de San Andres, University of California at Berkeley, NBER, Universidad Torcuato Di Tella. 24 Nov. 2008.

<http://www.iadb.org/res/publications/pubfiles/pubS-233.pdf>.

    Hall, David, and Emanuele Lobina. “Water privatisation in Latin America.” July 2002. Public Services International Research Unit, University of Greenwich. 24 Nov. 2008 <www.dev-zone.org/kcdocs/6154latam.pdf>.
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