Nancy C. Alexander
Citizens� Network on Essential Services (CNES)
Kyoko Ishida
Japan Center for a Sustainable Environment and Society (JACSES)

Driving forces of MDB's/IMF
The Multilateral Development Banks (MDBs)(*2) and International Monetary Fund (IMF) have many ways to pressure borrowing governments to adopt some variant of water privatization. World Bank veteran John Nellis says that IMF regularly requires borrowers to choke off budget subsidies and domestic bank financing of water systems. If a government refuses to do the IMF's bidding, the IMF can blacklist the government. Since the IMF is ringleader of the aid cartel, most donors and creditors will withdraw their assistance to a blacklisted government.

When utilities are starving for resources, the MDBs often begin to finance a step-by-step approach that leads to some variant of privatization, such as the public-private partnership (PPP).

The step-by-step approach to privatization:
It is typical for the MDBs to require governments to take steps, such as the following(*3):
-- decentralizing,
-- "unbundling",� or segregating water systems into profit-making and loss-making portions, so that profit-making portion can be more easily privatized This involves selling off or contracting out financially viable services (e.g. urban water supply). Under such arrangements, progressive cross-subsidies become difficult to implement.
-- passing water-related laws (e.g. laws that permit foreign ownership of water rights and utilities),
-- promulgating of new regulations,
-- introducing of full cost pricing,
-- launching public information campaigns� to persuade their citizens that privatization is the best policy option.

Since corporations are very risk averse, the MDBs and donor governments provide incentives for their participation, including:
-- Grant subsidies for corporations and/or poor consumers. When private providers extend services to poor populations, they can receive performance-based subsidies when delivery of services is verified. However, there are serious administrative costs and constraints to such schemes, especially in very poor countries and those with weak governance.
-- Commercial or political guarantees to private lenders and investors. A guarantee may promise a private firm compensation for certain losses if, under specified conditions, the host government does not meet its obligations. Guarantees which are provided by MDBs, export credit agencies and private insurers may shift risk from the private sector to domestic taxpayers. New guarantees may protect investors against currency fluctuations.(*4)
-- Assurance of a reliable water supply. In this regard, the MDBs may require that borrowers allocate water from glow value users (e.g. subsistence farmers) to high value users, e.g. urban water concessions, industry and agribusiness.

To promote liberalization in unprofitable (usually rural) areas, the Bank increasingly relies on Community-Driven Development (CDD) approaches, such as Social Funds (SFs), which allocate resources to communities that outsource infrastructure construction and social services. According to the Bank's evaluators, only 24% of SF water projects are rated as likely to be sustainable. In part, poor performance of CDD loans is attributable to the fact that financial resources often by pass governments, which weakens their capacity(*5).

Private Sector Development (PSD) Strategies.
Policies, such as those described above, are promoted by the Private Sector Development (PSD) Strategies of the MDBs. Under pressure from the U.S. government, among others, the Boards of the World Bank Group (WBG) and the Asian Development Bank (ADB) adopted PSD Strategies in 2002 and 2000, respectively. The PSD Strategies are transforming multilateral lending operations by significantly expanding the role of the private sector(*7) not just in water-related sectors, but also throughout the economies of borrowing countries. According to the Bank's internal evaluators, many country clients expressed dissatisfaction about the distributional and developmental impact of PSD operations. Nonetheless, the Bank still insists that its strategies for each sector (e.g. education, health, rural development, water) must be consistent with the PSD　Strategy(*7).

Focus on Investment and Services:
The WBG's PSD Strategy accelerates privatization, especially of basic services, including health and education as well as water. It also launches a new generation of adjustment loans focused on liberalizing investment(*7). The Strategy states that ongoing Bank work on privatization, competition policy, deregulation and strengthening of property rights, will help improve the investment climate in client countries. (*9) These efforts to liberalize investment and services through multilateral lending operations strengthen the position of Northern countries in parallel WTO investment and services negotiations(*10).

Water Resources Sector Strategy
In February 2003, the Bank adopted a new Water Resources Sector Strategy (WRSS), which promotes private sector involvement in water resources management(*11).

The WRSS supports the transfer of management from government agencies to localized water users associations (WUAs). While this could be a positive development, there is evidence that WUAs can become the implementing mechanism for policies made upstream, in negotiations between the Bank, donor representatives, and government ministers.

Whereas the WRSS favors market mechanisms for water allocation, the Bank's own surveys(*12) found that almost two-thirds of country stakeholders believed that central government's -not market-based mechanisms, such as river basin organizations- should directly allocate water resources among competing users. As noted above, the Bank values industry over agriculture and export agriculture over subsistence agriculture. Implementation of such a policy, -together with commercial pricing of water, could- deprive poor and powerless people of the water they need for livelihood(*13).

Implementation of the WBG's PSD Strategy may undercut the rights of citizens and elected officials to determine how essential services should be provided. Weak regulation in many countries invites abuses by private providers. Privatization or contracting out may jeopardize affordable service provision and promote two-tier separate and unequal� access to services.

ADB's cooperation� Since Japan is the top shareholder in the ADB and second only to the U.S. in the World Bank(*14), it has great influence over the policies and projects of these institutions.

Private Sector Development Strategy
of the ADB
In 2000, the ADB adopted its Private Sector Development Strategy (PSDS) which (like the PSD Strategy of the WBG) emphasizes the importance to (1) private provision of services and (2) an investment-friendly environment. Although the ADB says that the PSD Strategy is a part of its Poverty Reduction Strategy, the links are not evident.

Water Policy of the ADB
In 2001, the ADB released Water for All: The Water Policy of the Asian Development Bank�, which conforms with the PSD Strategy's emphasis on public-private partnership. It states, Global experience indicates that public responsibility and ownership are often best blended with private management�(*15). However, it fails to discuss the significant problems arising from water privatization and commercialization. Indeed, it cites the recently collapsed Suez/Maynilad concession as a success story.

In Conclusion
It is vital to improve the access to, and affordability of, quality water services. However, many public-private partnerships have failed to deliver on their promises. Where efficiency and profitability are the primary goals, the private sector will not assume responsibility for protecting secure access to water supplies by poor people or for water quality. Private water firms have a shoddy record of environmental and social accountability. Frequently, regulators are weak and lack independence, which invites abuse by private firms. In many cases, the public says "no"� to public-private partnerships and calls for improved public provision that takes into account the needs of the poor.

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(*1)This article focuses on how the World Bank and the ADB are expanding private participation in water-related sectors.
(*2)MDBs comprise the World Bank Group and Regional Banks, including the European Bank for Reconstruction and Development, Asian Development Bank, Inter-American Development Bank, and African Development Bank.
(*3)This process is characterized by a corporate influence-peddling as a result of tied aid that is, donor aid that requires the recipient government to buy the donor government's products or expertise. It is also characterized by poor transparency on the part of donors and creditors, which subverts democratic decision-making about water policies.
(*4)The decline in the value of the Filipino peso during the 1997 Asian financial crisis caused a ballooning of the dollar-denominated debt of Suez's water concession in Manila, which contributed to its collapse in 2003.
(*5)In Indonesia, one in every three rural villages is now covered by a Bank-assisted CDD project.
(*6)The strategies define private sector to include any non-state organizations, including non-profit as well as for profit organizations.
(*7)The U.S. government is linking its financial contributions to both banks to implementation of these strategies.
(*8)The PSD Strategy also expands direct assistance to firms and Social Funds (SFs).
(*9)p.50, PSD, World Bank
(*10)Two arms of the World Bank Group will increasingly work in low-income countries to expand private provision. The Bank's private sector affiliate, the International Finance Corporation (IFC), will team up with the Bank's soft loan arm, the International Development Association (IDA) for this purpose. IDA will work with governments to design subsidy schemes to offset the costs of private provision to low-income consumers.
(*11)The WRSS marks the Bank's comeback in financing dams and other big infrastructure after a significant decline during the 1990s. Of all cases brought before the Bank's Inspection Panel, 72% involved dams and other water-related operations. Unless the Bank steps up compliance with safeguard policies, the WRSS's promotion for high risk infrastructure may foster institutional disregard for these policies, which are intended to ensure that Bank-financed projects "do no harm"� to people and ecosystems. Indeed, WRSS reflects the view that excessive concern for safeguard policies may be a "recipe for paralysis.� (*12)Surveys were conducted by the Bank in Brazil, Yemen, India and the Philippines.
(*13)Currently, about 16% of all World Bank lending is water-related, reaching 22% and 25% for the East Asian and South Asian regions respectively. During 2003-2005, water-related lending is expected to rise rapidly, especially in East Asia. Bank lending will rise fastest for "reforming"� national and subnational governments; e.g. Indian states of Andhra Pradesh, Uttar Pradesh and Karnataka.
(*14)Japan holds share of 8.08% (in 2002) in the World Bank and 15.84% (in 2001) in the Asian Development Bank.
(*15)p.25 Asian Development Bank, Water for All