Privatization and Alterrnative Public Sector Reform in Sub-Saharan Africa

Privatization and Alternative Public Sector
Reform in Sub-Saharan Africa

This page intentionally left blank
Privatization and
Alternative Public Sector
Reform in Sub-Saharan
Africa
Delivering on Electricity and Water
Edited by
Kate Bayliss
and
Ben Fine
© Kate Bayliss and Ben Fine 2008
Foreword © Terry Mckinley 2008
Softcover reprint of the hardcover 1st edition 2008 978-0-230-00485-6
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Contents
List of Tables and Figure viii

Notes on Contributors x
List of Acronyms and Abbreviations xii
List of Water and Electricity Utilities in Sub-Saharan Africa xv
Acknowledgements xvii
Foreword: Whither the Privatization Experiment? xviii
1 Introduction and Overview 1

Part I The Privatization Experiment
2 Privatization’s Shaky Theoretical Foundations 13
Ben Fine
2.1 Introduction 13
2.2 Ownership and theory as such 17
2.3 Lack of regulatory capture – analytically speaking? 24
2.4 Concluding remarks 29
3 Privatization in Practice 31
Kate Bayliss and Ben Fine
3.1 Introduction 31
3.2 The impact of ownership 32
3.3 Public and private investment in infrastructure 43
3.4 Regulation 48
4 Rethinking the Rethink: The World Bank and Privatization 55
Ben Fine and Kate Bayliss
4.1 Introduction 55
4.2 From creeping to galloping privatization 57
4.3 A PWC on privatization? 65
4.4 The case for privatization is wounded;
long live privatization 70
4.5 The World Bank oversold 76
4.6 A further rethink? 80
v
vi Contents
5 Water and Electricity in Sub-Saharan Africa 88

Kate Bayliss
5.1 Introduction and background 88
5.2 Infrastructure: water and electricity 92
5.3 Water and electricity sector reforms 95
5.4 Case studies summary 101
5.5 Issues arising 105
5.5.1 Regulation 107
5.5.2 Prices 108
5.5.3 Finance 112
5.5.4 Social issues 113
5.5.5 Significant individuals 115
5.5.6 The state is key 116
5.6 Conclusion 118
Part II Case Studies
6 Ghana: Privatization – A Work in Progress 125

Kate Bayliss and Rudolf Amenga-Etego
6.1 Introduction 125
6.2 Background 126
6.3 Electricity 128
6.3.1 The utilities 129
6.3.2 Power sector reforms 131
6.3.3 Concluding remarks 134
6.4 Water and sanitation 136
6.4.1 Introduction and background 136
6.4.2 Urban water 138
6.4.3 Water in rural areas and small towns 142
6.5 Regulation and prices 145
6.6 Conclusion 148
7 Tanzania: From Nationalization to Privatization –

and Back? 151
Kate Bayliss
7.2 Background 152
7.3 Electricity 154
7.3.1 Electricity sector reforms 155
7.3.2 PSP – in generation 160
7.3.3 Conclusion 162
Contents vii
7.4 Water and sanitation 163

7.4.1 Water sector reforms 165
7.4.2 Urban water 167
7.4.3 Privatization – Dar es Salaam water 169
7.5 Regulation of energy and water 176
7.6 Conclusion 178
8 Zambia: The Commercialization of Urban Water

and Sanitation 181
Hulya Dagdeviren
8.2 Background 182
8.3 WSS reforms 183
8.4 Impact of reforms 187
8.4.1 General performance of utilities and
cost recovery 187
8.4.2 Access to water supply 193
8.4.3 Changing tariffs and affordability of water 196
9 Namibia: Lessons from Commercialization 208

Kate Bayliss
9.2 Context 209
9.3 Electricity 210
9.3.1 Generation and transmission 212
9.3.2 Electricity distribution 213
9.3.3 Prices and revenue 216
9.4 Water 220
9.4.1 Bulk water supply 220
9.4.2 Water distribution 221
9.4.3 Prices and revenue 222
9.5 Conclusion 231
10 Conclusion and Alternatives 235
References 249
Index 265
Tables and Figure
Tables
4.1 World Bank Group support for the electric

power sector 1990–2001 68
5.1 Key indicators for SSA countries 89
5.2 Access to improved sanitation and improved
water source 93
5.3 Urban and rural electrification rates by
region, % of population 94
5.4 Privatization contracts awarded (excluding
management contracts) 97
6.1 Proportion of the population with access to
electricity by region (%) 128
7.1 TANESCO performance indicators
1999–2003 158
7.2 TANESCO key performance indicators
1990–2005 159
7.3 Households’ sources of drinking water (%) 165
7.4 Percentage of households using piped and
well sources for water 1978–2001 165
7.5 DAWASCO sales and production 175
7.6 Dar es Salaam: Water prices for metered
water per m3 175
8.1 Zambia’s ten commercial utilities 184
8.2 Selected performance indicators in 2005 188
8.3 Sources of drinking water and access
to sanitation 194
8.4 Domestic water tariffs before and after
commercialization 198
8.5 Monthly spending on water by households with
unmetered connections 200
8.6 Proximate rates of affordability of water tariffs
for low-cost housing, 2002–03 200
viii
Tables and Figure ix
9.1 Nampower prices compared with CPI 217

9.2 Bulk water prices by area 1998–2004 223
9.3 Average price changes grouped by region 224
Figure
6.1 Per Capita GDP (Constant 1995 US$) 127

Notes on Contributors
Rudolf Nsorwine Amenga-Etego is Executive Director of the Foundation

for Grassroots Initiatives in Africa (GrassRoots Africa) based in Accra,
Ghana. A qualified lawyer, he pioneered the Rights-based advocacy pro-
gramme at the Integrated Social Development Centre (ISODEC) in
Ghana and was the national campaign coordinator for the Coalition
Against the Privatization of Water (CAP of WATER). He is a member of
the Governing Council of the Foundation for Security and
Development in Africa (FOSDA) and a member of the board of the Food
and Water Watch based in Washington DC. He is also a member of the
International Water Working Group (IWWG) and the Ghana Bar
Association (GBA). Publications include: ‘The New Face of
Conditionalities: The World Bank and Water Privatization in Ghana’
(with Sara Grusky) in The Age of Commodity: Water Privatization in
Southern Africa, McDonald and Ruiters (Eds) as well as numerous papers
for ISODEC on the privatization of water. He is the 2004 Goldman envi-
ronmental prize winner for Africa for his work with civil society in
fighting water privatization in Ghana.
Hulya Dagdeviren is a senior lecturer in Economics at the University of
Hertfordshire. Her research interests lie within development economics
and include issues in poverty alleviation, industrialisation and
development, investment and growth, privatization of state-owned
enterprises in general and public utilities in particular, the political
economy of liberalization programmes. She is the author of ‘Re-visiting
Privatisation in the Context of Poverty Alleviation’, Journal of
International Development, 18 (3) and the co-author of ‘Poverty Reduction
with Growth and Redistribution’, Development & Change, 33 (3).
Kate Bayliss is currently working as an independent consultant. She
has been working on issues related to privatization for more than a
decade spending three years at the Public Services International Research
Unit in London where she focused on the impact of water and electricity
privatization. She is the author of numerous publications on privatiza-
tion including ‘Can Privatisation and Commercialisation of Public
Services Help Achieve the MDGs? An Assessment’, Working Paper for the
International Poverty Centre, United Nations Development Programme
(with Tim Kessler); ‘Utility privatisation in Sub-Saharan Africa: a case
study of water’ Journal of Modern African Studies, (41: 4); and ‘Privatisation
x
Notes on Contributors xi
and poverty: The distributional impact of utility privatisation’ Annals of

Public and Cooperative Economics 73 (4).
Ben Fine is Professor of Economics at the School of Oriental and
African Studies, University of London. Recent books include Social
Capital versus Social Theory: Political Economy and Social Science at the Turn
of the Miillennium, Routledge, 2001; Development Policy in the Twenty-First
Century: Beyond the Post-Washington Consensus, Routledge, co-edited with
C. Lapavitsas and J. Pincus, 2001; The World of Consumption: The Material
and Cultural Revisited, Routledge, 2002; Marx’s Capital, fourth edition,
2004, (with A. Saad-Filho); and The New Development Economics: A Critical
Introduction, edited with K. S. Jomo, Delhi: Tulika, and London: Zed Press,
2006. Nearing completion are two books, one on the shifting relations
between history and economic theory, From Political Economy to
Freakonomics: Method, the Social and the Historical in the Evolution of
Economic Theory, 2008, and the other on the evolution of economic his-
tory as a discipline, Reinventing the Economic Past: Method and Theory in the
Evolution of Economic History, 2010, (both with co-author, D. Milonakis,
and publisher, London: Routledge).
Acronyms and Abbreviations
ATA Automatic Tariff Adjustment

CBM Community Based Management
CEO Chief Executive Officer
CGA Central Governance Agency (Namibia)
CPI Consumer Price Index
CU Commercial Utility (Zambia)
CWIQ Core Welfare Indicator Questionnaire (Ghana)
CWS City Water Services (Tanzania)
CWSA Community Water and Sanitation Agency (Ghana)
CWSD Community Water and Sanitation Division (Ghana)
DAs District Assemblies (Ghana)
DAWASA Dar es Salaam Water and Sewerage Authority
DAWASCO Dar es Salaam Water and Sewerage Corporation
DBSA Development Bank of Southern Africa
DRWS Directorate of Rural Water Supply (Namibia)
DTF Devolution Trust Fund of Zambia
ECB Electricity Control Board (Namibia)
ECG Electricity Corporation of Ghana
EIB European Investment Bank
ERP Economic Reform Programme
ESAF Enhanced Structural Adjustment Facility
ESI Electricity Supply Industry
EWURA Energy and Water Utilities Regulatory Authority (Tanzania)
GoG Government of Ghana
GWCL Ghana Water Company Limited
GWSC Ghana Water and Sewerage Corporation
HDR Human Development Report
ICSID International Centre for Settlement of Investment
Disputes
IPP Independent Power Producer
IPTL Independent Power Tanzania Ltd
JICA Japan International Cooperation Agency
LAs Local Authorities (Zambia)
LCMS Living Conditions Monitoring Survey of Zambia
LWC Local Water Committee (Namibia)
xii
Acronyms and Abbreviations xiii
MAWRD Ministry of Agriculture, Water and Rural Development

(Namibia)
MDG Millennium Development Goal
MLGH Ministry of Local Government and Housing (Zambia)
MME Ministry for Mines and Energy (Namibia)
MRLGH Ministry of Regional and Local Government and Housing
(Namibia)
MWLD Ministry of Water and Livestock Development (Tanzania)
NCAP National Coalition Against the Privatization of water
(Ghana)
NCWSP National Community Water and Sanitation Programme
(Ghana)
NE Northern Electricity (Namibia)
NED Northern Electricity Department (Ghana)
NPC National Planning Commission (Namibia)
NWASCO National Water and Sanitation Council of Zambia
ORP Operational Rescue Plan (Tanzania)
PMU Project Management Unit (Ghana Water)
PPA Power Purchase Agreement
PPM Pre-Payment Meter
PSIA Poverty and Social Impact Assessment
PSP Private Sector Participation
PSRC Power Sector Reform Committee (Ghana)
PSRC Parastatal Sector Reform Commission (Tanzania)
PSRP Power Sector Reform Programme (Ghana)
PSSOP Public Service System of Provision
PURC Public Utilities Regulatory Commission (Ghana)
RED Regional Electricity Distributor (Namibia)
SADC Southern African Development Community
SAPP Southern African Power Pool
SB Single Buyer
SOE State-Owned Enterprise
SOEGC State Owned Enterprises Governance Council
(Namibia)
STEM Short Term Energy Market (Namibia)
SWAPO South West Africa People’s Organisation
SWAWEK South West Africa Water and Electricity Corporation
TANESCO Tanzania Electricity Supply Company
TWI Thames Water International
UFW Unaccounted-for Water
UNDP United Nations Development Programme
xiv Acronyms and Abbreviations
UWSA Urban Water and Sewerage Authority (Tanzania)

VALCO Volta Aluminium Company
VRA Volta River Authority
WASP Water and Sanitation Policy
WCC Windhoek City Council
WPC Water Point Committee (Namibia)
WRC Water Resources Commission (Ghana)
WSC Water and Sanitation Company (Zambia)
WSS Water Supply and Sanitation
ZCCM Zambia Consolidated Copper Mines
Water and Electricity Utilities in
Sub-Saharan Africa
This list covers most major utilities in the region and all of those
mentioned in this book but is not exhaustive.
BPC Botswana Power Corporation

CEB Communaute Electrique du Benin (Benin and Togo)
CIE Compagnie Ivoirienne d’Electricite
DAWASA Dar es Salaam Water and Sewerage Authority (Tanzania)
DAWASCO Dar es Salaam Water and Sewerage Corporation
(Tanzania)
EAGB Electricidade e Agua da Guinea-Bissau
ECG Electricity Company of Ghana
EDEL Empresa de Distribuicao de Eletricidade de Luanda
(Angola)
EDM Electricite du Mali
EEPCo Ethiopian Electric Power Corporation
ELECTRA Empresa Publica de Electricidade e Agua (Cape Verde)
Electrogaz Rwandan water and electricity utility
EMAE Empresa de Agua e Electricidade (Sao Tome and Principe)
ENE National Energy Company (Angola)
ENECRA Energie Centrafricaine
EPAL Empresa Provincial de Agua de Luanda
ESCOM Electricity Supply Commission of Malawi
GWCL Ghana Water Company Limited
Jirama La Jiro sy rano Malagasy
KenGen Kenya Electricity Generation Company
KPLC Kenya Power and Light Company
LWSC Liberia Water and Sewerage Corporation
NamPower Namibian Electricity Utility
NamWater Namibian Bulk Water Utility
NAWEC National Electricity and Water Company (Gambia)
NCWSC Nairobi City Water and Sewerage Company (Kenya)
NEPA Nigerian Electric Power Authority
NIGELEC Societe Nigerienne d’Electricite
xv
xvi Water and Electricity Utilities in Sub-Saharan Africa
ONEA Office National de l’Eau et de l’Assainissement (Burkina

Faso)
REGIDESO Régié de Production et Distribution d’Eau et d’Electricité
SBEE Societe Beninoise d’Energie Electrique
SdE Senegalaise des Eaux
SEEG Societe d’Eau et d’Electricite du Gabon
SEEG Societe d’Exploitation des Eaux de Guineé
SEEN Societe’ d’Exploitation des Eaux du Niger
SENELEC Senegal Electricity utility
SNDE Société Nationale de Distribution d’Eau (Congo)
SNE Societe Nationale d’Electricite (Congo)
SNEC Societe Nationale des Eaux du Cameroun
SNEC Societe Nationale des Eaux du Congo
SNEL Societe Nationale d’Electricite (Congo)
SODECA Societe de Distribution d’Eau en Centrafrique
SODECI Société de Distribution d’Eau de Côte d’Ivoire
SOGEL Société Guineenne d’Electricite
SONEG Société Nationale des Eaux de Guineé
SONEL Societe Nationale d’Electricite du Cameroun
STEE Societe Tchadienne d’Eau et Electricite (Chad)
TANESCO Tanzania Electricity Supply Company
UEDCL Uganda Electricity Distribution Company Limited
UEGCL Uganda Electricity Generation Company Limited
VRA Volta River Authority (Ghana)
ZESA Zimbabwe Electricity Supply Authority
ZESCO Zambia Electricity Supply Corporation
WUC Water Utilities Corporation (Botswana)
Acknowledgements
We are extremely grateful for the excellent research assistance provided

in Tanzania by Tobias Mworia and in Namibia by Martin Boer. We would
like to thank the staff of the UNDP offices in Namibia, Ghana, Zambia
and Tanzania for their assistance and support in this research project. In
particular we are grateful to Ernest Salla in Tanzania, Sebastian Levine in
Namibia and Michael Soko in Zambia. We would also like to thank all
those who participated in interviews during the research programme
including the managers and staff of the electricity and water utilities,
regulators and government ministries in all four countries for their time
and invaluable assistance.
We would also like to thank Terry McKinley and the UNDP's
International Poverty Centre, Brasilia, for financial and intellectual
support for the production of this publication.
The authors gratefully acknowledge the following for permission to
reproduce copyright material: Oxford University Press, Organisation for
Economic Co-operation and Development/International Energy
Agency, United Nations Development Programme, National Bureau of
Statistics, Tanzania, WaterAid, DAWASCO, The World Bank.
The author and publishers have made every attempt to contact copy-
right holders. If any have inadvertently been overlooked, the appropriate
arrangements will be made at the first opportunity.
xvii
Foreword
Whither the Privatization

Experiment?
Terry McKinley*
The United Nations Development Programme (UNDP) has supported the

studies that comprise this book. This support has been provided
through a global programme on Privatization and Poverty Reduction,
which was initiated in early 2004. A major motivation for this pro-
gramme was the recognition that the international discussion on the
advantages and disadvantages of privatization had become very nar-
row and restricted. Most development practitioners in major interna-
tional organizations had assumed that the privatization of public
services should be, in almost all circumstances, preferable to public
provision. However, the evidence to justify such an assumption was
neither extensive nor deep.
This became clear when UNDP began to support studies on privatiza-
tion in 2002 as part of its Asia-Pacific Regional Programme on the
Macroeconomics of Poverty Reduction. Further evidence for skepticism
was provided by additional studies on privatization processes in transi-
tional economies in Eastern Europe and the CIS and in countries in the
Middle East.
These studies demonstrate that the record of privatization has been
mixed, at best: it has certainly not always been the best option for pro-
moting the public interest. This is particularly true for the provision of
the public services that are essential to basic human development. At
roughly the same time as these studies, other institutions such as the
World Bank and the OECD began to qualify their previously uncritical
support for privatization.
However, lender conditionalities still invariably promote privatiza-
tion, lauding it as though it were a goal of development. But national
policymakers should have the latitude to examine a range of policy
options, including restructured public-sector provision and public–
private partnerships of various sorts, in addition to full-scale privatization.
* Terry McKinley is Director, International Poverty Centre, Brasilia, UNDP.
xviii
Foreword xix
The ultimate test in judging each modality is whether it is the most

effective in promoting human development goals, especially the
Millennium Development Goals. In many cases, particularly for
essential services that have strong public good features, public-sector
provision is likely to be the optimal modality.
The justification for privatizing public services often assumes that pri-
vate firms are more efficient, provide better-quality services to more
people and charge more competitive prices. The evidence on improved
efficiency – often cited as the strongest claim for privatization – is
mixed, especially if private providers are compared to restructured pub-
lic providers. The argument for better access and quality is even weaker,
particularly for the provision of essential public services. Private firms
are rarely motivated – unless subsidized by the state – to ensure broad
access to households that are likely to have difficulty in paying com-
mercial tariffs. The risks in doing so discourage most private sector
investment. A declining trend in such investment in essential services
has become more pronounced in recent years.
Privatization has often been promoted because of its supposed
improvement of public finances. But the fiscal payoff to privatization
has been exaggerated. The most profitable public service providers are
often the first to be sold, with the consequent loss of yearly profit income
for the state. Moreover, little is known about the amount of tax revenue
that these firms contribute to the state while the continuing costs of
regulating them can be substantial. Ironically, states supposedly too
weak to provide effective public services are assumed strong enough to
regulate these service providers when, once privatized, they are more
difficult to influence.
Most importantly, more research needs to be conducted on the distri-
butional impact of privatization, particularly on poverty. Privatizing
essential public services might, in fact, slow progress towards the
Millennium Development Goals unless private service providers are sub-
sidized to maintain services for poor customers. Despite protracted
efforts to privatize public services during recent decades, substantial
gaps in the delivery of basic services still exist. When poor households
do gain greater access to services after privatization, the main reason is
often that government is subsidizing the private providers to extend
their coverage.
For essential public services – certainly for primary education, primary
healthcare, water and sanitation – states have a responsibility to finance
widespread access, especially for poor households, which are the ones
most frequently excluded. The financing for this purpose normally has
xx Foreword
to come from general public revenue, not from the commercialization

of service provision (such as through the imposition of user fees). When
fees are charged, poor households often forego use of services, despite
the contrary claims of so-called ‘willingness to pay’ surveys conducted
by the World Bank and other international financial institutions.
In order to finance essential public services in poor countries, a scal-
ing up of Official Development Assistance will be absolutely necessary,
as suggested recently by the UN Millennium Project. Substantial public
investment will be needed to expand the coverage of services, particu-
larly to peri-urban and rural areas, where most poor households often
reside. A stronger public-sector partnership should be forged between
governments in developing countries and international development
institutions in order to progressively provide universal coverage to basic
public services essential to human development and poverty reduction.
1
Introduction and Overview
‘Privatization has been oversold and misunderstood’. These are not the
words of left-wing activists but of one of the most ardent supporters of
privatization in the developing world, the World Bank (see Chapter 4).
When it comes to the provision of infrastructure in developing countries,
privatization has been unpopular, extremely difficult to achieve and,
where it has been implemented, few contracts have run smoothly. Why
then do we need another book to document the failings of privatization?
At an immediate level, this book concerns a narrow and well-defined
topic, the role of privatization in sub-Saharan Africa (SSA) with special
reference to water and electricity. In view of its critical stance on privatiza-
tion, it also offers an alternative, not surprisingly, in terms of (continuing)
public service provision. As such, what is surprising is the rarity of this
book’s subject matter relative to the weight of material that has supported
privatization.
There are three main points of departure in the analysis provided here
compared with other volumes on the subject. First, this book traces the
evolution of privatization from the early days of Thatcherism up to its
heyday around the turn of the millennium, and through to the more
sober perspective subsequently. It explores these phases in the ideology
and practice of privatization in the context of the developing world. The
analysis shows that there was little substance in either the theoretical or
the empirical arguments for infrastructure privatization, particularly
when applied to a low-income context. There was never a reason to pri-
vatize offered beyond the observed if not explained weaknesses in state
provision. In the early 1990s there were hints that privatization in a
poor country might have different effects from privatizing in an indus-
trialized context but these were not detected by policy-makers who,
instead, pressed for faster and wider-ranging privatization as a response
1
2 Introduction and Overview
to the ills of state provision with little theoretical or empirical support.

Sub-Saharan Africa was the laboratory for the privatization experiment.
It failed miserably as has now begun to be recognized.
As a second point of departure, this book examines the impact of, and
fall-out from, the hard-line promotion of utility privatization. How have
poor countries been affected by the attempt to promote the privatization
of utilities for over a decade? On one level, reforms that have led to
improvements in financial management have been beneficial from time
to time on these terms alone, but, in many cases, sector policy for water
and electricity has been reduced to creating an attractive environment
for private investors. While few countries in SSA have accomplished pri-
vatization as intended (see Chapter 5), the policy focus has meant that
most have at least the objective of restructuring the state to become a
facilitator for the private sector rather than itself continue as a provider
of services. Some countries have formulated unrealistic proposals to
create competitive markets, and some have restructured sectors to sepa-
rate out the potentially ‘viable’ components that might interest private
investors. Meanwhile support for state provision has eroded, and social
issues (with profound economic implications) have been neglected.
Investment in infrastructure has shrunk as finance evaporated under fis-
cal austerity programmes combined with the withdrawal of donor sup-
port, frustrated at poor state sector performance. Unfortunately the
private sector failed to fill the finance gap. So, some 15 years after priva-
tization first came to prominence, infrastructure for water and electric-
ity delivery, already weak at the start of reforms, is in some cases weaker
through lack of investment and fragmentation as sectors have been
unbundled to facilitate private sector participation (PSP). Where this has
not happened, often there have been large amounts invested by donors.
Third, this book is rare in considering an appropriate policy response
to the deficiencies of privatization. The World Bank and others, in
accepting the weaknesses of privatization have, at first glance, appar-
ently changed course acknowledging, for example, the limitations of the
one-size-fits-all approach and calling for states to support, rather than be
replaced by, markets. However, on closer examination, this has not been
a change in policy approach but a response to the previously underesti-
mated practical difficulties in implementing privatization. The new
World Bank position calls for increased focus on the state creating con-
ditions conducive for privatization programmes. Thus, there is greater
emphasis on pricing policies and the provision of an institutional frame-
work that will facilitate future PSP. For the World Bank, the failings of
privatization do not justify state provision or warrant re-examination of
Introduction and Overview 3
it as a serious alternative. Even though the state is, and will remain, the
principal provider of water and electricity throughout the region, donor
support for the public sector remains grudging, and even successful state
providers are judged in terms of how closely they resemble the private
sector. Meanwhile considerable donor resources have been put into
encouraging reluctant private firms to invest in African infrastructure.
Whilst privatization of water and electricity is covered in detail in case
studies in Part II of this book, a much more wide-ranging discussion is to
be found in Part I. How is it possible that the privatization dogma came
to be accepted? Why is it now being rejected even amongst those, such
as the World Bank, who previously adopted and promoted it with such
unbridled enthusiasm? What have been the implications of privatiza-
tion for public service delivery? And what are the prospects for the
future especially in view of the current rethink that is taking place over
privatization. With these questions in mind, our text addresses theory,
ideology and policy and how they interact, necessarily incorporating
considerations that go beyond the immediate issue of privatization
itself.
Chapter 2 critically surveys the theoretical literature on privatization.
It finds that it offers little support for the advantage of private over pub-
lic ownership. Indeed, the collection of strands of economic theory
adopted to support privatization, or the ‘synthesis’, as we have dubbed
it, on such matters, suggests that conditions of competition and regula-
tion are more important than ownership as such. Moreover, competi-
tion and regulation should be targeted as needed by corresponding
authorities – to solicit competition where possible and to regulate where
not so. The new approach remains sorely inadequate. In most respects,
it is simply a reflection of the re-emergence and revitalization of market
imperfection economics (especially of asymmetric information). As such,
it fails to address issues of power and conflict, let alone those pertaining
to development and poverty alleviation except as an afterthought. In
these respects, competition and regulation are too narrowly conceived,
and they fail to encompass the factors that do underpin, and interact
with, successful public service provision, ranging over technical
advance, economic and social spillovers, institutional capacity to deliver,
and public service ethos and so on. Whilst, partially in deference to
these factors, orthodoxy has moved towards the position that one model
does not fit all, its understanding of specificity remains limited whether
by country or sector.
Such conclusions are reinforced by the overview of empirical literature
in Chapter 3. There is again no general support for private over public
ownership. It is not even a simple exercise to isolate different forms of

ownership from other factors associated with specific countries and sec-
tors. For these are numerous and interact in different ways in different
circumstances. What is apparent is how studies of the impact of privati-
zation, especially in a developing country context, have highlighted
how much it has been premature if not foolhardy. Not surprisingly, this
can be interpreted in retrospect in terms of putting capacity for compe-
tition and regulation in place prior to privatization itself. But, as
observed in this chapter and elsewhere in the book, it is all too easy to
say privatization would have been better if its pre-conditions had been
in place. It is a tautology. Yet, with these pre-conditions satisfied, no
doubt the public sector would also have performed that much better.
And the effort that goes into making privatization work better might
have been better deployed within a continuing public sector.
This links immediately into Chapter 4 and its critical, indeed sceptical,
assessment of the World Bank’s current rethink on privatization. In prin-
ciple, this is to be welcomed for it departs from what is shown previously
to have been an unthink along the lines of just do it and never mind the
arguments. Remarkably for the World Bank, it borders on accepting that
we were wrong, that privatization was pursued precipitously, as a gamble,
and without the necessary pre-conditions being in place. Thus, 20 years
after it was first on offer, the World Bank has discovered the synthesis on
privatization, accepting that (private) ownership is not the be all and end
all, that one model does not fit all, and that public provision may even
be preferable to private in certain circumstances.
But these revelations need to be set in context. For they follow upon
the failure of privatization as a policy in a number of respects, especially
as far as SSA is concerned, and even more so for water. First, in practice,
privatization has not been successfully pursued in many instances.
Persuasion and intent have not materialized. Second, where privatiza-
tion has taken place, it has been extremely troublesome, with breaches
of contracts, for example. Third, privatization has not sustained the flow
of investment needed for public service delivery. Indeed, such invest-
ment has begun to fall rapidly. In other words, easy privatizations have
been achieved but the continuing privatization programme has stalled.
The resultant rethink in light of this experience is concerned with
rejuvenating the privatization programme and not with examining
public sector provision as an alternative except as a stop-gap measure of
unknown duration. Rather the demand is made upon the state to
establish the pre-conditions that will make privatization possible and
successful. In short, the rethink is a shift from demanding that the state
withdraw from provision in deference to the private sector, to requiring

the state to intervene to allow the private sector to flourish. In a sense,
the rhetoric has changed and the argument is less ideological. But the
policy thrust remains the same at a deeper level – how best to serve the
private sector, on the presumption that the private sector serves best
(when itself appropriately served). In short, as in other areas attached to
the World Bank’s departure from the neo-liberal Washington Consensus,
it is crucial to unravel the shifting relationship between rhetoric, schol-
arship and policy. These are not always consistent with one another, and
do themselves reflect shifting circumstances and expediencies.
These arguments are placed in perspective by Chapter 5, an overview
of water and electricity provision as it currently stands in SSA. Not only
is private sector investment sorely inadequate, it is also highly skewed
by sector and country, and is declining in absolute terms. That 90 per
cent of infrastructural needs will continue to be funded by or through
the state into the foreseeable future is indicative of the token, even
symbolic, role that the private sector can at most play. It would require
a huge leap in faith to believe that the 10 per cent tail of the private or
privatized sector will wag the dog of public service provision, through
some demonstration effect of the private on the public sector. It requires
that putting all your effort into making the magical private sector work
better will both succeed and lead to corresponding emulation within the
neglected public sector.
This all runs against the experience gleaned from our case studies and
other evidence on the effects of PSP in SSA. Chapter 5 brings together
the findings from the case studies and a wider review of the empirical
literature. Initially privatization in SSA came to the fore because of
donor frustration at the poor performance of the state but, as momen-
tum grew, the policy became supposedly a way of bringing in finance
and efficiency to sectors that were woefully lacking in both. The chapter
first sets out developments in the region to show that, far from being
on retreat, privatization is still on the policy agenda in much of SSA.
Fewer long-term lease and concession contracts have been signed
recently but that is not from want of trying. Countries are now plan-
ning to establish management contracts that have lower risk exposure
for private firms and so can be considered more attractive, but this is
still perceived as an interim stage on the road to more established pri-
vatization. The chapter looks at a number of key issues that have
emerged from the case studies and the literature when it comes to the
reforms that have been introduced, these generally following a similar
pattern. It is apparent that the design, and anticipated impact
of (preparation for) privatization has been erroneously based on an

as-if-developed-country context (however well itself understood). For
example, in SSA, regulators typically oversee state providers, invoking a
different array of incentives and policy implications to the conven-
tional notion of the regulator of a privatized utility in a developed
country with potential for competition. Efforts to create a purely tech-
nical framework for service provision have largely failed because of the
political issues involved in pricing essential services where consumers
are poor. Infrastructure investment is desperately needed and finance is
crucial for development but this has not and is unlikely to come from
the private sector to any significant degree. Governments and donors
will continue to be the main sources of infrastructure investment. One
of the main challenges, which has not been addressed, is the balancing
of revenue charges with service provision for the poor. Subsidies have
been discredited for failing to reach the poor but the emphasis on finan-
cial management has resulted in disconnections of essential services
with potentially major social costs. The chapter shows that the state
plays a key role both in creating the framework for service delivery
rather than distorting, or correcting, ‘market forces’ as well as dominating
provision in most of the region.
The subsequent case studies look at the evolution of the structures for
the delivery of services in Ghana, Tanzania, Zambia and Namibia.
These countries were selected to cover a wide geographical spread as
well as different levels of development and historical frameworks. In
Ghana, privatization has been a goal for water and electricity sectors
since the mid-1990s. However, little progress has been made with
regard to electricity and plans for two long-term concessions in the
water sector were shelved and replaced with a short-term management
contract. The chapter shows how the water sector was restructured to
accommodate the needs of investors so that delivery of urban water was
to be a commercial business while rural and small-town water as well as
sewerage were to be a ‘social’ service. As a result, the ‘non-viable’ busi-
ness units have lost their sources of expertise and cross-subsidy. In the
electricity sector, plans for wholesale competition were overly opti-
mistic. While one private power producer is operating, this is not on a
competitive basis, and there has been little interest from other
investors. The reforms to unbundle the electricity sector have stalled for
many years. After a decade of reform there is no sign of any improve-
ments in performance except for that provided by large financial con-
tributions from the government following debt write-offs under the
Heavily Indebted Poor Countries (HIPC) initiative.
Tanzania has made more progress with privatization and reform but
after some bad experiences, privatization is now in retreat. Although pol-
icy documents refer to the state’s role as a facilitator for private enterprise
to run the utilities, the state has, in practice, increased its role because of
the weaknesses in private provision. The running of the national electric-
ity utility has reverted to the state after a management contract with a pri-
vate firm finished at the end of 2006 and the state utility was recently
removed from the privatization list. Efforts to incorporate PSP in power
generation have created an expensive and inflexible structure for which
the state utility receives a government subsidy. The urban water provider
in the capital, Dar es Salaam, was privatized in 2003 only to be re-
nationalized after 18 months. The new public provider managed to bring
about rapid improvements in service delivery. Thus, while the Government
has espoused its commitment to PSP, the policy and the advice of the donors
and consultants that recommended it has been discredited in practice.
The chapter on Zambia covers the reforms in the water and sanitation
sector in urban areas where services for the majority of the population
are provided by one of ten ‘commercial utilities’ (CUs). These are inde-
pendent public companies responsible for the delivery of water and san-
itation services for a specified geographical area. They are supposed to
pursue a policy of cost recovery. In spite of increasing tariffs, metering
and collection, the performance of the CUs in terms of cost recovery is
no better on average than in the late 1980s. The chapter shows that
price increases have been greatest for poorer consumers and that water
remains unaffordable for many in the poorer parts of the country, even
though the country has one of the lowest water charges in SSA.
The case of Namibia presents a contrast to the other three examples
in that the country has two state-owned bulk providers of water and
electricity, Namwater and Nampower, that cover the whole country.
Furthermore, widespread privatization is not on the policy agenda and
the country has no World Bank or IMF programme to force through PSP.
Despite the absence of donor pressure, the water sector has undergone a
process of commercialization and a reduction in subsidy from 100 per
cent to zero since 1997. The electricity sector also receives no subsidy
and is in a process of major restructuring with plans for a competitive
wholesale market, similar to that proposed (but by no means achieved,
or even really attempted) in the other case-study countries. Nampower
is profitable and pays dividends to the state while Namwater has made
losses due to growing arrears and the system of service delivery has run
into difficulties. Under the Government’s drive for decentralization,
responsibility for local distribution in urban areas rests with local
councils, known as local authorities. While some of these, most notably

Windhoek City Council and other larger cities, are capable of managing
services, some local authorities have run up enormous debts to utilities.
As a result delivery of electricity has now largely been taken over by
regional electricity distributors. Decentralization has created a frag-
mented structure which, with a policy of full cost recovery, is set to
exacerbate inequalities. Like many other countries in the region, policies
in Namibia have focused on revenue management to the detriment of
social provision.
Our final chapter offers an alternative approach. A much bolder
re-assessment is made of the public/private divide than is offered by the
rethink by taking as starting point, not that the market does not work,
but the socio-economic and cultural determinants of public service
delivery. This involves both a more abstract approach to theory than the
optimizing individual of the economic approach to market imperfection
and the tying of abstract determinants to the specificities of country and
service delivery. This could have been done in a number of ways in light
of relevant literature across the social sciences, concerned, for example,
with the nature of the welfare state or issues raised by (re-) and (de-)
commodification. But the public service system of provision (PSSOP),
approach is chosen, drawing on work begun in Fine (2002a and 2005a)
in extrapolating from private consumption to the public services. This
emphasizes the integral and unique nature of service delivery across
each sector, as is implicitly recognized in more popular terms by reference,
for example, to the water and energy systems.
In correspondence to this analytical approach, a policy approach is
put forward in which it is proposed that each public service should be
attached to an ‘authority’ dedicated to that purpose, a water authority,
energy authority and so on. It would have responsibility for coordinat-
ing provision through identifying strengths and weaknesses in the
PSSOP and, where appropriate, drawing upon or rectifying them, respec-
tively. This goes far beyond the dominant framework for public service
provision in the wake of privatization, for which responsibility is
increasingly devolved to regulatory and competitive authorities, each of
which has insufficient powers in and of themselves and in coordination
with other aspects of policy-making, including those attached both to
poverty alleviation and developmental goals. To some extent, there is
some affinity, at least in principle, between this PSSOP approach and the
one popularized by the World Bank under the rubric of a Sector Wide
Approach (SWAP). However, in practice, the SWAP approach has been
more closely associated with coordination of donors to a given policy

rather than a thorough rethink of policy and provision themselves.
In light of this approach and our case studies, some broad conclusions
can be drawn. First, without pre-judging ultimate desirability of level
and form of private participation, instances of (prospective) ‘premature’
privatization can be identified. These might be defined as a situation in
which provision and access (especially to the poor) are inadequate and
pre-conditions for privatization, whether in levels of competition or
capacity to regulate (broadly interpreted), are weak. Second, premature
privatization can lead to dysfunctional outcomes below a threshold
level of material and cultural support to privatization – the imposition
of financial criteria in the context of inability or unwillingness to pay
leads to failure in bill collection and cost recovery, costly and futile
attempts at remedy at the expense of delivery and access, and political
and commercial opportunism in supply. Third, and more constructively,
whilst regulatory institutions and government departments (at various
levels) do exist to respond to these problems, they do not tend to incor-
porate the range and strength of powers and capacity to deal with them.
Accordingly, the recommendation of moving towards a system of public
service authorities is more important for highlighting the need to form
and consolidate these powers and capabilities than advising of any
particular institutional form for doing so.
Huge improvements in the delivery of water and electricity are
urgently required if countries in SSA are to achieve the Millennium
Development Goals (MDGS) by 2015. There are major economic, social,
educational and health effects from poor services with a disproportion-
ate burden on women having to travel long distances to collect water
and firewood. While the system of state provision was in many cases
very weak in the 1980s, there is little sign of improvement aside from
donor and government funded investment.
The evidence presented in this book shows that policy-makers –
most notably donors – got it very wrong when it comes to infrastruc-
ture privatization and continue to do so while rewriting the analytical
framework to cover all eventualities. Business principles prevail and
policies are designed to remove the state as far as possible unless it be
to serve and support what is often reluctant, ineffective and inappro-
priate private provision. Yet the state is set to remain the provider for
many years to come. The transplanting of policies designed for indus-
trialized countries has failed, and this failure highlights the impor-
tance of context for policy outcomes. On the basis of no relevant
evidence, countries have been encouraged, or bribed through donor

conditionality, to do whatever it takes to bring in private investors.
The privatization experiment cannot be considered a success in SSA.
Rather than continuing to tweak the model, it must be time for a new
approach based on state provision.
Part I
The Privatization Experiment
2
Privatization’s Shaky Theoretical
Foundations
Ben Fine
2.1 Introduction
There can be little doubt that privatization was placed on the political, and
hence economic and economics agenda, in the early 1980s by the mete-
oric rise of neo-liberalism.1 In particular, UK Prime Minister, Mrs Thatcher,
was recognized to have taken the first path-breaking, if modest initiative
by the selling off of local government-owned, ‘council’ housing to tenants
at knockdown prices (Brittan 1986). The understandable popularity of this
initiative to those who benefited in a booming housing market, with
no immediately perceivable disadvantage to the future homeless or hard
to house, spawned bolder initiatives. It gave rise to a major UK programme
of denationalization, including British Airways, British Coal, and the
electricity, gas and telecommunication public corporations.
The rest is history with privatization proudly being designated as the UK’s
most successful export, and the worldwide return of public to private sector
activity!2 In the two or three decades following the Second World War, it
was more or less taken for granted that a strong state sector was indispen-
sable for economic and social development. For Shleifer (1998, p. 133),
citing Nobel Laureates Arthur Lewis, James Meade and Maurice Allais:3
Half a century ago, economists were quick to favor government

ownership of firms as soon as any market inequities or imperfections,
such as monopoly power or externalities were even suspected. … At
that time, privatization of such services as incarceration and education
was evidently not even discussed by serious scholars.
Indeed, in an era of decolonization, the issue was posed of whether

multinational corporate affiliates, especially those engaged with natural
13
14 Ben Fine
resources, would be (re)nationalized, possibly without compensation

(Fine and Harris 1985).
There is no doubt then of a sea-change, as the post-war boom came to
an end, in the ideology surrounding the relative merits of the public and
private sectors. Keynesianism, welfarism and modernization as the
sources of developed country success and as the model for developing
countries to follow have been simply set aside. As Chang (2002) has
argued, developing countries are now, implicitly, told not to do as we
did but to do as we say – for public ownership as much as for industrial,
trade and other policy. By the 1980s, the Washington Consensus came
to the fore and, in a short time, privatization became a key element in
policy conditionality.4
A full account of privatization theory must surely address why priva-
tization has come so rapidly to prominence in practice. The first and
most popular explanation is usually offered in terms of the rise of par-
ticularly aggressive right-wing laissez-faire governments, such as those
attached to Thatcherism and Reaganism. This has gone hand in hand
with a more general shift in the balance between market and state as
neo-liberal perspectives have gained ground at the expense of
Keynesian, welfarism and state-led modernization. But right-wing
governments are far from new, and can even strongly support state eco-
nomic intervention and ownership. And the privatization baton has
also been taken up across a much wider political spectrum than previ-
ously would have been foreseen. No doubt the rise of neo-liberalism has
tempered the rhythm and extent of privatization, but the question
remains open as to why it should have triumphed in the form of such
policies and why they should have proved acceptable to the ‘captains of
industry’ and a broader political constituency.
Of course, those pressing for such change have inevitably perceived
themselves as shedding the pro-state bias and conventional wisdom of
the past in pressing their own neo-liberal doctrine. But, whilst allowing
a role for ideology itself in promoting the rise of privatization, is it pos-
sible to identify underlying material forces that explain why it should
have come to the fore, so rapidly and extensively?
More secure grounds for explaining the emergence of privatization are
to be found in the shifting conditions underpinning the performance of
the world economy. First, the development of production has been
marked by two crucial developments. On the one hand, although not
new, the internationalization of production (and ‘globalization’ more
generally) has posed challenges to those state-owned companies that are
confined to domestic ownership alone. Across a number of industries,
Privatization’s Shaky Theoretical Foundations 15
joint ventures between different firms have proved essential with the
result that state-owned companies have only been viable on the basis of
participation, however fully, with private capital. On the other hand,
especially in the wake of new technology and reinforcing the previous
factor, traditional divisions between the various sectors of the economy
have been broken down, most notably in telecommunications, office
equipment and data processing for example. Traditional divisions
between the public and the private sector, and corresponding intellec-
tual divisions, have necessarily been re-drawn, with the public sector no
longer able to be confined to a number of demarcated areas of activity,
such as ‘utilities’ and health, education and welfare. In other words, eco-
nomic integration across sectors opened up the public to the private sec-
tor both in principle and in practice.
Second, globalization and new technology have possibly had more
impact upon the financial sectors than on any other. Consequently, put-
ting it in very loose and informal terms, the volume and range of finan-
cial services that have been made available have given rise to a wealth of
‘idle capital’ that makes itself busy by pursuit of privatization. This is in
the first instance, after all, simply the financial process of transferring
ownership from the public to the private sector. In down-to-earth terms,
such idle capital is most noticeable in the proliferation of competing
financial consultancies, desperate to gain existing privatization business
and to promote more. More generally, there has been a proliferation of
financial instruments bridging and shifting the public/private divide.
Moreover, a longer view of the choice between public and private provi-
sion, stretching back into the nineteenth century, reveals that the pri-
vate sector presses to provide when and where it is profitable for it to do
so (and to use the state to make it so) and, equally, does not embark
upon, or abandons, provision where profitability fails. In contrast, the
state is saddled with the burden of provision irrespective of commercial
viability and can be pressured to support private at the expense of public
provision.
Third, privatization has been an important way in which the rela-
tions between capital and labour have been reorganized. In part, this
reflects the advantage to be taken by capitalists from the forms of
restructuring mentioned in the previous paragraphs, in conjunction
with shifts in management techniques associated with new technology
with the greater potential, for example, for subcontracting. In part, it
also draws upon the shifting balances between capital and labour in the
labour markets, as economies have experienced higher and, at times,
very high levels of unemployment, and women have increasingly been
16 Ben Fine
drawn into the (formal) labour market. In short, privatization and the
so-called labour market flexibility have been intimately related to one
another.
Fourth, with the end of the post-war boom associated with Keynesianism
and wider economic and social intervention by the state, the pressures
on public delivery of services have intensified. Accordingly, public enter-
prise is perceived to have failed, especially in poorly performing devel-
oping countries. This is separate but closely related to the rise of
neo-liberal ideology as such because there is a sense in which the public
sector has failed (but the same could be said of the private sector). Such
a sense and reality of failure has been reinforced by the collapse of pre-
viously centrally planned economies, although their transitions to capi-
talism have hardly been marked by success in general and through the
results of privatization programmes in particular.
Against this background, how has mainstream economics as a disci-
pline responded to privatization? As revealed in the next section, it had
considerable difficulty in doing so, especially at the theoretical level.
Previously, study of public and private enterprise had run very much
along parallel lines. Now they had been forcibly brought together. As
will be seen, the result was to provide an analytical ‘synthesis’, uncom-
fortably seeking to accommodate inappropriate theoretical principles
with awkward and unanticipated empirical developments. As discussed
in Section 2.3, this has rendered the synthesis anodyne as far as policy
debate is concerned, especially over the merits of privatization itself,
having drawn the conclusion that ownership as such does not matter!
But it has also left it floundering and tailing upon empirical develop-
ments in the wake of the incidence and experience of privatization
itself. Paradoxically, from positing grand, universal theory in the first
instance, the synthesis has evolved by bringing back in, on a piecemeal
basis, the essential elements that it had previously omitted. It even
draws the conclusion that specificity is of importance. But what is
brought back in, and how, remains open to question. Should the
optimizing individual simply be modelled over a wider range of vari-
ables or must we introduce questions of power, together with the
specifics of socio-economic structure, power and process, all attached to
the specific context of particular countries? Throughout, then, the syn-
thesis is examined critically in order to draw the conclusion that the
relationship between public and private sectors needs to be assessed in
context and not on the basis of universal principles concerning market
imperfections. Analytical, empirical and policy substance is added to
this argument in the remainder of the volume.
2.2 Ownership and theory as such
Whatever its impact in the real world, privatization came as a great

shock to mainstream economics. It was simply ill prepared to deal with
the issue theoretically for two reasons. On the one hand, during the
post-war boom, public ownership had traditionally belonged more to
the applied, empirical and policy side of the discipline with little atten-
tion from high theory as opposed to Marshallian partial equilibrium
considerations. The relative absence of public ownership in the United
States, particularly of core industries at a national level, also tended to
place the issue off the agenda of vanguard neoclassical economic theory.
Elsewhere, there was the presumption that the performance of national-
ized industries lay somewhere between benign and effective correction
of unavoidable market failures (natural monopoly or the like) and
benign but inefficient practices of career civil servants and politicians.
Accordingly, analyses focused on an ideal of what public enterprise should
do and an empirical account of what it did do.5 The question of privati-
zation did not arise. Indeed, the extension of public ownership was
more likely as a response to emerging market failures or need for severe
adjustment, especially with industrial decline of older industries and the
need for extensive rationalization and redundancy.
On the other hand, analytically, mainstream economics was ill pre-
pared to respond to privatization because it raised two issues in which it
had traditionally had very little depth to contribute. The first of these is
the notion of ownership itself. For economics, ownership simply
denoted the capacity to sell a well-defined physical object, or to claim
residual income from economic activity. Consequently, there existed no
analytical framework in which to comprehend ownership at all, let
alone the transfer of ownership from the public to the private sector.
This was especially so, second, because of weakness in the theory of the
state. Primarily, it had been seen as a benevolent representative of soci-
ety correcting macro or micro failures to the best of its ability. As a result,
in confronting privatization, mainstream economics was faced with the
task of bringing (back) in questions of the state and of ownership.
It did so in two ways, first, not surprisingly in a neo-liberal political
context, the analytical vacuum surrounding how to approach privatiza-
tion was in part filled by previously longstanding but marginal contri-
butions in an era of Keynesianism, those associated with neo-Austrian,
rent-seeking, public choice and property rights theorizing. These leaned
heavily in favour of privatization in view of their support for private
enterprise. Second, though, the same was not true of the more general
18 Ben Fine
response from within the discipline. For, also not surprisingly, main-
stream economics began to address privatization from the perspective of
its own most recent developments. At the time of privatization, these
began to concern contracting in a world of market, especially informa-
tional imperfections, with principal–agent theory coming to the fore
(with, for privatization, various principals and agents in the chain
between consumer, producer, regulator and government and back to
consumer again as voter-citizen).
In short, the prod provided by privatization in practice prompted
mainstream economics in principle to delve into its toolkit to address
the issue. That its toolkit might be inadequate, indeed that it was, could
not be contemplated for neoclassical economic theory is based on
universals, like production functions and optimizing individuals, appli-
cable across all times, places, circumstances and issues.6 Consequently,
privatization had to be analytically cut to suit the theory rather than
vice-versa. In other words, given our theory, what can we say about
privatization? As argued by Fine (1990a, chapter 8),7 this all rapidly gave
rise to what he termed the ‘new synthesis’ on privatization with the
following elements, and weaknesses deriving from the bringing back in
of considerations that it was ill-suited to address.
First, at an informal level, there was considerable commitment to the
‘quantity theory of competition’, Weeks (1981), the idea that the higher
the number of firms, the more competitive the industry, and the more
competition the better is the outcome. This is only true, however, within
orthodox neoclassical economics under highly restrictive assumptions
such as absence of externalities and economies of scale and scope, and
within a partial equilibrium framework. This is heavily confirmed by the
conclusion within industrial economics observed by Schmalensee
(1988, p. 677) in his centenary survey of industrial economics for the
Economic Journal:
Recent theoretical research suggests that market conduct depends in

complex ways on a host of factors, and the empirical literature offers
few simple robust structural relations on which general policies can
be confidently based. Moreover, formal models of imperfect competi-
tion rarely generate unambiguous conclusions. In such models, feasi-
ble policy options usually involve movements towards but not to
perfect competition, so that welfare analysis involves second-best
comparisons amongst distorted equilibria. In particular, there is no
guarantee that making markets ‘more competitive’ will generally
enhance welfare, particularly if non-price rivalry is intensified.
Such ambiguity over the merits of more or less competition have tended
to be overlooked by the advocates of privatization, although the idea of
contestability (depending on costless entry and exit) has been used to
suggest that the presence of a monopoly does not necessarily mean lack
of (potential) competition against incumbents. Both the nature of
competition (and the many different ways in which it could be fought)
and its results (as a dynamic process of change rather than a static
equilibrium) were unduly simplified (see Fine 1999 for extensive discussion
in terms of models of oligopoly).
Nonetheless, as a second feature of the new synthesis, more sophisti-
cated notions of competition, and its consequences, soon found their
way into the literature, not least by tailing upon the shift from the ‘old’
to the ‘new’ industrial economics. Previously, as suggested, the old had
incorporated a substantial component of informal and institutional
analysis as neatly summarized, for example, in the structure-conduct-
performance (SCP), paradigm. This suggests that the structure of an
industry, as in size distribution of firms and degree of monopoly, affects
the way in which an enterprise goes about its business. The approach
allows for a whole range of factors to be brought into consideration,
including the internal organization of the firm and its capacity to inno-
vate and diversify. But for the new industrial economics, the descriptive
and inductive framework provided by the SCP and similar approaches
was rejected to make way for deductive mathematical models of equi-
librium in which firms play strategic games with one another on the
basis of relatively few variables. As a result, the anticipated effect of one’s
own and one’s rivals’ performance affects the choice of conduct and
structure so that a unilinear causal relationship between the three fac-
tors is rejected. But what is gained through such causal feedback and
simultaneity is associated with other, arguably greater losses. All indi-
viduals, across private and public sectors, are treated as equally and
crudely self-motivated. Yet, corporate organization and performance
may have much more to do with socio-economic and political context
and cultural norms that differ across countries than whether a firm is
privately or publicly owned. And, in a sense, the notion of competition
became much tamer than the dynamic rivalry associated with earlier,
more empirically minded accounts of industrial performance.
Despite the ambiguity surrounding the notion and benefits of a com-
petitive industry, the synthesis, third, took it as an ideal type at one
extreme, with natural monopoly (extensive increasing returns) lying at
the other (for which public ownership was the traditional response).
However, there are problems with the idea of natural monopoly. For, if
20 Ben Fine
wages are driven down for example, itself a possible consequence and
even intent of privatization, this can make smaller-scale technologies
viable. Consequently, ‘natural’ monopoly cannot be defined independ-
ently of the economic conditions in which it is presumed to operate.
More generally, stylized accounts of the differences between the public
and private sectors are inappropriate. Is the private sector disciplined by
competition when the likelihood of take-over has more to do with size
of enterprise than relative efficiency (Martin and Parker 1997)? And
both principal–agent problems and rent-seeking prevail irrespective of
the form of ownership, as shareholders cannot be sure that managers act
in their interests (Aharoni 1991), and that the private and privatized
sector will not seek favourable state policy (and regulation).
Not only, however, does the synthesis tend to rely upon two idealized
extremes of industrial organization, it also tends to set them within the
equally idealized context of a perfectly working economic, legal and
social environment. It is liable to be presumed that there is an effectively
functioning financial system, able and ready to fund new owners and
competitive entry, a well-functioning legal system and socio-economic
environment, a cadre of capable private managers and state officials, and
so on. Possibly, these background assumptions, so much taken for granted
that they are rarely stated, are a reflection of the modern origins of
privatization in the UK economy. But their lack of realism has been heav-
ily exposed, if not always taken into consideration, as privatization has
spread to a whole range of countries that clearly do not satisfy these
conditions. Indeed, it has been argued that the absence of such under-
pinnings for the modern economy will be rectified by privatization –
creating a stock market in developing countries, for example, from shares
in privatized utilities. Or, in slightly different terms, it has even been
suggested that, ‘at the time privatizing quickly and comprehensively – and
then fixing the problems later on – seemed a reasonable gamble’. But,
‘taking the same gamble today with the benefit of seven more years of
experience, would be much less justified’ (Stiglitz 1998b, p. 20).
Similarly, Shirley (2002), for example, a strong proponent of privatiza-
tion, has conceded that institutions and path dependence, and not just the
market, matter for the success of privatization.8 Whilst recognizing that
multinational corporations in providing public services may wish to pro-
tect their reputation at the expense of crude, short-term profit-making, she
considers this to be of lesser importance than competition and regula-
tion. But even where the latter is absent, she comes down in favour of
private as opposed to public provision on the grounds that public provi-
sion does not necessarily favour the poor, and competition may induce
private firms to promote regulation and to resist corruption and perverse

incentives.
As Adam (2002) observes, there are two different strands to Shirley’s
position, both of which are questionable. On the one hand, the private
does better than the public sector even in the absence of appropriate
pre-conditions for privatization. On the other hand, deficiencies in
those pre-conditions tend to be corrected through privatization. More
generally, this reveals the extent to which Shirley is merely refining the
idea that private is better than public provision by extending the virtues
of the market to non-market factors. As Carter and Danert (2003) put it
in the case of water, there are a number of fallacies around privatization,
including optimism over the willingness and capacity of the private sec-
tor to deliver, let alone optimally, ‘like some Victorian philanthropist’.
In contrast, ‘an effective private sector needs a strong public sector.
In the absence of strong public sector policy-making, tight contract
management, and close regulation, the private sector cannot function
to the benefit of society’ (p. 1069). As for other public services and basic
needs, ‘the goal of sustainable permanent water and sanitation services
for the least well-off is too important to be hijacked by dogma or vested
interest’ (p. 1072).
In short, public versus private ownership cannot be explored in the
absence of the context in which the market operates, including the def-
inition, or formation, and exercise of vested and ‘public’ interests
through institutions, themselves broadly conceived. This is all indica-
tive, fourth, of a more general failure of the synthesis to incorporate
broader social and economic considerations. This is evident in a number
of respects. Property rights are, for example, understood simply as the
residual claim to income – whatever profits are left over after payment
of costs accrue to the state or to private claims according to ownership.
Not surprisingly, this tends to lead to the conclusion that ownership as
such does not matter except as a secondary issue relative to competition
and regulation. Further evidence of the neglect of the socio-economic
environment is the failure of the new synthesis to take into account the
specific histories of nationalized industries, their dynamic and their
broader social and economic significance (Shapiro and Taylor 1990). In
Britain, for example, the strong popular commitment to the National
Health Service is almost certainly a consequence of the tradition of free
and universal provision that it embodies. There has also been a more
general commitment to public service, including the ethos of public
provision as opposed to pursuit of self-interest, although this is being
eroded with the progress of privatization. Historically, a major wave of
22 Ben Fine
nationalization took place in the United Kingdom after the Second

World War (coal, electricity and gas, for example), out of the failure of
the private (or local public) sector in the interwar period, and the absence
of the private sector explains the necessary role of the state in promoting
industry in much of the developing world.
Further, privatization has been heavily associated with an ideology,
through anti-statism, of ‘bureaucratic bashing’. It is no exaggeration to
see the orthodox literature as primarily depending upon individual pur-
suit of self-interest in determining both economic and non-economic
activity but falling back upon irrationality, culture or whatever where
this is perceived to suffer explanatory failure. This places the legitimacy
of government into question as well as public service ethics and moti-
vation. To be a state official is potentially to court the reputation for
being superfluous, inefficient relative to the private sector, and rent-
seeking if not corrupt. The consequences have not been purely ideolog-
ical or damaging to public service morale. For the public sector has
found it necessary to mimic the practices and criteria of the private
sector in order to avoid or deflect such accusations and perceptions.
In addition, though, it is not simply a matter of drawing upon, or being
wary of, the special nature of the ethos surrounding public service
delivery – whether free goods are wasted or valued, secure employment
is abused or conducive to loyalty and commitment, for example. This
leaves open the question of how a public ethos is or is not created, or
sustained, and with what content. Here it is arguable that privatization
itself has an important and potentially negative impact. If you treat
individuals as if they are purely self-interested and organize provision
accordingly, then it is hardly surprising if their ethos shifts to conform.
Nor is this distributionally neutral, for as Dellgran and Höjer (2005)
have demonstrated in the context of Sweden’s social workers, higher
professionals and those more likely to gain from privatization are more
inclined to support it, for ideological as well as for reasons of economic
self-interest.
Haque (1996, p. 191) provides a comprehensive discussion of these
issues, concluding that,
The current ethical challenge to the public service emanates basi-

cally from an attempt of various agencies to restore their weakened
legitimacy or revive their lost public confidence by adopting the
values of private enterprises, although such values are relatively
incompatible with mainstream public service norms. However, this
incorporation of market values in the public service may lead to a
further decline in its legitimacy, because there is no reason to believe

that the public will have more confidence in a public service driven
by market values than one based on traditional, largely democratic,
values.
In this respect, there is a striking paradox in the World Bank’s strong

commitment both to privatization and to social capital in so far as the
former presumes the absence of the latter in individual ethos. But, as
Champlin (1999) observes, privatization is also perceived to depend
upon, and yet undermines, social capital in pursuit of positive-sum col-
laborative outcomes. Fine (2001 and 2002b) for the deficiency of the
World Bank’s approach to social capital in its failure to address its rela-
tionship with the economic satisfactorily. The World Bank would appear
to wish to appeal to social capital in order to make up for its policies of
privatization! And equally, the rise of social capital as part of World Bank
rhetoric has proceeded, oblivious to the diversion of its resources to the
private sector (Fine 2007).
In addition, irrespective of the damage done to the morale and ethos
of the public sector, there is an impact on recruitment to civil service
employment. Although possibly subject to nepotism, the state has often
been able to enjoy a commitment from its workforce that has allowed
lower wages to be paid than in the private sector and for a benefit to
accrue from the pursuit of a career as a state employee. Even those who
first put forward public choice theory recognized that a residual limit
remained beyond which their approach would not apply, reflecting a
commitment to public ethos by public servants (Fine and Milonakis
2007). Such reservations have been forgotten by more recent microeco-
nomic theory on which the synthesis draws and for which optimizing
individuals are the basic building block.
And, at a practical level, with a shift in the ethos of public service with
privatization, state employment is liable to lose the advantages of com-
mitment to public service, leading to inefficiencies through high
turnover of staff. The civil service can merely be seen as an alternative or
stepping stone to more remunerative employment in the private sector.
As Grout and Stevens (2003, p. 233) put it,
The motives of those involved in their delivery and the nature of the
services make the incentivization process particularly complex and
delicate, and so a public sector with incentive structures that are at
least as high-powered as elsewhere in the economy is unrealistic and
almost certainly sub-optimal.
24 Ben Fine
Similarly, Besley and Ghatak (2003, p. 247) conclude that, ‘ownership

issues are given far too much weight in existing debates about public-
service reform’. For them, it is better to focus upon the mission of
organizations and the motivations of agents, and in ‘matching providers
and employees in the labour market and in matching customers to
providers’.9 In addition, the public sector tends to become the provider
of last resort as opposed to the private or privatized sector that can
cream off the more commercially viable and readily served markets. This
reinforces the idea of state failure and private success.
One effect of the synthesis, then, was to reduce the scope and depth
of variables considered and another was to alter the framework for
examining industrial performance from descriptive to analytical (of a
certain type). Not surprisingly, this gave rise, fifth, to a corresponding
shift in the understanding of industrial policy. In the past, with a shift-
ing rhythm of emphasis across time, place and sector, this has focused
upon trade protection, research and development, skills, sources of
finance, vertical integration, role of small businesses, provision of infra-
structure and so on. Each, at one time or another, has been seen, rightly
or wrongly, as a focus for industrial policy. For the new synthesis, a new
mantra, equally narrow as each of the others taken in isolation, comes
to the fore. It is that industrial policy depends upon the interaction of
competition and regulation.
Thus, the numerous analytical corners cut in forging the synthesis
contributed a compelling, if flawed, policy logic. At one extreme, poten-
tially competitive industries require competition (ease of exit and entry
and absence of collusion) whilst, at the other, there is a need for (price)
regulation of natural monopolies. Given the weak understanding of
ownership in terms of property rights, the state, and broader social, his-
torical and economic environment, it is hardly surprising that the con-
clusion, as already mentioned, should be drawn that ownership as such
does not matter much for performance. Rather, with economic activity
divided along the spectrum between potentially competitive and natu-
ral monopoly, desirable outcomes are perceived to depend upon a corre-
spondingly appropriate mix of induced competition and regulation.
2.3 Lack of regulatory capture – analytically

speaking?
This all reflects the microeconomic scope of the synthesis with little account
of the macroeconomic environment. With the approach universally appli-
cable, it is perceived to be appropriate across a range of circumstances
give or take a detail or two. It does not seem to matter whether unem-
ployment is high or low, with the same applying to other targets of
short- and long-run macroeconomic management as for inflation, budget
deficit, balance of payments, and growth and development of the econ-
omy and of productivity, although the Panglossian view has often been
that these will all be simultaneously enhanced by privatization despite
the likelihood of target trade-offs.
As indicated, the synthesis initially focused upon the relative merits
of public and private enterprise. Ultimately, not surprisingly in view of
its weak notion of ownership, it drew the conclusion that it was at most
of secondary importance relative to conditions of competition and
regulation, should there be market imperfections. These themselves are
understood as artificial (and subject to competition policy) and/or natu-
ral (economies of scale and scope or informational) and to be subject to
regulation. Consequently, having got ownership out of the way, theory
could easily be targeted at the next practical step in the process of
privatization – what to do with the privatized sector.
This ought not to have been a new issue. After all the state has long
‘regulated’ the private sector, not least in the United States, with anti-
trust legislation and even regulation of utilities. The state has exercised
a whole range of policies towards the economy in this respect, and these
might be usefully summarized as ‘industrial policy’. However, rather
than build upon this experience (and its associated literature), the syn-
thesis effectively started afresh other than in drawing upon its own
newly constructed framework for understanding the (lack of ) difference
between public and private ownership.
Here, though, in light of the analytical weaknesses of the synthesis, it
is hardly surprising that the regulator or regulation should prove to be
little more than a pale surrogate for industrial policy. On the one hand,
the regulator commands extremely limited powers corresponding to the
putative correction of artificial and natural monopolies. Given a focus
primarily on pricing and profit, or occasionally product quality and
access at the level of the enterprise, there is usually no way of directly
influencing wage differentials, employment levels, R&D, technology
used, skills and training of the workforce, the promotion of economies of
scope and so on. On the other hand is the limited accountability of the
regulator over extended periods in terms of democratic representation.
Whilst this might be seen as a positive aspect in terms of independence
from particular interests, including those of an established government,
it is more fundamentally a negation of popular participation in decisions
that often crucially affect the day-to-day lives of citizens dependent
26 Ben Fine
upon the provision of basic utilities. Such issues have been addressed by
the literature but, once again, from an analytical point of view, primarily
in terms of principal–agent problems and whether and how the enterprise,
the state or the customer can ‘capture’ the regulator.
However, with the empirical evidence of twenty or more years of pri-
vatization (and US electricity utilities for even longer), a number of
important lessons do seem to have been learnt (although not entirely
within the United States itself given the Californian electricity crisis).10
First is that regulatory capacity should be in place before privatization.
Indeed, it is not clear how contracts can be satisfactorily made in the case
of private service provision unless conditions of regulation are known in
advance (and how well they will be implemented). Otherwise, public
will be turned into private monopolies, for example, or the private sec-
tor will misjudge or take undue advantage of what is expected of it.
Second, a consequence of poor regulatory capacity is that unsatisfac-
tory contracts are made and may be broken on either side, with failure
to deliver or ad hoc intervention by government over the top of the
regulator in response to political, ideological or other pressures (see
Brunekreeft and McDaniel (2005) for a discussion in the context of
appropriate forms and consequences of regulation in the face of uncer-
tainties). For Estache et al. (2003), regulation does not translate readily
from developed to developing or transitional economies because of
lack of (similarity in) institutional, regulatory and productive capacity.
The consequence has been frequent renegotiation of contracts with
uncertain distribution of benefits of better provision. There is also an
increase in uncertainty leading to higher costs of capital and lower lev-
els of investment as well as incentives for quick returns when using
price-cap regulation. Indeed, the choice between rate of return and
price regulation reflects a corresponding dichotomy between static and
dynamic aspects of performance, with one trying to squeeze away
monopoly profits on the basis of given conditions of production and
the other the profits accruing from productivity increase. And possi-
bilities for taxation by government lead to weakening of the power of
the regulator.11
Third, regulation itself is extremely complex and demanding of skilled
capacity, with the need to make refined judgements in light of strategic
responses and goals (see Paredes (2005) and Mattos and Coutinho
(2005) in context of telecoms for Chile and Brazil, respectively). To pro-
mote competition by enforcing access to a network or grid, for example,
may disadvantage the economies of scale and scope of the incumbent
network provider.
Fourth, the process of privatization itself will be eased and initial

revenues potentially higher if regulation is anticipated to be light. Fifth,
there are the issues of what is to be regulated and how. As is well known,
rate of return regulation encourages over-investment whereas price reg-
ulation can be at the expense of quality. Paradoxically, as is indicated by
the literature on planning objectives under a socialist economy, what-
ever is included as a goal with incentives will be met in a distorted way
at the expense of those goals that have not been included. And
developmental goals, not least those attached to skills and research and
development, will almost inevitably be excluded. Significantly, Jannuzzi
(2005) offers a rare discussion in context of power sector reform in
Brazil. He concludes the need for (p. 1761):12
energy companies to design and implement energy efficiency and

energy R&D programmes under the supervision of the regulator. The
potential benefits to society that can come about from investing in
energy efficiency and R&D are high, for example: environmental,
socio-economical and national security issues.
It is imperative that such benefits should accrue, but it is to stretch

the current meaning and practice of the notion of regulation beyond
recognition.
In short, the synthesis went through a particular and, in some respects,
convenient evolution. It could begin by setting aside the significance of
ownership and place emphasis upon the importance of competition and
regulation. On a reduced scale, it could then discuss regulatory rules for
the optimal treatment of market imperfections. Once again, though, the
real world would rudely shatter the complacency of the synthesis by
pointing not only to different forms of privatization itself but also that
regulation needs to be both possible and in place before privatization. So
the two cannot be considered independently of one another. Even more
than before, everything depends upon everything else. As Parker and
Kirkpatrick (2005, p. 514) describe it
Under conditions of perfect competition, perfect information and

complete contracts, publicly owned and privately owned firms would
have the same level of performance. … But recent advances in property
rights and principal-agent theory in economics have emphasised the
importance of private property rights in providing optimal incentives
for principals to monitor the behaviour of their agents in the face of
incomplete information, contracts and markets. … At the same time,
28 Ben Fine
developments in public choice theory have concentrated on the

behaviour of agents within government and their tendency to pursue
their own interests, or the interests of special interest groups, over the
public interest.
So ownership does matter after all depending on how you model prin-
cipals, agents, property rights and vested interests, these themselves
having an impact upon whether privatization does take place or not, in
what form, and with what competition and regulatory policy.
From these insights, two deeper and broader conclusions can be
drawn. First, the supposed comprehensive duality between competition
and regulation glosses over considerable complexity and specificity in
each and their interaction. Inevitably, however well regulation and com-
petition policy are implemented, they will remain insensitive to the
range of factors associated with the policy requirements of economic
and social development. Second, whilst privatization does change the
conditions under which provision is made, it does not thereby necessar-
ily reduce corruption, independence from ad hoc state intervention,
and the need for considerable expertise to monitor and regulate the pri-
vate sector, Bodammer et al. (2005) in case of Ghana’s telecoms.13
Here again, the synthesis is forced back to its uncomfortable relation-
ship to reality by the uneven pattern, pace and incidence of privatiza-
tion itself, and correspondingly evolving empirical developments. If
regulatory capacity, for example (and the institutional norms of market
society more generally) is a desirable pre-condition for privatization,
does this explain why privatization has occurred where it has or has not,
and in what form? And, if not (as is the case), do we not have to bring
back in what the synthesis has left out in terms of historical and social
conditions, vested interests and their political and ideological impact?
Or do the same principles apply readily across the optimizing individu-
als of the United Kingdom, Eastern Europe and Sub-Saharan Africa?
Again, the synthesis has lost its innocence, been brought back into
touch with reality by such issues, acknowledging that its principles need
to be extended to include not only ownership and regulatory capacity
but also any other factor that might give rise to market imperfection.
But, by now, the theory has lost its simplicity around ownership, com-
petition, regulation, the state, motives, and so on, and its dualisms
between market perfection and imperfection, and between regulation
and competition. Instead, we are offered complexity in place of simplic-
ity, and an acceptance of the importance of specific circumstances, so
wide-ranging are the variables to be incorporated. Theory can be exact

in case of axiomatic assumptions around networks, externalities or
economies of scale, but its application is not. With fulsome support
from official sources, Laffont (2005) reflects upon the theory and
evidence around privatization and regulation from the perspective of
market imperfections. He comes to the conclusion that ‘a broader
political economy of reform, taking into account specific historical and
political situations, is necessary’ (p. 39).
2.4 Concluding remarks
This raises the question of where do we go from here. And the answer
has to be a different starting point rather than continuing to build upon
what has already been contributed. The theory of privatization has
evolved around a narrow set of issues, explanatory factors and explana-
tory methods. It has responded piecemeal to empirical evidence and
policy conundrums as they have arisen. And it has relied upon the uni-
versal principles of analysis associated with the mainstream that beggars
belief when applied across different countries at different stages of
development, and with different economic, political and ideological
structures and processes. Whilst the United Kingdom might have pro-
vided the initial model, political and analytical, for privatization, what-
ever its applicability there, it is entirely inappropriate as a template for
elsewhere. Even so, by the expedient of bringing back in what it has pre-
viously omitted, the synthesis has commendably been drawn to the
conclusion that specificity does matter. Our own take on this is to
eschew models, at least in the first instance, and examine country-by-
country, sector-by-sector, exactly what is involved in the provision of
‘public’ services. Water is different from electricity. And Sub-Saharan
Africa is different from the United Kingdom. This is not to abandon the-
ory altogether but to accept that specificity needs to be present from the
outset. What and how are taken up later in this book, generally in
Chapter 5, and more specifically through the case studies. Before that,
groundwork is provided through empirical and establishment policy
overviews in Chapters 3 and 4, respectively.
It is a shame that this theoretical contribution did not inform ortho-
doxy before privatization and not tail upon the experience of privatiza-
tion in practice. And, by the same token, whilst a more palatable and
rounded conclusion has been obtained, the route by which it has been
realized and the content with which it is endowed remain unsatisfactory.
30 Ben Fine
Notes
1. On neo-liberalism from various perspectives, see Saad-Filho and Johnston
(eds) (2005).
2. Williamson (2004, p. 2), source of the term Washington Consensus, does
himself explicitly reject ‘neo-liberalism’ but ‘The exception was privatiza-
tion, which was Mrs Thatcher’s personal gift to the economic policy agenda
of the world, and which, by 1998, had proved its worth’.
3. Note that Shleifer writes against this tradition and in favour of private own-
ership. His enthusiasm for privatization witnessed his running a project at
Harvard University in support of US aid to the Russian privatization pro-
gramme in which he himself invested. But, in 2004, he was found liable for
conspiring to defraud the US Government through violation of rules on con-
flicts of interest. In 2005, Harvard settled with a payment of $26.5 million,
and Shleifer paid $2 million himself, neither admitting wrongdoing. He
remained a professor at Harvard as well as having been a close friend of
Harvard President, and previous World Bank Chief Economist, Larry
Summers (Financial Times, 13th May, 2006). Writing in the Economic Journal
from the Russian Privatization Centre, Shleifer proposes, ‘The starting point
of our analysis is the commonplace observation that public enterprises are
inefficient because they address the objectives of politicians rather than max-
imise efficiency’ (Boycko et al. 1996). Not surprisingly, this leads to the con-
clusion that, ‘the critical agency problem that explains the inefficiency of
public firms is the agency problem with politicians rather than with man-
agers’ (p. 318), and not a mention of corrupt academic advisors to privatiza-
tion programmes. See also Kouri (2005).
4. See Jomo and Fine (eds) (2006).
5. On the other hand, socialist stances on public ownership tended to support
public ownership in principle but criticize it in practice in light of intrusion
of the imperatives of capitalism (see Fine and Harris (1985)).
6. See Fine and Milonakis (forthcoming).
7. See also Fine (1990b and 1997).
8. She explicitly, if casually, references the work of Douglass North for this,
although his treatment of these matters and capacity to draw policy conclu-
sions are extremely problematic (Fine and Milonakis (2003) and Milonakis
and Fine (forthcoming)).
9. See also Francois (2003) on not-for-profit provision of public services.
10. For more details on the electricity crisis in California, see Cicchetti et al.
(2004).
11. See also Estache (2004b) with specific reference to Argentina, and Vagliasindi
(2003) where absence of regulation in advance of privatization is shown to
lead to significant economic and political clout of privatized monopolies.
12. Munari and Oriani (2005) take an upbeat view of the impact of privatization
on R&D performance but they observe that ‘the gains in dynamic efficiency
associated with privatization, regarding investments, R&D and innovation,
have largely been ignored, both in theory and practiser’ (p. 61).
13. See also Bel and Trillas (2005) and Parker and Kirkpatrick (2005) for the
argument, and evidence, more generally.
3
Privatization in Practice
Kate Bayliss and Ben Fine
3.1 Introduction
Once put into practice, the policy of privatization reveals itself as

increasingly complex as it is applied to a vast range of circumstances,
with an equally diverse set of outcomes that defy simple analytical prog-
nostications. The content and emphasis of theory itself has been moulded
in response to emerging empirical evidence. Empirical research typically
examines the effect of ownership on enterprise performance by compar-
ing results before and after privatization or comparing private with
public entities. A balanced assessment is extremely difficult to make
because one can never tell what would have happened otherwise and
because there is scope for different interpretations of findings, with the
same case studies used by supporters and critics of privatization alike.
Privatization can be a cup half full or half empty depending on many
factors such as underlying assumptions, time frame and distributional
considerations. Even where privatization has failed it is readily asserted
that it was not the policy but the context that was to blame. So the
logical conclusion drawn is that the context needs to be made more
conducive to successful privatization rather than that privatization
should be rejected.
This chapter looks at infrastructure privatization in practice in devel-
oping countries by examining the empirical evidence, the impact on
infrastructure investment and the nature of regulation of the sectors.
The chapter begins in the next section by offering what is necessarily a
partial review of the empirical literature on privatization in terms of
impact on performance. Section 3.3 discusses the way in which devel-
oping country infrastructure has been starved of investment as private
sector finance has failed to materialize while donor and government
31
32 Kate Bayliss and Ben Fine
investment has dried up. Section 3.4 considers how efforts to relegate
regulation to a purely technical matter have failed and politics contin-
ues to play a role. In many respects, this all serves as a background to
Chapter 5 which provides a more specific account of the experience of
privatization in sub-Saharan Africa (itself more general than the case
studies found in subsequent chapters). The concluding remarks empha-
size that with donor and private finance for infrastructure currently in
decline, the case for prioritizing private provision of infrastructure is
questionable, especially when it calls upon the state to render it more
attractive. This is so, irrespective of the relative merits of public and
private ownership. The private sector will not deliver. Effort must be
concentrated in the public sector.
3.2 The impact of ownership
On its own terms, and at an early stage, the mainstream ‘synthesis’

on privatization focused on the question of whether ownership as such
matters, and concluded that conditions of regulation and competition
are more important. This broad approach confronted considerable com-
plexity from the experiences of privatization in practice. Privatization
has spanned everything from denationalization to deregulation, the lat-
ter allowing the private to begin to compete with the public sector. It has
covered nationally and locally provided services. Economic activity tar-
geted has ranged from the largest scale basic industries, through tradi-
tional public utilities and social services, including the running of
prisons and other security services, and down to small shops and hotels.
The range of countries has been equally broad, from developed to devel-
oping, and ultimately encompassing transitional economies. There has
also been the question of the different ways of privatizing, in part a way
of beginning to recognize both the diversity of before and after condi-
tions and the significance of the wider socio-economic environment. A
public enterprise could be sold off en bloc by tender (organized in dif-
ferent ways), be offered to management or other buy-out, be floated on
the stock market, be subject to a continuing government stake or golden
share, with or without restrictions on who may or may not buy (whether,
or to what extent, foreign ownership is allowed), or ownership be dis-
tributed through a voucher scheme of some sort. Given the decision to
privatize, how it will be done will depend upon what sort of enterprise
(small or large, competitive, politically sensitive, technically demanding,
etc.), the availability or not of a well-functioning stock market, potential
buyers, satisfactory management, a unionized workforce, market prospects,
Privatization in Practice 33
state capacity and motivation, etc. More general is the issue of whether
the economy concerned is developed, developing or undergoing transi-
tion (from socialism) – these themselves serving as unduly crude cate-
gorizations glossing over considerable differences in underlying
conditions.
Such issues of empirical complexity could always be accommodated,
if in piecemeal fashion, in abstract mathematical models. Empirical
assessment of the results of privatization is considerably more challeng-
ing since account has to be taken, at least in principle, of all relevant fac-
tors simultaneously. In the meantime, those ideologically committed to
privatization could proceed regardless, asserting the superiority of pri-
vate over public provision. There has, however, been considerable effort
over the past two decades to provide empirical assessment of the why,
where, when and with what effects of privatization. To a large extent,
this unwittingly restores the literature to the applied style and content
of the pre-privatization period. It is heavy on description and more or
less arbitrary statistical exercises, and light on the theory that so confi-
dently marked the initial emergence of the new synthesis (Chapter 2).
Results are mixed, if generally favouring privatization and private over
public enterprise, albeit the less so, the more attention shifts away from
developed to developing and transitional economy contexts, and results
vary widely across types of industry, privatization methods, sectors, coun-
tries, regions and timeframe. In addition there are a number of grey
areas when it comes to methodology which can affect research out-
comes. This section considers the general trends in the empirical litera-
ture in relation to privatization before a discussion of the impact of the
methodological challenges.
Empirical research into the impact of privatization takes many forms,
ranging from case studies through in-depth analysis of one national
privatization programme (Martin and Parker (1997) for the United
Kingdom and La Porta and Lopez-de-Silanes (1997) for Mexico, for
example) to assessments that incorporate large numbers of firms from
many countries (Megginson et al. (1994), Boardman and Vining (1989),
and Carlin et al. (2001) who examine 3300 firms in 25 transition
economies). In addition, there are now meta-studies that attempt to
synthesize findings from the numerous individual empirical investiga-
tions, Shirley and Walsh (2001), Djankov and Murrell (2002) and
Megginson and Netter (2001).
Broadly, the evidence from industrialized countries has been inter-
preted to indicate that the performance of private and privatized firms is
better than that of publicly owned firms. Megginson and Netter (2001)
review studies of privatization in 38 countries including 16 transition

economies and reach strong conclusions (p. 381):
We know that privatization ‘works’ in the sense that divested firms

almost always become more efficient, more profitable, and finan-
cially healthier and increase their captial investment spending.
Shirley and Walsh (2001) examine 52 studies that empirically assess

the effects of privatization. Of these, 32 find the performance of pri-
vate and privatized firms to be superior, 15 find that there is no signif-
icant relationship between ownership and performance or that the
relationship is ambiguous, and five suggest that publicly owned firms
perform better than private firms. They conclude that, ‘none of the
studies finds that performance would be better had they not been pri-
vatized’ ( p. 53). The period of the studies runs from 1971 to 1999 but
all of those that found the public sector to be superior were carried out
before 1985.
The problems of making empirical assessments are compounded
when it comes to developing countries although there has been less
research. The result has been that larger claims are made on the basis of
even weaker evidence. Some studies make cursory reference to the devel-
oping country context. D’Souza et al. (2001), for example, take a sample
of 118 firms, from 29 countries and 28 industries, privatized via public
share offerings between 1961 and 1995. One of their conclusions is that
the level of development can have an impact on post-privatization per-
formance as they find that stronger efficiency gains are observed for
firms in developing nations. However, they use ‘non-OECD’ as a proxy
for ‘developing country’ and the ‘non-OECD’ sample consists of a
maximum of 23 firms and includes four enterprises from Singapore,
which is classified as a high-income economy, and a number of upper-
middle-income countries (Chile, Oman and Malaysia). None is from
sub-Saharan Africa, (SSA). The empirical findings are therefore of little
relevance to privatization in a low-income context.
Other studies also group all low- and middle-income economies under
one ‘developing country’ heading in an attempt to show that privatization
in poor countries can be beneficial. For example, Shirley and Walsh
(2001, p. 38) make the observation (on the basis of four studies) that,
‘several major empirical studies have found marked improvements in
post-privatization performance in developing nations’. But three of the
studies are entirely restricted to middle- and high-income countries – the
United Kingdom, Chile, Malaysia, Mexico and Argentina. The fourth

study, by Megginson et al. (1994), fails to include companies from any
countries that are classified as ‘low income’ and only one, Jamaica, that is
classified as ‘lower-middle-income’. And it only accounts for two compa-
nies out of a sample of 69. The rest are at least ‘upper-middle-income’.
Shirley and Walsh later assert that, ‘private ownership has an advantage in
both industrialized and developing nations and this lead is more
pronounced in the latter. This result is especially noteworthy given the
argument by many SOE [state-owned enterprise] proponents that market
failures in developing nations make SOEs more viable relative to private
firms’ (p. 52), and, ‘The private advantage is more pronounced in develop-
ing countries where market failures are more likely’ (p. 53). These conclu-
sions are far stronger than are warranted given that the studies observed
more or less failed to represent low-income economies at all.
Indeed, concern was raised that the empirical impact of privatization
might be different in a low-income context in findings published by
Galal et al. (1994), even though the findings were broadly supportive of
privatization in middle-income economies – Malaysia, Mexico,
Argentine and Chile. For them (p. 560):
These conclusions have to be extrapolated with caution to other

countries. And nowhere does this cautionary note apply more than
to the very poor countries of the world which are at a different level
of development than any in our sample and therefore lack some
of the institutions and markets our sample countries possess … the
experience with divestiture could well be quite different from what
we have observed in this study.
Put more strongly, privatization in one (rich) country as opposed to

another (poor) country is not a matter of two examples of one and the
same thing. The developing country context was explored in more
detail by Boubakri and Cosset (1998 and 1999). Their findings indicate
that privatization in a low-income economy will have weaker benefits
and that privatization provided greater benefits for companies operating
in developing countries with a higher income per capita. Research on
the impact of privatization on African enterprises shows a different pat-
tern of empirical findings from other regions (Boubakri and Cosset
1999). The sample consisted of 16 large companies: ten from North
Africa (five from Tunisia and five from Morocco); four from Nigeria; and
one enterprise each from Senegal and Ghana. They used the same
methodology as that adopted in the larger cross-country impact assess-

ments carried out by Megginson et al. (1994), D’Souza and Megginson
(1999), and Boubakri and Cosset (1998). Contrary to these other studies,
they found only a weak increase in profitability after privatization
that was not significant for the sample. Furthermore, they found that
after privatization, firm efficiency decreased, although this finding
also was not significant. They documented efficiency improvements
after privatization in just 47 per cent of their sample. They also found
that sales (output) decreased by an average of 5 per cent from the pre- to
post-privatization period for the sample. There is then a suggestion from
these findings that privatization in a low-income context does not
conform to the results predicted by its proponents.
There seems to have been a kind of cyclical nature to privatization
findings, which in itself questions the robustness of the science. In the
early days, a synthesis of studies focusing on developing countries
reached a neutral stance. Millward (1988) reviews a number of studies to
see if conclusions can be reached about the relative efficiency of the
public and private sectors. He finds no statistically significant evidence
of superior private sector performance but that that technical efficiency
in both public and private ranges from the best to the worst practice.
Similarly, Chang and Singh (1992) review a number of studies of the
comparative performance of enterprises in industrialized countries and
conclude that evidence is ‘patchy’, and that there is no conclusive evi-
dence of superiority of the private over the public sector. Even if theory
favouring privatization is correct, there seems no reason why it should
hold better in more recent years unless, as implicit above, the methods
of assessing performance and the selection of privatized firms have
become increasingly biased, not least with the ideological and policy
weight thrown behind privatization. As privatization grew in popularity,
so did empirical support reaching stronger conclusions on the basis of
weak evidence, particularly in the developing country context as, for
example, in the study cited above. More recently, a review of infrastruc-
ture performance conducted by a team of World Bank researchers drew
the following conclusion, Estache et al. (2005, p. 21):
For utilities, ownership often does not matter as much as sometimes

argued. Most cross-country studies find no statistically significant
difference in efficiency scores between public and private providers.
Similarly, a review by AFREPREN (2005) of African energy utilities finds

that the ones that did best were not those that had been privatized.
The empirical literature on privatization, then, has gone through a

kind of pendulum swing with initial caution followed by eager support
and, more recently, greater circumspection, especially in the context of
developing countries. The empirical approach itself has raised a number
of issues: what are the criteria by which to judge performance; how to
measure that performance; and how to correct for factors other than
change or difference in ownership in assessing performance. Studies
typically look for statistically significant differences in indicators of
performance between private and public sector companies or compare
figures for privatized enterprises on a before and after basis. This is
problematic in principle and practice for a number of reasons.
First, public and private firms may have different objectives with the
latter tending to be confined to maximizing profitability. Consequently,
where empirical research compares profit-based performance indicators,
which is often the case, the public sector is being judged by the criteria
of the private sector.1 Privatized firms, for example, may increase prices
to raise profitability but this is not an inherent indication of superior
performance, although some studies attempt to control for this, La Porta
and Lopez-de-Silanes (1997), for example. Performance needs to be
assessed across a wide range of indicators although these might be both
interrelated (profitability and productivity, for example) and reflect
underlying theoretical approach (profitability as an indicator of effi-
ciency or not). Private owners, for example in the water sector, may
improve their revenue position by disconnecting services to those that
fail to pay. Such an effective revenue control mechanism, that would
improve the utility’s financial position, may incur substantial social
costs. This is discussed further in Chapter 5.
Second, studies suffer from selection bias since they only include suc-
cessful private or successfully privatized firms as opposed to the failed
and those not privatized for whatever reason. Generally, the firms that
are included in the studied samples of privatized firms are those that are
most ‘visible’, and these are liable to perform better for this reason.
Some studies just use data from share issue privatizations, Megginson
et al. (1994) and Boubakri and Cosset (1998), for example. Outside
industrialized countries, some firms are easier to sell than others, some
sectors are more attractive, and some multinational corporations are more
acquisitive in some sectors than others. Thus, it tends to be easier to
generate interest from investors when privatizing companies are
involved in mining or agricultural production for export. Other sectors,
particularly those producing for the domestic market in sectors that are
exposed to import competition such as textiles, are less attractive to
investors. Furthermore, selection bias emerges because privatization is a

priority where the state is failing. Privatization assessments do not
generally consider SOEs that are performing well or countries where
there has been little privatization. Selection bias means that privatized
enterprises may typically share certain positive characteristics that will
affect subsequent performance.
In some sense, to be fair, the literature on what gets to be privatized is
indicative of a mix of reasons that do not necessarily primarily reflect
economic criteria alone (Ramamurti 1999; Biglaiser and Brown 2003).
The evidence suggests that political considerations, including external
pressure, are at least as important as any economic rationale. So, despite
the sample selection bias in favour of the privatization of what are liable
to be profitable outcomes (otherwise why would they be taken on by
private enterprise), this is not the sole determinant of the incidence of
privatization. In case of privatization of pension funds, for example,
Brooks (2005, p. 277) finds that a peer group copy-cat mechanism is at
work. It requires ‘a dramatic shift in the paradigm of social protection,
from redistributive social insurance models … toward an individual sav-
ings paradigm corresponding to the resurgence of neoclassical economic
ideas’. While multinational corporations and international financial
institutions have been powerful purveyors of the idea of privatization,
domestic constituents remain important. Indeed, she anticipates that
the (pension) privatization model is liable to be turned around as its
regressive distributive effects become apparent (p. 290). After all, state
pensions were put in place because of the multifarious failures of the pri-
vate sector and as part and parcel of the evolution of the welfare state as
it has now become.
Third, then, it is almost impossible to isolate the effects of ownership
change although studies attempt to control for other factors. The per-
formance of an enterprise is affected by the context in which it operates,
including for example the degree of competition faced. It can be
difficult to separate the effect of privatization from other policies that
are sometimes implemented simultaneously such as liberalization and
deregulation. This is particularly significant in the context of transition
economies where enterprises have faced an extensive transformation
in their operating environment. Also, where particular sectors, such as
telecommunications, are undergoing rapid innovation and productivity
increase unrelated to ownership as such, it will appear as if privatization
is a beneficial factor, especially in ‘before and after’ studies. Similarly,
policies in developing countries are often associated with the release of
donor funds contingent on the implementation of privatization. As a
result, the policy is immediately associated with significant increase in

investment, not because of any inherent merit of the ownership change
but because of a spurious connection invented by donors, as for exam-
ple with the Guinea water lease (Menard et al. 2000).
Fourth, studies tend to be micro in their perspective while national
privatization programmes also have wider, macro-level implications.
Most empirical studies focus exclusively on the internal link between
privatization and efficiency. Such studies are often not concerned with
the wider economic and social welfare effects, indirect public finance
effects, or other subsidiary objectives that are affected by privatization.
Thus, for example, a privatization programme which results in most
domestic manufacturing enterprises being liquidated due to weak
investor interest, but which attracts a handful of foreign investors into
the typically most attractive sectors, such as mineral extraction, may
well be judged a success. The privatized firms may show improvements
in internal efficiency even though the majority of enterprises have failed
to benefit. In addition, empirical research typically fails to consider dis-
tributional outcomes of privatization, although there has been some
attempt to assess the extent of layoffs and/or price increases. Public
ownership may generate positive externalities, and distributional effects
arise where, for example, privatization reduces the scope for cross-subsidy,
discussed in Chapter 5 and the subsequent case studies.2
Fifth, as observed, empirical assessments of privatization are narrow in
their focus. Findings are usually limited to the increase (or decrease) in
the profitability or productivity of a selection of firms after ownership
change. However the conclusions are often extrapolated beyond what
is merited, particularly across countries and regions. It may be that it is
what public and private enterprises have in common within countries
that affects performance rather than different ownership structures
across countries. For example, in a large study on the impact of privati-
zation that compared the performance of the 500 largest manufacturing
and mining corporations in the world outside the United States
(Boardman and Vining 1989), Italian and French companies performed
significantly worse than other countries in terms of all profitability
measures. Differences may be due to accounting systems but are also
likely to be related to other contextual factors specific to each of the
countries in turn. This raises the crucial issue of the economic as
opposed to the statistical significance of all of the studies. For the differ-
ence in performance between all enterprises of one country as opposed
to another is arguably more important than the impact of difference of
ownership of enterprises within countries. Even if the performance
of public and private enterprises were equalized within countries, this

would raise economic performance little compared to the differences of
performance from one country to the next, especially comparing devel-
oped with developing countries. The central issue is how to raise the per-
formance of both public and private sectors rather than to equalize
between the two (by privatization for example), although neo-liberals
would argue that privatization also disciplines the public and renders
dynamic the private sector.
Thus, for example, a recent study on the comparative performance of
public and privatized enterprises in Egypt finds no statistically signifi-
cant difference between alternative ownership structures. The author
concludes that the results could be interpreted to mean that privatiza-
tion improved the performance of privatized firms which in turn may
have had spillover effects on SOEs, Omran (2004). If so, this proposition
has not been studied empirically. More generally, the relationship
between the (theoretically specified) mechanisms by which privatiza-
tion is supposed to affect performance (as opposed to the results of the
mechanisms in performance indicators) have rarely entered the domain
of broadly based empirical studies. There are many different theories,
and mechanisms, purportedly explaining the superior performance of
the private over the public sector. But the evidence has rarely explored
these other than in seeking to attach superior performance to form of
ownership and without filling out empirically the intervening steps by
which ownership is presumed to be connected to outcomes.
The performance of a privatized service can vary significantly depend-
ing on when it is assessed. In Guinea, following privatization, water serv-
ices improved for the wealthy for a short time but the lease was not
renewed after ten years (partly due to the massive escalation in water
prices). Despite limitations with the policy, it was regarded as a success in
some ways (Menard and Clarke 2000b). Since the expiry of the contract
in 2000, water supplies have been worse than ever. By the end of 2003, it
was reported that ‘thousands of men and women wander the city every
day with containers in their hands looking for drinkable water’.3 Thus,
taking a long-term perspective, privatization has clearly failed to deliver.
Similarly, for several years the Maynilad water concession in Manila was
touted as a showcase of successful water privatization until the com-
pany’s multiple requests for rate hikes and financial collapse ultimately
revealed the concession’s mismanagement (Esguerra 2003).
Privatization operates on many levels and empirical findings can be
contradictory which itself demonstrates the complexity of the issues
involved. Paradoxically, this conclusion is supported rather than
negated by the study of Galiani et al. (2005) that argues privatization of

local water supply has been highly beneficial for Argentina (p. 83):
In the 1990s Argentina embarked on one of the largest privatization

campaigns in the world, including the privatization of local water
companies covering approximately 39 per cent of the country’s
municipalities. Using the variation in ownership of water provision
across time and space generated by the privatization process, we find
that child mortality fell 8 per cent in the areas that privatized their
water services and that the effect was largest (26 per cent) in the poor-
est areas. We check the robustness of these estimates using cause-
specific mortality. While privatization is associated with significant
reductions in deaths from infectious and parasitic diseases, it is uncor-
related with deaths from causes unrelated to water conditions.
This is an incredibly powerful conclusion as, by implication, not priva-

tizing kills children. But there are gaps in the analysis. Private providers
are not usually associated with expansion of services into poor areas and
have little incentive to increase access to poor users so this perverse
result needs explaining. The research fails to indicate how access expan-
sion was financed. Were these findings the result of effectively regulated
contractual obligations imposed on private firms or was the investment
financed by donors? One of the municipalities studied was Buenos Aires
where investment increased substantially from US$25m a year before
privatization to around US$200m after privatization with major improve-
ments in service and expansion in access, primarily to poorer house-
holds. Yet much of the initial investment was funded by loans from
development banks such as the World Bank through the International
Finance Corporation (IFC), the IDB and the European Investment Bank,
which together provided about US$500m. This was enough to cover
major financial needs for the first three years (Biche 1998). Arguably the
public sector could have carried out the investment if such funds had
been made available. It is also suggested that in Buenos Aires the water
and sanitation situation was intentionally worsened before privatization
in order to highlight the inadequacy of publicly owned services. Certainly
prices were increased before privatization so that bidders would be more
likely to offer lower prices subsequently (Loftus and McDonald 2001).
Furthermore, tensions grew between the firm and the government
following the freezing of prices in 2001. The contract was terminated
in 2006 and the private consortium, Aguas Argentinas, replaced by a
new group called Aysa, which is 90 per cent owned by the state and
10 per cent by workers,4 so even if benefits can be achieved, their sus-

tainability is questionable.
The point here is not simply to contest the statistical exercise
undertaken by Galiani et al., although regression analysis is better at
establishing correlation as opposed to causation. However, in order to
reach these estimates, correction needs to be made for a whole host of
other variables such as housing conditions, poverty, sewerage, income
level, inequality, political party in power, etc. At least implicitly, this is
to accept the diversity and complexity of the mechanisms by which
water provision (private or public) influences health outcomes. No one,
after all, got healthier simply by virtue of ownership of water supply. It
follows that if benefits are to be sustained, such mechanisms from how
water is owned and provided through to health effects, need to be iden-
tified and maintained. Such would be the responsibility of water and
health authorities, carefully identifying how it is that water provision
has contributed to health and what balance of public and private activity
is necessary for it to continue to do so.
More widely in Latin America, other researchers such as Clarke et al.
(2004), analysing household data from Argentina, Bolivia and Brazil,
find that the number of connections increased following the introduc-
tion of PSP in the water sector. But they also find a similar increase in the
number of connections in cities that retained public control of the water
sector suggesting that PSP per se was not the cause of the increased con-
nections. Consequently there is little evidence that PSP leads to greater
coverage. Other research into the effects of water privatization in
Argentina, such as a detailed case study of the Cordoba private water
concession indicates little expansion of access to the urban poor follow-
ing privatization. As a result the municipality has been providing
finance through a special local development fund together with com-
munity support and technical assistance to pilot projects to improve
access, with varying results. The research queries the sustainability of
the municipality to regulate the private concessionaire effectively
(Nickson 2001). This highlights the limited degree to which results can
be extrapolated from one case study to another in privatization research
and, inevitably as a consequence, policy-making.
The above analysis indicates that the empirical foundations for
promoting privatization in developing country infrastructure are flimsy
at best. While the case for privatization is by no means water-tight in
middle- or high-income economies, the little research that has been done
in low-income economies indicates that different factors come into play
where institutions are weak and consumers are poor. Furthermore, the
privatization of infrastructure industries – which are typically monopolis-

tic in structure and which have potentially enormous social, environmen-
tal and economic down- and up-stream linkages – presents a different set
of issues both for consumers, for investors and for governments, as
explored in the next section.
3.3 Public and private investment in infrastructure
The quality of infrastructure in developing countries, already fragile in

the mid-1980s, has declined further over the past 20 years as donors
have stepped back from funding in the vain hope that the private sector
would pick up the slack. Private investment has largely failed to materi-
alize while governments themselves, tied into Structural Adjustment
Programmes, have been committed to programmes of fiscal austerity,
thus preventing them from investing in infrastructure. As a result, in
many countries, the past two decades have been disastrous for infra-
structure investment.
In the early 1990s, there was substantial optimism regarding private
sector investment in infrastructure and, initially, results were inter-
preted to be promising. However private investment peaked in 1997
and has tailed off since. The trend toward plummeting investment sur-
prised policy reform champions in the World Bank who, pointing to
financial constraints of cash-strapped governments, had long argued
that the private sector was the only viable alternative for financing
massive infrastructure projects (Harris 2003). Not only has the invest-
ment failed to materialize overall, but firms have also failed dispropor-
tionately to invest in areas of greatest need. And, where there has been
investment there is a growing catalogue of disputed contracts. More
than 70 per cent of private sector infrastructure investment between
1995 and 2004 went to telecommunications alone. Just under 19 per
cent went to the electricity sector and less than 3 per cent to water and
sewerage. Latin America and the Caribbean accounted for more than 27
per cent of private investment between 1995 and 2004 while the amount
going to sub-Saharan Africa was less than 8 per cent (Izaguirre 2005).
These figures are hardly surprising from the perspective of commercial
imperatives but the reverse is true in the light of poverty and provision of
basic needs. The private does not substitute for the public sector.
Average annual private investment in the water sector fell from
US$4.2b over the period 1995 to 2000 to less than half, averaging just
US$1.9b between 2001 to 2004. This can be compared with the estimated
annual investment required to achieve the water-related MDGs of
around US$6.7b. The decline in investment flows also reflects changes

in the size and type of water projects with PSP. The average project size
fell from US$156m in 1999 to US$59m in 2004 but the average annual
number of projects dropped by just one from 28 to 27 between
1995–2000 and 2001–2004. The number of concession and lease con-
tracts declined drastically, while the number of management contracts
increased (Izaguirre and Hunt 2005). There has, then, been a change in
the nature of PSP in the water sector in developing countries since
2000. The projects that are now being taken up are smaller and have
lower risk attached for investors. This change in focus may reflect
the fact that the more profitable large projects have already been
creamed off with those that remain proving less attractive. It may also
reflect changes in international perspectives on developing country pri-
vatization projects as international infrastructure firms have become
more risk averse and more and more PSP contracts run into difficulties.
What previously may have seemed an opening into which first comers
would accrue longstanding and increasing advantages has become an
intractable liability.
According to Harris (2003) between 1990 and 2001, there have been
2500 projects in 132 countries involving private participation in
infrastructure provision. This has attracted private investment of the
order of US$754b. But, instead of occupying the space vacated by
the state, private sector involvement peaked in 1997 at US$128b, falling
to US$47b in 2002, the lowest level since 1994 (da Silva et al. 2004).
These aggregate figures, however, conceal other disturbing features for
the proponents of privatization. Much of the investment involved, for
example, has added nothing to capacity, simply taking over facilities
that are already in place. Some new investment might only have facili-
tated this process rather than adding to capacity. Nor is it clear that
such investment is unambiguously positive as far as provision of
finance is concerned. As da Silva et al. (2004) indicate, there is consid-
erable displacement of equity by debt in regulated privatized infra-
structure in developing countries, shifting the problem of finance back
onto strained macroeconomic management. In short, private is substi-
tuted by public debt adding to cost and risk. In case of the IT bubble, for
example (p. 3):
In order to participate in the telecoms boom of the second half of the

1990s, major incumbent telephone companies had issued stock and
took excess debt to finance spending and acquisitions. Since the

crisis, the companies have seen their market capitalization fall more
than half since 2000. As credit rating agencies downgraded compa-
nies, the cost of borrowing increased and this in turn eroded the price
benefits of the technological progress in the sector.
They conclude, somewhat strangely (for what is the point of monitoring

without regulation)5 that (p. 16):
These concerns do not imply that regulators should regulate the

financial structure of the company, but it certainly implies that it
may be important for regulators to better monitor the leverage rates
and their evolution to minimize the risks of unexpected shocks. It
will also require much serious commitment by all stakeholders to
deliver the regulatory accounting systems needed to increase the
transparency of the monitoring of the financial viability of compa-
nies that ultimately are responsible for delivering basic services in the
poorest countries of the world.
This indicates how regulation can be dragged into activity beyond con-
sideration of direct provision itself. Subjecting telecoms to the vagaries
of the stock exchange under the banner of privatization provides little
support for the newly rediscovered goal of poverty alleviation, let alone
financial and macroeconomic stability.
Thus, the poor response from the private sector comes on top of
extensive efforts from donors and developing country governments to
attract private investment with measures such as debt write-offs and sec-
tor restructuring. Where private firms are involved they increasingly
need to be paid a premium to compensate them for the exposure to risk.
While private firms have shied away from long-term concessions and
projects requiring investment with an uncertain return, private invest-
ment in water and wastewater treatment plants has been stable (Izaguirre
and Hunt 2005). These are similar to ‘Build-Operate-Transfer’ (BOT),
projects in the energy sector which take the form of Independent Power
Producers (IPPs). Such projects are attractive to investors because they
are underwritten by a government guarantee which fixes the amount
purchased at a cost fixed in foreign currency under a Power Purchase
Agreement (PPA). Ultimately the financing for these projects comes
from the taxpayer and/or end-users, as the government still has to pay.
Such financing arrangements are essential for risk-averse investors but,
for governments, they are inflexible, expensive and tie up government

funds for long periods of time (World Bank 2003b, p. 28):
Long term PPAs with payment commitments and tariffs indexed to

fuel costs or foreign exchange rate movements have a potential for
constraining scarce financial resources in the host country.
The private sector generally pays a higher cost of capital than the public sec-
tor, so costs could be higher with private sector involvement. To bring
financial benefits, privatization needs to result in efficiency gains that more
than offset higher private sector borrowing costs and, on the relative effi-
ciency of the private sector, it is now accepted that, ‘the theory is ambigu-
ous and the empirical evidence is mixed’ (IMF 2004a, p. 14). Thus, where
private investors do take part in developing country projects, it is often
because these risks are either underwritten by a third party such as a sover-
eign government or donor, or because the price charged for finance is high
enough to compensate for the risk exposure – or a combination of both.
Meanwhile, aid flows to developing countries for infrastructure
declined continuously during the 1990s. Infrastructure commitments
from multilateral development banks fell from about US$18.0b in 1996
to US$13.5b in 1999 (Estache 2004a). Donors grew disheartened with
support for infrastructure projects that, during the 1980s, had often
resulted in investments that did little to affect institutional reform or
deal with systemic inefficiencies. The cutbacks in donor spending,
together with the disappointing investment from the private sector,
coincided with the widespread adoption of structural adjustment
policies in the 1980s and 1990s in which a key component was fiscal
discipline thereby restricting the main source of infrastructure finance –
the state.
The Latin American experience is indicative. Serven (2005) shows that
fiscal adjustments included a ‘drastic’ contraction of public infrastruc-
ture investment. The decline in the primary deficit from around 5 per
cent of GDP in the early 1980s to about zero of GDP at the end of the
1990s was accompanied by a fall in infrastructure investment from an
average of 3.5 per cent of GDP in the early 1980s to 1.5 per cent at the
end of the 1990s. This affected virtually all countries in the region.
Although infrastructure investment accounted for only a small part of
overall public expenditure, contraction of infrastructure investment
amounted on average to about 40 per cent of the observed fiscal adjust-
ment. Thus, fiscal adjustment affected investment spending more than
consumption spending. The steady drop in financing, in turn, has
eroded the quality and reach of public services, particularly in the con-
text of a growing population.
Public investment contraction can adversely affect future income as
basic services create assets that are important drivers of economic growth,
which will itself generate revenue and fiscal space in the long term. The
research by Serven (2005) reveals that the countries that managed to
attract higher private investment in infrastructure in Latin America were
those that had maintained higher levels of public investment suggesting
that private and public investment are complements rather than substi-
tutes, crowding in rather than out. Attempts to cut back on infrastructure
spending have been self-defeating (Estache 2004a, p. 9):
compression of public investment in infrastructure can be, and has

been, associated under a wide range of circumstances with lower eco-
nomic growth and less efficient poverty alleviation, which in turn
has ended fuelling fiscal insolvency which the main concern expen-
diture cuts were supposed to address.
The notion of turning virtuous into vicious circles springs to mind

although the channels involved need to be specified in each case by
country and sector.
While acknowledging the importance of public investment, the IMF
has continued to emphasize the need for strict fiscal discipline and rec-
ommends traditional measures to create more room for spending:
namely, increasing taxes, changing budgetary priorities and cutting
‘wasteful’ spending. Moreover, the IMF insists that its stability packages
merely set limits on spending and deficit levels, but do not dictate which
cuts governments should make. However, for political reasons, it is easier
for governments in times of fiscal austerity to keep up levels of current
expenditure and cut back on large infrastructure projects until more funds
are available (Hemming and Ter-Minassian 2004, p. 31). This creates a
volatility in infrastructure spending which is undesirable although it is far
from clear that the alternative of cutting current costs such as wages to
fund capital expenditure is a solution to insufficient expenditure overall.
The decline in spending by donors, government and the private sec-
tor has left the capital stock severely weakened. In Latin America
(Estache 2004a, p. 8),
Very roughly, infrastructure investment levels today average

40–50 percent of what they were 10–15 years ago – and very little of
this drop can be explained by more efficient service delivery.
A similar pattern has been repeated elsewhere. Governments could

in theory raise funds for infrastructure by borrowing, but this is not
encouraged by donors who prefer to provide loan finance to private
sector investors in developing countries for infrastructure. Numerous
funding instruments have been established to promote the provision
of private investment in infrastructure in developing countries such as
the Public Private Infrastructure Advisory Facility (PPIAF), the Public-
Private Partnership for the Urban Environment (PPPUE), the Private
Infrastructure Development Group (PIDG), and the Emerging Africa
Infrastructure Fund (EAIF). As already indicated, as instruments in the
financial toolkit, they have not provided sufficient leverage in real terms.
Thus, despite the push for privatization since the early 1990s, approx-
imately 70 per cent of infrastructure investment in developing countries
is still financed by governments or public utilities from their own
resources or from non-concessional borrowing. The private sector
accounts for around 20–25 per cent and official development assistance
(ODA), 5–10 per cent. These estimates were first made by DfID (2002)
and confirmed by World Bank estimates, Estache (2004a). DfID puts the
private sector contribution as low as 3 per cent. This raises doubts over
the role that privatization can play in providing finance for investment.
And, in the poorer countries of Asia and Africa, there has been far less
private sector investment than in countries with higher incomes, so
ODA exceeds private capital flows (DfID 2002). This means that, even if
there is any progress in increasing private sector participation, the bulk
of financing will continue to need to come from the public sector and
ODA (GMR 2005). But this is difficult in the current climate of fiscal aus-
terity. It is as if, in the context of infrastructure provision, developing
were already developed countries for which public provision previously
characterized the creation of infrastructure and its continuing delivery
despite the recent fad for privatization and private participation in
renewal. In other words, promoting private sector participation is fid-
dling with the current problems, not necessarily proficiently, in the belief
that this might lead to the resolution of long-run problems through the
promotion of the private sector and its displacement of public sector
investment. It is too little and too premature.
3.4 Regulation
Regulation is widely regarded as an essential pre-requisite for infrastructure

privatization. Where privatized enterprises are monopolistic, privatization
is intended to guard against abuses of market power by mimicking the
pressures of the market. The desirable features of regulation include

transparency, accountability, capacity and independence. When it
comes to utilities, discussions are largely technical, centring around the
choice of a rate-of-return type of regulation where investors are allowed
to make a specified return on their investment, or incentive-based regu-
lation where prices are fixed and profits of investors are determined by
their degree of efficiency. However, these are narrow interpretations of
the term. Regulation is not just about the specific laws relating to prices
and possibly quality. Regulation is also about the wider legislative frame-
work governing operations and about prevalent practices and service
delivery systems. Furthermore, it is also about bargaining and negotiat-
ing positions. Minor – or even major – breaches may be overlooked,
depending on the sanctions available to the regulator.
In order to make decisions about prices, the regulator needs accurate
information from the utilities but firms have an incentive to provide
incorrect data. Even in industrialized countries erroneous reporting may
go undetected. A report by the UK water regulator, Ofwat, into the oper-
ations of the private water utility, Severn Trent Water, found that the
company had ‘provided data … that had been deliberately miscalcu-
lated and which meant customers had been overcharged’ (OFWAT 2006,
p. 3). The irregularities were not detected by the regulator but only
emerged following allegations from a whistle blower from within the
company. If falsified information provided to the regulator fails to be
detected in the United Kingdom, how much more open to abuse are sys-
tems in developing countries with less sophisticated accounting and
auditing procedures and weaker regulatory capacity? When it comes to
the regulation of the international private sector investing in develop-
ing countries, multinational companies with extensive experience can
run rings round poorly paid government negotiators and regulators. A
particular stumbling block in Africa with regulation has been in enforce-
ment of disclosure (Bayliss 2003). Without accurate information from
the regulated enterprise, the regulator is powerless to make any mean-
ingful decisions regarding prices if they are to be set on a cost-plus basis
and the technical arguments about the appropriate formulae become
irrelevant.
In practice, regulation has not worked as planned and it has rarely
been a purely technical task. Reviews of the water and electricity sectors
by the World Bank’s Operations Evaluation Department (OED) reveal
that there is little by way of effective regulation of these sectors in devel-
oping countries. The water sector ranks lowest out of all sectors assessed.
The best regulatory agencies are in Chile and Colombia, and these were
established without Bank assistance (World Bank 2003a). Elsewhere reg-

ulation is largely absent. Tariffs in the water sector are still politically
determined: ‘In the few countries where de jure tariff regulation does
exist, it can rarely withstand pressure to conform to short-term political
expedience’ (p. vii). According to the study, regulation has been ‘over-
ridden by the political realities’ (p. 12).
In the electricity sector, a World Bank OED review found substantial
constraints to establishing effective regulation. It has been a slow process,
with the creation of the regulatory agency, like privatization, becoming
an end in itself. There are many instances of ineffective regulation due
to poor legislation, lack of autonomy, weak technical skills and politi-
cization of decisions. Lack of regulatory skills is particularly acute in SSA
(except South Africa) and will continue to be so for many years to come.
Inevitably, tariff levels continue to be politically sensitive so that pricing
decisions cannot be made on purely technical grounds. As with the
water sector, World Bank efforts to encourage private sector involve-
ment in the electricity sector have not worked well. ‘PSDE [Private Sector
Developments in Electricity] achievements are few and the challenges
remain considerable’ (World Bank 2003b, p. 16).
In principle, regulation is not just an issue for the private sector alone
but should also be applied to government providers. But, in practice, it is
difficult to implement sanctions against a government, against itself as it
were. Furthermore, regulation can be manipulated by different interest
groups, for example, where first-generation reforms benefited the nas-
cent business interests of senior state actors who have increasingly
straddled the private/public divide, Addison (2003, p. 60):
Early winners can influence the evolution of nascent regulatory

frameworks to their advantage and their opportunity is greatest when
democratic institutions are new born and thus constraints at their
weakest.
Politically motivated interventions in regulation have necessarily

persisted. A number of countries have established regulatory agencies,
but these are never and cannot be entirely independent of government
and are often far from offering an appearance of independence. With
the exception of Ghana, in a study of the African electricity sector, board
members of regulatory agencies were found to be presidential or minis-
terial appointees (AFREPREN 2005). Yet regulation is perceived as a way
of avoiding political interference in the strategic role of public service
provision as well as in day-to-day operations. This is, of course, reinforced
by the notion of the virtues of the market and the private sector, and
privatization, as politically neutral in some sense. Inevitably, as regula-
tion fails to be provided or to function effectively, it is perceived to be a
consequence of undue political interference. But a more appropriate
starting point is to recognize that the market for, and/or provision of,
infrastructure cannot be politically neutral whatever the nature and
strength of regulation. It is more a matter of what form of politics and
in whose interests (see Chapter 2). There is a fine line between regula-
tion and the ‘political interference’ that is so anathema to supporters of
privatization. When regulating the providers of essential services,
inevitably regulatory choices create winners and losers and such alloca-
tions or re-allocations are political decisions. On one level regulation is
regarded as a purely technical process for setting prices and monitoring
performance but the underlying mechanisms by which prices are set
inevitably involve value judgements either on the part of the regulator,
the government or donors. For example, the World Bank and IMF are
supporting Automatic Tariff Adjustment mechanisms where infrastruc-
ture input costs are directly linked to consumer prices (see Chapter 5).
Regulators are charged with the task of applying a pre-determined formula
but the decision that end-users (rather than utilities or governments)
should be the party that is exposed to the risk of international currency
fluctuations is a political decision which is designed to suit the needs
of investors. Such measures have a direct distributional impact and
there are knock-on effects resulting from the impact on consumption
patterns.
The limitations of regulation have contributed to greater efforts to treat
it as a technical rather than political construct. As von Hirschhausen et al.
(2004, p. 1) put it, ‘a new era of research has dawned. It has placed the
debate on more technical and less ideological terms. The microeconomic
foundations of the debate have been enhanced, building on auction and
contract theory, network economics, and institutional economics’. This
is, to put it bluntly, bizarre, telling us much more about the concerns of
contemporary economic theory than it does about our concerns over pri-
vatization and public service delivery to the poor. And, once placed in the
context of the evolving theory, practice and rhetoric surrounding privati-
zation, claims of being less ideological need to be handled with consider-
able caution. For the technical, and supposedly non-ideological, terms on
which the new research is to be founded have been in place since before
the ideological stance took hold. And the putatively new cutting edge of
auction and contract theory and the like reflects more developments
internal to economic theory than an attempt otherwise to grapple,
however theoretically, with the problems and determinants of privatiza-

tion and public service delivery. This is not an invective against theory,
nor even the importance of auctions, contracts, networks and institutions
in practice. But the theory has to be demonstrated to be relevant, other
than in ideological terms, to the issues at hand.
The regulation issue highlights one of the key contradictions of
privatization. One reason often presented in favour of privatization is
that it removes the need for the enterprise to serve multiple and con-
flicting objectives. However, privatization does not remove the conflict
over multiple objectives in the provision of essential services, but serves
to privilege some and to offer them greater economic and political lever-
age in resolving conflicts. Providers of water and electricity face the chal-
lenge of maintaining a sustainable revenue source as well as investing
in infrastructure and ensuring that people have affordable access to
services. Regulation is to some degree about addressing these conflicting
demands, but it can only aspire unsuccessfully to reduce them to tech-
nical terms alone. And the political content is more properly assigned to
the province of government. The point is then that while, of necessity,
many regulatory processes are political, there can be too much politics
involved in decision-making. It is a question of degree.
Only once privatization was put in place – ‘just do it’ – has the absence
of, and need for regulation, been more widely recognized and, equally,
become subject to more applied research. In retrospect, how is it possi-
ble that the World Bank and others could have promoted privatization
as a general programme without first at least surveying what capacity
was in place for regulation (and institutional pre-conditions more generally,
especially in case of transition economies)?
Empirically, if for the purposes of future research and somewhat late
in the day, Wallsten et al. (2004) report that a survey has now been
carried out on regulatory capacity. In doing so, they observe (p. 2):6
Privatization therefore meant creating a private firm capable of

exercising significant market power. In other words, even when
competition was feasible, the presence of a dominant firm often
made its introduction difficult. Regulation agencies and regulations
thus became an integral component of reform as a means of protecting
consumers, reassuring investors, and, presumably, helping to advance
competition. Nonetheless, in developing countries the design of reg-
ulatory policies and structures to govern infrastructure industries
after privatization was often given relatively little attention compared
with privatization itself.
Essentially the emphasis placed on regulation is affected by perceptions

of public and private providers. If the public sector is regarded as corrupt
and the private sector as efficient then regulation can readily be seen as
an unnecessary luxury in the privatization process. If, on the other hand,
the private sector is regarded as exploitative and the public sector as oper-
ating in the public interest then regulation will be considered essential.
Thus, although it has long been accepted that privatization of monopo-
lies should not take place before regulation is in place, in practice there
are numerous examples of premature privatization in these terms (see
Chapter 5 and the following case studies). With faith, or hope, in the pri-
vate sector, regulation is not essential. Outside the institutional frame-
work of developed countries with a refined legislature and established
service system, ultimately policy outcomes depend on the nature of the
state and of the investor and regulation has little influence. As the World
Bank (2003a, p. 21) report says of PSP in the water sector:
A capable government can use it to great advantage to improve

the water supply and sanitation situation but an inept government
can make matters worse through an injudicious use of PSP without
providing clear quality and price regulation and lending strong and
sustained support to PSP.
Thus, rather than replacing weak state providers with private sector serv-
ices, the World Bank evaluation implies that effective state capacity is an
important pre-requisite for PSP, just as it is for exclusive public provision.
In practice, the empirical case for privatization is far from water-tight.

Ambiguous findings combined with methodological challenges mean
that no clear case can be made on the basis of existing research. However,
when it comes to the delivery of infrastructure in developing countries,
the empirical debate becomes irrelevant because investors are no longer
interested in taking part in the kinds of privatizations typically addressed
in the empirical literature.
Despite the major limitations discussed above, privatization has
become entrenched and is rapidly becoming the infrastructure policy
default position. Because privatization is so deeply ingrained into the
world’s policy-making psyche, the lack of investor interest is not perceived
as a reason not to privatize but calls for a revision of the demands placed on
investors in order to make them interested. Similarly, some supporters of
privatization take comfort from the notion that, while the results of
privatization may be disappointing, at least the wider reform process of
which privatization is a part (such as institutional restructuring, cost
recovery in prices) might be considered beneficial (Harris 2003).
Furthermore, rather than making the argument for privatization,
supporters of privatization now deny that critics can make the case for
re-nationalization. For Harris (2003, p. vii),
The last decade showed that private participation was not a panacea,
but also that it was not the root cause of these problems. The legally
binding contracts and hard budget constraints introduced by private
participation flushed into the open problems that had been hidden
during the era of public provision. While some governments have
not been able to deal successfully with these, these problems will not
be solved by a reversion to public provision.
But, by the same token, nor will the problem be solved, rather than
flushed out, by the private sector. Both theoretical and, as we have seen,
empirical evidence points to the secondary but significant impact of
ownership whose direct and indirect influence depends on specific con-
ditions and the sectors concerned. Whilst this has now become the new
conventional wisdom, what it means in principle and practice is some-
thing to be established, and disputed, rather than taken for granted.
Notes
1. There is also the issue of how accounts themselves are constructed; see Conrad
(2005) in context of privatization.
2. But see Rodríguez-Boetsch (2005) for a critical evaluation of the role of PPSEs,
privatized public sector enterprises, in Argentina’s crisis of 1999–2002.
3. ‘Guinea Capital Lacks Water, Light and Citizens Want to Know Why’, Agence
France Presse, 17 December 2003.
4. ‘Argentina severs Suez water deal’, BBC News, www.news.bbc.co.uk, 21 March
2006.
5. See also Estache (2004b) with specific reference to Argentina.
6. But see Kirkpatrick et al. (2005, p. 104) who concluded from a survey of regu-
lators that, ‘great care is needed when transferring regulatory policy from one
country (or region) to another’.
4
Rethinking the Rethink: The
World Bank and Privatization
Ben Fine and Kate Bayliss
4.1 Introduction
There can be little doubt that currently underway is a strengthening, if

far from universal and unilinear, reaction against the extreme postures
associated with the neo-liberal ‘Washington Consensus’. This is even
acknowledged and welcomed by the person (John Williamson) credited
with having coined the term.1 However, the retreat from the old
Consensus is uneven across scholarship, rhetoric and policy, and how they
do or do not mutually support one another (Fine 2001). The shift in
posture towards being more state-friendly is matched by more explicit
attention to poverty alleviation, and appeal to non-market factors such
as good governance and government ownership of, and commitment
to, ‘good’ policy.
Such putative shifts in approaches to development, in part inspired by
the post-Washington Consensus (PWC), associated with former World
Bank Chief Economist, Joe Stiglitz, need to be assessed with considerable
critical caution for a number of reasons.2 First and foremost, there has
been no thoroughgoing rethink of the notion of development itself and,
in many respects, as a result, the new consensus shares many elements
with the old. The perfect market approach of the ‘new development
economics’ associated with neo-liberalism has merely given way to a
‘newer development economics’ based on the simple idea of correcting
market and non-market imperfections (Jomo and Fine (eds) (2006) for a
wide-ranging discussion). Analytically, the result has been both to con-
fine the understanding of development by appeal to the relatively nar-
row ‘economic approach’ associated with mainstream neoclassical
economics. By the same token, there is a failure to draw upon older tradi-
tions within the study of development, and alternative approaches from
55
56 Ben Fine and Kate Bayliss
within economics and across the social sciences even though much
of this has been inspired by, and has inspired, critique of the Washington
Consensus (Jomo (ed) (2006); Jomo and Reinert (eds) (2006)).
Privatization, as a key element within the neo-liberal agenda, has been
affected by these changing perspectives but in ways that are often merely
piecemeal and token. Previously, neo-liberal dogma had prevailed in pol-
icy circles over the ‘synthesis’ that suggested that conditions of regula-
tion and competition are far more important than ownership as such
(see Chapter 2). Significantly, this is the apparent conclusion towards
which international agencies are now in part moving. To be blunt, their
reasons for doing so are highly opportunistic, not least because the argu-
ments involved have been available for some time and were simply
ignored previously as inconvenient. The following section documents
the evolution of the Bank’s approach to privatization which was initially
cautious but rapidly gained momentum. Section 4.3 considers the more
tempered position on privatization associated with the PWC. The World
Bank rethink is both academic and rhetorical as revealed in the previous
chapter. Now these alternatives are being embraced, and regret expressed
for past negligence and dogma. But this does not guarantee absence
of continuing influence of ideology from vested interests and imperfect or
inappropriate analytical nostrums. In practice and in policy, the role of
the public sector has already been heavily precluded, and the potential
lessons to be drawn from the experience of privatization neglected if not
set aside.
The groundwork for these critical conclusions are provided in
Section 4.4 by focusing on the weaknesses in an OECD (2004) study of
privatization in Africa and, thereby, revisiting the issues that have arisen
in debate over privatization. It is shown that the orthodox rethink com-
mendably accepts that privatization and provision of public services
depend on much more than relying primarily upon the market. But, in
doing so, it only offers a token attempt at opening the ‘black boxes’ con-
taining other economic, political and ideological factors. Moreover, its
motivation in incorporating them is merely to identify potential imped-
iments to successful privatization without seriously questioning whether
public provision is preferable given the pre-conditions and continuing
costs required to make privatization workable and putatively preferable
to public provision. Much the same is true, as covered in Section 4.5, of
the apparent rethink over privatization by the World Bank (2004a). It
accepts, in principle, that privatization is not always justified and that,
in practice, results have been disappointing on occasion. Yet it does not
do so in order to redirect attention back towards public provision but in
The World Bank and Privatization 57
order to target and promote further privatization. It seeks to do so with

most ‘easy’ privatizations already having been pushed through (and
quite a few ‘hard’ and failed ones as well). This was a result of the helter-
skelter rush to privatize in the past, the lack of rationale for which is
documented in Section 4.2. Section 4.6 brings the discussion up to date
to show that support is now provided for the state sector but only where
it is considered to be performing well. So the current rethink is more
driven by a shift in circumstance than a shift in heart and mind, with
privatization and the private sector remaining the driving imperative
and goal if with a more qualified tone. In this light, the concluding
remarks point to the need for a more penetrating rethink in principle,
and for it to be put into practice.
4.2 From creeping to galloping privatization
As is apparent from the previous section, the relationship between rhet-

oric, scholarship and policy (and the empirical evidence) in World Bank
practice is complex, shifting and inconsistent. This means the currently
lighter touch as far as privatization is concerned needs to be approached
with considerable caution if not cynicism. The new stance needs to be
critically assessed in and of itself, on which see both earlier and later
chapters, and in terms of its evolving content and impact. Accordingly, it
is worth reviewing how the Bank has come to its current rethink on
privatization, one that was already in principle open to it as the ‘synthesis’, or
conventional wisdom, of 20 years earlier. Rethinking the Bank’s rethinking
is necessary in order to be able to assess critically the Bank’s continuing
interventions across rhetoric, scholarship and policy in its continuing
practices.
This section documents the evolution of the Bank’s approach to pri-
vatization and shows how its position shifted from one where the policy
was something of an experimental shot in the dark to one where it
became a core policy. The aim is to cover key texts that have marked
shifts in the Bank’s position. Much of the discussion focuses on the con-
tributions of John Nellis and Mary Shirley. They were closely involved in
the Bank’s privatization policies during the 1980s and 1990s.3
Within the Bank, the shift towards privatization stemmed from a
turning point in the treatment of the state in sub-Saharan Africa (SSA),
that arose with the publication of the Berg Report, World Bank (1981),
itself a signal of the emerging Washington Consensus. It blamed gov-
ernments for perceived development failures in the region, criticizing
widespread state intervention, arguing that parastatals were a drain on
scarce government resources. Many countries recorded negative growth

rates in the 1970s, and losses had reached crisis proportions by the start
of the 1980s. According to the Report, this was partly due to the poor
performance of an extensive, post-independence public sector. It called
for greater efficiency of resource use in the public sector and discussed
the possible gains from small-scale private participation in government
projects. However, at this stage, wholesale privatization of parastatals
was not yet on the agenda. Management rather than ownership was
deemed to have a greater impact on enterprise performance. Furthermore,
rather than condemning the use of public enterprises to achieve social
objectives, the Report just recommends that these should be more
transparent. Indeed according to World Bank (1981, p. 96)
The problems that parastatals typically encounter do not stem from

their public ownership but rather come from their not being treated
as commercial enterprises … Governments must still pursue social
objectives, of course, but to the extent possible parastatals should be
maintained as commercial enterprises and compensated for any
social services they are required to perform.
Thus, the commercial functioning of public enterprises was to be pro-

moted, not their privatization. The theme of the ‘burden’ of the state sec-
tor appeared again in the Bank’s 1983 World Development Report, (WDR).
Here, it was recognized that the SOEs were often used to fulfil non-com-
mercial objectives, such as maintaining employment. Again, rather than
denouncing these completely, the Report called for the government and
SOE managers to work out the cost of achieving such targets. The empha-
sis was on improving management and accountability. For, ‘managerial
ability is the key to SOE reform’ (World Bank 1983, p. 87). Privatization in
the form of divestiture received little attention as, at this stage, it was per-
ceived as too problematic for several reasons: governments would only
want to sell the loss-makers and these would not be of interest to buyers,
weak domestic capital markets would mean that there would be few poten-
tial buyers and sales would be concentrated in the hands of the already
wealthy, thus reducing competition. In short, ‘selling large SOEs to
oligopolists who already dominate the private sector might reduce
competition. It could also result in unhealthy ties between financial insti-
tutions and industry, further reducing the flexibility of capital markets’
(World Bank 1983, p. 86).
Later in the 1980s, a paper by Nellis (1986) demonstrated ambivalence
in the Bank’s approach to public sector reform and privatization. On the
one hand, there was still some reluctance to press for wholesale privati-
zation because there were some public sector enterprises that performed
well and it would be difficult to privatize monopolies. On the other
hand, many of the economic problems of the region were attributed to
its large and inefficient public sector. According to Nellis (p. 25):
There are a number of well-managed, profitable public enterprises in

sub-Saharan Africa. Some of these are very well known, their success
having been identified and analysed at length. … The Kenya Tea
Development Authority, the Botswana Meat Commission, Tanesco
(Tanzania’s electricity company) and the Ethiopian Telecommunications
Authority have previously been singled out as efficient effective and
profitable organisations.
Furthermore, privatization was expected to have only limited benefits

when it came to monopolies (p. 44):
There is no reason to believe that the replacement of an inefficient

public monopoly by a poorly regulated or unregulated private
monopoly would add greatly to the country’s net socio-economic
welfare. … Indeed it is apparent that the factors which contribute to
poor PE [public enterprise] performance (improper macro-economic pol-
icy environment, poor managers, poor information systems, pervasive
corruption) are the very same factors which weaken the African states’
capacity to regulate large and powerful private sector firms.
However there was growing frustration with efforts at reform of the

parastatals in the SSA region and decreasing tolerance with the use of
public enterprises for the pursuit of social objectives (Nellis 1986,
Executive Summary):
African PEs present a depressing picture of inefficiency, losses, budget-

ary burdens, poor products and services and minimal accomplishment
of the non-commercial objectives so frequently used to excuse their
poor economic performance. Though every African country has one
or more PEs which perform well by the most stringent of standards,
on the whole, PE sectors are not fulfilling the goals set for them by
African planners and leaders.
Much the same might have been said of the private sector. But Nellis
depicts privatization as a kind of extreme experiment, an untried policy
without theoretical rationale, that countries might adopt out of

desperation after years of disastrous public sector performance. He
avoids presenting a theoretical argument, ‘because economic theory
provides neither arguments for global condemnation nor for global pref-
erence of public production’, but indicates that privatization is a
pragmatic response to failed efforts at public sector reform (pp. 42,45):
For a growing number of persons concerned with PE performance,

rehabilitation of existing enterprises is not enough. To stop the
haemorrhage of resources requires a more drastic attack on the prob-
lem. Increasingly one hears recommendations for divestiture, for the
sale or liquidation of PEs. … African governments are turning towards
privatization out of desperation, in an attempt to stem the drain on
their budgets, even though they are aware of the experimental nature
of this effort. There is a growing sense that even unproven measures
such as privatization, which at least hold some promise for improve-
ment, must be tried because a continuation of the current PE situation
cannot be tolerated.
This represents a distinct shift towards ‘just do it’ as far as privatization

is concerned. And in the early 1990s, the tone of the Bank, and Nellis,
shifted dramatically. In his 1991 paper with Shirley, Nellis develops argu-
ments in favour of privatization. For the merits of non-market alternatives
are perceived to have been oversold and those of the private sector
underestimated. For the first time, privatization was presented as an end
in itself, with theory set aside because, in practice, governments cannot
resist interfering (Shirley and Nellis 1991, p. 67):
Ownership matters. In theory, ownership may not affect efficiency, but

in practice it almost always does – because governments tend to tilt the
economic/financial playing field toward ‘their’ firms in ways that are
difficult to perceive and harder to correct. Thus, the telling argument
for privatization is that it enhances competition. Privatization also
preserves the gains laboriously achieved under, but continuously
threatened by, public ownership. The lesson of experience is that gov-
ernments cannot resist interfering in public enterprises, regardless of
the barriers they may erect to prevent such tampering.
Nonetheless, the scope of privatization was still to be limited. And there

was concern for the social costs, although these were considered to be
due to discrepancies in the timing of costs and benefits rather than an

absolute loss. Indeed, ‘the immediately visible social costs of privatiza-
tion can be severe in the short run, whereas the growth of benefits
and increases in employment and investment may not appear until
later’ (p. 61). Some key enterprises were considered to be beyond
privatization but there were not many of these (p. 64):
Most countries have no more than 10 or 15 enterprises in this group;

typically they include the companies providing electricity, water, and
post and telecommunications services, the railroad companies, state
financial institutions, and some mining or petroleum firms that cannot
be privatized easily.
Still there remained a sense that privatization was an untested

process (p. 56):
privatization is a relatively new and experimental activity for most

developing countries and they may not have all the necessary conditions
for success.
For Shirley and Nellis, though, the novelty of privatization made its
application all the more urgent in case the new toy be taken away.
There might only be a temporary period in which it could be played
with. For (p. 65):
A combination of circumstances has created a favorable environment

for the reform of the state enterprise sector: the lesson of such reforms
in developed countries and the successes of market-oriented strategies
among developing countries; the acute financial crisis, which has
raised the economic and political costs of doing nothing; and the
installation of a number of new, reform-minded governments.
Nonetheless, ‘the resulting movement toward reform is inherently

temporary; the momentum must be sustained’. This urgency gave
licence to push for widespread privatization even though some of the
fundamentals that were regarded in the wider economic literature as
essential prerequisites for privatization (such as a competitive environ-
ment and/or regulation as well as social safety nets) were not in place.
The ‘reform window’ might not be open for long.
In the following year, Shirley and Nellis with Sunita Kikeri expanded
more positively on the benefits of privatization. It began to acquire a
virtuous momentum of its own, becoming a cure for all sorts of

economic ills. Privatization was linked with poverty reduction and devel-
opment of the private sector. In addition, for Kikeri et al. (1992, p. 12):
Privatization, when correctly conceived and implemented, fosters

efficiency, encourages investment and thus new growth and employ-
ment, and frees public resources for infrastructure and social
programs.
Private ownership became the default position. While both public and
private firms can range from good to bad in terms of performance,
‘there is considerable evidence indicating that the median point on the
private enterprise spectrum lies higher than the median on the public
enterprise spectrum’. This meant that decisions regarding reform,
‘should thus tend toward privatization as the outcome most likely to
produce positive gains. The likelihood that SOEs will cause problems
places the burden of proof squarely on their advocates. The evidence in
this book repeatedly points to the conclusion that ownership itself
matters’ (p. 3).
Again, social costs, in terms of adverse distributional impacts, were
noted but these were considered secondary to the efficiency gains that
privatization was expected to provide. For, ‘the distributional effects of
privatization have yet to be thoroughly analyzed, but the possibility
that assets will be concentrated in the hands of a small elite is a legiti-
mate concern’ (p. 40). However, ‘Short-run distributional considera-
tions, although they cannot be ignored, should not be pursued at the
cost of managerial competence’ (p. 6).
This Report, then, revealed that the analytical foundations for privati-
zation were extremely shaky. Indeed, they explicitly and consciously
went against the conventional wisdom. The fear was repeated that there
might only be a short time during which privatization could be realized.
The unsubstantiated justification for privatization was that the gains
would outweigh the risks (p. 7):
A growing number of governments are opting to launch their priva-

tization programs with sales of large and often poorly performing
public utilities. They believe that the window of political opportunity
may be but briefly open, that divestiture of a major SOE will signal
commitment to investors and markets, and that the economic returns
of enhanced efficiency in a large firm will outweigh the potential
risks.
This brief window of opportunity for privatization was used to justify

privatizing larger SOEs than had previously been on the privatization
agenda (p. 49):
there can be compelling reasons for adopting this strategy … the

potential economic and financial benefits may be worth the risks.
Privatizing badly managed firms that provide critical upstream goods
and services (telecommunications and power, for example) helps
accelerate modernization and growth and removes constraints on
private sector development. Privatizing a few large loss-makers can
have an enormous budgetary impact.
The Report also laid the foundations for future policy to focus on the
investment climate, arguing that the outcome of privatization would be
determined by, first, the nature of the market (competitive or non-
competitive) and, second, country conditions including the overall
macro-policy framework and capacity to regulate. The benefits were
considered to be potentially greater the more market-friendly the policy
environment. For, ‘in countries with a market-friendly policy framework
and a relatively well-developed institutional and regulatory capacity,
privatization will be both easier to undertake and more likely to yield
financial and economic benefits’ (p. 39).
The case for widespread privatization was further boosted by a
detailed World Bank empirical study in 1994 that attempted to estimate
the welfare impact of privatization by generating a counterfactual
position.5 It concluded that privatization even of monopolies could
bring about net welfare gains (Galal et al. 1994). This view was cited, for
example, by Kikeri et al. (1992) and World Bank (1995b) as evidence that
privatizing monopolies could be beneficial. Most references, though,
neglected to mention that the authors of this study explicitly warned
against extrapolating their findings to very poor countries where market
conditions and institutional infrastructure differ substantially from
those of the sample countries (see Chapter 3).
This marked the beginning of the public sector being held responsi-
ble for all that was wrong in developing countries. According to the
Bank’s study ‘Adjustment in Africa’, ‘The public sector lies at the core
of the stagnation and decline in growth in Africa’, World Bank (1994,
p. 99). In its assessment of private sector development, public enter-
prises were considered to be at the heart of the region’s economic
problems. This was because of the constraints imposed on the ability
of the private sector to respond to structural adjustment policies

(World Bank 1995a, p. 6):
In Africa as a whole, the fiscal drain of public enterprises and the

losses of the financial system can be as high as 8–12 per cent of
GDP – 2–3 times the spending on health and education and about
two-thirds of gross investment. So, few resources remain for private
or public investment to upgrade the weak base of human resources
and infrastructure. And that has severely limited the ability of a weak
and fragmented private sector to respond to macroeconomic reforms.
Thus, by the mid-1990s, the small-scale private participation envisaged

in the early 1980s was no longer considered adequate. Large-scale
privatization was needed, according to the Bank, because in low-income
countries it would provide savings and resources and, ‘open the space for
private economic activity needed to break out of the economic stagna-
tion afflicting so many of them’ (World Bank 1995a, p. 105). It became
important to privatize large firms because doing so would have the great-
est impact on the fiscal deficit and would demonstrate the government’s
commitment to reform. The natural monopoly case for public service
issue no longer seemed to be significant (World Bank 1995a, p. 10):
Infrastructure utilities are particularly attractive candidates for

divestiture. The financial, economic and psychological impact of
increased private involvement is generally large. The need for improved
services is incontestable – consumers always applaud increases in the
quality or reliability of services. And investors are willing and able to
act. Moreover, privatizing infrastructure services facing growing
demand – such as telecommunications or power – typically results in
little loss of employment. And efficiency still rises because of
increased investment and proper pricing.
Thus, it was now legitimate to privatize virtually anything, and the larger
the better. Indeed, it had become profligate not to privatize, for ‘a grow-
ing body of evidence indicates that delaying privatization leads to further
deterioration of the assets, decreased revenue for the state and probably
decreased welfare and efficiency for the economy. The financial and
economic costs of not privatizing can thus be very high’ (p. 111).
The Bank’s newfound and sudden enthusiasm for privatization did,
however, provide it with a conundrum. If privatization was so benefi-
cial, why had it not already been widely adopted? Its Policy Research
Report, ‘Bureaucrats in Business’, sought to resolve this paradox and
raise the Bank’s stance to a more scholarly level, World Bank (1995b). It
did so through appeal to a kind of socio-political analysis. It concluded
that SOE reform (and privatization) are only implemented when it is
politically desirable, politically feasible and where promises are credible.
Such a descriptive framework inevitably accommodates most outcomes
and could apply equally to extension of public ownership. Yet, the Report
gave the impression that it had shown that the public sector (or politics)
was getting in the way of the private sector (or the economy).6
Two further developments in the mid-1990s marked increments in
the elevation of privatization policy. First, privatization began to be
linked to aid disbursements more specifically than previously (World
Bank 1995b, p. 17):
Foreign assistance is more effective when it differentiates between

countries that are ready to reform their state-owned enterprises
successfully and those that are not.
Second, privatization began to be closely associated with private sector

development (PSD), with both featuring prominently together in the
Report entitled Private Sector Development in Low Income Countries, World
Bank (1995a). In an apparently subtle shift, privatization became
absorbed by PSD. But this was a significant development. Previously the
Bank had made some (limited) attempt to justify and debate the merits
of privatization. Once the policy became categorized as one of a number
to promote PSD (alongside other less contentious policies such as sup-
port for small and medium enterprises, micro finance and legislative
reform), there seemed no longer to be any need for discussion, as if the
subject was closed and the argument won.
4.3 A PWC on privatization?
By the mid-1990s, the World Bank’s position on privatization could be

described as wedding neo-liberal rhetoric and policy with a vacuous
level of scholarship. Indeed, apart from selective and partial use of evi-
dence, analysis tended to be contemptuously dismissed as irrelevant or,
more exactly, inconvenient in light of the anti-statism and just-do-it
dogma of the Washington Consensus. But the rhetoric around privatiza-
tion shifted once more in the mid-1990s with the emergence of the PWC.
Its emphasis on market imperfections, its departure from the Washington
Consensus, the launch of the Comprehensive Development Framework
(CDF) and the disastrous experience of the transitional economies,
placed neo-liberal advocates of privatization on the defensive.

Essentially, at least in principle, the World Bank had now turned to the
synthesis position on privatization. This is hardly surprising given that
both it and the PWC derive from the same neoclassical microeconomic
principles. As seen in Section 4.2, the result is consolidated in the Bank’s
rethink on privatization in which three new mantras replace ‘the leave it
to the market’ dogma: there may be a case for public enterprise; one model
does not fit all; and policy depends upon specific circumstances.
Whilst a marked shift in principle, the shift in practice and policy is
open to question, not least given the shift in circumstances in which
most ‘easy’ privatization had already been pushed through – and with
mixed results and against mounting opposition. The PWC, and the eco-
nomic theory on which it rests, remains heavily committed to reliance
upon market forces unless their imperfections can be shown to be suffi-
ciently severe and sufficiently open to remedy to warrant state interven-
tion. In practice, this has meant a licence for discretion – to privatize
where possible, and to pave the way otherwise, rather than to build
capacity for public enterprise and provision.
In short, it is important not to exaggerate the shift in principle on pri-
vatization that has come with the PWC; and it is equally important not
to believe that any such shift has been carried over into policy other
than for the purpose of adding legitimacy (Bayliss and Cramer 2001).
Indeed, the necessity for such caution is signalled by the way in which
the PWC informed the Bank’s shifting position on privatization.
The development of the PWC in relation to privatization is illustrated
by two main outputs of the Bank in the late 1990s. First, the Bank’s 1997
World Development Report (WDR), The State in a Changing World,
marked a relaxation in the anti-statist line that had blamed the public
sector for all economic problems. The Report suggests that a strong insti-
tutional framework is needed for markets to work. Second, the (then)
Chief Economist at the World Bank, Joseph Stiglitz (who had also man-
aged the production of the 1997 WDR), shed some retrospective, if
apologetic, light on the mania that had surrounded privatization earlier
in the decade. In Stiglitz’s view, most policymakers at the time would
have preferred to have proper regulatory systems and competition in
place before privatization but the reason it was pushed through was
that, ‘no-one knew how long the reform window would stay open’.
With hindsight, the idea of privatize now and regulate later ‘seemed a
reasonable gamble’ although ‘from today’s vantage point the advocates
of privatization may have overestimated the benefits of privatization
and underestimated the costs’ (Stiglitz 1998b, p. 20). As with other
aspects of the PWC, old ideas were presented as new, but the form, con-
tent and approach had been weakened. For example, according to
Stiglitz (1998a), privatization had mistakenly become an end in itself
rather than a means to sustainable and equitable growth. Nonetheless,
his new (imperfect) information-theoretic approach is sufficiently sup-
portive of the policy of privatization that it could be seen, by his own
admission, as worth a gamble in advance given uncertain consequences.
Yet, whilst the PWC appears to offer a less aggressive stance on priva-
tization, with a softening of the ‘ownership matters/governments are
inefficient’ dogma, it is arguable that a tougher policy line was adopted
in practice, not least because both Stiglitz and the WDR put forward
the notion that state should match its role to its capability. Taken to its
logical conclusion, it follows that the weakest states should privatize
most (although, paradoxically, having the least capacity for regulation
and likelihood of attracting competitive investment). For the poorest
countries, states would be effectively consigned to an ‘enforced mini-
malism’ (Glentworth 1998, p. 4). The PWC changes the debate from one
of state versus market to an acknowledgement of the need for interac-
tion between the two. However, the position with regard to low-income
economies is essentially unchanged. It is language and rhetoric that have
become refined while policy implications are the same. While ostensibly
being more sympathetic to the needs of the public sector, the underly-
ing message of the PWC continues to erode the authority and role of
the state. Stunning confirmation of the rhetorical and academic role
of the PWC, especially as regards privatization, is provided through
Stiglitz’s enforced resignation from the Bank around the turn of the mil-
lennium, once his interventions were perceived to be unsettling policy
as usual.7
But the proof of the privatization pudding is in the policy practice,
and the extent to which the failed gambles of the past are fully recog-
nized and reversed, in detail. Most significantly, just as the position on
privatization appears to be softening, so allocation of resources for sup-
port to public services has been institutionally shifted towards involve-
ment of the private sector. The Bank has developed a number of
mechanisms for providing support to the private sector, through the IFC
which lends only to private enterprises and through the Multilateral
Investment Guarantee Agency (MIGA), which provides political risk
insurance to private firms. A review of the Bank’s lending indicates how
the strategy has shifted with more support going to the private sector.
World Bank infrastructure investment lending declined by 50 per cent
between 1993 and 2002. The Bank’s support for private sector firms
Table 4.1 World Bank Group support for the electric power sector 1990–2001
1990 2001
IBRD/IDAa Number of projects 16 9

lending Approvals (US$m) 2,968 824
Bank power project lending as % 14.3 4.8
of total commitments
IFC investments Number of approved instruments 2 8
Value of gross approvals (US$m) 45 687
IFC power project approvals as % 2.0 12.8
of total approvals
MIGA Number of projects guaranteed 0 4
guarantees
Note: a The World Bank has two institutions that provide funds to governments. The
International Development Association (IDA) provides concessional loans and grants to low-
income countries while the International Bank for Reconstruction and Development (IBRD)
lends to middle-income and credit-worthy poor countries. While the IBRD raises most of its
funds on the world’s financial markets, IDA is funded largely by contributions from the
governments of the richer member countries.
Source: World Bank (2003b).
investing in infrastructure, increased over this period through MIGA

and IFC (World Bank 2003c).
In the water sector in 2002, the World Bank’s lending for water and
sanitation projects was only 25 per cent of its annual average during
1993–97.8 Table 4.1 shows the number and value of electricity sector
projects that were supported by the Bank in 1990 and 2001. The table
indicates a decline in the number of projects and amount of funds
devoted to electric power sector projects while there has been a large
increase in the extent of financial support for the sector in the number
of MIGA guarantees provided as well as through IFC Investments.
This change also represents a shift away from SSA as just 6 per cent of
the IFC support for electricity over this period went to SSA, with 50 per
cent going to Asia, World Bank (2003b, p. 21). The reasons for the decline
in infrastructure lending are not just down to a change in policy but are
also attributed to other internal Bank Group factors relating to infrastruc-
ture finance more generally, including a ‘lack of clarity on the roles of the
private and public sector in infrastructure service provision and under-
investment in country-level infrastructure diagnostic work’. In addition,
‘High preparation costs, risk aversion among staff, corporate signals on
infrastructure and a move towards programmatic lending contributed to
a reluctance to take on infrastructure projects’ (World Bank 2003c, p. 2).
As a result of these and other internal and external factors, infrastructure

has been ‘underrepresented’ in Country Assistance Strategies (CASs) and
Poverty Reduction Strategy Papers (PRSPs) leading to a decline of about
10 per cent in the Bank administrative budget allocated to regional infra-
structure departments over the three years before the production of the
cited report (World Bank 2003c). Thus, the Bank’s framework led to a
decline in infrastructure spending as such projects were considered ‘risky’.
Meanwhile, the world’s poor face declining levels of access to, and quality
of, water, sanitation and electricity.
The Bank has developed a number of mechanisms for supporting the
private sector, which are mainly through the IFC, discussed above and
MIGA which offers political risk insurance in relation to restrictions on
currency transfers, expropriation, war and civil disturbance and breach
of contract. MIGA’s website lists its advantages, the first of which is
‘deterring harmful actions’ on the basis that, ‘MIGA’s relationship
with shareholder governments provides additional leverage in protect-
ing investments’. This implies then that by taking out insurance with
MIGA, private investors can benefit from the might of the World Bank
as, given the significance of the Bank for the budgets of most developing
countries, the Bank’s private-sector allies are likely to be safer than those
without such ‘leverage’.
The Bank has also developed the concept of ‘output-based aid’ (OBA)
and was instrumental in establishing the Global Partnership for OBA
(GPOBA) with the UK’s DfID. The essence of OBA is that private service
providers are paid on the basis of a contractually agreed output. Thus, the
public sector is supposed not to need to be involved in the minutiae of
infrastructure projects. The strategy proposes that OBA creates an incen-
tive effect that can be used to ensure that private firms have responsibil-
ity for operation and maintenance of infrastructure. By adopting an OBA
approach, private firms will not be paid if the projects do not run accord-
ing to contractual arrangements. But this is not a significant departure
from existing privatization arrangements where for example, conces-
sionaires are paid on the basis of output. A key example of OBA is the
UK’s Private Finance Initiative (PFI), in schools and hospitals. These PFI
schemes may on occasion have reduced delays in public sector projects
but critics maintain that costs are high and the schemes can be highly
profitable for private contractors. This advice, and experience, comes
from a country without its own national football stadium, and a disas-
trous railway system, and failed mega-projects from Concorde to the
Dome. Even so, irrespective of the merits of OBA for a developed country
such as the United Kingdom, corresponding levels of governance, and so
forth hardly prevail in the developing world, especially SSA. On closer

inspection, the Bank’s ‘shift’ to OBA offers little that is innovative in the
way of aid and infrastructure although, typically the GPOBA projects are
smaller with domestic private sector players compared with the larger
privatization projects (GPOBA 2005). However, the term presupposes a
need for privatization that appears to warrant no justification. By shift-
ing the debate onto the merits of output-based versus other sorts of pay-
ments to the private sector, the Bank circumvents entirely the question
of whether the private sector should be involved at all, let alone that
there should be exclusive public sector provision.
4.4 The case for privatization is wounded;

long live privatization
From previous chapters, it is apparent that it has become accepted by

many that the private sector is preferable to the public sector.
Essentially, public intervention and provision have been seen as a resid-
ual. It should pick up the pieces where the incidence of market, that is,
private provision, imperfections are sufficiently serious, and the benefits
of intervention are not outweighed by corruption, self-seeking, and
creation of new distortions to the market.
This is all despite limited analytical and empirical support for such a
stance once the evidence is closely examined (see previous chapter). Yet,
paradoxically, even with a belief in the growing weight of evidence in
favour of privatization, conforming to policy perspectives attached to
donor conditionalities, there has over the most recent period been
something of a strengthening reaction against unqualified and precipi-
tous support for privatization, especially amongst the donor commu-
nity. For Nellis (2003, p. 12) for example, a leading proponent of
privatization, it is even suggested that the notion that, ‘privatization
will produce sub-optimal, perhaps negative outcomes … has risen rap-
idly to the status of conventional wisdom’. This is due to the impact of
privatization in the presence of ‘institutional weaknesses’ although, for
him, ‘the concept is disturbingly vague and difficult to make sense of
operationally’.
Significantly, Nellis is speculating in the context of a review of African
experience, and there are two reasons why this supposedly new conven-
tional wisdom should have come to the fore in case of Africa. First, pri-
vatization has not proceeded apace across the continent for reasons that
need to be explained. Second, the results from privatization where it has
occurred appear to have been more mixed than elsewhere, again for
reasons that need to be examined. Privatization in Africa has, to a large

extent, stalled at a second stage. It has passed through a first stage, involv-
ing small-scale enterprises, but has not moved forward sufficiently to
embrace public utilities (see Chapter 5).9
Such features of the progress of privatization are, however, only at the
most extreme in the case of Africa. There has been a more general
stalling in the forward march of the private sector across the developing
world (see Chapter 3) and the distribution of privatization activity, and
investment, has been highly uneven across countries and sectors. Latin
America and East Asia have been the leading regional beneficiaries with
telecommunications, followed by electricity, serving as the leading sec-
tors. This means that Africa and water, for example, have been particu-
larly poorly served by privatization. In short, to some extent,
privatization has not been delivered at all and, where it has, it has not
delivered on its exaggerated promises.
Such is one of the conclusions of one of the most comprehensive
report on privatization for Sub-Saharan Africa (OECD 2004). Its findings
are worth examining closely on their own and in light of other critical
literature, not least because it seeks to draw upon as full a database on
privatization as is available.10 The Report’s main points can be summa-
rized, and added critically to, as follows. First and foremost, the pace and
success of privatization depend upon broader pre-conditions. These
include good governance, an appropriate presence and balance of com-
petition and regulation, and for governments to own or to be commit-
ted to the privatization process rather than to conform to the dictates of
donors and imposed conditionalities.11
Second, certainly until most recently, there has been little in-depth
analysis of the broader impact of privatization, especially in social terms
and poverty alleviation (see previous chapter and Bayliss (2002) for
major exception and review of other contributions). What is now the
current turn to poverty in the privatization literature has, no doubt,
been fuelled by a more general interest on the issue taken up by the IFIs,
not least in attaching structural adjustment and stabilization pro-
grammes to PRSPs. Possibly as a result of neglect of poverty in the past,
there is perceived to be unwarranted ideological hostility to privatiza-
tion on the grounds that it is unduly disadvantageous to the already dis-
advantaged. Significantly, Gupta et al. (2001) suggest that the passage of
privatization might be smoothed by providing safety nets for otherwise
obstructive workers, although the cost of these has to be set against the
revenue gained from, or difficulty of, privatization. Of course, it should
be added that such costs should be factored in to the decision on whether
to privatize, not taken as pragmatic costs. Rizzo (2002), for example,

shows how privatization can lead to increase in supply through compe-
tition and ease of entry but also to drops in standards, both for wages
and working conditions (long hours of work and lack of security of
employment) and for safety, speed and overloading. Such have been the
consequences for the Dar es Salaam transport system. More generally,
for privatizations in Mexico, MacLeod (2004, p. 239) concludes that
The process of privatization has involved a profound restructuring of

the relationship between workers and owners. Workers have gener-
ally lost rights that they enjoyed under previous collective bargaining
agreements to participate in decisions over the organization of
production … Large privatizations, therefore, were almost invariably
accompanied by the restructuring of labor contracts on terms more
favorable to capital.
There can be little doubt that core proponents of privatization not only
favour the private sector but also a shift in power and advantage to
capital relative to labour through privatization even at the expense of
efficiency, development and equity (although this would rarely be
explicitly acknowledged). Although these extremes do not necessarily
apply to the broad and broadening constituency that has favoured pri-
vatization, it does mean that the process of privatization inevitably
tends to gather momentum in favour of the powerful within the private
sector irrespective of counter-intentions.
This is embedded in popular consciousness. Not surprisingly, then,
Boubakri and Cosset (2002, p. 112–13) gather evidence to the effect that,
privatization is ‘widely perceived on the [African] continent as a euphe-
mism for unemployment, reduced government spending on social pro-
grams and to the extent that foreign investors participate and make
windfall profits, recolonisation’.12 But, for the OECD, these views are far
from proven, and there are reasons for believing otherwise. On the one
hand, subsidized public provision may disproportionately benefit those
who are relatively wealthy – those who have access to the public serv-
ices. On the other hand, there may be more effective ways of supporting
the poor than through generalized subsidies to public utilities.13 In
short, a much fuller and wide-ranging impact analysis is needed for
poverty assessment. But it is also important to bear in mind that con-
cessions, even disproportionately so, to those who are not impoverished
may be necessary in order to gain political support for those measures
that will at least begin to benefit the poor.
Here, a lesson can be learnt from the welfare systems of the now
developed economies which are not necessarily progressive in origin
and current impact (overall or by various elements of health, education
and social security, etc.). Yet these do tend to guarantee some level of
minimum provision to those who are most impoverished and least artic-
ulate and represented through the political system. In addition, it
should be emphasized that there is an anomaly, if not inconsistency, in
the position that accepts both that the benefits of privatization have
been oversold and that the opposition to privatization is based on ill-
founded ideology. Resistance to privatization has, no doubt, played
some role in reversing the uncritical, and equally ideological, promotion
of privatization. As one advisor to Mrs Thatcher essentially put it, pay no
heed to dissent when it comes to privatization, just do it!14
Third, whilst opposition to privatization may in part be ideologically
driven, it is also fuelled by genuine vested interests. Change of owner-
ship will undoubtedly have a redistributive impact, with both winners
and losers, whether the latter be the result of loss of job as producer or
subsidy as consumer, or politicians for perpetrating these wins and
losses. Ayogu and Hodge (2002), for example, claim that South Africa’s
privatization of telecommunications has been stalled by the power of
vested interests. In Uganda, as argued by Tangri and Mwenda (2001),
privatization has accommodated vested interests more explicitly, with
the involvement of the president’s younger brother in purchasing state
enterprises, alongside ministers and their political supporters. By
November 1998, a select committee report ‘decried “growing nepo-
tism” and how “some politically powerful families have been manipu-
lating the process of privatization”. Its shocking revelations of
corruption and political influence … caused a storm’ (p. 122), with four
examples offered of profitable privatized companies – the Uganda Grain
Milling Corporation, the Entebbe Handling Services Ltd, the Uganda
Commercial Bank, and the Kampala Sheraton. The World Bank itself
pointed to ‘non-transparency, insider dealing, conflict-of-interest and
corruption’ (p. 127).15 There was the need for a ‘regulatory framework
that could ensure probity and fairness’ as opposed to self-serving discre-
tion amongst a state elite and its favoured clients. Nor is this satisfaction
rather than removal of (corrupt) vested interests through privatization
unique to Uganda but it is common across sub-Saharan Africa.
Fourth, public utilities are recognized to be of significance to govern-
ment for a combination of strategic, political, bureaucratic and eco-
nomic reasons. Further, each service provided has its own specificity in
view of its strategic nature. The latter is summarized in terms of serving
both production (as intermediate input) and consumption (as final out-
put), in heavily influencing levels and distribution of welfare (through
price, quality and access), and in organizational aspects in view of the
technical features attached to networks, scale economies and tendency
to monopoly. Parker (2002) suggests the need to accommodate market
failure from externalities, public goods, (de)merit goods, incomplete
information, incomplete markets, monopoly, and inequality, each poten-
tially understood from within a range of different theoretical frameworks
including neo-Austrian economics, property rights, principal–agent and
public choice theory, quite apart from issues of regulatory capture. For
Carlin and Mayer (2002), the strategic role played by a financial system
differs according to the type of economic activity involved, so that finan-
cial regulation should be geared towards the structure of economic activ-
ity and stage of development. The same applies to privatization in
general and differentially according to the sectors subject to public
and/or private provision, and how they are financed.
Last, in the context of Africa, the absence of necessary pre-conditions
for successful privatization has inevitably given rise to undesirable out-
comes. Thus, there may be limited scope for promoting indigenization
of ownership unless it be to favour an entrenched elite. Genuine com-
petition in tendering for privatization contracts may be limited or non-
existent, and is itself subject to bribery and corruption as, ‘In Lesotho,
subsidiaries of a dozen multinationals (from the United Kingdom,
France, Italy, Germany, Canada, Sweden and Switzerland) have been
prosecuted for paying bribes to obtain contracts in the Lesotho
Highlands project’ (OECD 2004, p. 49). More generally, there is a recog-
nition that there is no simple dichotomy between market and the state,
between public and private, with the corresponding presumption that
privatization will both remove the distorting influence of the state (rent-
seeking, bribery and corruption) and enhance efficiency.
In short, the OECD study represents an exemplary illustration of the
new ‘conventional wisdom’ to which Nellis points but with which he
himself is less attracted for fear of needing to wait more or less indefi-
nitely upon poorly specified political and institutional pre-conditions to
be satisfied (see p. 76). There are, however, from a broader perspective,
three striking features of the OECD approach. First is the failure to con-
sider seriously the rationale and policies for continuing public provision.
It states that, ‘the intent is neither to justify nor to reject privatization,
but rather, on the basis of past experience, to highlight key elements of
both successful privatizations and failures’ (p. 17). As a result, the whole
thrust of the Report is to search out empirical regularities that might
indicate why privatization has succeeded or not in order that those pre-
conditions can be put in place, promote future privatization and make it
successful. As already indicated, the conclusion drawn concerns the
presence or not of pre-conditions, themselves loosely understood as
competition, governance, regulation and ownership. What this leaves as
notably absent is any consideration of the impact on continuing public
provision had those pre-conditions been in place (and how they might
have been deployed). There is a sense in which the goal of making
privatization successful has become so overwhelmingly entrenched that
sight has been lost of what good policy and capacity in competition,
governance, regulation and ownership of policies attached to aid could
contribute to public provision.
Second, the OECD Report essentially takes the neo-liberal case for
privatization as its point of departure. By doing so, not least in light of
the empirical evidence from Africa, it questions whether private is
inevitably superior to public provision and that absent pre-conditions
for successful privatization will either be of limited significance or be
corrected through the market mechanism itself – elimination of rent-
seeking and price distortions, lack of adequate financial system, etc. This
is merely to restore, at least in part, the orthodox academic stance
adopted on privatization during its early stages, the synthesis as previ-
ously discussed in Chapter 2, that ownership as such is not the decisive
factor in enterprise performance. It depends much more on the condi-
tions of competition and regulation. In short, it seems as if it has taken
a decade or more for the empirical and policy to catch up with the the-
oretical literature and to focus upon the external environment within
which enterprises operate rather than the form taken by ownership. On
a more cynical reading, especially in light of the previous point, the turn
to pre-conditions for privatization might reflect a concerted attempt to
overcome, in part ‘ideological’, opposition to its extension to public
utilities in light of limited action and success with it so far.
Third, analytically, the OECD approach represents, primarily implicitly,
an attempt to ‘bring back in’ and then to ‘open the black boxes’ of what
has been left out, or essentially considered unproblematic, by the neo-
liberal orthodoxy by virtue of its reliance upon the market. Quite apart
from competition and regulation, it makes reference to vested interests, to
strategic, political and bureaucratic aspects of the state, to ideologies
favouring public ownership, to good governance, and to the specific fea-
tures of these and other characteristics across the various public services.
In short, the OECD Report has sought to address privatization by
redressing the deficiencies of the neo-liberal approach. Consequently, its
own approach remains marked by this starting point in both analytical

and policy perspectives. For it, the issue is what needs to be added to the
market to make privatization work? In effect, this is a case of being
caught in what in a slightly different context of the new public (finan-
cial) management (NP(F)M) has been termed the ‘evaluatory trap’. For
Olson et al. (2001), new systems of management are being accepted
even though they have not been demonstrated to have been successful,
and despite ‘lengthy histories of mishaps, problems and unintended
consequences’ (p. 506). Outcomes have been far from uniform in prac-
tice. And, in piecemeal response to problems as they emerge, there has
been an evolution of measures with, ‘the continuing pursuit of effi-
ciency and effectiveness potentially resulting in a damaging spiral of
fewer and fewer public services being provided at ever-higher unit costs.
We refer to this as the public sector’s “evaluatory trap” ’ (pp. 506–7). In
other words, privatization does not work as promised. Let us find the
reasons why and correct them. When it still does not work, repeat the
process. And so on. The result is to embark upon a process of reform
without recognizable outcome or end in sight. And broadly conceived,
costs imposed upon the public sector in order to make the private sector
work may well exceed any savings made. Are the costs and conse-
quences of privatizing and regulating factored into assessing the per-
formance of the private sector, or are they taken as a free service
provided, paradoxically, by the state? This can all be taken to a second-
order stage, in the suggestion of privatizing regulation itself and charg-
ing the regulated for the ‘service’ provided (Bertolini 2004)! But who will
regulate the regulators, and so on if this is also privatized, other than
ultimately to fall back upon ‘accountability’ and ‘transparency’? It
seems as if privatization has become an addictive habit whose demands
must be served.
4.5 The World Bank oversold
The OECD Report, then, marks a significant step in questioning the

unambiguous merits of immediate privatization. But its rationale for
doing so has only been reluctantly accepted. Thus, for Nellis (2003,
p. 20), ‘while one might make a case for retaining infrastructure firms in
state hands pending the development of a modicum of regulatory
capacity, the same can hardly be said for retention until the quality of
sound political decision-making reaches some acceptable level. The
point is to reiterate unease with the institution-building argument and
approach’ (emphasis added). Essentially, this is to move out a little the
earlier ‘limited window of opportunity’ or ‘just do it’ approach to priva-

tization to rely upon a modicum of regulation rather than just the
market alone. Remarkably, though, possibly too much so to be a coinci-
dence, the World Bank (2004a) has come to similar conclusions to the
OECD in questioning what was previously for itself, and Nellis, an
unshakeable faith in the virtues of privatization. Indeed, although the
World Bank has itself fanatically pursued privatization in the past, its
shift of position is highlighted in a heading (p. 6):
Privatization Has Been Oversold and Misunderstood
Its own previous stance was one underpinned by free market dogma and
judicious selection and interpretation of evidence. Campbell-White and
Bhatia (1998, p. 1), for example, concluded that
Until a few years ago, there was doubt about many African govern-
ments’ commitment to privatization. That has changed; it is no
longer a question of whether or not – or what – to privatize; it is how
and when to privatize. Today, most governments are committed to
the process, but they have to do more to demonstrate it.
In contrast to such overselling and misunderstanding, the World Bank’s

latest offering (World Bank 2004a) accepts, on a case-by-case, not-one-
model-fits-all basis that there can be a rationale for continuing public
ownership in principle (p. 4), despite ‘the fact that state ownership is
flawed’ (p. 8), and offers the example of Brazilian hydro in practice (p. 43).
It concedes that more and more careful evidence is needed on the welfare
impact of privatization (p. 15). And whilst falling short of explicit self-
criticism, it allows the Wall Street Journal to speak on its behalf (p. 259):
THE WORLD BANK, THE APOSTLE OF PRIVATIZATION, IS HAVING A

crisis of faith. What seemed like a no-brainer idea in the 1990s – that
developing nations should sell off money-losing state infrastructure to
efficient private investors – no longer seems so obvious … Consumers,
feeling deceived, increasingly associate privatization with higher rates
for them and higher profits for foreign companies and corrupt offi-
cials. The unexpected turn of events has left privatization enthusiasts
at the World Bank wondering what went wrong.
So there has been a shift in principle towards a more tempered position

on privatization, and from dogma to a more scholarly approach. The
situation with respect to policy in practice is, however, open to an

entirely different interpretation. This can be seen by reading between
the lines in the Report itself. For its content is not so much about accept-
ing that privatization has gone too far, and it is now time to give state
enterprise another chance. To the contrary, as with the OECD, the
majority of the Report is concerned to identify what pre-conditions, of
regulation and competition, that the state must put in place in order
that privatization can be renewed and be successful. There is no consid-
eration of state enterprise as alternative nor measured consideration of
whether the resources, efforts and capacity building that are needed to
ensure successful privatization might not be better spent promoting and
improving the performance of otherwise factually ‘flawed’ state enter-
prise. As Kessler (2004, p. 18) has argued, also in support of many of the
propositions posed here:16
One might have hoped … [to] have included the option of designing
a more efficient and accountable public provider. However, given the
unflinching support of private provision and relative neglect of regu-
latory issues that characterized Bank policy just a few years ago, the
recommendation to establish a strong regulatory framework before
privatizing reflects a considerable progress.
But matters are not so simple. For the World Bank Report (2004a) is
acutely conscious of the extent to which privatization has stalled in
practice, especially in Africa, as a result of opposition itself from govern-
ment, popular movements and, more by way of passive resistance, pri-
vate (foreign) capital. The latter is rarely interested in investing in
socio-economic infrastructure, such as water provision, with impover-
ished customers and uncertain returns. The result is for the Report to
have a pecking order of targeted infrastructure for privatization – running
from telecommunications and energy through transport and the dead
duck of water and sewerage.17
Elsewhere, the Bank’s shift in position from the neo-liberal clarity and
dogma over support for privatization is represented in a mish-mash
stance loosely attached to the synthesis on privatization, with the
exception of prior commitment to the private sector if at all possible. It
accepts that, ‘Whilst private participation has had its successes, getting
it to work well has proven difficult’ (World Bank 2005a, p. 3). It reiter-
ates, cautions against one-size-fits-all recommendations. Rather ‘the aim
is to indicate how an appropriate solution can be found on economic
reasoning and an assessment of country-specific circumstances’ (p. i).
That economic reasoning is centred on the division between artificial

and natural monopoly (economies of scale without competition for
entry (p. 20)), with competition (numbers of producers) more or less suf-
ficient to guarantee a rationale for participation of the private sector.18
Yet, ‘the approach is pragmatic and solution-oriented, requiring country
officials and Bank group task managers to weigh carefully the pros and
cons of different approaches’ (p. 4).19 There must be doubts about bal-
ance. Tucked away in a footnote on page 16 of the Report is the claim:
Public spending requires a social rate of return of at least 30 percent

for the combined tax and spend operation to increase welfare. Such
high rates open the door for private financing.
And, in case the message has not got across, the text continues:
Suppose the private sector found a project to be privately profitable

with a cost of capital of 15 per cent. If the social rate of return of the
project were 20 per cent, welfare would be reduced if it were financed
from public funds, but increased if it were privately financed.
So much also for warnings about one-size-fits-all and country-specificity.

It follows that the World Bank has adopted an apparently more cautious
approach to privatization (and private participation) in principle as the
means by which to try and push more of it through in practice. ‘Just do
it’ no longer works to get more privatization, nor does it get it to work
well once in place. It is now necessary to focus on sectors where there is
liable to be more chance of success in privatizing. And state activity, if
not enterprise, is needed to make privatization happen. Significantly, the
World Bank has explicitly sought to transfer billions of dollars of infra-
structural financing from the public to the private sector, from IDA,
which makes concessional loans to governments, to the IFC, which lends
exclusively to the private sector. Equally, the WDR for 2005, A Better
Investment Climate for Everyone, essentially fails to recognize the impor-
tance of public sector enterprise other than, at most, as a contributory
factor to favourable climate for the private sector (World Bank 2004b).
In short, there is a bias in the approach of the World Bank, and the
OECD, in favour of market provision even as the deficiencies of the mar-
ket are increasingly being recognized as an obstacle to further privatiza-
tion itself. This bias is liable to be even more marked in policy practice
than in principle. For DfID (2002), a similar bias against the public
sector is revealed if offered in an apparently constructive fashion. It is
recognized that private sector contribution to public service infrastruc-

ture is liable to be limited quantitatively, to 10 per cent or so of sorely
inadequate investment levels. Yet, whilst the public sector will remain
responsible for 90 per cent of investment, policy emphasis is placed
upon how to leverage in more private sector investment rather than
otherwise to enhance the performance of public provision itself!
4.6 A further rethink?
With increasing attention devoted to poverty as well as the decline in

private and government finance for infrastructure, the Bank had to
reassess its strategy for infrastructure lending and an Action Plan was
produced in 2005. The Plan in some ways is almost a step back in time
to the themes of the early 1980s in that at some level it is not owner-
ship that matters. The distinction between public and private is increas-
ingly blurred. A common theme is that improving infrastructure is
difficult under both private and public provision. In the water sector,
for example, ‘regardless of whether the utility is publicly or privately
managed, the core sectoral problem is financial sustainability’ (World
Bank 2005a, p. 22). Similarly, the role for the private sector can only be
decided on a case-by-case basis, and good management is important,
‘In all cases the Bank Group should aim to install management arrange-
ments that create the strongest possible incentives to improve access,
quality and affordability whilst maintaining financial sustainability’
(p. 23). Thus, the water sector is the most difficult to privatize, and
ownership of assets would probably rest with the public sector. Is this a
rethink or a pragmatic acknowledgement of the failure of the private
sector to invest?
This revised approach is clearly a response to the realities of the lack of
private sector enthusiasm for developing country infrastructure invest-
ment. The document does not attempt to conceal the fact that the Bank
has little time for state providers unless they are performing well. Where
financial performance has been poor, the Bank will not provide support
unless government presents a clear strategy for improving performance
(World Bank 2005a, p. vii). In the energy sector, when it comes to invest-
ment in generation, the Bank recommends that governments and
donors take their lead from the private sector, ‘if there is little private
sector interest because the sector produces inadequate revenue to cover
costs and incremental generation, then there should be doubts about
additional public investment too. Any system expansion would only
exacerbate fiscal drain’ (p. 24).
In the long term, competition is considered desirable but the Bank

now recognizes that this may take some time and the Bank might now
consider lending to public operators while the competitive context is
constructed. The appointed leader for a Bank project is advised to bal-
ance the importance and urgency of current investment needs against
the time and effort that will be needed to put in place an effective form
of private participation in infrastructure (PPI). If the government is a
long way from successfully attracting private participation, investment
in a public project may be considered, but any purely public project
should aim to address the major constraints to private participation.
Indeed, ‘In the long run, the aim should be to encourage the private sec-
tor to assume a greater proportion of total infrastructure investment’
(p. 20). So, despite an apparent turnaround in Bank policy regarding pri-
vatization, what we have in the 2005 outline of the Bank’s approach is a
more realistic take on the situation with greater awareness of the chal-
lenges but support for the public sector is reluctant and ultimately the
faith in the private sector and the goal of reducing the state’s involvement
are unchanged.
This is symptomatic of a wider shift which has become entrenched in
the donor approach to infrastructure. Not only is the private sector pre-
ferred, but also policy design is focused on ways in which the context
can better support the private sector and utility performance under state
ownership is discussed in terms of how closely it resembles the private
sector. In 2006 the World Bank (2006a) produced a ‘Toolkit’, which pro-
vides a step-by-step guide for governments that plan to use the private
sector in the delivery of water. Much of the complex political realities
and trade-offs are reduced to facile choices and much of the description
is difficult to reconcile with the situation in very poor countries. The
policy advice is, first, very costly relying heavily on the use of external
advisers and, second, can only be carried out by a government with con-
siderable capacity. If a government is capable of carrying out the advice
suggested, it can certainly manage a water supply. While subsidies are
presented as an option for the poor, it is not clear how these can be man-
aged where the vast majority of the population lives on less than US$2
per day as is the case in much of Africa.
While clearly this Report is for governments that have already opted
for PSP, and so is not intended to address the question of whether or not
the private sector should be used, the nature of the advice presents an
institutional structure that is virtually entirely aimed at meeting the
needs of private firms. However, little account has been taken of the cir-
cumstances in very low-income countries and major discrepancies have
been overlooked. This is particularly prevalent in the discussion regarding

the allocation of risk.
One of the supposed advantages of PSP is that the risk associated with
service delivery that previously rested entirely with the government can
be shared between the government and the provider but this means that
aspects of service delivery now become treated as ‘risk’ which were not
previously because they affect the revenue of the operator. This is the
case with ‘demand risk.’ In poor countries where water is a scarce
resource, one of the reasons for introducing charges for water is to dis-
courage excessive usage. Conservation of water means that resources are
less depleted. However, with an operator in place, a fall in demand
means a fall in revenue for which the operator must be compensated.
This has become ‘demand risk’ and the toolkit advises contractual
arrangements which permit the operator to increase prices if demand
falls, thus penalizing consumers for too little usage. And this is aside
from the fact that increases in price can be expected to reduce demand
further. So what then – increase prices further?
The Toolkit says on several occasions that risk should lie with the
party best able to manage it or mitigate against it. But what really mat-
ters is what will be tolerated by the private operator. In order to suit the
needs of investors, major risks are passed to the party least able to resist
which is ultimately the consumer, completely contradicting the risk
allocation arguments. When it comes to changes that affect the cost
of inputs, such as exchange rate risks, the operator will not be willing
to bear such risk. This is nothing to do with which party can control or
manage the risk, just that the operator will not want to carry this risk so
it is passed to the government and to the consumer. There can be no
‘risk allocation’ argument to justify passing exchange rate risk to the
consumer when it comes to the supply of water as consumers are not
only least able to manage the risk but also they cannot ‘diversify’.
Indeed such ‘diversification’ leads to increased use of unsafe water
sources with public health issues attached (see Chapter 5). However
exchange rate and other costs become embedded in mechanisms such as
‘cost pass–throughs’ and ‘tariff adjustments’. Other suggested costs to be
passed through to the consumer include changes in sales tax or value-
added tax and changes in regulations governing the quality of water or
waste water.
The discussion on risk shows how service delivery has become
entrenched in terms of how the private sector is affected and wider
issues are neglected. For example, a fall in water consumption concerns
wider aspects of resource management which can only be addressed
with an integrated approach to service delivery. Similarly an appropriate

response to exchange risk is to find ways to reduce such risks by using
local suppliers and financing mechanisms rather than focusing on ways
to meet the needs of the private sector. There are other risks for the gov-
ernment associated with having a private operator which are not
addressed in the document. For example, there is the risk that the oper-
ator will fail to disclose appropriate information for the government to
make decisions about costs and tariffs, the risk that the operator will
withdraw following a decision made by directors and shareholders in
some distant head office or the risk that the operator will fail to deliver
results.
Strong support for the private sector goes hand in hand with little
support for the public sector even where state utilities have been effec-
tive. A study by Baietti et al. (2006)20 looks at eleven ‘well-performing’
public water utilities, including three from SSA – Burkina Faso, Uganda
and South Africa. However, the success of these utilities does not lead to
the conclusion that the state is to be encouraged. Rather (p. 1):
Successful public utilities are still the exception, however, and since
most people in developing countries are under the jurisdiction of
public utilities, much of the world’s population is still not adequately
served.
Thus there is some implicit suggestion that lack of privatization is to

blame for the poor water service in developing countries, despite little
evidence of superior private sector performance (see Chapters 3 and 5).
The enterprises are essentially judged on the basis of how much they are
like the private sector. Indeed there is little difference between the two
according to the Report (p. 3):
The organisational structure of the government-owned company

does not differ from that of a privately owned company. The only dif-
ference relates to the ownership of the shares.
The study aims to identify the features of these well-run utilities by look-
ing at external accountability and internal functioning. Key findings
from the study are that greater autonomy was associated with better per-
formance, there was little external regulation, performance targets are
well set, and most use external auditors. On the internal side, the study
found that internal incentive systems were common, the utilities out-
sourced non-core functions, and were responsive to customer needs.
The Report concludes that reform is a political process and the external
context and internal structure need to be mutually supportive. Private
Sector Participation cannot substitute for fundamental sector reforms.
The Report views cost recovery as essential, pointing out than even poor
countries like Burkina Faso can cover operation and maintenance costs.
All successful utilities have been able to ‘fractionalize’ the power of
politicians to pursue short-term political interests.
Ultimately, the Report lists ways in which policy-makers can suggest
how ‘better [to] align incentives among the owners of public utilities in
such a way that natural forces are pulling to improve water service qual-
ity, coverage and financial and operational performance’ (p. 30). Various
methods are presented such as establishing benchmarks, making gov-
ernment transfers conditional on good performance, bringing in other
stakeholders such as banks, government to act as guarantors for bank
loans to utilities, establishing performance-based agreements. The Report
then is establishing ways of creating an incentive framework to make
state providers respond to stimuli that are market-like. Essentially the
message is that private provision is best and where there is a public
sector provider, the more it is like the private sector the better. The ana-
lytical approach stems from the New Public Management (NPM) philos-
ophy which transfers business and market principles and strategies to
the public sector, discussed briefly at the end of Section 4.2 above.
One of the main criticisms of NPM is that it assumes that there is no
difference between the public and private provider. But there are major
differences and some have cautioned against the blurring of the distinc-
tion between public and private (see Haque 2001 for a discussion).
Furthermore, NPM is associated with a smaller state but there is evidence
that effective performance, public or private, is associated with a strong
state. In addition, there are reasons that the private sector has not pro-
vided services that the state provides, typically because they are not
profitable. The Report is about creating a structure that will make public
utilities mimic private providers. Thus a study that might have been able
to shed light on the strengths of the public sector as a provider, disap-
pointingly serves to further undermine the state. This theme is taken up
again in Chapter 5.
As indicated, three commendable conclusions, mantras even, have been

drawn in the World Bank’s rethink on privatization: work through
market and the state; one model does not fit all; and specific circumstances
matter. As Kessides (2003, p. 24), a lead economist with the World Bank’s
Development Research Group, puts it:
One clear lesson that has emerged from the restructuring of network
utilities during the past two decades is that there is no universally
appropriate reform model. … Every restructuring and privatization
program needs to explicitly take into account the important specific
features of each utility (its underlying economic attributes and the
technological conditions of its production) as well as the country’s
relevant economic, institutional, social and political characteristics.
The cookie-cutter approach to reform is unlikely to work and would
predictably lead to problems for the public interest.
And all of this, under a heading ‘One Model Doesn’t Fit All – Choosing
Among Imperfect Systems’.
But one issue, heavily emphasized here, is how the relationship
between rhetoric, scholarship and policy has been rearranged in the
World Bank. Privatization continues to offer a classic illustration of an
apparently softer approach which has not been carried through in prac-
tice, especially in light of the (poor experience of) privatization already
achieved, the difficulties of taking it further in any case, and the delib-
erate shift in resources and support to the private sector, either directly
or indirectly through making the state make the (private) market work.
In this light, the Bank’s rethink on privatization is at most a way of
adding scholarly and rhetorical legitimacy to unchanged policies or as a
response to changed circumstances.
It is, however, one thing to reveal, and criticize, the shifting relation-
ship between rhetoric, scholarship and policy in the Bank, and another
to offer alternatives. One way of doing so is to take the three mantras of
the Bank more seriously than it does itself, and endow them with greater
content and depth. Models do not fit at all, at least of the type associated
with the PWC. The issue of specificity needs to be tied to the sector
and country concerned, to broader developmental goals and processes, and
to an assessment of the economics, politics and culture of provision. And
the role of the state must be seen as something other than residual in case
the market does not work or cannot be made to work. This is all taken up
in Chapter 5 in principle and in detail in the following case studies.
Notes
1. See Williamson (2004) and Kuczynski and Williamson (eds) (2003), as cited in
Chang and Grabel (2004) in their critique of the Washington Consensus and
offer of alternatives.
2. Chang (ed.) (2001) for a collection of Stiglitz’s contributions and, for a wide-
ranging critical assessment of the PWC and the new(er) development eco-
nomics on which it is based, see Fine et al. (eds) (2001) and Jomo and Fine
(eds) (2006).
3. From 1990 to 2001, Mary Shirley was Research Manager on competition pol-
icy, regulation, finance, public sector management and private sector devel-
opment at the World Bank. From 1984 to 2000 John Nellis was a staff
member of the World Bank working on public enterprise reform and associ-
ated areas. His last position at the Bank was as Director of the Private Sector
Development Department.
4. Privatization programmes in developing countries have often been over-
loaded with objectives, and these have at times proved contradictory. For
example, the Government of Malaysia’s guidelines on privatization for 1985,
cited in Adam et al. (1992, p. 23) state:
privatization is expected to promote competition, improve efficiency and
increase the productivity of the services. [In addition] privatization, by
stimulating private entrepreneurship and investment, is expected to
accelerate the rate of growth of the economy.
5. The study included enterprises from Malaysia, Mexico, Argentina, Chile and
United Kingdom.
6. See Bayliss and Fine (1998) for more details, together with Chang and Singh
(1997) for critique.
7. See Wade (2001), and Fine and van Waeyenberge (2005) for corresponding
inconsistencies in Stiglitz’s own economic vision of the world – as information-
theoretic, on the one hand, and reflecting the power of (vested) financial
interests and ideology, on the other, when his views do not prevail!
8. Interview with World Bank Managing Director Shengman Zhang, in Beyond
Transition, vol. 13, no. 103.
9. See previous chapter and also Kayizzi-Mugerwa (2002).
10. The report draws up numbers of tables reflecting distribution of privatization
(value and numbers) by country, region of Africa, sector and so on. Unless
treated with considerable caution, these can be extremely misleading not least
because, for example, privatization of telecommunications accounts for just
1 per cent of numbers and a third of value of sales. South Africa, with just
14 sales out of 2535 up to 2002, accounts for US$2.5bn of US$8.8bn of proceeds
in total. Note that New Zealand, with a population of four million, has gener-
ated more value from privatization over the 1990s than the whole of Africa.
11. As Tangri and Mwenda (2001) observe for the Ugandan privatizations of the
1990s over which government set aside its own reservations in deference to
International Financial Institutions (IFIs) advice and corresponding access to aid.
12. See Hall et al. (2005) for an overview of popular resistance to privatization of
water and energy, and discussion of implications.
13. Foster and Araujo (2004) in context of electricity and telecoms in Guatemala.
14. As reported in Fine (1990a, p. 114). The person concerned is Oliver Letwin,
subsequently the UK’s Tory Shadow Chancellor, although previously Head of
Rothschilds’ International Privatization Unit, a merchant bank from which
he gave up employment after political pressure to do so in case of conflict of
interest!
15. See also Konings (2003) for corruption and ethno-regional protest in case of
privatization of the Cameroon Development Corp.
16. See also Kessler (2003, p. 2) and the notion of a privatization paradox
whereby the state is insufficiently capable of delivering public services itself
but sufficiently capable of supporting the private sector in its doing so. And
for Hall et al. (2005, p. 298):
In 2003, the WB made encouraging statements to the effect that its
position on privatization in water and energy was being completely
reviewed, but no new approach has yet emerged which would enable the
Bank to support public-sector developments with the same vigour.
17. See Hilary (2004) for the interaction between privatization, consultants, DfID
and public services, with profit to the fore for the private sector at the
expense of both public provision and access of the poor.
18. Interestingly, the merits of competition are perceived in terms of the poten-
tial elimination of (inefficient) firms (p. 9), rather than the creation and
entry of new ones associated with development.
19. There must be doubts about balance. Tucked away in a footnote is the
claim (p. 16):
Public spending requires a social rate of return of at least 30 percent for
the combined tax and spend operation to increase welfare. Such high
rates open the door for private financing.
And, in case the message has not got across, the text continues:
Suppose the private sector found a project to be privately profitable with
a cost of capital of 15 percent. If the social rate of return of the project
were 20 percent, welfare would be reduced if it were financed from public
funds, but increased if it were privately financed.
So much also for warnings about one-size-fits-all and country-specificity.
20. It should be noted that, although this research is published as a Water Supply
and Sanitation Note, produced by the Infrastructure Network of the World
Bank Group, the Report has a disclaimer that the findings, interpretations
and conclusions are those of the authors and should not be attributed in any
manner to the World Bank.
5
Water and Electricity in
Sub-Saharan Africa
Kate Bayliss
5.1 Introduction and background
Sub-Saharan Africa (SSA) is the poorest region in the world. Average per
capita GDP in 2003, at just US$633, was less than half that of all devel-
oping countries and less than one-fortieth of that of OECD countries.
There is variation across the region. Equatorial Guinea has the highest
GDP per capita following the exploitation of mineral wealth that led to
its becoming one of the region’s major oil exporters. Burundi is at the
other end of the scale with per capita GDP of just US$83 (see Table 5.1).
Despite decades of international support, income levels in the region
have barely improved in the past 40 years, although, once again, there is
considerable variation across countries. Zambia, for example, has seen
per capita GDP fall by around 44 per cent since the mid-1960s, and
Niger has suffered a fall of 54 per cent while Malawi has seen an increase
of 45 per cent, and Kenya an increase of 59 per cent. Botswana has wit-
nessed the biggest increase with per capita GDP rising by over 1000 per
cent since 1965 (World Bank African Development Indicators). Many
countries made significant economic gains during the 1960s and 1970s,
but these were offset by sharp contractions in the subsequent two
decades. Poverty in SSA rose from 41 per cent in 1981 to 46 per cent in
2001, and the number of people living in extreme poverty rose by 140
million. Of the 26 countries for which data are provided, in 24 of these,
more than half the population lives on less than US$2 a day (Table 5.1).
In most countries, soon after independence in the 1960s, the public
sector expanded rapidly as new governments ‘Africanized’ state
administrations and enterprises were nationalized. State ownership
became widespread. Single-party political systems were often sustained
by commodity windfalls. Rulers had considerable powers of patronage
88
Table 5.1 Key indicators for SSA countries
% population % population
with sustainable with sustainable
Popn.
access to improved access to improved
GDP sanitation water source Electri- without Electricity consump-
per Year of % living fication electricity tion per capita
capita highest on less Change Change Rate (%) (m) (kWH)
GDP per than $2 (% (% %
2003 capita a day 1990 2002 points) 1990 2002 points) 2002 2002 1980 2002 change
1 Angola 975 1992 – 30 30 0 32 50 18 5 12.5 214 135 ⫺37

2 Benin 517 2003 – 11 32 21 60 68 8 24.8 4.9 37 92 149
3 Botswana 4,372 2002 50.1 38 41 3 93 95 2 26.4 1.3 – – –
4 Burkina Faso 345 2003 81 13 12 ⫺1 39 51 12 10.0 11.4 16 32 100
5 Burundi 83 1991 89.2 44 36 ⫺8 69 79 10 – – 12 25 108
6 Cameroon 776 1986 50.6 21 48 27 50 63 13 40.7 9.3 168 207 23
7 Cape Verde 1,698 2003 – – 42 – – 80 – – – 55 99 80
8 Central 309 1977 84 23 27 4 48 75 27 – – 29 28 ⫺3
African
Republic
9 Chad 304 2003 – 6 8 2 20 34 14 – – 10 12 20
10 Cormoros 538 1985 – 23 23 0 89 94 5 – – 26 25 ⫺4
11 Congo 949 1996 – – 9 – – 46 – 19.6 2.9 98 210 114
12 Congo, 107 1975 – 18 29 11 43 46 3 8.3 46.9 161 91 ⫺43
Democratic
Republic
13 Cote d’Ivoire 816 1978 38.4 31 40 9 69 84 15 50.7 8.1 220 197 ⫺10
14 Equatorial 5,900 2001 – – 53 – – 44 – – – 83 54 ⫺35
Guinea
15 Eritrea 171 1998 – 8 9 1 40 57 17 18.4 3.3 – 66 –
16 Ethiopia 97 2002 80.7 4 6 2 25 22 ⫺3 2.6 67.2 – 32 –
17 Gabon 4,505 1976 – – 36 – – 87 – 47.9 0.7 766 1,226 60
18 Gambia 278 1986 82.9 – 53 – – 82 – – – 70 96 37
19 Ghana 369 2003 78.5 43 58 15 54 79 25 48.5 10.5 450 416 ⫺8
20 Guinea 459 2002 – 17 13 ⫺4 42 51 9 – – 85 95 12
21 Guinea-Bissau 160 1997 – – 34 – – 59 – – – 18 41 128
22 Kenya 450 1990 58.3 42 48 6 45 62 17 9.1 28.7 109 155 42
23 Lesotho 635 2003 56.1 37 37 0 – 76 – 5.0 1.7 – – –
24 Liberia 131 – – 38 26 ⫺12 56 62 6 – – 474 164 ⫺65
25 Madagascar 324 1975 85.1 12 33 21 40 45 5 8.3 15.5 49 42 ⫺14
26 Malawi 156 1979 76.1 36 46 10 41 67 26 5.8 11.2 66 80 21
27 Mali 371 2002 90.6 36 45 9 34 48 14 – – 15 33 120
Continued
Table 5.1 Continued
% population % population
with sustainable with sustainable
Popn.
access to improved access to improved
GDP Electri- without Electricity
sanitation water source
per Year of % living fication electricity consumption per
capita highest on less Change Change Rate (%) (m) capita (kWH)
GDP per than $2 (% (% %
2003 capita a day 1990 2002 points) 1990 2002 points) 2002 2002 1980 2002 change
28 Mauritania 384 1976 63.1 28 42 14 41 56 15 – – 60 58 ⫺3

29 Mauritius 4,274 2003 – 99 99 0 100 100 0 100 0 482 1,631 238
30 Mozambique 230 2003 78.4 – 27 – – 42 – 8.7 16.9 364 378 4
31 Namibia 2,120 1980 55.8 24 30 6 58 80 22 34.7 1.3 – – –
32 Niger 232 1979 85.3 7 12 5 40 46 6 – – 39 40 3
33 Nigeria 428 1977 90.8 39 38 ⫺1 49 60 11 44.9 66.6 108 148 37
34 Rwanda 195 1983 83.7 37 41 4 58 73 15 – – 32 23 ⫺28
35 Sao Tome 378 – – – 24 – – 79 – – – 96 115 20
and Principe
36 Senegal 634 1976 67.8 35 52 17 66 72 6 31.4 6.8 115 141 23
37 Sierra Leone 149 1982 74.5 – 39 – – 57 – – – 62 54 ⫺13
38 South Africa 3,489 1981 34.1 63 67 4 83 87 4 67.1 14.7 3,181 4,715 48
39 Sudan – – – – – – – – – 31.0 22.7 – – –
40 Swaziland 1,669 1998 – – 52 – – 52 – – – – – –
41 Tanzania 287 2003 59.7 47 46 ⫺1 38 73 35 9.2 33.0 41 83 102
42 Togo 362 1980 – 37 34 ⫺3 49 51 2 17.0 4.0 74 120 62
43 Uganda 249 2003 – 43 41 ⫺2 44 56 12 4.0 24.0 28 61 118
44 Zambia 417 1976 87.4 41 45 4 50 55 5 18.4 8.7 1,125 603 ⫺46
45 Zimbabwe – 1998 83 49 57 8 77 83 6 40.9 7.6 1,020 981 ⫺4
Sub-Saharan 633 – – 32 36 4 48 58 10 23.5 526.3 434 536 24
Africa
All 1,414 – – 33 48 15 70 79 9 – – 388 1,155 198
developing
countries
Sources: Data on electrification rate and population without electricity from World Energy Outlook © OECD/IEA 2004, Table 10.A.2, pp. 360–361, as
modified by the author. All other data from the Human Development Report 2005, reproduced by permission of Oxford University Press.
.
Water and Electricity in Sub-Saharan Africa 91
through the distribution of public jobs. Many countries suffered from a

series of events in the 1970s which led to precipitous economic decline.
Economic contraction in the 1980s meant that hiring in the public
sector stalled, and real wages collapsed. For example, by 1985 the
average Tanzanian civil servant’s salary was one-fourth of its level a
decade earlier. Civil servants moonlighted to make up for lost income.
The low wages in the public sector led to corruption, institutional
paralysis and a sharp decline in service standards (Addison 2003).
Towards the end of the 1980s, many countries in financial crisis
adopted structural adjustment programmes, with financial support from
the IMF and the World Bank. These focused on creating macroeconomic
stability. Second-generation reforms such as restructuring of the public
sector and privatization soon followed. Donor and multilateral agencies
have made privatization a condition for the receipt of funds. Some
countries have seen improvements in recent years but a number of them
have yet to regain the levels of income that they had attained in the
1970s (Table 5.1).
Privatization has been widespread across the continent, at least in
terms of rhetoric. In practice, though, it has often been difficult to
achieve in large part due to lack of interest from investors, so the pace of
privatization has slowed, in SSA, as elsewhere, after an initial surge.
Following years of initiatives, many governments have had to realign
their expectations and focus on creating the right conditions for
investors as an immediate goal while full-scale privatization is placed on
the back-burner. Reforms are dominated by commercialization, regula-
tion and a transition to marginal cost pricing, all of which are aimed at
paving the way for the private sector in the long term.
The policy context is shaped by a number of parameters that apply
across most countries in the region. For example, these are among the
poorest countries in the world, limiting the extent to which consumers
can pay for services. Levels of access to these services are lower than any-
where else in the world. So the top priority should be to raise the number
of people that are connected to services rather than tweaking incentives
and financial ‘viability’, as might be the case in industrialized economies.
Most countries have experienced one or more economic crises in the
1970s and 1980s, leading to a major weakening of the state and the pub-
lic sector’s capacity to implement and to monitor privatization. Finally,
these countries are highly donor dependent, so government policy is
often largely derived from donor influence. Most private sector partici-
pation (PSP) in infrastructure in Africa has been sponsored or supported
by International Financial Institutions (IFIs) (Nellis 2005). According to
92 Kate Bayliss
Kayizzi-Mugerwa (2003, p. 228): ‘more African countries undertook

privatization in an effort to assuage donor fears over domestic reform
commitment than out of ideological or economic conviction’.
In this light, this and the following chapters take up the themes raised
in the previous chapters and relate them specifically to SSA. Chapters 6
to 9 provide details of reforms undertaken and their outcomes in four
countries – Ghana, Tanzania, Zambia and Namibia. This chapter brings
together the findings from these case studies with other empirical obser-
vations in connection with electricity and water reforms in the region.
This chapter starts with a review of developments in SSA in water and
electricity provision and access and cites the main privatization con-
tracts that have been implemented in SSA. While long-term contracts
have slipped from favour, management contracts are increasingly popu-
lar, largely as a precursor to more extensive privatization. The chapter
then moves on to discuss the main issues that emerge from the case
studies which follow in subsequent chapters and the wider literature.
While the extent of privatization has been limited, countries have intro-
duced market-oriented reforms to facilitate private sector participation.
The reforms introduced generally have focused on financial manage-
ment with some success, but social issues have been neglected. Despite
the World Bank’s rethink, many governments still have their sights
set on privatization, which remains on the policy agenda for many
countries. But regardless of reforms, the main players in service provi-
sion are donors and governments and not the private sector. The
response to the failings of privatization has been to try to do more to
make the environment attractive for private firms rather than to support
the state which is set to remain the dominant provider of these services
for the foreseeable future.
5.2 Infrastructure: water and electricity
Not surprisingly, levels of access to water and electricity in SSA lag far
behind the rest of the world. While considerable progress has been made
on increasing access rates in other regions, in SSA just 58 per cent have
access to an improved water source and 36 per cent to improved sanita-
tion.1 Very little improvement has been made in sanitation over the past
decade (Table 5.2) compared with other developing regions, although,
once again, these averages mask considerable variation across the
region. In Botswana, for example, around 95 per cent of the population
has access to water. Others have seen considerable improvement, such
as in Malawi, where water access has increased from 41 to 67 per cent of
Table 5.2 Access to improved sanitation and improved water source
% population with % population with

sustainable access sustainable access
to improved to improved
sanitation water source
1990 2002 1990 2002
Sub-Saharan Africa 32 36 48 58
All developing countries 33 48 70 79
OECD – – 96 98
World 43 58 75 83
Source: Human Development Report 2005, reproduced by permission of Oxford University

Press.
the population between 1990 and 2002. Performance in other countries is

below average, as in Ethiopia where just 22 per cent of the population has
access to water and only 6 per cent to sanitation facilities (Table 5.1). The
majority of those without water and sanitation are in rural areas, where
the majority of the population lives. According to 2002 data, less than
half of the rural population of 443 million in the region have access to an
improved water source and just 26 per cent have sustainable access to
improved sanitation (WHO/UNICEF Joint Monitoring Programme data).
Similarly, in the electricity sector, access rates in SSA lag far behind
those of the rest of the world (Table 5.3). The proportion of the population
with access to electricity has risen from 9 to 26 per cent over a 35-year
period. This is far lower than in other developing regions and the rest of
the world. As with water and sanitation, there are wide variations in
levels of access across the region, from 4 per cent in Uganda to 100 per
cent in Mauritius. Over 547 million of the population in the region do
not have access to electricity. Per capita consumption of electricity was
higher in SSA than the rest of the developing world in 1980, but, by
2002, the consumption level in SSA was less than half that of the figure
for all developing countries (Table 5.1). The countries of West Africa
have the world’s lowest levels of electrification with rates of access rarely
exceeding 30 per cent and as low as 1 per cent in rural areas. The vast
majority of poor households do not have electricity, and incomes are so
low that few could afford the cost of a connection (Sokona et al. 2004).
Evidence indicates that, with current rates of increase of electrification,
SSA will be the only region where the absolute numbers of people with-
out electricity will increase by 2030 (AFREPREN 2005). Access is being
outpaced by population growth.
94 Kate Bayliss
Table 5.3 Urban and rural electrification rates by region, % of population
2005
1970 1990 2000 Regional Urban Rural
Sub-Saharan Africa 9 16 22.6 25.9 58.3 8.0

North Africa 34 61 90.3 95.5 98.7 91.8
Africa 14 25 34.3 37.8 67.9 19.0
South Asia 17 32 40.8 51.8 69.7 44.7
Middle East 36 64 91.1 78.1 86.7 61.8
East Asia/China 30 56 86.9 88.5 94.9 84.0
Latin America 45 70 86.6 90.0 98.0 65.6
Developing countries 25 46 64.2 68.3 85.2 56.4
World 49 60 72.8 75.6 90.4 61.7
Source: Data from World Energy Outlook © OECD/IEA 2006, Table B1, p. 567 and World
Energy Outlook © OECD/IEA 2002, Table 13.3, p. 380, as modified by the author.
For public services, there is a huge range of performance across state

utilities. Some are in desperate straits. For example, according to the
General Manager of the electricity utility in Congo DRC, ‘Our company
exists only in name. If it were a bakery, it would have already collapsed’.2
Some are reported to have difficulties with corruption, such as Nairobi
water.3 Others are relatively well run by standard criteria. In Uganda, the
National Water and Sewerage Corporation (NWSC) recorded an increase
in operating profit of about 22 per cent, from US$6.0m to US$7.3m,
for the year to end of June 2005.4 Similarly, the Government of Kenya
was able to earn a dividend of Sh500m from the Kenya Electricity
Generating Company (KenGen) in 2005.5
In the early days of independence, access to electricity increased.
From the 1960s, power sectors grew rapidly in developing countries.
Major towns and many smaller ones were linked to integrated networks.
Emphasis was placed on expansion and access to cheap power in order
to promote economic development. In addition, electricity utilities were
used to address social equity and employment issues and to improve the
quality of life of the population (World Bank 1993). Until the mid-
1970s, with low inflation and low debt levels, governments allowed util-
ities a significant degree of managerial autonomy. However, conditions
began to deteriorate from the mid-70s and, by the early 1990s, power
sectors in developing countries were in crisis. System losses were two to
four times higher than the normal level for an efficient utility, and
transmission and distribution losses were often higher than 20 per cent
and sometimes higher than 40 per cent (World Bank 1993).
There were many different issues involved. Some of these were

exogenous, such as increases in world oil prices, high interest rates and
rising inflation. Others were related to domestic sector policies, espe-
cially pricing, which meant that the revenue received failed even to
cover debt repayments so that utilities relied heavily on government
support. The World Bank’s approach to the power sector in SSA mirrored
the organization’s wider perspective outlined in Chapter 4. For the Bank
the crises in electricity utilities boiled down to, ‘undue government
interference in those day-to-day organizational and operational matters
that should be under utility control’ (p. 35). Such interference, accord-
ing to the Bank, had far-reaching consequences, influencing procure-
ment decisions, restricting ability to raise tariffs, limiting access to
foreign exchange, mandating low salaries tied to civil service pay levels,
excessive staffing and political patronage. As a result, utilities suffered
from inadequate management capacity, departure of more capable staff,
inefficient operation and maintenance, high losses and weak financial
controls. Efforts to implement reform were considered unsuccessful by
the Bank due to lack of government commitment and, in the 1990s, a
different stance was adopted (World Bank 1993, p. 12):
The Bank will aggressively pursue the commercialization and

corporatization of and private sector participation in developing
country power sectors. … Power enterprises must operate as commer-
cial businesses.
There were concerns regarding the time to establish regulation but, for
the Bank, ‘The benefits of moving away from current inefficient
practices far outweigh the costs’ (p. 15). Efforts at reform in the 1980s,
including measures such as contract plans, failed to generate lasting
improvements and, by the end of the 1980s, donors were increasingly
interested in experimenting with privatization.
5.3 Water and electricity sector reforms
While there were some nuances, the reform package adopted in the
majority of SSA countries in both water and electricity shared much
common ground. Essentially, reforms have targeted financial manage-
ment, addressing staffing, pricing, revenue collection and costs. The
main elements are first corporatization (or commercialization) whereby
the utility is separated, as a stand-alone company, from the operations
of government. Second comes unbundling intended to ease the
96 Kate Bayliss
monopolistic hold of integrated utilities. Service provision is broken

down into different segments that can be undertaken functionally, as
in the electricity sector where generation, transmission and distribution
are typically separated, or geographically, for example, where provision
for rural services are separated from urban services, as has been done with
both water and electricity in some cases. Third, privatization is the final
stage of reform, and this is intended to bring in both efficiency and (pos-
sibly) investment.6 It should be noted that the private sector is already
active in service delivery on a small scale with, for example, in the water
sector, private tankers and water vendors operating throughout the region
and entrepreneurs operating small-scale private services. Hereinafter
though, our attention will be on contracts with larger firms under lease,
concession or management-type arrangements as well as divestiture and
greenfield investments when it comes to power generation.
Generally there are higher hopes for a competitive market structure in
electricity than in the water sector. Some countries (such as Kenya) are
aiming to create a ‘single-buyer’ model where multiple private (and pos-
sibly public) sector power generators compete to sell power to a single,
state-owned transmission company which will sell the power on to a
number of electricity distributors. There are varying degrees to which
reforms have been implemented. Kenya has only unbundled generation,
whereas Uganda and Zimbabwe have gone to the extreme of completely
unbundling generation, transmission and distribution (AFREPREN
2005). Some have introduced long-term concessions with the private
sector (see Table 5.4), whereas in Kenya, the electricity distribution
company, Kenya Power and Lighting Company (KPLC) has been listed
on the Stock Exchange. While a number of countries have reached the
commercialization stage, some have managed unbundling and privati-
zation, but none has managed to bring competitive forces to bear on
service provision (although this is unlikely in water but was a goal for
electricity). In the electricity sector, ‘after more than a decade of reform,
this standard model of an unbundled, competitive and privatized indus-
try is nowhere to be found in Africa’ (ESMAP 2005, p. 13).
Table 5.4 lists all the major contracts that have been signed for the
delivery of water and electricity in SSA. The table shows privatization
has not run smoothly and that the pace of privatization has slowed with
just one contract awarded in the water sector since 2001 (and that has
now been terminated). In the electricity sector, a major contract was
signed for PSP in Uganda in 2004. But despite efforts to unbundle the
electricity sector, the same investor, Eskom, has a stake in both the gen-
eration and distribution companies. The table also shows that a number
Table 5.4 Privatization contracts awarded (excluding management contracts)a
Country Year Company Contract type Lead investor
Electricity utilities
Uganda 2004 UEDCL 20-year lease for Umeme (Eskom/Globeleq)
distributionb national electricity
distribution
Uganda 2002 UEGCL 20-year contract to Eskom
generationc manage the country’s
two state-owned
power dams
Cameroond 2001 Sonel 20-year concession AES
and 56% Equity stake
Togoe 2000 Togo 20-year concession Elyo (Suez) and HQI –
Electricite investors filed suit against
government with ICSID
2005.f
Senegalg 1999 Senelec 34% stake and Hydro-Quebec and Elyo
management control (Suez) – abrogated in 2000h
Guineai 1994 SOGEL 51% Equity stake SAUR – EdF – HQI –
Investors left 2001j
Côte 1990 CIE Concession SAUR and EdF
d’Ivoirek
Joint water and electricity utilities

Chadl 2000 STEE 30-year concession with Vivendi – pulled out after
first 5 as management 5 years.m
contract
Malin 2000 EDM 20-year concession SAUR and IPS – Re-
nationalized 2005⬚
p
Cape Verde 1999 Electra 50-year concession Electricidade de Portugal
(EdP) – Mediator to resolve
long-running dispute
between investors and
govt.q
Gabonr 1997 SEEG 20-year concession Vivendi
Water utilities
Tanzania – see 2003 City Water Lease contract Biwater/Gauff – terminated
Chapter 7 by GoT 2005
Nigers 2001 SNE 10-year renewable Vivendi
contract
t
Mozambique 1999 Aguas de Concession: Aguas de Portugal and
Moç Maputo and Motola SAUR – SAUR left at end
ambique 15 years; 2001 and AdP became
Other 3 cities: 5 years main shareholders.u
South Africav 1999 Greater 30-year lease Biwater / NUON
Nelspruit
Utility
Company
South Africaw 1999 Dolphin 30-year lease Saur (Siza Water)
Coast
x
Senegal 1996 Senegalaise 10-year lease – since Saur
des Eaux extended
(SdE)
South Africay 1995 Nkonkobe 10-year lease Suez subsidiary,
(Fort Northumbrian Water –
Beaufort) nullified December 2001
Continued
98 Kate Bayliss
Table 5.4 Continued
Country Year Company Contract type Lead investor
South Africaz 1993 Amahlati 10-year lease – since Suez subsidiary,

(Stutterheim) extendedaa Northumbrian Water
South Africabb 1992 Lukhanji 25-year lease Suez subsidiary
(Queenstown) Northumbrian Water
Central African 1991 SODECA 15-year lease contract Saur – withdrew 2000
Republiccc
Guineadd 1989 SEEG 10-year lease Saur – Lease not renewed
in 1999
Côte 1960 SODECI Contract started in 1960. Saur
d’Ivoireee In 1987 was renegotiated
for 20 years
Notes: a There are various databases and information sources relating to privatization such as the
World Bank’s PPI database but, of all sources, local press reports (corroborated with other evidence)
were found to be the most accurate.
b
‘Globeleq/Eskom takes over Ugandan electricity distribution’, Datamonitor NewsWire, 1 March
2005.
c
‘UMEME To Manage Uganda’s Power Supply’, East African, 2 August 2004.
d
‘AES Acquires 56% of Cameroon Utility for Approx. $70 Million; First Integrated Utility
Purchased by AES in Africa’, Business Wire, 18 July 2001.
e
‘Togo Gets New Electricity Company’, Africa News, 14 December 2000.
f
http://www.worldbank.org/icsid/cases/pending.htm.
g
‘Senegal: Energy Provision’, Economist Intelligence Unit, 9 June 2004.
h
‘Senegal: Energy provision’, Economist Intelligence Unit, 1 August 2003.
i
’Guinea New deal for Sogel’, FT Energy Newsletters – African Energy, 1 June 2001.
j
‘Guinea: Energy provision’, Economist Intelligence Unit, 15 December 2003.
k
Campbell-White and Bhatia (1998).
l
‘Vivendi to run Chad Power, Water Company’, Africa, Reuters Textline, 31 January 2000.
m
‘Vivendi Waves Goodbye’, Africa Energy Intelligence, 25 August 2004.
n
‘Energie du Mali Welcomes New Owners’, FT Energy Newsletters – African Energy, 26 January 2001.
o
‘Le Mali reprend à Bouygues le contrôle de l’eau et de l’énergie’, Le Courrier (Suisse), 12 November
2005, published on ufctogo.com, 15 November 2005.
p
www.electra.cv/prinemp.htm
q
IMF (2005a).
r
Samuel (1999).
s
‘French Success in West Africa’, FT Energy Newsletters – Global Water Report, 16 January 2001.
t
‘Mozambique Awarded Its First Water Privatization Concession’ SAPA, South African Press
Association, 30 September 1999.
u
‘Mozambique: Water Company Announces New Image’, Agencia de Informacao de Mocambique,
4 September 2003.
v
‘A First in South Africa’, Biwater Press Release, May 1999.
w
‘Dolphin Coast Takes The Privatization Plunge’, Financial Mail, South Africa, 5 February 1999.
x
‘Bouygues Saur Water Services Wins Distribution Order In Senegal’, Bloomberg News, 11 January
1996.
y
‘Nkonkobe Council Wins Case Against Company’, Business Day, South Africa, 18 December 2001.
z
Plummer (2000).
aa
Booysen (2004).
bb
www.suez.com
cc
‘French Firm Saur To Run Water Services’, Africa Economic Digest, Reuters Textline, 23 September
1991.
dd
Menard and Clarke (2000b).
ee
Menard and Clarke (2000a).
of these contracts are in difficulties, and some have been terminated. Of

the electricity privatization contracts, three out of seven are in media-
tion or have broken down. Three out of the four combined water and
electricity utility privatizations have been terminated or are in difficulty.
A higher proportion of water privatization contracts are continuing
relatively smoothly but still many have faced major problems, most
recently in Tanzania (see Chapter 7). The disputes usually boil down to
two major issues: the investment that the private firm is required to
carry out and the tariff at which services are to be provided.
The decline in long-term contracts, as shown in Table 5.4, reflects the
tailing off of private investment in infrastructure, discussed in Chapter 3.
Management contracts are preferable for investors. In December 2004, a
senior official at the French utility Saur, which has been involved in a
number of African privatizations, indicated that the economic stability
of most countries around the world could not be predicted beyond
2 years which made 30-year contracts difficult to envisage as attractive.7
Yet, management contracts are still seen as an interim phase on the road
to full privatization which clearly remains a policy objective for many.
Several short-term management contracts are in place, for example, in
the combined water and electricity utilities in Madagascar and Sao Tome
and Principe. In Kenya a two-year management contract is planned for
the distribution utility KPLC.8 In 2001, a Suez-led consortium was
awarded a five-year management contract for water services for the city
of Johannesburg. The Burkina Faso water utility has had a five-year man-
agement contract in place with Suez subsidiary, Ondeo, from 2001.
Management contracts are also in place for the delivery of urban water
in Ghana and in the Tanzanian electricity utility (see Chapters 6 and 7).
Elsewhere, there have also been smaller-scale private sector activities. In
Namibia for example, electricity distribution in the north of the country
was privatized for a time (see Chapter 9). In addition, there are a num-
ber of IPPs in the region producing electricity which is sold to the state
transmission company. But generally their contribution to the national
grid is substantially less than state-owned generating capacity.
The contracts listed in Table 5.4 fail to capture developments in
countries that have been striving for years to privatize utilities but with-
out success. Some privatizations took years to achieve, only to result in
contractual disputes or even termination, as in Tanzania’s urban water
sector (see Chapter 7). Meanwhile, some countries spent years trying to
privatize their utilities before finally giving up. That is not to say that
privatization is off the agenda. Most of these countries are planning to
introduce management contracts as an interim measure before larger-scale
100 Kate Bayliss
privatization. In Malawi, for example, the Lilongwe and Blantyre Water

Boards were lined up for sale in 1996 but privatization was finally
dropped in 2004. The Government now plans to introduce PSP with
management contracts.9 In the Republic of Congo (Brazzaville) an
attempt to privatize the state water company, Societe Nationale des Eaux
du Congo (SNEC), attracted just one international bidder, Biwater,
which then withdrew its initial offer. The Congolese Government is
now planning to offer a management contract combined with funding,
some of which is from donors, for rehabilitation of the utility.10 Burundi
launched its privatization programme as long ago as 1991, seeking to
sell off its parastatals including the water and power utility REGIDESO,
but the process attracted very little interest from investors, and the
parastatal remains in state hands.11 In Niger, the electricity utility, NIG-
ELEC, was put up for privatization in 1996.12 In 2006, according to the
IMF, the privatization has been delayed mainly due to the difficulty of
finding private companies ready to invest the US$60–100m required for
expansion and rehabilitation of the power system. However, the
Government of Niger, ten years on, is not deterred from privatization
and is reported to be looking into new ways to make the NIGELEC offer
more attractive (IMF 2006).
Utility privatization has been a long, slow and painful process in SSA.
The revised policy approach, as well as in rhetoric and scholarship, cov-
ered in previous chapters, reflects the growing number of contracts,
listed in the table above, that have been terminated or are in major dif-
ficulties, as well as the experiences of countries that have spent years try-
ing to privatize but without success. However PSP in water and/or
electricity is reported to be in the pipeline in a number of other
countries – Zambia (see Chapter 8), Burkina Faso,13 Nigeria,14 Kenya,15
Benin,16 Botswana,17 Cameroon,18 Central African Republic19 and
Republic of Congo.20 Policy documents are littered with commitments
for the state to step back and be a facilitator for PSP rather than a
provider. This is also shown in the case studies in the following chapters.
Regardless of the Bank’s sudden change of heart and now hesitation at
least in principle over privatization in absence of stringent pre-conditions,
governments in SSA still have faith in the private sector. In Ghana,
against the advice of the World Bank, there has been a clause introduced
in the management contract for the provision of water in urban areas
that allows it to be turned into a lease agreement. The Ministry of
Energy in Ghana issued a press release in 2006 to say that the power
shortages would be alleviated by private investment in the sector despite
little investment to date (see Chapter 6). Privatization is still on the
agenda for many countries and the World Bank’s rethink has yet to
reach policy-makers in much of the region.
5.4 Case studies summary
Chapters 6 to 9 cover in more detail the developments in water and elec-

tricity in four countries: Ghana, Tanzania, Zambia (water only) and
Namibia. These case studies cover a range of reform processes, economic
development and historical background. The countries are in East, West
and Southern Africa. However, case studies cannot adequately represent
the whole continent, so this chapter brings together the findings from
the case studies with other empirical research from the region to present
a more rounded, if far from comprehensive, analysis, provided in
Section 5.5.
Three of the four case study countries (Ghana, Tanzania and
Zambia) became independent from the United Kingdom in the 1960s
while Namibia was liberated from South Africa in 1990. Ghana and
Tanzania have attempted some form of PSP in both water and elec-
tricity. In Zambia and Namibia, the focus of reform has been on com-
mercialization. Ghana, Tanzania and Zambia are all heavily aid
dependent while Namibia, although receiving some support from
donors, does not have loans from the IMF or World Bank and so has
greater freedom to pursue its own policy agenda. In each country the
post-independence period featured large expansion of social sectors
and increases in access to water and electricity to high standards
under the public sector, even when independence came as late as 1990
as in Namibia. This was out of a commitment to national develop-
ment and a focus on social objectives. Ghana, Tanzania and Zambia
suffered major economic contraction soon after this expansion.
Economic crises in the 1970s led to poor state performance and
declining social indicators. Namibia, in contrast, has not experienced
such economic shocks and has seen a more gradual transition period
in the state sector after independence with many employees
unchanged from the pre-independence period. Despite this, a number
of the policies associated with the neo-liberal agenda feature in
Namibia as well as in the other three countries.
In the energy sector, Ghana and Tanzania proposed similar major
reforms to their electricity sectors in the 1990s. Both set out plans for
unbundling their vertically integrated utilities and increasing PSP in
power generation to reduce dependence on hydro sources. In Ghana,
102 Kate Bayliss
the ultimate vision was of a competitive wholesale power market with a

single independent transmission company and a number of distribu-
tors, along the lines of the ‘single-buyer’ model with an independent
regulator. Multiple private generators were to compete to sell power to
the national grid as well as directly to large consumers through bilateral
contracts, so cherry picking was to be actively encouraged.
In Tanzania competition was expected to bring efficiency into the
energy ‘market’ with the government only intervening when market
forces failed to deliver desired results. The utility, TANESCO, was to be
vertically unbundled to allow competition in electricity generation and
an independent regulator was to develop a bulk electricity exchange mar-
ket where the price would be determined by the system marginal cost.
Retail tariffs were to be determined on the basis of price-cap regulation.
Divestiture of the vertically separated companies was to be complete by
mid-2005. The liberalization of the electricity sector would leave the state
disengaged from direct production activities, allow more resources to be
devoted to social services and transfer commercial risks to private capital.
A decade later, there has been little progress in establishing the single-
buyer model in either country. In Ghana, plans for restructuring have
been stuck at the design stage for many years. By 2005, eight years after
the launch of reforms, just two changes had been introduced – there was
a regulator in place and one private power generation plant established.
The electricity sector is still dominated by the state-owned vertically
integrated utility, VRA, and the state distribution company, ECG. The
electricity situation in Ghana continues to be precarious. The two state
utilities have made consistent losses. Revenue collection is low, and
there is extensive theft of power through illegal connections. System
losses from ECG reached 25 per cent in 2004. Reforms have yet to make
a significant impact.
The performance of the Tanzanian utility, TANESCO, has been better
although system losses were increasing in the late 1990s. Rather than
unbundling, a management contract was introduced in 2002. Any
improvements are not immediately obvious from a review of the com-
pany’s financial data although it is reported that there has been a
change in the culture of the enterprise since the start of the contract and
that the company now disconnects government organizations that fail
to pay their bills. But the performance of the electricity sector is domi-
nated by shortages in hydropower due to lack of rainfall, thereby
increasing reliance on high cost thermal energy, some of which uses
expensive imported fuel and for which the utility pays a high price to
private producers.
As part of the drive to increase generation capacity, both Ghana and

Tanzania invited private firms to establish IPPs. One has been estab-
lished in Ghana and two in Tanzania. Instead of being competitive, they
are inflexible and expensive, underwritten by long-term power purchase
agreements (PPAs) and payments have to be met regardless of changes in
circumstances. The IPPs in Tanzania have proved so costly that the gov-
ernment is considering buying one of them from the private investor in
order to save money.
Namibia is also planning to introduce a single-buyer system, even
though the utility has been profitable and self-financing, to address two
key constraints – insufficient generation capacity and fragmentation in
distribution leading to different policies regarding tariffs. The single-
buyer system is only intended as an interim measure for about five to
eight years, after which the market is to be fully liberalized. For the via-
bility of the transmission system, foreign utilities will not be allowed to
cherry-pick large customers without contributing to the overheads of
the transmission system. There has been some PSP in the distribution of
electricity in Namibia, with private firms operating in parts of the north
and the south of the country, with mixed results.
As with Tanzania and Ghana, Namibia urgently needs to increase the
capacity for power generation as it currently relies on imports from South
Africa for almost half of the power consumed, but this source is looking
less secure as demand for electricity in South Africa has escalated. The
main issue in the energy sector is identifying an alternative source of
power, and there are plans to develop the Kudu gas reserves off the southern
coast of the country. Whether this is achieved or not depends on the out-
comes of negotiations with private firms as PSP may prove too costly.
The reforms proposed in the electricity sector in the 1990s were overly
optimistic in Ghana and Tanzania, and based on industrialized countries
rather than development policy. Even in Namibia, where there is a
higher level of capacity within the state utility, the prospect of creating
a competitive wholesale power generation market is ambitious. There is
a stark contrast between the vision of a competitive wholesale power
market and the rigid expensive IPPs in Tanzania. Clearly, institutional
reforms are required, for example, in Ghana to address the high levels of
system losses, but the system that has evolved, with a regulator but little
else, fails to address the constraints imposed by poor performance and
insufficient generation capacity.
Reforms are more advanced in the water sectors. Considerable restruc-
turing has taken place in Ghana, Zambia and Tanzania, and each of these
countries has also introduced some form of PSP in the water sector.
104 Kate Bayliss
Reforms in each of these countries were urgently required as conditions

in all three have been deteriorating with high physical and commercial
losses. In Ghana, the water sector was restructured so that rural water
and sanitation were separated from urban water in preparation for pri-
vatization via two long-term leases. After extensive delays and vocifer-
ous protests, this policy was dropped and a single, short-term
management contract for the delivery of urban water was signed in
2005. In Zambia, ten commercial utilities have been created for the
delivery of urban water. The first was established in 1989 but most
were created in 2000. One privatization contract was introduced to
provide water and sanitation in the mining area after the mines were
privatized but this was terminated in 2005 on the grounds that the pri-
vatized utility did not perform any better than the state utilities in the
mining areas.
In Tanzania, urban provision was separated from rural water and sew-
erage. Eighteen independent urban water and sewerage authorities were
established around the country, excluding the capital. Central govern-
ment subsidies for water utilities were to be removed and the authorities
were to become self-financing. A separate programme was established for
the privatization of urban water and sanitation in Dar es Salaam. After a
long and tortuous process, a lease contract was finally signed in 2003 for
the supply of urban water and sewerage services in the capital but it was
subsequently terminated after just 18 months. The government and the
operators are in arbitration. The provision of water and sanitation in the
capital was taken over by a state company under the guidance of a new
CEO, an engineer with a long history in the state water company. With
technical support from the newly successful Ugandan water utility, the
delivery of water in the city has improved rapidly.
Water was provided through a government department in Namibia
until it was commercialized in 1997 with the creation of a separate
parastatal, Namwater. From being completely subsidized, prices were
increased over the next few years with a view to reaching a position of
full cost recovery. Namwater provides water across the country and to
rural communities. In urban areas, Namwater sells water to local
authorities which are then responsible for delivery of water and sewer-
age services within their geographical area. While Namwater has become
self-financing, the company has huge amounts owed to it from a num-
ber of municipalities that are responsible for local distribution in urban
areas. Some of these municipal councils lack the capacity to manage
distribution and have accumulated large arrears which threaten to
undermine the sustainability of the system.
Aside from the economic and practical outcomes from the reform
process, discussed in Section 5.5, the restructuring has created a
corporate approach to service delivery following advice from numerous
management consultants. For example, to make a more attractive busi-
ness, rural water and sanitation were separated from urban water in
Ghana as they were detrimental to the ‘corporate synergy’ and failed to
‘add value’. Similarly, the autonomous water and sewerage authorities in
Tanzania have been advised by consultants to have clear marketing
strategies, to increase market share through ‘market development’ and
to reach ‘new customers’ and ‘new geographical markets’. Thus, from
being a service the delivery of water is treated as a commercial business.
5.5 Issues arising
The empirical literature on the impact of privatization in water and energy

in Africa is limited both in extent and on account of the limited experience
outlined above. However, in general, there is little to indicate that privatiza-
tion has had a marked impact on the performance of utilities. While some
improvements have been observed with some PSP contracts, some improve-
ments too, have been made under state ownership. Equally, the perform-
ance of some state providers has declined and the performance of some
services have deteriorated under private control. Research by AFREPREN
(2005) on the electricity sector indicates that reforms in the power sector
generally continue to show unsatisfactory technical but improved financial
performance. The best performing electricity utilities are not those that have
been privatized.
In the water sector a study by Ballance and Tremolet (2005) examines
the impact of PSP on the delivery of water in SSA based on seven case
studies. They find that ‘performance improvements from PSP are by no
means guaranteed’ and ‘publicly-owned corporations can also respond
positively to incentives, particularly if rewards are provided to their man-
agers and employees for improved performance’ (p. vi). Statistical analysis
of the comparative performance of public and private water utilities in
Africa fails to detect any significant difference (Kirkpatrick et al. 2006).
The results suggest that ‘the efficiency performance of state-owned water
firms in Africa is comparable to that of private enterprises’ (p. 155).
One case is regularly cited as an example of successful privatization.
The Senegal water utility, Senegalaise des Eaux (SdE), was transferred to
Saur under a ten-year lease contract in 1996, subsequently extended. This
has been described as ‘an example of a well-planned and well-executed
reform which … has stood the test of time’ (Brocklehurst and Jannsens
106 Kate Bayliss
2004, p. 1). Criteria for this evaluation include an increase in connec-

tions and improvements in profitability. A further reason it is judged pos-
itively is that the contract was successfully renegotiated. A dispute arose
over the operator’s targets. The investors claimed that the baseline figures
were inaccurate, and that the Government had failed to provide the
required investment. These issues were eventually resolved and the lease
revised. But the success of this outcome may not be related to the con-
tract terms so much as the context in which they were set. Senegal is
regarded as an example of a good system for conflict resolution but a sim-
ilar system was established in Tanzania, yet ‘this was not really allowed to
follow its course’ (Ballance and Tremolet 2005, p. 45), and the contract
was terminated, suggesting that contractual terms can be overruled. This
suggests that it is not the contractual framework that matters so much as
what drives each party to negotiate an agreement, and these incentives
have more to do with power and politics than contract terms.
Initial conditions are also important. In Senegal, according to Brocklehurst
and Jannsens (2004, p. 43), the utility was
already performing relatively well at the time that it was initiated:

The utility was not heavily overstaffed and was relatively well-run
from a technical point of view and the tariff levels were reasonably
close to cost recovery of operation and maintenance costs … there
was also a conducive legal framework which was already structured in
such a way that private sector partnerships could be fostered.
Evidence from elsewhere indicates that the water utilities that were per-
forming well before privatization tend to continue to do so after privatiza-
tion while those that were failing continue to do badly. Privatization, per
se, has not managed to turn around a poorly performing utility although,
as in the energy sector, privatization has focused attention on revenue and
even poorly performing utilities have made a profit after privatization
(Bayliss 2003). Initial conditions may also affect the scope for renegotia-
tion. The performance of the water sector in Tanzania before privatization
was very weak, so there was no slack to allow time for renegotiation, but in
Senegal, if the sector was performing well, there is more space for parties to
revise the details of the contract. Finally, the privatization project in
Senegal benefited greatly from two World Bank loans to support the urban
water sector. The first in 1995 was for US$247m and the second in 2001
was for US$376m, much of which was invested in infrastructure (Tremolet
et al. 2002). Finance, as discussed below, can greatly enhance performance
irrespective of the balance of public and private participation.
Policies in water and electricity in SSA have been dominated for over
a decade by the quest for private sector investment that has not been
forthcoming or which has failed to achieve the desired results unless

the utility was already doing well. Even where privatization has been
achieved, tensions persist between the drive for a commercial return
and the need to meet social and political objectives. However, the
response to these major stumbling blocks has not been to re-focus
attention on supporting the state as the provider of public services but
rather to make more effort to accommodate the needs of the private
sector. Given the challenges with privatization, reforms in many coun-
tries have focused on the environment for PSP and utility management.
Measures undertaken include the establishment of independent regula-
tors and a shift to cost-recovery pricing practices. These as well as the
impact on social policies and the role of the state are explored in the
rest of this section.
5.5.1 Regulation
There have been mixed results when it comes to regulation. In the case
studies, Ghana has established a multi-utility regulator, the Public Utilities
Regulatory Commission (PURC) as well as a specialist electricity sector reg-
ulator, the Electricity Commission, although there has been little PSP in
the electricity sector. Namibia has established a regulator for parastatals
and an electricity regulator and Zambia is one of the few countries in the
region to have established a dedicated water sector regulator. In Tanzania,
although enabling legislation had been passed, at the end of 2005 the reg-
ulator for water and energy had not been established. There are question
marks over the independence of these utilities – see case studies for more
on this – but the bigger question is what they can realistically achieve.
Most regulators in SSA are regulating state utilities. The only case-
study country that had implemented a major privatization was
Tanzania, and it is here that the regulator has not yet been established.
While it is no less important to regulate public than private providers
of utility services, the use of a regulatory framework established for
industrialized country private providers has questionable relevance in
the SSA context. The imposition of fines for breaches of regulation will
be counterproductive in the case of a cash-strapped state utility which
has limited capacity. In addition, the ultimate sanction of the revoca-
tion of a license is pointless where there is only one state provider. The
case studies demonstrate that there is little the regulators can do in
terms of the imposition of sanctions in the event of non-compliance
with set targets. What regulators can realistically achieve in SSA is to
impose greater scrutiny on state providers. In Ghana, the PURC website
publishes details of sectoral performance. In Zambia, NWASCO pub-
lishes details of the performance of the ten commercial water utilities
108 Kate Bayliss
and provides greater scrutiny of activities but can do little beyond

providing feedback. The PURC in Ghana also promotes a social agenda
highlighting the role of secondary and tertiary providers in the distribu-
tion of water to those outside the piped network. Similarly in Zambia,
NWASCO has been encouraging commercialized utilities to extend
services to deprived areas to kiosks managed by a water vendor.
The existence or otherwise of an independent regulator does not seem
to be of great significance as the ‘successful’ water privatization in
Senegal was carried out without a regulator in place. The regulation was
based on the terms established within the contract. Yet the replicability
of the contract terms depends on the wider context; see above. The
imbalance of information and resources has made regulation difficult in
places where there is a private operator. While the regulator or contract
can provide a monitoring capacity, it can be overridden if it suits one or
other party. Regulation has been difficult to achieve in a number of
privatization contracts in the region (Bayliss 2003).
The orthodox image of a regulator is of a purely technical agency that
applies clearly defined rules and which is immune from political
pressures. In SSA, where consumers are poor, price setting cannot be based
solely on cost but also needs to take affordability into consideration. In
Namibia, Ghana and Zambia, the regulators have been involved in setting
prices, and they have intervened to limit price rises. In Namibia the elec-
tricity sector regulator stood up to the state electricity company in 2006
on a request for price increases on the grounds that people cannot afford
it. The matter is now being debated at ministerial level and opinions are
divided over whether or not the government should ‘bail out the con-
sumer’. Thus independent tariff-setting formulae can only work up to a
point at which the question of who pays for electricity and water becomes
a political one. In Ghana, the PURC sometimes resists pressure from utili-
ties to increase prices on the grounds that they could do more to reduce
losses. Tariff-setting on the basis of cost then is not a purely technical
activity as it requires a view on what costs are controllable and what prices
are affordable.
5.5.2 Prices
Prices in SSA have in the past often been below cost, and raising prices
has been seen as a crucial step in restoring the financial health of water
and electricity utilities. But simply increasing prices to cover costs is not
straightforward. For example, cost-recovery pricing policies mean that
shortages can put upward pressure on prices. In Uganda, for example, in
early 2006, a drought led to a drastic reduction in power supplies. As a
result of these power shortages the privatized distribution firm, UMEME,
plans to increase prices. According to UMEME’s Managing Director:21
Load shedding has two impacts – other than the fact that there is no
power, to us it means that the costs of the entire electricity sector goes
up because we are now distributing our costs over reduced produc-
tion. Unless there can be some subsidy obtained, the price will go up
because the sector has to make up for the rising cost of production.
But increasing prices is not popular where service levels have declined.
Furthermore, raising prices does not always lead to higher revenue as con-
sumption can fall as a result. Higher prices can also drive consumers to use
alternatives which are unsafe, unhealthy or unsustainable. In Malawi, for
example, a 25 per cent price increase in October 2005 was followed a few
months later by a record high in levels of charcoal dependence even
though charcoal production has been illegal since 1997 in a bid to stop
deforestation.22 Elsewhere price increases have led to increased use of unsafe
water sources, as for example, in South Africa (Cottle and Deedat 2002).
Each of the case study countries is aiming, at least in theory, for full cost
recovery in the delivery of water and electricity, but the difficulty here is
first in determining what costs should be covered, especially where there
are high levels of losses from the utility and, second, how to apply this
principle where the costs are unaffordable for consumers. In Ghana, for
example, prices rose substantially between 1998 and 2002 with four
increases in the price of both electricity and water. By 2003, the PURC con-
sidered that cost-recovery levels had been reached and losses had to be
reduced. Subsequent price increases were to be just for input costs. This is
borne out by performance data for the utility GWCL which indicate that,
even though rates of collection fell and physical losses remained above 50
per cent, there was a large increase in revenue between 1996 and 2003 due
to price rises (see Chapter 6). Elsewhere, efforts to introduce full cost recov-
ery in pricing have had limited impact due to low incomes and high costs.
In Tanzania, electricity prices are supposed to be based on the long-run
marginal cost of power supply covering fixed and variable costs but the
cost of generation is so high that the utility, TANESCO, is paid a subsidy
from the government. Tariffs are described as ‘cost reflective’ but full cost
recovery is not in place, nor will it be for the foreseeable future because
consumers cannot afford it.
Similarly, incomes in Zambia are so low that even the relatively low
price of water is unaffordable for many. Although prices have increased
since commercialization of the water sector, erosion by inflation has
meant that prices charged are among the lowest in the region. However,
analysis in Chapter 8 indicates that, when incomes are disaggregated,
110 Kate Bayliss
prices have increased most for the poorer communities. Furthermore,

water charges are unaffordable for about a quarter of the urban popula-
tion.23 The concept of full cost recovery is undermined when consumers
are too poor to be able to cover the cost of basic supplies of water.
Commercialization in Zambia has been achieved only on paper, as the
independent Commercial Utilities are regularly bailed out by the gov-
ernment. The sector needs huge investment as decaying infrastructure
means that leakages are high which pushes up costs.
In Namibia, full cost recovery policies have been adopted in the water
sector. As a result, prices have escalated since 1997 but the distribution
of the increase has been geographically uneven, depending on how
much it costs to bring water to a particular area. Price increases have
been lowest in the wealthiest areas as it is cheapest to supply water to
these regions due to the location of natural resources, while the poorer
regions have seen the biggest rise in water prices. This is the country
with the world’s most unequal income distribution. Thus, while full cost
recovery appears to be a neutral, purely technical concept, the situation
in Namibia shows that it does not just perpetuate, but can exacerbate
already high levels of poverty and inequality. Full cost recovery prevents
the use of utility tariffs to promote redistribution.
Another component of pricing reform relates to the treatment of
exchange rate fluctuations on costs and prices. Both electricity and
water have high capital costs which are often incurred in foreign cur-
rency, but revenue is received in domestic currency. There has been an
ongoing debate over which party should bear the risk of exchange rate
fluctuations in the event of private sector involvement (see Chapter 4).
The orthodox position on risk allocation is that the party that is best
able to bear the risk should be the one to which the risk is allocated. This
was used to justify the government, rather than the private investor,
being saddled with exchange rate risk as they, rather than private
investors, were deemed best able to influence exchange rate risk
(although, arguably, with a diverse portfolio and access to international
risk mitigation facilities, private firms might be better able to cope with
exchange risk). Even if the government agrees to bear the risk of
exchange rate fluctuations, private investors are still not entirely com-
fortable, as they are dependent on the government meeting their com-
mitments. More recently, the argument has shifted so that exchange
rate and input costs are typically passed through to end-users, creating a
more secure revenue stream for investors which is outside of govern-
ment influence. While this argument might provide greater comfort for
investors, it is inconsistent with the risk allocation logic, as consumers,
especially the poor, are least able to influence or accommodate

exchange rate fluctuations. There is also the issue of whether private par-
ticipation is a contributing factor in, or even creates, risk and volatility in
outcomes.
In an increasing number of cases, the allocation of risk to the con-
sumer has become institutionalized in the tariff-setting mechanism
where tariffs are set according to some pre-determined formula which
includes fluctuations in significant parameters including the exchange
rate, imported inputs and inflation. The aim is to ensure the financial
sustainability of the utility and that consumers respond to price signals.
But prices may become volatile. In Kenya, electricity bills doubled in two
months as generating costs went up due to drought. The resulting fluc-
tuations in electricity prices has made it difficult for manufacturing com-
panies to operate.24 In Malawi, the Automatic Tariff Adjustment (ATA)
led to a 25 per cent price increase in the price of electricity. The regulator
in Ghana now uses an ATA to determine price changes so that increases
in the cost of inputs for both water and electricity (such as imported oil,
currency devaluation and inflation and electricity costs in the case of
water) are passed on to the consumer. Donors have had a strong hand in
the price-setting agenda. Ensuring that electricity and water tariffs are in
line with their respective formulae for automatic quarterly adjustments is
a performance criteria set by the IMF. Tanzania is considering introduc-
ing an ATA in the electricity sector but it is not currently in place.
Full cost recovery policies can weaken the scope for cross-subsidy, and
this is also the result of restructuring measures that have accompanied pri-
vatization and commercialization in creating a fragmented structure. In
the case-study countries, rural water has been separated from urban and, in
each case, some form of independent, autonomous, self-financing entities
have been created to manage water distribution. While such a policy may
increase the responsiveness to local needs and cut down on bureaucracy as
in Tanzania, for example, there can be limitations in terms of capacity and
finance and there is little scope for cross-subsidy. In Ghana, for example,
rural and small-town water supplies had benefited from cross-subsidies
from urban water and sanitation. Following their separation in the run-up
to privatization, the scope for regional cross-subsidy was removed, thereby
increasing the vulnerability of small providers. In these areas, cost recovery
is unlikely because consumption is so low that the charges would not be
adequate to cover costs. Where towns lack industrial and commercial
enterprises the financial position is vulnerable, especially where there are
high levels of poverty. In the absence of cross-subsidies, regional inequities
can be perpetuated. In Namibia, local councils are responsible for the
112 Kate Bayliss
delivery of water and sanitation and are supposed to be self-financing but

some do well and some are in a very weak condition. Small councils lack
the capacity to manage water distribution networks and some areas have
high unemployment and no industrial base and there is no secure revenue
source. This is in contrast with the country’s more wealthy industrial
centres, and inequality is further exacerbated.
5.5.3 Finance
Water, sanitation and electricity providers in SSA need finance for
investment. Many are operating with ancient infrastructure following
cutbacks in government spending. There is some evidence from the
case studies that investment finance contributes to improvements in
performance. In Tanzania, a review of the independent urban water
authorities found improvements in some authorities but not in others.
The authorities that did best were the ones that have enjoyed consid-
erable financial support from donors. These have up-to-date water pro-
duction installations and established sewerage systems and are in
better condition than those that have not had financial support.
Similarly, in Zambia the utility that has performed well is the one that
had its infrastructure completely replaced by donors when it was estab-
lished, and its performance was better than that of the utility that was
privatized. Evidence elsewhere indicates that ongoing donor support
was key to the success of management contracts. In Kenya and Burkina
Faso, for example, donors funded most of the investments required to
deliver service improvements and network extension (Ballance and
Tremolet 2005).
Despite increases in prices and attempts at cost recovery, finance for
water and electricity services in Ghana, Zambia and Tanzania is mainly
provided by donors with some funding from government. Donors con-
tribute about 90 per cent of the total investment in rural and small-
towns water services in Ghana. The rehabilitation of the urban water
sector in Accra will cost around US$120m, and nearly 90 per cent of this
will come from the World Bank. In Tanzania, funds available for investment
in the water sector are much lower now than they were in the 1970s and
1980s. The urban water project in Dar es Salaam, which started in 2003,
will require US$165m of which donors are providing 87 per cent, 8 per
cent was to come from the Government and private investors were to
provide 5 per cent. Even with this large donor commitment, far more is
needed. A fourfold increase in annual investment is required if the MDG
for access to water and sanitation is to be met for Ghana.
In contrast, in Namibia, the electricity utility, Nampower, makes a profit,

paying dividends to the government, but alternative sources are required
to finance the additional generation capacity which is urgently required.
Namwater is also self-financing, but as official subsidies have been
removed the company is amassing losses due to non-payment. However,
the municipalities that cannot afford to pay Namwater sometimes receive
ad hoc bailouts from the Ministry of Regional and Local Government
and Housing as well as large local firms in some cases. So this is a form
of subsidy to those that fail to pay their bills, and the evidence indicates
that these are not always the most needy.
5.5.4 Social issues

The wider policy shift from structural adjustment to poverty reduction
has highlighted the deficiencies in the privatization agenda, in part
because it has continued to focus on financial health, and, in the elec-
tricity sector, on bridging short-term generation shortfalls (AFREPREN
2005, p. 94):
The most outstanding social impact of power sector reforms is the

inability of reforms to increase access to electricity among the poor
after 15 years of reform.
What little research there is indicates that reforms have had a neutral or
adverse effect on the poor and should be redesigned if they are to ‘be jus-
tified under a poverty-reduction agenda’ (AFREPREN 2005, p. 93).
Privatization and commercialization have failed to increase rates of
access for the poor and have even adversely affected them with the
removal of subsidies. This has placed a heavy financial burden on low-
income consumers, leading to disconnections. Social issues in service
delivery had not received much attention. Provisions to serve the poor
are not well established or refined.
The poor typically pay more for both water and electricity in SSA (and
elsewhere). Perversely, this can lead policy-makers to jump to the
conclusion that they are both able and willing to pay more. Because
the poor pay more for services, this does not mean that higher prices can
reasonably be afforded. It necessarily means that other expenses are not
met in order to pay for essentials such as water. Some countries, such as
Ghana and Uganda, have seen increases in numbers of electricity
connections but, at the same time, a reduction in per capita consumption
suggesting that affordability remains a constraint (ESMAP 2005). Measures
114 Kate Bayliss
to increase usage by the poor have included subsidies for consumption.

A growing number of countries have accompanied price increases with
provisions to ensure electricity is affordable for the poor. This is so of life-
line tariffs, available, for example, in Kenya, Uganda and South Africa
(AFREPREN 2005). The utilities in the case-study countries had intro-
duced lifeline tariffs for the poorest but these are blunt instruments in
addressing poverty. They fail to reach those most in need as they are not
connected to networked services or they live in large households with
shared connections where combined consumption greatly exceeds the
lifeline amount.
One of the major challenges of service delivery is getting consumers to
pay. Non-payment for services continues to be a major cost for water and
electricity utilities. There are a number of reasons for non-payment in SSA.
In some cases, services have been provided for free or at very low cost and
the transition to cost-recovery requires a revision of consumer attitudes.
Water is not considered something of value as it was free for so long.
Revenue collection has also been hampered by weak capacity within the
service providers and a weak revenue base in towns with high unemploy-
ment and no industry. Corruption and weak capacity has in some cases led
to increased reluctance to pay utility bills because of a sense that the
money paid would be wasted in a weak and corrupt system. In the past, in
Namibia, non-payment was used as a political tool in the fight against
apartheid and this mindset continues. Finally, many are poor and cannot
afford to pay. Evidence from Zambia presented in Chapter 8 indicates that
water is not affordable for a large proportion of the population.
The use of prepayment meters in the collection of revenue has not
been widespread in the case-study countries apart from Namibia where
in some parts more than 90 per cent of electricity meters are prepaid. In
the water sector, prepayment meters have been installed in many infor-
mal settlements where it has proved difficult to organize a collective
payment system. While there has been little if any protest against the
use of electricity prepayment meters, in the water sector such meters
have been disastrous. This is because of high levels of breakdown and
vandalism so that they have in some cases had a devastating effect on
the already weak financial states of some local authorities, with water
allowed to flow freely to waste and without payment.
In much of SSA, the main means of enforcing payment is to disconnect
those that fail to pay for services. The difficulty is that the evidence indi-
cates that there are two types of non-payer – those that can pay and
choose not to and those that cannot afford to pay. The challenge then is
to differentiate between those that can afford to pay from those that
cannot. Where services are disconnected, some households pay straight-

away and are reconnected while others remain disconnected. This
process differentiates between the two types of non-payer but for those
that cannot afford to pay, it is too late. Those that remain disconnected
are reported to obtain water from neighbours but also from unsafe water
sources. With the wider use of water meters, the coping strategies of
those disconnected are under threat. In Tanzania, the introduction of
meters has led to a restructuring of social norms, as those that have a
connection are no longer willing to provide water to their neighbours.
The penalty for non-payment can be more severe than disconnection. In
Namibia, debts to the council for utilities can accumulate quickly, accru-
ing interest, and people have been evicted from their homes as a result.
The goal of increasing access to water and electricity is undermined if
subsequently large numbers are disconnected due to non-payment. One
of the ‘successes’ of the Senegal contract was the increase in collection
rates, but this was achieved with a strict disconnection policy. Reportedly
about 12 per cent of connections were not in service in the area served by
the private operator and this rate was higher outside Dakar reaching
20 per cent in some areas, and there are similarly high levels of discon-
nection from the water network in Cote d’Ivoire (Tremolet et al. 2002).
With the fragmentation that is present in each of the case-study coun-
tries, social provision for the poor is strained. In Namibia, policy is at
the discretion of each individual council provider, but many lack the
resources or the capacity to provide any kind of support for those that
cannot afford to pay. There was some evidence in the case studies
(although based only on interviews and not substantiated) of specific tar-
geted subsidies being applied in rural water in Namibia and in the capital
in Tanzania. In both examples a small subsidy was provided once a case
of need had been established following investigation of each individual
situation. This is a labour-intensive approach, but some measures of this
kind are essential to ensure that a focus on cost-recovery policies does
not result in cutting supplies to the poorest.
5.5.5 Significant individuals

There is some evidence from the empirical literature and the case studies
that policy reform can be successful under the control of particular indi-
viduals in particular circumstances and this is regardless of ownership.
In Cameroon, AES’s management of the electricity utility was disastrous
from the start of the contract in 2001, with expatriate managers failing
to have any impact on the company’s poor performance. The contract
was almost terminated. It was only, on the direction of the President’s
116 Kate Bayliss
energy adviser, with the appointment of a local manager in 2004 who

had been with the company for 27 years that performance of the com-
pany improved and has since been turned around.25 In Uganda, the
national water utility, NWSC, was operating at a loss with performance
indicators below African utility standards. In 1999, the World Bank rec-
ommended that it should be closed down. A newly hired Managing
Director quickly established a 100-day programme in which positive
change had to be observed, or he would resign. Targets were established
and several significant benefits achieved – monthly water production
increased, sewerage overflows were reduced, response time to blockages
declined, water meter coverage increased and Unaccounted for Water
(UFW) fell from 49 per cent to 33 per cent. Collections increased and
arrears fell. Building on this a system of Area Performance Contracts
with Area managers was launched and a series of further 100-day goals
was established. Performance exceeded targets by a considerable margin.
In Senegal, the experience with privatization of the electricity utility,
Senelec, was very different from that of the water sector. The privatiza-
tion contract was cancelled after 18 months and efforts at re-tendering
failed to attract effective interest from investors. However, a review of
the performance of the utility indicates that once plans for privatization
were finally abandoned Senelec showed a marked improvement in per-
formance and the efficiency of the company ‘soared’. The main reason
put forward to account for the massive improvement in performance is
the appointment of a dynamic new Director-General (Gökür and Jones
2005). A similar situation is emerging in the water sector in Tanzania
where the performance of the water utility has started to improve with
the appointment of a new CEO after privatization had been dropped.
These four cases highlight the role of individuals in both public and pri-
vate utilities in pushing through institutional changes to improve per-
formance. The measures introduced by these individuals are not
revolutionary but they are tailored to the situation and they have been
effectively implemented. It may be that the individuals in question have
some kind of incentive framework or that their timing was right or they
have useful connections which enable them to bring about change. For
whatever reason, the most effective institutional reforms have been at the
hands of significant individuals irrespective of the contractual framework.
5.5.6 The state is key

Many of the reforms assessed above are intended to remove the state
from involvement in the water and electricity sectors as far as possible
with delivery in the hands of at least an independent state provider if not
a private firm and the rules set by an independent regulator, impervious

to political pressures. However, the way in which water and electricity are
provided in SSA cannot be described as, or as approaching, a free market.
Profits or losses of utilities depend on government decisions, for exam-
ple, on pricing. In Kenya, the government directed the state generation
company, the Kenya Electricity Generating Company, KenGen, to sell
electricity to the state electricity distributor, KPLC at a subsidized whole-
sale price. As a result of this subsidy, there was a great improvement in
the performance of KPLC which turned a profit after four consecutive
years of losses and the company’s share price rose. In 2005, however, the
subsidy was stopped and the withdrawal of this subsidy was expected to
result in large reductions in the share price of KPLC but was needed to
boost the performance of KenGen in advance of its own Initial Public
Offering in 2006.26 The state determines profits and share prices. There is
an underlying contradiction in the notion that sector policy comes down
to getting the environment right to attract private investment and make
the market work when the whole market context is completely shaped
by state intervention. There is a false view that markets are an efficiency-
making force of nature. The experience of SSA shows that they are
manipulated and, moreover, manipulation is tolerated by donors (and
recipients) on a selective basis.
Similarly, there is considerable emphasis on competition but these
services are not competitive and PSP will not increase competition. The
main competitive element is in the form of governments competing
to attract private firms to invest in their utility rather than firms
competing to win contracts. And private investors will only be inter-
ested in relatively risk-free rather than competitive projects. Contracts
can deliberately stifle competition and are set to provide exclusivity for
long periods (as, for example, in the case of AES investment in the
Cameroonian electricity utility where theirs was the only bid and the
firm was awarded exclusive management responsibilities for generation,
transmission and distribution assets for 20 years (Pineau 2002)).
Privatization has been little more than a side show in the provision of
water and electricity services, despite dominating the headlines in some
countries. The state is the dominant provider. According to WaterAid
(2006, p. 54)
Very pragmatically, the accomplishment (or at least the efforts

towards it) of the MDGs on water and sanitation depends on the
improvement of the public sector which delivers for more than
90 per cent of the piped population worldwide.
118 Kate Bayliss
In the case studies, the main players have been donors and the state. The
electricity providers in the three case studies are state owned and in the
water sector services are provided similarly by state-owned providers.
The state is still the provider even where there are short-term manage-
ment contracts as in TANESCO and Ghana Water Company Limited.
Like it or not, the state is going to be the main provider of services in the
region until such time as the initial conditions are right for a ‘successful’
privatization by which time, presumably, the limitations of the state will
have been addressed to render privatization unnecessary. At most, a
rethink on privatization and private participation can only be brought
forward once pre-conditions are in place. But should SSA have devel-
oped such capacities, other conditions will already have been trans-
formed beyond recognition. In short, the World Bank’s rethink, from
empirical experience and practical needs, is too little and too late. And it
is ill-directed in focus. Attention must focus on state provision.
5.6 Conclusion
Utility privatization has been disappointing in SSA except where per-

formance was already good and/or where there have been large donor
disbursements. That is not to deny that the subcontracting of some
activities to the private sector has been beneficial or that management
contracts have brought some gain. The process of commercialization
has led to greater attention to matching revenue and expenditure in the
delivery of basic services, and this is essential for financial sustainability.
However, the policies of commercialization and privatization have
neglected social issues and have created a piecemeal reform and frag-
mented structure with sector policies developed in a disjointed fashion.
Based on industrial country policies and experience, sector policies in
water and electricity in SSA have effectively been reduced to creating an
attractive environment for private investors.
The wider impact of such policies has been neglected. For example,
privatization has meant that ‘non-viable’ business units were separated,
but those that were not viable have become even more fragile with inad-
equate capacity and no source of cross-subsidy. Similarly, policies which
have focused on revenue, such as full cost recovery, have been pursued
in isolation from social issues, and the policy of disconnecting non-
payers can lead to increased use of unsafe sources. Furthermore, the
wider policy context has affected service delivery. Urbanization follow-
ing from the decline in agricultural incomes has placed a significant
strain on resources in large urban areas. This is particularly significant in

Zambia and in Dar es Salaam. Unplanned urban informal settlements
place a huge strain on providers. Similarly, government policies aimed at
decentralization, as in Namibia, have also led to a heavy burden on
small municipal councils that have limited capacity.
The evidence above shows that both public and private ownership
have the best and the worst of performance. The quest throughout the
empirical literature is to find the thing that works. What is the key to a
successful utility? Evidently it is not ownership. A study by WaterAid
(2006) lists four themes which recur in their case studies of two successful
public water utilities. These are efficiency, accountability, transparency
and community participation. These are not contradicted in the case
studies that follow here, but some additional factors have also emerged
which relate to the wider context of service delivery.
Some common themes run through both the case studies and findings
from the wider literature. First, initial conditions matter. The most suc-
cessful contract for water privatization was in Senegal and it was already
performing well. Successful public ownership in Namibia is the result of
historical legacy and high levels of capacity in addition to sector
reforms. The importance of initial conditions is established in other
research but it is described elsewhere in terms of degree of readiness for
privatization, and the response, where initial conditions are not con-
ducive to privatization, is to try to create these conditions. Ballance and
Tremolet (2005), for example, suggest a progressive approach to PSP,
given the number of pre-conditions to be in place to transfer more risk
to the private sector. Arguably, by the time these conditions have been
created, the state will be capable of being an able provider itself.
Second, finance is vital. The utilities that do best are the ones that
receive finance. Utilities are trapped in vicious circle of weak infrastruc-
ture, high system losses, high costs and low revenue leading to little
investment and weak infrastructure. Cost recovery is not an option for
most of the region, and many still cannot afford even the lowest prices.
Alternative and local sources of finance would help to keep costs down.
Low incomes need not be an impediment to a strong utility, as one of
the more ‘successful’ state utilities is in Burkina Faso which is one of the
poorest countries, but large amounts of donor finance have helped per-
formance improvements (Ballance and Tremolet 2005). Third, contracts
and regulators might work or they might not. A transparent accountable
system of operation is required but is not sufficient. At least as important
seems to be an effective manager and supportive conditions inside and
120 Kate Bayliss
outside the utility. Finally, a coherent national strategy is needed to

enable some kind of cross-subsidy from richer to poorer districts and to
include small private providers that are at the forefront of delivery to the
poorest.
The sectoral reforms proposed for the water and electricity sectors in
SSA in the 1990s were hopelessly unrealistic. Policy-makers got it very
wrong. Chapter 4 tells how privatization was pursued by donors with
little in the way of empirical or theoretical grounding. The region has
been a laboratory for development policy. The discussion above shows
how the African privatization experiment has failed. The drive for pri-
vatization has come from donors and has been promoted by consultants
across the continent, offering the same ‘advice’ to governments
throughout the region which often comes down to making utilities
attractive for investors. Millions of dollars have been spent on consult-
ants and advisors designing inappropriate policies that have been
shelved or have failed, as, for example, in Ghana and Tanzania. Not only
is this aid money that could have been better spent but there is no
redress against the poor advice from consultants and donors which are
unaccountable for the policies they promote. In Tanzania water privati-
zation was a condition for debt relief and donors paid for consultants
from a right-wing UK think-tank to help with public relations for priva-
tization. However, when the contract collapsed, it was the government’s
problem – see Chapter 7.
It is increasingly acknowledged that privatization in infrastructure has
not had the hoped-for benefits in SSA (Nellis 2006a, for example). The
question is what is the appropriate policy response to the failings of
privatization. For Nellis it is a case of learning from the failings of
privatization and modifying its implementation to allow greater private
sector involvement. For the World Bank (2005a) support for the public
sector is grudgingly given but only until such time as private participa-
tion can take over. But the evidence in SSA is stacked against private sector
success when it comes to the delivery of basic services, in the absence of a
strong state. Surely an appropriate policy response would be to look at
bolstering the public sector by considering what has worked instead of
what should work if the circumstances were changed?
Notes
1. Improved sanitation facilities include connection to a public sewer, connec-
tion to septic systems, pour-flush latrines, simple pit latrines and ventilated
improved pit latrines. Not considered as improved sanitation are service or
bucket latrines, public latrines and open latrines. Improved water sources
include household connections, public standpipes, boreholes, protected dug
wells, protected springs and rainwater collections. Unimproved water sources
are unprotected wells, unprotected springs, vendor provided water, bottled
water and tanker truck-provided water. Access is broadly defined as the
availability of at least 20 litres per person per day from a source within one
kilometre of the user’s dwelling. Sustainable access has two components with
respect to water. The first requires that the source be environmentally
sustainable and so extraction needs to be less than that available and the
second requires that the programme be sustainable in terms of supply and
management. See www.who.int
2. ‘Power Shortfall a Nightmare for Brazzaville Residents’, Africa News, Congo-
Brazzaville, 2 May 2005.
3. ‘Inside Story: Nairobi’s Water Infamy’, The Nation, Kenya, 31 January 2005.
4. ‘Uganda’s “Exemplary” Water Firm Given $90m Debt Swap’, The East African,
17 January 2006.
5. ‘KenGen to Pay State Sh500m Dividend’, The East African Standard,
22 December 2005.
6. The different approaches adopted in the electricity sector are covered in
AFREPREN (2005).
7. ‘Overseas Work Must Change’, Utility Week, 17 December 2004.
8. ‘KPLC Privatized Soon’, The Indian Ocean Newsletter, 21 January 2006.
9. ‘Development: Malawi Drops Plans To Privatize Two Water Firms’, IPS, Inter
Press Service, 9 November 2004.
10. ‘Regulatory Watch: Congo (Brazzaville)’, EIU Business Africa, 25 April 2005.
11. ‘Privatization Drive to be Intensified in Burundi’, World Markets Analysis,
17 November 2004.
12. ‘Nigelec Eligible for Privatization’, Africa Energy & Mining, 6 November 1996.
13. Country PRSP, 2003.
14. www.irc.nl, 6 December 2004.
15. ‘The Case for Water Privatisation in Kenya’, The East African Standard,
29 September 2004.
16. ‘Privatizations Beckon’, Power Economics, West Africa, 16 March 2005, and
‘Bids to Open for SBEE in January’, Africa Energy Intelligence, 15 October 2003.
17. ‘Botswana–Master Plan Reveals Privatization Candidates’, Africa News, Mmegi/
The Reporter, 12 October 2005.
18. Cameroon water company, SNEC, Government Letter of Intent IMF, p. 69.
‘Cameroon: Review of the Staff-Monitored Program and Request for a
Three-Year Arrangement under the Poverty Reduction and Growth Facility
and for Additional Interim Assistance Under the Enhanced Heavily
Indebted Poor Countries Initiative – Staff Report’, IMF Country Report,
no. 05/413.
19. IMF (2006, p. 47) Central African Republic: Use of Fund Resources – Request
for Emergency Post-Conflict Assistance – Staff Report IMF Country Report,
no. 06/42.
20. ‘Sell-Off in Three Years’ Time’, Africa Energy Intelligence, 1 June 2005.
21. ‘Lake Victoria Water Levels Fall As Country Plunges Into Power Crisis’, The
Monitor, Uganda, 7 February 2006.
122 Kate Bayliss
22. ‘Charcoal Dependence Levels Reach Record High’, The Chronicle Newspaper,
Malawi, 7 February 2006.
23. Based on affordability measured as 5 per cent -of income – see Chapter 8.
24. ‘Consumers Panic Over Power Bills’, The East African Standard, 16 October
2005.
25. ‘Plugging Into Africa’ www.money.cnn.com, 1 November 2005.
26. ‘Electricity Costs to Increase As KenGen Withdraws Subsidy’, The East
African, 30 November 2005.
Part II
Case Studies
6
Ghana: Privatization – A Work
in Progress
Kate Bayliss and Rudolf Amenga-Etego
6.1 Introduction
Privatization has dominated reform policies in Ghana’s water and

electricity sectors since the early 1990s when substantial restructuring
was planned with a view to paving the way for private sector investment.
More than a decade later, although results have been disappointing,
there remain hopes that the private sector will intervene both to bring
in investment and to make utilities operate efficiently. In the water
sector, during the 1990s, restructuring took the form of separating the
potentially lucrative urban water sector from the ‘social’ water service to
rural areas and small towns so that the urban segment could be priva-
tized. After several years the aspirations for Private Sector Participation
(PSP) had to be scaled down due in part to massive domestic and inter-
national protests against the privatization of water as well as changes
in the international climate regarding private sector investment in
infrastructure.
In the electricity industry, there were grand plans to create a competitive
wholesale market, where multiple providers would sell to an independ-
ent transmission company as well as to a number of regional distribu-
tion companies. But, as yet, the market framework that was to be the
basis for the organization of the energy sector has not materialized, and
the reform focus has shifted. Private Sector Participation has slipped
from the headlines, and greater emphasis is now placed on creating the
right environment for the private sector, a key component of which is
removing the government from policy decisions and moving prices to
cost recovery levels. The country is required by the IMF to ensure that
increases in costs in the supply of both water and electricity (due, for
example, to rising oil prices, inflation or currency devaluation) are
125
126 Kate Bayliss and Rudolf Amenga-Etego
passed through as increases in consumer prices via an automatic

formula. This is implemented by the regulator and takes the government
out of price-setting (IMF 2004b).
This chapter presents findings from research, most of which was
carried out in November 2005, into the nature of reforms in the water
and electricity sectors. The chapter initially explores some aspects of the
economic and historical context for privatization before examining
developments in detail first in electricity and then with the water sector.
The role of the regulator for both sectors is also considered. Reforms
have been intended to address the poor performance of the state utilities
which have made persistent losses with high levels of leakage. The
emphasis has been on financial goals and, hence, very high price
increases have been implemented in both sectors as part of a transition
to full cost recovery. Until recently, social issues were secondary to suiting
the needs of investors but to date there has been little PSP in these sec-
tors. Privatization remains a core policy objective. While the World
Bank may have moved on from infrastructure privatization, after years
of being doctrinaire and indoctrinating, it may take longer to turn
around policies on the ground.
6.2 Background
When Ghana became independent from the United Kingdom in 1957 it

was classified as a middle-income country, on a par with South Korea
and Mexico. Under Nkrumah, the first President, with a state-led
approach to economic development, the economy was stable until the
late 1960s. Following a drastic currency devaluation and a military coup
in 1972 the economy took a major downturn and the decade to 1983
has been described as an ‘economic disaster’ (Aryeetey and Harrigan
2000). Initially the deterioration in underlying conditions was masked
by favourable developments in gold and cocoa markets. Ghana’s GDP
peaked in 1973–74. However, in the subsequent down-turn, poor eco-
nomic policies combined with external shocks. The decade to 1983 saw
real per capita GDP growth become negative in six out of the ten years.
Price controls and a corrupt state coincided with international recession
to bring about virtual economic collapse. By 1982, per capita GDP was at
a level far below that of the 1970s (see Figure 6.1).
In 1983 the Government introduced the Economic Reform
Programme (ERP). The ERP included many of the common features of a
structural adjustment programme such as the removal of price,
Ghana: Privatization – A Work in Progress 127
600
500
400
300
200
100
0
65
67
69
71
73
75
77
79
81
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85
87
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01
19
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19
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19
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19
19
19
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20
Figure 6.1 Per Capita GDP (Constant 1995 US$)
Source: World Bank Africa Development Indicators Database.
exchange rate and interest rate controls as well as regulatory reform. It

was the urgent need to obtain financial support from donors that
precipitated the adoption of the ERP (Aryeetey and Fosu 2002). With the
rubber stamp of approval from the Bretton Woods Institutions, substan-
tial amounts of aid began to flow into Ghana. Under the ERP, manage-
ment of the public sector budget came under scrutiny as did the state’s
involvement in over 300 parastatals. Many public sector workers were
laid off (Alderman et al. 1995). The State-Owned Enterprise Reform
Programme was introduced in 1987. Ghana launched its divestiture
programme in 1988 and performance contracts were introduced in most
state-owned enterprises (SOEs).
While growth has been much more even and stable in the 20 years
since the ERP (see Figure 6.1), it is difficult to isolate the impact of policy
from aid flows (McKay and Aryeetey 2004). Progress has been slow. Per
capita GDP is around US$369 and over 78 per cent of the population live
below US$2 a day (Human Development Report 2005). Despite positive
growth rates there is little evidence of a significant structural change in
the economy. Increases in investment are from the public rather than
the private sector. Expansion of services as a proportion of GDP has been
in ‘lower-order’ services such as wholesale and retail trade as well as
restaurants. The share of industry in GDP has generally been declining
since the 1990s, largely a result of poor performance in manufacturing.
Agriculture remains dominant, and higher than target growth in 2004
was achieved largely as a result of improved techniques in the agricul-
tural sector (ISSER 2005). Ghana is highly aid dependent. Foreign loans
have been essential for financing the budget (ISSER 2005), and the coun-
try accumulated very high debts which have now been reduced since
Ghana reached the completion point under the enhanced HIPC
Initiative in July 2004 (IMF 2005b).
While some major changes have been implemented since the 1980s
(economic liberalization, democratization), of all the ERP policies, it has
been particularly difficult to introduce reforms in the public sector
despite extensive donor support for reform measures (McKay and
Aryeetey 2004). Civil service employment as a percentage of the popu-
lation is one of the highest in the region but emoluments for the public
service have been very low (GPRS 2003). The authorities are still under
pressure to reduce the civil service wage bill (IMF 2005b).
6.3 Electricity
According to Ghana’s 2002 census report, approximately 43 per cent of

the population had access to electricity which is higher than average in
SSA (see Table 5.1). Over 80 per cent of the domestic electricity supply is
consumed in the cities and towns. The highest rates of access are in the
Greater Accra Region and the lowest in the northern Regions (Table 6.1).
In rural areas around 16 per cent of the population has access to
electricity (RCEER 2005).
While access rates have increased and average annual per capita
consumption – at around 416kWh – is significantly higher than in
neighbouring countries (Table 5.1) consumption per capita has declined
since its peak in the early 1980s.1 The main agents involved in the elec-
tricity sector are the two utilities, Volta River Authority (VRA) and the
Electricity Corporation of Ghana (ECG) as well as two regulatory agencies,
the Electricity Commission (EC) and the Public Utilities Regulatory
Commission (PURC).
Table 6.1 Proportion of the population

with access to electricity by region (%)
Ashanti 59.0
Brong-Ahafo 43.2
Central 49.4
Eastern 42.1
Greater Accra Region 83.1
Northern Region 28.8
Upper East Region 14.7
Upper West Region 18.0
Volta Region 36.0
Western Region 50.6
Source: UNDP Ghana (2005) (citing CWIQ report

2003).
6.3.1 The utilities

Ghana’s power sector is dominated by the state-owned VRA which is
responsible for electricity generation and transmission across the country
as well as distribution in the north of the country (via a subsidiary,
Northern Electricity Department (NED)). Established in 1961, VRA pro-
duces power mainly from two large hydropower plants at Akosombo
and Kpong on the Volta River. In the 1990s, in order to reduce the vul-
nerability of the electricity sector to fluctuations in rainfall, VRA
explored thermal power production options and completed the first
330MW thermal plant at Takoradi with World Bank funding in 1999. In
the same year, VRA entered into a joint venture with CMS Energy of the
US to expand the Takoradi Thermal Power Plant to 550MW with the
addition of 2x110MW Combustion Turbine plants that began operation
in 2000 (RCEER 2005). In 2003, 34 per cent of power generated was from
thermal plants and 66 per cent was from hydro sources (VRA Annual
Report 2003). The thermal plants are expensive as they rely on imported
oil and have higher costs than the hydro plants. Costs also have to
accommodate a commercial return for private investors. The power gen-
eration project developed by CMS Energy is reported to be underwritten
by a Power Purchase Agreement (PPA) which allows the company a max-
imum of 20.5 per cent return on equity (ECA 2003).
In 1997, VRA established the NED to distribute electricity in the
northern regions of the country. NED was developed as an integral part
of the larger Northern Electrification Project. Electricity distribution in
the south of the country is the responsibility of another parastatal, the
ECG which was established in 1967 to purchase power from VRA and
distribute it to all consumers with the exception of the Volta Aluminium
Company (VALCO) and other large consumers supplied directly by VRA.
ECG is responsible for more than 86 per cent of electricity connections
and around 93 per cent of energy consumption in the country with just
14 per cent of connections and 7 per cent of consumption accounted for
by NED (RCEER 2005).
While most consumers receive their power from the national grid,
some have their own generation facilities (such as the main oil distributor,
Tema Oil Refinery, mines, large saw mills and oil palm mills, the national
water company and the main state hospital). In addition, VRA sells
power directly to some bulk consumers. The main customer (in terms of
foreign currency) is VALCO whose aluminium smelter is at Tema. Bulk
sales are also made directly to a number of smaller industrial and mining
consumers.
Until the late 1990s VRA was regarded as well-managed with a high
degree of autonomy, commercial orientation and relatively few institu-
tional problems (World Bank 1995c). However this may owe more to the
fact that VRA sold a large proportion of its output to large customers that
paid in foreign currency and so VRA was effectively insulated from the cur-
rency crises and economic decline that faced the rest of the country
(Edjekumhene and Dubash 2002). Since the late 1990s, VRA has not been
profitable. Electricity Corporation of Ghana on the other hand, has had
weak performance indicators for many years. The company was supposed
to operate as a commercial entity but has lurched from crisis to crisis despite
technical support from ESB Ireland and the French utility EdF which
brought short-term improvements that failed to be sustained (ECA 2003).
According to Company Reports, VRA last made a profit in 1996.
Performance improved substantially in 2003 but this was largely due to
two tariff increases during the year, stabilization of the currency and a
major cancellation of the company’s debts by the government using
HIPC relief that amounted to $US145m. This reversed a persistent down-
ward trend fuelled by high input costs for oil generation and a rising pro-
portion of imports. According to calculations by ESMAP, VRA’s rate of
return on net fixed assets has averaged –3.3 percent since 2000 (ESMAP
2005). The company’s welfare is, thus, determined to a large extent by
external factors: currency fluctuations, prices (set by the regulator PURC)
and debt write-offs.
VRA’s distribution subsidiary, NED, did little to contribute to the com-
pany’s financial health. While the number of connections served by
NED increased by 85 per cent between 1998 and 2004 (compared with
69 per cent growth in connections served by ECG), system losses also
increased substantially from 21.8 per cent to 31.4 per cent over the same
period and in 2003 were higher than those for ECG. Various reasons for
high losses include substandard lines, old meters as well as theft and
illegal connections.
ECG has made losses consistently although a net profit was recorded
in 2001, a year in which tariffs were increased by 103 per cent, inflation
declined from a peak of 41.9 per cent in March to 21.3 per cent at the
year end and the currency was stable (ECG Annual Report 2001). System
losses are high, reaching 24.9 per cent at the end of 2004. Revenue col-
lection is low and there is extensive power theft through illegal connec-
tions. Numerous factors have been proposed to account for the poor
performance. These fall into two broad categories: infrastructure weak-
nesses (inefficient transmission and distribution systems, broken meters,
inadequate computerization, old vehicles) and institutional weaknesses
(weak staff motivation due to conditions of service, high staff turnover)

(ECG 2005). The company aims to expand the provision of prepayment
meters which only accounted for 7 per cent of connections at the end of
2003 (ECG 2005).
The performance of both ECG and VRA are interlinked. At the end of
2003, over 70 per cent of ECG’s debts were to VRA for power purchased.
The amount was equal to more than 49 per cent of ECG’s turnover (ECG
Annual Report 2003). For VRA, in 2003, the value of debtors in respect
of power sales was equal to more than 60 per cent of sales (VRA Annual
Report 2003).
Despite the weak financial position of the electricity utilities, Ghana
has one of the highest rates of access to electricity in SSA. Increases have
been largely a result of concerted government campaigns financed
mainly by bilateral development assistance. There is evidence, however,
that increased access does not necessarily translate into increased usage
and consumption. Despite the fact that all district capitals are now con-
nected to the national electricity grid, there is no sign of improved eco-
nomic activity in them and very few households try to get connected.
Thus, social and economic infrastructure service delivery has improved
considerably but this seems to be in the absence of a comprehensive pro-
gramme to make the infrastructure achieve a specific planned outcome
(McKay and Aryeetey 2004). Other evidence such as a decline in the per
capita electricity consumption suggests that access is constrained by
affordability. Despite a subsidized lifeline tariff, many households are
not able to afford electricity services, with arrears and disconnections
described as ‘fairly prevalent’ (ESMAP 2005, p. 35). There is anecdotal
evidence that in many rural communities, after the initial connection of
households, the use of the service has declined because of inability to
pay for appliances or the electricity consumed (ESMAP 2005).
6.3.2 Power sector reforms

Electricity sector reforms in the 1990s were reportedly driven by the
need to attract new investment in power generation and to improve the
commercial management of utilities (ESMAP 2005). Pressure for change
increased following severe power shortages in 1997 and 1998 as a result
of water shortages. Reforms were also largely prompted by pressure from
the World Bank which had provided finance for Ghana’s power sector
since independence. In the mid-1990s, the Bank refused to finance
VRA’s expansion at Takoradi (to which the Bank was contributing
US$175.6m) without the implementation of basic structural reforms in
the electricity sector (Edjekumhene and Dubash 2002).
The nature of the proposed reform strategy was determined by the

Power Sector Reform Committee (PSRC) established in 1994 which
submitted a final report to the Government of Ghana (GoG) in 1997
with substantial recommendations for the transformation of the elec-
tricity sector. Volta River Authority was to be unbundled into two separate
generation companies (hydro and thermal), a transmission company
and the distribution company (NED). The separated activities would be
established as business units and performance contracts would be drawn
up for ECG and VRA. Volta River Authority was to compete with other
private Independent Power Producers (IPPs). The ultimate aim was to
establish a wholesale power supply market where multiple private gen-
erators (and VRA) would compete to sell the power to the national grid
as well as directly to large consumers through bilateral contracts (see 6.3.1).
For smaller consumers, the country would be divided into five distribu-
tion zones that would eventually be privatized (Edjekumhene and
Dubash 2002). Such a structure was intended to bring in private sector
finance to compensate for the gaps in government and donor funding
and to create efficiency as providers would need to keep costs down to
be competitive. The reforms aimed to remove the monopolistic and
centralized structure of the industry (RCEER 2005). In order to be
attractive to investors, a key element of the reform programme was the
establishment of independent regulators so that the private sector
would be assured of impartiality and non-interference by government.
The regulator was to be responsible for transparency and predictability
in tariff-setting with a structured methodology and to ensure that
there was open access for IPPs and large power consumers (ESMAP
2005).
There was great emphasis on the fact that the reforms were Ghanaian-
owned. The World Bank had suggested a more moderate reform
programme. Reasons put forward to account for the government’s more
radical approach include a desire to dismantle the privileged position of
VRA, avoiding the government having to put up sovereign guarantees,
and there may also have been a national pride at stake in Ghanaian
policy-makers rejecting the idea that they were too small and not yet
capable of developing a sophisticated electricity market (Edjekumhene
and Dubash 2002). Plans to unbundle and privatize the electricity sector
were reiterated in agreements with donors. For example, according to
the country’s agreement with the IMF, the VRA was to divest its thermal
power generation assets, and restructure EGC which would be offered
for sale by end-1999 (ESAF 1999).
By November 2005, just two aspects of the proposed reforms had been
implemented. First, a private investor CMS Energy of the United States
has constructed a power plant at Takoradi in a joint venture with VRA in
2000 (RCEER 2005) and, second, two new regulatory agencies were
established in 1997. Volta River Authority remains intact, although
work has started on unbundling in some areas, for example, on separating
accounts (ECA 2003). Reform of electricity distribution has barely
started. Policy outcomes are far removed from the grand design. The aim
of creating a competitive energy sector has been described as more
rhetoric than serious intent (ESMAP 2005).
In 2003, Cabinet approved a new strategy and reform timetable,
although this bears a strong resemblance to the previous reform
programme, featuring policies such as the unbundling of VRA and, just
two years later, many of the target dates had already slipped. An
independent transmission system operator was planned for 2005. The
formation of a distribution holding company including the awarding of
a management contract was also made a target for 2004 with operations
set to commence in 2005 (ESMAP 2005). At the end of 2005, even fun-
damental issues were still unclear such as whether NED and ECG would
be merged.2
The one aspect of the reforms that has progressed on schedule has been
the development of regulation. Two regulatory authorities have been
established for the electricity sector – the Public Utilities Regulatory
Commission (PURC) discussed below, and the Energy Commission
which is the technical regulator and licensing authority. The Energy
Commission was established in 1997 and consists of seven Commissioners
appointed by the President. While the Commission has a number of
functions (to regulate, manage and develop the utilization of energy
resources in Ghana; to provide the legal, regulatory and supervisory
framework for all energy providers; to grant licences and to promote
competition in the energy market) it is restricted to licensing and
technical regulation with responsibility for energy planning, policy for-
mulation, and implementation remaining with the Ministry of Energy
(ESMAP 2005).
A key function of the Commission relates to the regulation of entry and
exit into the sector but there has been very little of either entry or exit
since the organization was established. Meanwhile the Commission regu-
lates the two state electricity utilities but with questionable powers as
there is little the Commission can do should the enterprises fail to meet
performance targets. The ultimate sanction is to take away the licence but
realistically this cannot be done to ECG or VRA. The Commission can

have a say in energy policy but there are indications that this might not
be acceptable when staff get too outspoken. It is rumoured that the dis-
missal of the Executive Secretary of the Commission was related to his
public criticism of the proposals for Ghana’s involvement in the West
African Gas Pipeline.3
Electricity sector infrastructure has been mainly financed via govern-
ment loans to VRA and ECG, supported by donor funds. These utilities
have continued to accrue huge debts which in turn have undermined
their operational capability. To address the problems posed by the high
level of debt and also to enhance the operational performance of the
two companies, the government in 1998 undertook restructuring and re-
capitalization of VRA and ECG with substantial support from donors.
Financial Recovery Plans were adopted and significant debt relief granted
to the ECG amounting to US$95.6m. In addition, total debt relief
amounting to US$88m was written off by the government. As part of its
macroeconomic restructuring programme with the World Bank and IMF,
the government agreed to continue to provide the ECG with further debt
relief annually up to 2008, while undertaking to secure further funding
for the company to undertake critical short-term investments in the dis-
tribution system. The government also granted VRA total debt relief of
around US$144.9m under the HIPC initiative and it is reported that the
government paid for the US$10m quarterly crude oil supply to Takoradi
Thermal Power Plant. These interventions, particularly the debt relief,
have transformed the organization’s financial status as, for example,
VRA’s return on average net fixed assets moved from negative (4.5 per cent)
to 2.25 per cent in 2003 (RCEER 2005, p. 37).
6.3.3 Concluding remarks

After ten years of reform, the performance of Ghana’s electricity utilities
remains weak. They are still in a fragile state and system losses are high.
The reform process has so far failed to produce the desired outcomes but
that is not to say that the final vision has been abandoned. The
unbundling of the electricity supply system is an element in the coun-
try’s Poverty Reduction Strategy (GPRS 2003). While the timescale has
been revised, the private sector is still expected to develop new genera-
tion facilities and to take over the management of both the distribution
sector, through one or two management contracts (depending on
whether NED and ECG are merged), and of the Takoradi thermal plant
under a management contract (Energy Commission 2004). In view of
the difficulties in securing private investors, the emphasis is on creating

the right environment for investment. In response to a particularly
severe power shortage in January 2006, the Ministry issued a brief press
release which stated that the ongoing power sector reform programme
would ‘create the environment for private participation in the genera-
tion of power. This will reduce the burden on the Government to source
and implement power sector projects. This will ensure the timeliness of
investments’.4
Despite the best efforts of the government, it remains an open question
whether, first, the private sector will come forward to participate in the
Ghanaian electricity sector and, second, whether PSP will have the
desired results. To some extent the proposed reforms are contradictory.
There is a fundamental discrepancy in aiming to attract private sector
investment and the idea of a competitive wholesale market. Risk-averse
investors will want long-term PPAs rather than competition. Commercial
imperatives are not consistent with social and economic goals of
meeting the growing demand for electricity. Even though the Energy
Commission was established to assure investors of fairness and a level
playing field for the participants in the market (Energy Commission
2004, Appendix 5), the investors have so far failed to materialize. In
power generation, there is an ‘open invitation’ for private firms to estab-
lish generation plants but so far only one IPP is operational in Ghana.
While rumours abound, there are no other large-scale PSP projects in the
pipeline.5
Key issues need to be addressed. These include the institutional weak-
nesses in the utilities, hydro shortages and high costs of thermal power
production. Policies which aim to create an attractive environment for
the private sector such as the development of an Automatic Tariff
Adjustment formula to allow a pass-through on costs, while creating an
investor-friendly environment, neglect the pressing concern of the need
for diversification of energy sources to create low-cost electricity to
meet the needs of low-income consumers. The events of the past
decade suggest that little can be expected of the international private
sector although there may be scope for smaller-scale local private
involvement. The expansion of access that has been achieved has been
through government and donor programmes. The utilities have shown
improvements but with government support. Even if there were a com-
petitive wholesale market, with electricity as such a significant industry,
VRA would still have an important strategic role as, say, supplier of the
last resort. The government looks set to continue to dominate the elec-
tricity sector for some time to come.
6.4 Water and sanitation
6.4.1 Introduction and background

There are varying estimates of the rate of access to water and sanitation
in Ghana, depending on sampling, assumptions and timing of research.
According to the Human Development Report, overall access rates for
water in 2002 were around 79 per cent of the population and about
58 per cent for sanitation, both of which are above average for SSA
(Human Development Report (2005); Chapter 5). A Ghanaian consul-
tancy, MIME Consult, put urban water coverage at 61 per cent at the end
of 2004. In rural and small towns, water supply coverage at the end of
2004 was estimated at 51.7 per cent (MIME Consult 2005). According to
the World Bank (2004c), only 51 per cent of the population has access to
an improved water supply, representing about 61 per cent of the urban
population and 46 per cent of rural population. Sanitation coverage in
the country is low, less than 40 per cent according to the World Bank
(2004c). There is considerable regional variation. In the north of the
country, rates of access to sanitation are just 23 per cent in some places.
In the Upper East Region, just over 10 per cent has access to sanitation
facilities compared with 82.7 per cent in the Greater Accra Region
(UNDP Ghana 2005).
Most consumers in urban areas in Ghana do not have house connec-
tions. The absence of a piped water supply results in higher costs and
less water consumption. Research by the regulator, PURC, found that
the most significant determinant of consumer use and unit cost of water
is whether consumers have to collect and pay for water by the container.
Those with a piped supply use more water – up to four times more per
person – than those collecting by bucket but pay about the same
monthly amount for a larger volume. Only 4 per cent of the urban poor
has access to private sources at home. The majority without a connec-
tion get their water from neighbours and secondary suppliers (35 per
cent of the urban poor) at prices three to four times more expensive than
piped supply. Others receive their water from communal standpipes
(32 per cent of the poor, at around double the price of piped water).
Around 4.6 per cent of the urban poor obtain their water from tankers
and these are very expensive, sometimes nine times the price of piped
supply. Others take water from surface sources (PURC 2005a). Waterborne
disease is common, and Ghana has one of the highest incidences of
guinea worm which is caused by drinking water from unsafe sources.
Diarrhoea-related diseases are the third most reported cases in health
centres across the country (World Bank 2004c).
There is extensive private sector participation in the delivery of water

to those that are outside the piped network in the form of secondary
water sellers, most of whom depend on the state utility for their water
such as private tankers. Tankers are an important medium for delivering
water for the urban poor, particularly in the Eastern part of Accra. In
Accra alone there are over 530 registered tanker operators. The price of
water supplied through tankers is described as ‘exorbitant’ and the
quality is dubious (MIME Consult 2005).
Investment in the water sector has been dominated by donors. In
2003, External Support Agencies contributed about 90 per cent of the
cost of rural water and sanitation facilities. The GoG contributed just
8.3 per cent (MWH 2005). Huge amounts of additional investment are
required if Ghana is to achieve its MDGs with respect to access for water
and sanitation. In urban areas, access rates need to increase from around
59 per cent in 2004 to 85 per cent by 2015, requiring a total investment
of US$891m (PURC 2005a). Currently annual investment in rural and
small-town water is in the region of US$17m and this needs to rise to
around US$75m. In urban water annual investment of around US$85m
is needed while the sector has in recent years only been able to inject
around $20m annually (MIME Consult 2005).
The Ghana Water and Sewerage Corporation (GWSC) was created by
an Act of Parliament in 1965. Under the terms of the Act, the Corporation
was responsible for the delivery of water and sanitation throughout the
country. Urban areas were predominantly supplied by water from sur-
face sources through supply and reticulation systems. Rural populations
received their water from wells, boreholes and springs. While GWSC
performed reasonably well in terms of engineering and technical
effectiveness, revenue management was not so successful. The company
made persistent losses and accumulated large debts over the years
despite several attempts at reform. GWSC suffered from numerous
institutional deficiencies including weak billing systems, poor state of
infrastructure and overstaffing. Various approaches have been adopted in
an effort to reform the system. For example, a twinning programme was
introduced with Thames Water International (TWI) from 1988 to 1991
where TWI provided specialists in a wide range of activities to visit
Ghana and selected staff from GWSC visited Thames Water in the
United Kingdom. Despite this, little changed within GWSC.
In 1995, consultants, Halcrow, were appointed to evaluate seven
privatization options for GWSC (some form of privatization had already
been decided on at this stage). They attributed the failure of the earlier
attempts to stimulate change within GWSC to a number of factors
including the lack of experience of TWI, the continued restrictions on

GWSC and the fact that the consultants, TWI, did not have a financial
stake in the fortunes of GWSC but were engaged solely as advisers with
no commercial risk. Halcrow advised that ‘common ownership’ of the
business was required for technical support to have any lasting effect.
Halcrow recommended that the urban water sector be privatized under
two lease contracts, and this was ratified at a consultative meeting in
1995. This meeting was intended to be participatory but it was
dominated by government and donor representatives.
There were high expectations from privatization as the private sector
was considered to be superior to the state when it came to resource
mobilization, management and efficiency.6 Privatization was expected
to lead to industrial growth and economic expansion. From the start,
one of the main objectives for introducing PSP was to bring in finance
from the private sector. The consultants, were aware that it would not be
easy to attract international private capital to the Ghanaian water sector,
especially after contacting water companies which, on the whole,
showed little interest. This was dismissed in the belief that the privatiza-
tion could be made attractive to investors with suitable ‘packaging and
marketing’ (Halcrow 1995). In 1995, the consultants warned that,
although the corporation needed urgent attention, the privatization
process could take months or even up to two years to accomplish. In the
event it took more than a decade.
It was largely a desire to create a commercially viable water supply
business, that would be of interest to the private sector, that led to the
separation of the urban water supply from the less lucrative activities of
rural water supply and sanitation. The supply of water to small towns
and rural areas was presented as a potentially separate business with
little in common with the urban water supply business. Also in the mid-
1990s, responsibility for sewerage and sewage disposal was transferred
from GWSC to municipalities. According to the consultants, the main
issue was that sewerage and sewage disposal were detrimental to ‘corporate
synergy’, failing to ‘add value’. The provision of rural water and sanita-
tion became a social service while urban water was to be a commercial
business (Halcrow 1995).
6.4.2 Urban water

After hiving off rural water and sanitation, and following numerous
additional consultancies to sort out the details, the remaining urban
water system was divided into two business units (to create competi-
tion), both of which were to be leased to private firms by October
1999. Two regulatory agencies in the water sector were established in

1997 – the Water Resources Commission (WRC) which is responsible
for the regulation and management of the utilization of water
resources, and the PURC, discussed below. The government established
a programme of price increases to ensure the financial viability of the
sector. Average water prices were increased by 140 per cent in March
1998 and GWSC became incorporated as Ghana Water Company
Limited (GWCL) in 1999, marking a shift from a public provider to a
commercial business entity. After some slippage, by 2002 the stage was
set for private participation in the water sector. The private company
leasing each of the two business units would be responsible for opera-
tion and management and was to invest US$70m for rehabilitation,
renewal and improvement of the water systems. They would have lit-
tle responsibility for expansion of the systems. Responsibility for
financing and executing extension to the water system was to remain
with GWCL.
There was, however, extremely vociferous opposition to the privatiza-
tion proposals from civil society groups in Ghana, with support from
around the world. In 2001 a number of civil society organizations came
together under the National Coalition Against the Privatization (NCAP)
of Water. Their rejection of water privatization was based on both moral
and economic grounds. They argued that water, as a basic human right
should not be subject to profit and that there was little empirical
evidence to support the privatization of water. Furthermore the propos-
als failed to address the conditions facing the urban and rural poor. The
Coalition organized extensive protests and roused support from civil
society around the world including demonstrations outside the UK
headquarters of a potential investor.
By 2003, privatization had stalled and the lease contracts were looking
doubtful. One bidder withdrew following the protests. The international
climate was shifting, and the difficulties with water privatization
elsewhere were increasingly coming to light. According to the World
Bank, the PSP option chosen was reassessed by the government on the
grounds that circumstances had changed since the original PSP had
been designed – operators were less enthusiastic about expanding to
developing countries, many had suffered large losses, and financial
markets had less investment money available than in the late 1990s
(World Bank 2004c).
Although the lease arrangement was in difficulty, the World Bank was
still pressing for private involvement after spending large sums on GWSC
with little impact. Between 1973 and 1998, the Bank’s IDA invested
US$152.4m to improve Ghana’s urban water supply infrastructure but

with little benefit (World Bank 2004d, p. 7):
The results over 25 years of public sector management have been

disappointing and the urban water sector remains in a poor condition
with the trend in service and sustainability currently worsening. Thus
the continuing with a public sector only regime for a new project was
not recommended by IDA nor was it chosen by the Government of
Ghana.
Some form of PSP had to be found. The two long-term leases where the
private sector was required to commit investment funds were replaced
with a single five-year management contract where the private operator
was required to provide ‘working capital’. At the end of 2005, a contract
was awarded (after evaluation of three bids received) to a consortium of
two state-owned water companies, one Dutch (Vitens) and one South
African (Rand Water). The consortium is in charge of day-to-day opera-
tion (producing, transmitting and distributing water and collecting bills
in urban areas) and maintenance of the GWCL water supply systems,
reporting to a Director in GWCL headquarters. They were to be paid a
fixed monthly fee and the base fee could increase or decrease depending
on performance in relation to specified targets. The Government of
Ghana, having spent close to ten years preparing for privatization on a
rather more substantial scale was reluctant to let go of the lease option
altogether, and there was provision in the management contract for it to
be changed to a lease or affermage contract after the duration of the
management contract (or even before the end). This was not the advice
of the World Bank. Rather the Bank’s Ghana office had been informed by
Head Office in Washington that it was no longer Bank policy to advise
governments to undertake long-term leases in the water sector.7
The management contract is part of a much larger Urban Water
Supply Project which has been costed at around US$120m for a five-year
project, most of which will be devoted to system expansion and
rehabilitation. Nearly 90 per cent of the finance comes from the World
Bank. Other funds will come from the Nordic Development Fund and
the GoG. The Bank project is to pay 100 per cent of the fees paid to the
private operator in the initial four years of the contract and 75 per cent
of its fees in year five (World Bank 2004c).
According to the World Bank, a key risk of the project is that there will
be weak political will to sustain reforms – particularly the PSP element –
if quick gains are not realized. In order to reduce this risk, the project
preparation has ‘de-emphasized’ the PSP element and instead increased

awareness of stakeholders about improving water supply infrastructure
(World Bank 2004d, p. 9). So, to avoid controversy, the privatization
component of the project has been deliberately downplayed. However,
the revised PSP still has its critics. For example, the NCAP of Water has
pointed out that if privatizing water was supposed to be for the benefit
of the poor then the starting point should be the most deprived, guinea
worm infested areas rather than urban water. According to the Minister
of Water Resources, Works and Housing, the decision to bring in expa-
triate managers was influenced by the fact that ‘Ghanaians are known
not to be efficient managers’8 but it is difficult to determine the degree
to which poor managerial performance can be attributed to features that
are associated with being Ghanaian rather than the relatively low
salaries paid to GWCL managers compared with the packages that will
be paid to their expatriate counterparts. The Operator, its subcontractors
and its foreign personnel are all to be exempted from paying income tax
and the company will receive a management fee of around €10m that
will cover the 13 expatriate staff.9
There are high expectations of the private operators in view of the
poor performance of the water utility for many years. The company has
high physical losses. In 2003, 57 per cent of water produced was not
billed and this is the same as in 1996. However the company has bene-
fited from some preparation in the run-up to privatization. While there
was little change in most production indicators, a series of price
increases has meant a large rise in the value of billing and collection
although the collection rate has actually fallen. A review of the per-
formance of GWCL by the regulator, PURC, in 2005 found that the
supply of water increased by 11.8 per cent over the period from 1998 to
2003 but over the same period, losses increased by a higher proportion
thereby wiping out the gains. The proportion of bills collected failed to
improve over the review period but this is in part because of a reduction
in government payments from 2002. As a result the headline efficiency
of GWCL expressed as the percentage of water produced which is con-
verted into income collected has fallen from 37.8 per cent in 1990 to
32.4 per cent in 2003 (PURC 2005b). There are high levels of leakage and
illegal connections to the GWCL piped network (PURC 2005a).
The financial health of the company improved considerably in 2003
as the government converted some of the company’s long-term loans to
equity. As a result, the proportion of costs that were accounted for by
non-operating costs (exchange losses and loan interest) decreased from
52 per cent to less than 1 per cent (GWCL Annual Reports).
Meanwhile electricity accounted for a greater proportion of costs in

part because of electricity price increases but also because of the reduc-
tion in non-operating costs. Thus, the price of electricity, at 30 per cent
of total costs, had a major impact on the financial health of GWCL. This
shows the way that the fortunes of the water utility are affected by
government policies and developments in other sectors.
6.4.3 Water in rural areas and small towns

At the start of the 1990s, rural water was the responsibility of GWSC
and was heavily centralized (WSP 2002). The National Community
Water and Sanitation Programme (NCWSP) was launched in 1994 in
line with the government’s decentralization policy. In 1998, the
Community Water and Sanitation Agency (CWSA) which oversees the
provision of water and related sanitation to rural communities and
small towns in Ghana, was separated from GWSC. The CWSA provides
support to District Assemblies (DAs) regarding the provision of safe
drinking water. The facilities are owned and managed by the commu-
nities and DAs are responsible for ensuring that the facilities are well
managed in a sustainable manner (CWSA 2004). DAs are required to
ensure that management committees are formed to manage the water
supplies. These are known as WATSAN committees for rural communi-
ties and Water and Sanitation Development Boards for small towns
(MIME Consult 2005).
Under the NCWSP, coverage has increased from 30 per cent in 1993 to a
little over 50 per cent at the end of 2004 (MIME Consult 2005). The agency
is now well established throughout the country. DAs have become increas-
ingly involved in project implementation. Communities set their own tar-
iffs, and there is widespread acceptance of the need to pay for water.
Communities now have a greater sense of ownership in Water Supply and
Sanitation (WSS) matters. Numerous donors are involved in the sector, in
part reflecting the credible institutional framework (MIME Consult 2005).
There are, however, a number of issues emerging with the provision
of water and sanitation outside the urban water sector. First, the cur-
rent system is not based on solid sustainable financial foundations.
Virtually all projects are donor-financed, and there are many donors
involved. The financial contribution of the government is small. The
financial sustainability has been affected by the restructuring that was
shaped by the desire to attract private investment into urban water.
The transfer of water and sanitation to DAs led to competition for
funds between the small towns and rural communities. Prior to the
separation of the small and rural systems, they had been supported
with cross-subsidies from the more viable systems operated by GWCL

(MIME Consult 2005). The non-payment of bills by public institutions
is putting a major strain on small-town water bills. Such bills are sup-
posed to be paid centrally by the government but payments have not
been made or have been delayed which is undermining the viability
and sustainability of some systems. Community-managed systems are
required to set tariffs to meet operation and maintenance costs and set
funds aside for replacement. While most are able to meet running
costs, few set aside funds for replacement and have to go back to the
DAs or central government for support. Cost-recovery is unlikely.
Consumption is so low that charges would not be adequate. Without
industrial and commercial enterprises in the small towns, there is no
scope for cross-subsidy.
Second, the system is undermined by weak human capacity at the DA
level, their low level of knowledge of water and sanitation issues (MIME
Consult 2005) and their role in community development. A review of
decentralization policies found that DAs do not have the capacities (in
quality and quantity) needed to execute their administrative, legislative
and executive functions (IMF 2004c).
Third, after the separation from urban supply, GWCL no longer had
input into small towns and rural water so these communities no longer
had access to skilled engineers that had the capacity to deliver and
maintain water systems. It was reported informally that where commu-
nities lacked the capacity to maintain the water system they sometimes
used the services of GWCL staff, moonlighting to fix and maintain sys-
tems. This resource gap has been addressed with more recent policy
developments. In 2005 some 1500 staff were laid off from GWCL. These
are receiving training and encouragement to become ‘water entrepre-
neurs’10 who will then be able to set themselves up to work officially on
the maintenance of community systems. However, while those laid off
may be competent engineers, such skills do not necessarily translate
into entrepreneurship. Furthermore those laid off are not based in rural
areas and may not have the equipment to carry out engineering work
independently of GWCL. Greater support needs to be provided to small
local private sector operators. There is a heavy reliance on foreign firms
and contractors in the delivery of most CWSA projects so local private
firms are excluded, and there is little backup when the foreign firms
leave. Some private water providers are emerging who have sunk their
own boreholes and are selling the water produced on a commercial
basis. There appears, however, to be no clear institutional responsibility
for the monitoring of drinking water quality for community water or for
the registration or licensing of private firms in the water business (MIME

Consult 2005).
Finally, the system may continue to exclude the poorest. Under the
NCWSP, communities are required to contribute 5 per cent of the capital
cost of the basic water service to be provided with the remaining 95 per
cent financed with public funds. The rationale for this is that it ensures
stronger community ownership and also demonstrates the community’s
ability and willingness to pay the operation and maintenance costs of
water supply. But there are doubts as to whether this is the case, and
some NGOs have been concerned that some communities are excluded
as they cannot afford to pay the 5 per cent. It is not always clear whether
communities refuse to pay or cannot afford to pay. There are safety nets
within the national policy for communities to be provided with safe
drinking water where there are incidences of serious water-borne diseases,
such as guinea worm, but early warning systems could enable the safety
net to kick in at an earlier stage.
There is one case of an innovative community-managed water supply
that seems to be working effectively. In the Northern town of Savelugu,
water is provided by GWCL to the community which is then responsible
for its distribution and for collection of payment and for paying GWCL
as a bulk consumer. Consultancy services and technical support are pro-
vided by GWCL. The Savelugu system has low losses and high levels of
access to piped water compared with the rest of the country. By buying
water from GWCL, the town is thereby relieved of the complex process
of producing water which other towns have to deal with. Profits are used
to expand the service. This system makes the most of GWCL’s unques-
tioned technical expertise but uses community skills in revenue
collection and billing – areas where GWCL are reported to be weak
(ISODEC 2002).

After more than ten years, water privatization has finally materialized
in Ghana, albeit in a form which is far more diluted than was planned
at the start of the 1990s. Despite the best efforts and with support from
numerous consultants to create two commercially viable business
units with careful ‘packaging and marketing’, there was little interest
from investors until the risk element was virtually removed. One
aspect of ‘marketing’ that has changed is that policy-makers have
deliberately downplayed the privatization element to avoid the scale
of opposition that developed in Ghana with previous privatization
attempts.
The introduction of PSP in the water sector in Ghana has dominated

the past decade. The unbundling of GWSC, the creation of the regula-
tor, the debt equity swaps and price increases have all had the core pur-
pose of making the sector more attractive to investors. This has been a
priority over and above social aspects of delivery and the resulting sec-
tor structure is far from coherent. For the supply of rural water, a series
of small independent systems now exists, mostly with finance from
separate donors for separate projects creating duplication and increased
costs.
It is not just the privatization process that has led to a fragmented
approach. There are a number of players in the water delivery system
and ad hoc private providers are emerging with little regulation. A large
proportion of consumers receive their water through secondary and
tertiary providers that slip through the net of sector policy. The PURC is
now calling for a Sector Wide Approach to encompass all water sector
operators as well as the urban water utility. A review of the whole sector
needs to incorporate rural water supply and sanitation, which have been
neglected, in order to create a national strategy.
6.5 Regulation and prices
The PURC was established under an Act of Parliament in 1997 to

regulate the provision of utility services in the electricity and water
sectors. It regulates ECG, VRA, NED and GWCL. The Commission is
independent of any government ministry and, for administrative pur-
poses, comes under the umbrella of the Office of the President. The
responsibilities of PURC include the approval of tariffs charged by utilities,
protection of the interests of both consumers and providers of services,
monitoring of standards, compilation of data, and investigation into
utilities and standards of service (PURC 2005b). The PURC is intended to
provide transparency and clarity in the operations of the electricity and
water utilities. As such, the PURC has issued guidelines on such things
as the disconnection of services for non-payment and complaints pro-
cedures. The PURC has also developed a social policy framework based
on research to understand better the needs of poor consumers (PURC
2005a). Five years after its creation, a review concluded that the
Commission had made headway in establishing its legitimacy among
the stakeholders through transparent processes in tariff-setting and
complaints procedures (PURC 2005b).
Funding has emerged as a critical issue. The PURC is funded through
government subsidies, grants and donor agencies but the Commission
needs to be financially independent of government if it is to retain its

credibility. Budgets have fallen far short of requirements and crucial studies
have been postponed because of lack of funds. There has been a high
turnover of staff. Key personnel need to be recruited but PURC cannot
match the remuneration package of the private sector and some key staff
have left. In the absence of private sector water and electricity enter-
prises, PURC regulates the state utilities but has few sanctions in the
event of non-compliance, although at least there is greater transparency
as a result of more detailed scrutiny of the activities of the utilities.
Sanctions are difficult as the imposition of a fine on a cash-strapped
government utility could have social costs.
The aim of PURC in setting prices is to ensure the financial viability of
the utilities and therefore at least operational costs are to be covered. The
Commission is attempting to follow a middle path between critics that
say on the one hand that it should stick purely to tariff-setting on a
technical level and those that say such decisions cannot be taken inde-
pendently of macroeconomic and social context. Some consumers are
on such low incomes that tariff increases can reduce consumption with
adverse social effects, particularly in the water sector. Under a
Transitional Plan PURC aimed to move tariffs to cost recovery levels over
a two-year period to 2002. The PURC has, since its inception in 1997,
approved four increases for both electricity and water. Prices increased
greatly between 1998 and 2002.
After 2003, tariffs were considered to have reached economic and
cost-recovery levels and the Commission expects subsequent increases
just to reflect changes in cost. The PURC now uses a specified formula to
determine price changes so that increases in the cost of inputs to water
and electricity (such as imported oil, currency devaluation and inflation
and electricity costs in the case of water) are passed on to the consumer,
known as an Automatic Tariff Adjustment (ATA). The idea behind the
ATA is that where the utility is unable to control the impact of a
particular risk factor, then it must be passed through the tariff to the
consumer.11 It is far from clear that the consumer is any better placed to
control the risk particularly when it comes to water for which the only
cheaper alternative is unsafe supplies. However, a utility with a pass-
through on cost pricing mechanism is far more attractive to prospective
investors and, as in the past, the needs of private capital win over social
provision. Donors have had a strong hand in the price-setting agenda.
Ensuring that electricity and water tariffs are in line with their respective
formulae for automatic quarterly adjustments is a performance criteria
set by the IMF (IMF 2005b). The PURC sometimes resists pressure from
utilities to raise tariffs on the grounds that the utilities could do more to
increase their efficiency, reduce losses and improve quality of service
(Edjekumhene and Dubash 2002).
To address social issues, PURC provides a lifeline tariff in both water
and electricity. In the electricity sector, the lifeline tariff applies to con-
sumers whose consumption falls below 50kWh per month. The lifeline
tariff is US$1.5 (about 13,000 cedis) per month (RCEER 2005), but there
is evidence that even this is unaffordable for some. Despite a 500 per
cent increase in access to electricity 1991–2000, per capita consumption
fell over the same period (ESMAP 2005). The evidence from Ghana (and
South Africa) indicates that some households have been voluntarily dis-
connecting themselves from their electricity service and have been
using other fuels as alternatives (ESMAP 2005). A Poverty and Social
Impact Assessment (PSIA) of Ghana’s energy prices concluded that the
lifeline programme assumes that meter users are single individuals but
the existence of shared household and shared meters and prepaid
meters makes the lifeline tariff ineffective for targeting the poor. The
PSIA also found that rises in tariffs have failed to result in increased
revenue for utilities because of inefficiency in the system and low
collection rates (IMF 2004c).
As with the electricity sector there is a lifeline tariff in the water sector
for low levels of consumption but few of the poor have access to piped
water. Research by PURC indicates that within urban piped system areas
only 15 per cent of the poor have access to piped water either directly or
via yard taps. Yet the poor make up 47 per cent of the total population
within these areas (PURC 2005a). The majority of the poor depend on
secondary and tertiary water providers and so do not benefit from the
lifeline tariff. Expansion of piped access is crucial to improving services
for the poor. The existence of multiple users of single connections as in
Compound Houses also undermines the effectiveness of a lifeline tariff.
In the water sector, considerable emphasis has been placed on
willingness to pay. According to Alan Booker, former Deputy Director of
UK regulator Ofwat, advising PURC: ‘One interesting fact to emerge is
that the needs of the poor are identical to the needs of the rest of the
population and their willingness to pay for a reliable supply is also the
same.’12 However, while the poor may state a high willingness to pay for
water this does not mean that increasing prices is an appropriate policy
response because first a ‘willingness’ may not be matched by an ability
to pay higher prices in areas where people are on low incomes. Second,
where poor households spend a large proportion of their income on
water this may not mean that they can ‘afford’ it but that they are cutting
back on other crucial areas of household expenditure such as food,

health and education in order to pay for water. Research from ISODEC
shows that poor households in Accra spend 18 to 25 per cent of their
income on water compared with the 1 per cent of income spent on
water in the United States. Cases of cholera have increased as prices have
escalated. In the Greater Accra region, the number of cases rose from 254
in 1998 to 3525 in 1999 (Fact-Finding Mission 2002).
6.6 Conclusion
The economic situation in Ghana is fragile, and the supply of water and
electricity are crucial to sustainable development. Privatization is still
mainstream policy. For over a decade, the GoG has been trying to make
these sectors attractive to investors. Investor-friendly approaches have
dominated reforms in the belief that the private sector would bring
efficiency and funds for investment. The World Bank may have revised
its approach but the attitudes are now deeply ingrained and government
bureaucrats in Ghana remain enthusiastic supporters of privatization.
Hence there is provision in the water sector for changing the manage-
ment contract into a long-term lease. Even though privatization has
failed to be achieved, policy-makers still use hypothetical benchmarks
based on how efficient they think the private sector would have been. In
2005 a report from PURC indicated that GWCL was projected to reduce
losses from leakage and illegal connections from 50 per cent to 40 per
cent of water produced. However the PURC claims that this reduction
could be much more substantial if privatization had been achieved:
‘Had PSP taken place in the form of enhanced lease contracts, it was pro-
jected that losses from leakage and illegal connections could have
reduced to 25 percent of water produced’ (PURC 2005b, para 4.6).
Furthermore, the myth still persists that privatization will bring in
revenue for investment. In April 2005 the MD of GWCL charged priva-
tization critics to ‘provide concrete alternatives as to how to mobilise the
desired levels of funding to ensure rapid expansion in service delivery
instead of being emotional about the reform’.13 Thus, while the World
Bank may now take a more circumspect view, after promoting privatiza-
tion for so long, it will take years to undo the pro-privatization mindset
that continues in developing country policy-making. This is despite the
fact that the privatization that has finally been undertaken in Ghana
will do little to bring in any funding.14 The operator of the management
contract for urban water is not required to invest any more than ‘working
capital’.
The case of Ghana highlights the tensions and contradictions in

service delivery. On the one hand, prices have increased dramatically
with a view to putting the utilities on a sustainable financial footing
but this has meant that water and electricity have become unaffordable
for some. Donors have been providing more connections, particularly
in the electricity sector but the existence of a connection is not enough
to ensure consumption, suggesting that alternative means of support for
poor electricity consumers are required. In the water sector, the piped
supply is only one component of the delivery of urban water and many
consumers receive water through secondary and tertiary providers.
Similarly evidence from both sectors calls into question the concept of
cost recovery as a basis for price setting. Where utilities have high
technical and non-technical system losses, should these be ‘recovered’
in the tariff structure?
The privatization policies have created a fragmented structure in the
water sector, reducing the scope for cross-subsidy and creating small
municipal providers that lack the capacity and the resources to manage
local water supplies effectively. The privatization process in Ghana has
been designed to allow – even to encourage – cherry-picking by
investors by hiving off the potentially commercially viable urban water
sector and allowing private electricity providers to deal directly with
large private consumers (not that this has happened). Meanwhile, great
challenges remain in meeting the needs of the poor as it becomes clear
that such facilities as a lifeline tariff fails to reach the most needy. It is
not possible to know what would have happened in the absence of the
changes implemented. Earlier attempts at reform failed to be sustained
and the performances of the utilities have improved little since the late
1990s. Both sectors are frail and highly donor dependent but evidence
from elsewhere indicates that ownership is not the defining feature of
utility performance. Innovative local responses need to be explored such
as those used with community management in Savelugu.
Notes
1. World Bank Africa Development Indicators Database.
2. Interview, Ministry of Energy, 10 November 2005.
3. 10 June 2005, Public Agenda, www.ghanaweb.com/public_agenda
4. 10 January 2006, Ministry of Energy Press Release.
5. Interview, Energy Commission, 11 November 2005.
6. Key conclusions of the Ghana Water Restructuring Workshop – Novotel,
6–8 February 1995.
7. Interview, World Bank, Ghana Office, 11 November 2005.
8. 9 December 2005, Public Agenda, www.ghanaweb.com/public_agenda

9. 9 December 2005, Public Agenda, www.ghanaweb.com/public_agenda
10. Interview, Project Management Unit, 8 November 2005.
11. Presentation by William Gboney Director, technical operations and regulatory
economics, New Conference hall GNAT, Accra, September 2003.
12. 1 October 2002 www.irc.org
13. 1 April 2005, Public Agenda www.ghanaweb.com/public_agenda
14. Aside from donor finance which is conditional on privatization but this is a
spurious link, see Chapter 3.
7
Tanzania: From Nationalization
to Privatization – and Back?
Kate Bayliss
7.1 Introduction
Tanzania had stronger socialist leanings than most other countries in

sub-Saharan Africa (SSA) following independence in the 1960s, and it
was one of the later countries to embrace market-oriented reforms
(Tsikata 2003). Following economic crises in the late 1970s the country
signed its first Structural Adjustment Programme with the IMF in 1986.
Second-generation reforms followed, with privatization gaining in promi-
nence in the 1990s and, by the end of 1996, all enterprises including
utilities were up for privatization. Thus, over a ten-year period, the
government completely reversed the socialist policies of Nyerere, the
country’s first President.
While some sceptics may have remained, on the whole, Tanzania
embraced the shift toward market-oriented policies in the 1990s. The
privatization programme is symptomatic of a more general philosophy
that has taken root, apparent both in meetings and government policy
documents. The government now sees itself not as a provider of services
but as a facilitator. Furthermore, services are run on business lines. Cost
recovery is a widely accepted principle of service provision. Where
privatization is not possible, the aim is to create an attractive business
climate.
This wholesale adoption of the Bank and Fund neo-liberal agenda
continues, despite disappointing results, particularly in infrastructure.
There were great hopes for privatization as parastatals had amassed sub-
stantial debts, and infrastructure had not seen any major investment for
several years. However, in practice, privatization of electricity and water
has been extremely difficult to achieve and after a decade it has been
shelved for both water and electricity. Regulation, which is widely
151
152 Kate Bayliss
regarded as an essential pre-requisite for privatization (see Chapter 3)

has yet to be finalized. Private generation plants have proved to be
expensive and inflexible to the extent that the state electricity company
is planning to buy a privately owned power plant in order to save money.
The water utility of Dar es Salaam that was privatized in 2003 has already
been taken back into state hands and performance has since improved.
Efforts to increase the business orientation of regional service providers
has led to some improvements in some districts but has also highlighted
major deficiencies in terms of financial and human resources.
This chapter explores the developments with sectoral reform and pri-
vatization in Tanzania and is based on interviews with key stakeholders,
held during November 2005, as well as review of literature and key data
sources such as company reports and policy documents. The next sec-
tion highlights some of the key features of the background to the priva-
tization of infrastructure. Then the chapter considers the nature and
impact of the reforms undertaken in the electricity and water sectors.
Overall the chapter tracks the stages involved in attempting to arouse
interest from the private sector that in the end yielded little, if any, ben-
efit. Although there was strong support for privatization within the gov-
ernment, as it was persuaded of the benefits of a policy which would
bring both finance and efficiency, the subsequent poor results from pri-
vate sector participation (PSP) may have eroded confidence in the policy
recommendations of donors and external consultants.
7.2 Background
While Tanzania is one of the more politically stable countries in the

region (World Bank 2000), it is one of the poorest in SSA. With per capita
GDP at US$287, nearly 60 per cent of the population live on an income
of less than US$2 a day. The GDP growth rate from 1990 to 2003 has
been just 1 per cent (Human Development Report 2005). With a popu-
lation of around 36 million, a major demographic shift is occurring with
migration and urbanization. According to the 2002 census, about 23 per
cent of the population live in urban areas. However, the population
growth rate in urban areas is around 4.4 per cent compared with a
national growth rate of 2.9 per cent (NBS 2002). Migration to the com-
mercial capital,1 Dar es Salaam, has resulted in large areas of unplanned
habitation where many lack basic services.
Since 1990, Tanzania has made significant progress in increasing the
proportion of the population that has sustainable access to an improved
water source with a rate of access of around 73 per cent in 2002. Access
From Privatization to Nationalization 153
to sanitation, while not much improved since 1990, is also above the
regional average. With electricity, however, both consumption and the
rate of electrification are far below the average for SSA. Around 90 per
cent of the population, about 33 million people, do not have access to
electricity (Chapter 5, Table 5.1).
Tanzania became independent from the United Kingdom in 1961.
Under the country’s first president, Julius Nyerere, major investments
were made in basic social services such as education, health, water and
sanitation through central government investment programmes with
substantial donor support resulting in considerable achievements in
terms of life expectancy, infant mortality, education enrolments and lit-
eracy (Wangwe 2005). State ownership increased from about 40 entities
in 1966 to 450 entities by the mid-1980s (Bigsten et al. 1999).
During the 1970s, Tanzania was the largest recipient of aid flows in
SSA. The World Bank doubled its lending to the country between 1972
and 1977 (Bigsten et al. 1999). Towards the end of the 1970s and early
1980s, the country suffered a number of economic shocks caused by a
combination of factors including a decline in the terms of trade,
increases in the price of oil and the price of food grain, the break up of
the East African community, war with Uganda and severe droughts
(Messkoub 1996). A decline in access to and quality of basic social serv-
ices was one of the many adverse effects of the subsequent economic
contraction (Wangwe 2005).
The country also experienced a change in donor attitudes towards the
end of the 1970s amidst growing donor fatigue and evidence of low aid
effectiveness. By 1983, donors had scaled down their support and aid
flows declined sharply. Under pressure from bilateral donors as well as
the wider crisis, the government adopted a far-reaching Economic
Recovery Programme (ERP), in 1986 with IMF and World Bank support
(Bigsten et al. 1999). The second ERP in 1989 brought in reform of the
banking system, parastatals, government administration and the civil
service. Privatization started in 1994 and about 270 public enterprises
were divested by 1998. In late 1996 the privatization programme was
expanded to cover all major utilities including water and electricity. The
government’s stated aim was to divest all of these enterprises by the end
of 2000 (World Bank 1999). After a further decline in external support
in the early 1990s following concerns over reform commitment, donor
confidence was restored and normal aid resumed after the new
government came into power and especially following the conclusion of
an Enhanced Structural Adjustment Facility (ESAF) with the IMF in 1996
(Bigsten et al. 1999).
154 Kate Bayliss
The reforms of the 1980s and 1990s have had a major impact, not just
in economic terms but in perceptions and behaviour. Within a short
space of time, user charges were introduced across most public services,
cut-backs in public services were implemented, state subsidies for food
were removed and real wages declined. This combination of events
required a sudden and rapid adjustment on the part of the great major-
ity of the people. The adjustment policies of the 1980s quickened the
pace of change in Tanzania and acted as a catalyst for the restructuring
of the economy and society more generally (Messkoub 1996). Tanzania
remains highly aid dependent and high levels of poverty persist. In
2005, aid was used to finance over 40 per cent of budgetary spending,
up from 20 per cent a decade earlier. Aid flows were expected to rise to
12 per cent of GDP in 2005/06 from around 9 per cent in 2003/04
(Mramba 2005). Securing good relations with donors is high on the
policy agenda for the government.
The crisis years had a devastating effect on the public sector. Civil
service salaries deteriorated so that by the late 1980s, the real salary of a
civil servant was only one-fifth of what it had been in the early 1970s.
Falling wages led to a severe decline in morale, poor performance, absen-
teeism, moonlighting and corruption in the 1990s (Bigsten et al. 1999).
State employees had to supplement their wages from other sources.
Those with marketable skills turned to private practice or working for
donors. Others took advantage of their official position to earn extra
income (Messkoub 1996). The quality of public services declined. As a
result of all of these factors, state legitimacy and credibility were severely
eroded by the mid-1990s. In this context, where infrastructure policies
are heavily influenced by donors and reflect a collapse of faith in the
state, it can be no surprise, then, that non-state actors emerged as the
agents of choice for the operation of water and electricity services.
7.3 Electricity
The early power sector in Tanzania consisted of small, privately owned

companies. In 1964, three years after independence, the power supply
was nationalized into one company, Tanganyika Electricity Supply
Company (TANESCO) with a view to correcting the private sector’s
inability to increase access to the majority of the population. TANESCO
was one of a handful of parastatals described by John Nellis in 1986 as
‘well-managed, profitable public enterprises’ (Chapter 4). Despite rapid
growth in domestic energy demand due to population growth and an
increase in economic activity over the past decade, electricity continues
to account for just over 1 per cent of primary energy supply while over
90 per cent is accounted for by biomass fuel particularly fuel-wood
(Ministry of Energy and Minerals 2003).
The electricity supply is controlled by TANESCO, a state-owned, verti-
cally integrated utility. It is responsible for the generation, transmission
and distribution of electricity throughout the country. In addition, there
are two private electricity generation companies, IPTL and Songas. The
country has installed capacity of about 839MW. Around 67 per cent of
this is from hydropower plants, owned by TANESCO. Droughts have
become increasingly common and, following a major shortage at the
start of 2006, the government took the drastic step of closing the hydro
plants until water levels increased.2 As a result, day-time power was
stopped for non-essential users (excluding places like hospitals).
In the absence of hydropower, the electricity sector has relied on ther-
mal generation using expensive imported fuel. The discovery of natural
gas on the Songo Songo Island and Mnazi Bay in Mtwara has raised
hopes for cheaper fuel but the cost of production so far has been high.
In 2004 the World Bank approved a US$45m Emergency Power Sector
Loan to pay for the incremental cost of thermal power generation due to
low rainfall (World Bank 2004f).
Electricity is only available to a small proportion of the population. At
the national level, around 10 per cent of the country has access to elec-
tricity, at least for lighting. In rural areas, this figure is less than 1 per
cent (Ministry of Energy and Minerals 2003). The 2002 Census indicates
large regional variation in electrification rates ranging from 45 per cent
of the population in Dar es Salaam to just 3 per cent in Shinyanga and
Mtwara. In 2005 the government approved the Rural Energy Act to
establish the Rural Energy Board, Fund and Agency to be responsible for
the promotion of improved access to modern energy services in the rural
areas of mainland Tanzania. Under the terms of the Act, the government
is to act as a facilitator of activities and investments made by private and
community entities (para 4 (c)). The Rural Energy Fund will receive
funds from donors. Some pilot projects have already been established.
Most will be undertaken by TANESCO and will be hooked up to the
national grid. Some will be private such as a tea company that has a
small hydro capacity which will be developed to supply neighbouring
villages.
7.3.1 Electricity sector reforms

Tanzania began liberalization of the energy sector with the country’s
first National Energy Policy in 1992. As part of this policy, in order to
156 Kate Bayliss
increase electricity generation, private sector involvement was to be

encouraged. Soon after, the government entered into negotiations with a
Malaysian firm, IPTL, to construct and operate a private power plant
(see below). In October 1999 the government approved a new electricity
industry policy and restructuring framework with a number of objectives
including improved efficiency, accelerated electrification and economic
viability to ensure long-term sustainability. One of the specified
objectives was to ‘reduce public expenditure and debt by transferring to
private capital the commercial risks inherent in investments in the
electricity sector’ (Parastatal Sector Reform Commission, PRC, website,
www.psrctz.com).
Building on deregulation and liberalization, the country issued a fur-
ther sector policy document in 2003, highlighting the changing nature
of the energy sector with the government’s decision to disengage itself
from direct production activities. This is intended to allow more resources
to be devoted to social services (Ministry of Energy and Minerals 2003).
Furthermore the policy document suggests that competition will be
expected to bring benefits for the electricity sector, ‘Competition as a
principle to attain efficiency shall apply for the electricity market’
(Ministry of Energy and Minerals 2003, p. 28). The government’s role is
to intervene ‘when and where market forces fail to deliver desired
results’ (Ministry of Energy and Minerals 2003, p. 12).
The TANESCO reform programme (as outlined by the PSRC) envisaged
a strong role for market forces. Competition was to be introduced into
the sector ‘where applicable’ while stakeholders’ and consumers’ inter-
ests were to be protected by regulation. The plan was to start with the
vertical separation of electricity generation, transmission and distribu-
tion and to allow competition in electricity generation. A regulatory
agency was to be established which would, among other things, provide
a framework for pricing of the parts of the electricity supply chain that
continued to display natural monopoly characteristics. Thus, in the gen-
eration of electricity, the regulator would develop a bulk electricity
exchange market where the price would be determined by the system
marginal cost. At the retail end, electricity tariffs were to be determined
by price-cap regulation. Consultants were to advise on restructuring and
privatization as well as electricity trading arrangements. According to
the government’s timetable, divestiture of the vertically separated
companies was scheduled for mid-2005 (PRSC website).
At the time of this research in November 2005, the situation was not
as planned. TANESCO was still state-owned and vertically integrated
but management had been transferred to a South African firm under a
two-year (subsequently extended to four-year) management contract.

Progress with the reform programme had been painfully slow while
TANESCO was in an increasingly desperate state. By 2000 there had
been little progress, TANESCO was deteriorating and, increasingly, the
benefits from privatization elsewhere were equally less than obvious.
Following a review from two external consultants as well as visits to
neighbouring countries, the government opted for a management
contract. Three bids were received and the contract was awarded to
NETGroup Solutions from South Africa.3
The management contract is intended to be an interim phase.
However the possibility of privatization via divestiture has become less
and less likely as the government’s expectations of the private sector
have become more realistic. TANESCO has now been ‘de-specified’ from
privatization meaning that it has come off the privatization list and is
no longer controlled by the PSRC. This has advantages for TANESCO as
the company is now eligible for loans and donor support that could be
denied to private (or earmarked to become private) firms, and the PSRC
no longer has a say in the investment decisions of the company.
Privatization is now viewed as a possible option several years down the
line but the nature of the small market and weak infrastructure are such
that there would be little interest from investors. This is not a rejection
of the principle of privatization but a pragmatic response to the
demands of international capital.4
Under the management contract, some of the senior positions at
TANESCO (including that of Managing Director) are held by a small
number of expatriates that work with the management of the company.
NETGroup reports to the Board of TANESCO. NETGroup’s performance
bonus is based on the financial performance of TANESCO, quality of
supply and number of new customers connected (TANESCO Company
Profile, 2005). In 2004 the contract was renewed until 2006 but the
renewal was at one stage reported to have been in some doubt as the
Swedish firm hired to oversee the work of NETGroup were critical of
‘exaggerated’ bonuses paid to company executives.5 According to several
press reports, under NETGroup’s first contract, the company was
reported to have been paid a management fee of US$4m.6 The contract
with NETGroup was terminated at the end of 2006 and control reverted
to local management.7
Table 7.1 presents details of key performance indicators for TANESCO
from 1999 to 2003. The management contract was introduced in 2002.
The figures show little change in sales but a substantial decline in gross
and net profit over the period due to a major increase in the cost of
158 Kate Bayliss
Table 7.1 TANESCO performance indicators 1999–2003
% change
US$m 1999 2003 99–03
Sales 166.93 158.82 ⫺5

Cost of sales 92.44 182.84 98
Gross profit 74.49 ⫺24.02 ⫺132
Operating loss/profit 22.64 ⫺62.82 ⫺377
Employment 7,223 4,996 ⫺31
New connections 32,869 27,708 ⫺16
Total connections 396,440 513,703 30
KWH sold (million) 1,748 2,326 33
Sources: Information provided by Tanesco; Company Annual Reports.
sales. This is accounted for largely by the costs of thermal generation

and payments due to the two Independent Power Producers (IPPs).
New connections have increased since the NETGroup contract was
signed in 2002 but the rate of increase has not changed. There has been
a major reduction in the size of the workforce with employment falling
by more than 30 per cent between 1999 and 2003, and the rate of
decline has increased since the start of the NETGroup contract. Revenue
collection has improved but the high generation costs mean that the
financial performance of the company is still vulnerable to fluctuations
in input costs.
Generation and transmission expenses almost tripled between
2001 and 2003. The cost of purchased electricity increased by more
than 70 per cent between 2002 and 2003. Since 2002 the company
has received a government subsidy to contribute to the costs due to the
private power generator, IPTL, under the Power Purchase Agreement
(PPA) but generation costs remain high. Furthermore, in 2001 it was
reported that the company’s liquidity position was threatened by the
high level of outstanding loans (TANESCO Annual Report 2001).
The number of electricity connections has increased and employment
has fallen so, as a result, productivity as measured by the number of con-
nections per employee has increased substantially. Table 7.2 shows data
from 1990 to 2005 which gives a longer-term view of the performance of
TANESCO. There has been a huge increase in productivity in terms of
the number of connections per employee which has increased by more
than 300 per cent. While system losses, at 25 per cent in 2005, have
fallen from 28 per cent in 2001, they are more than 30 per cent higher
than they were in 1990.
Table 7.2 TANESCO key performance indicators 1990–2005
%
1990 1995 2000 2001 2003 2004a 2005b change
Number of Customers
per employee 27 35 63 68 106 117 120 344
System losses 19 14 25 28 23 24 25 31
Electrification level (%) 8 7 7 10 – – – –
Notes: a 2004 figures based on estimate based of actual figures at September 2004.
b
2005 figures based on estimate based of actual figures at July 2005.
Sources: Tanesco Company Reports and Marandu (2005).
One of the main achievements reported from the management

contract is that the company is now able to disconnect government
departments that fail to pay their bills. This provision was in place
before but was not observed. With external NETGroup personnel in
senior management roles, TANESCO is able to enforce this more effec-
tively than parastatal managers could in the past. Furthermore, the pri-
vate firm has reportedly managed to instil a more pro-active
management culture in TANESCO. According to interviews with the
Ministry, the changes could possibly have been implemented without
NETGroup but would have been more difficult to achieve. An alterna-
tive perspective is provided by Nellis (2006b) who says that under pri-
vate management the technical and financial performance of TANESCO
has improved greatly because the firm has cut costs and cut services to
non-payers. According to Nellis (2006b, p. 22):
Still there is some bitterness and dismay that a handful of white

South African managers has been able to do in three years what
Tanzanian managers could not accomplish in 40. The fact that the
expatriate managers are very well rewarded for their services … is a
compounding matter. The level of public grumbling is such that,
despite the much improved electricity situation the Government is
under some pressure to terminate the contract and reinstate Tanzanian
management.
It is likely that politics plays a part in decisions regarding the manage-

ment contract but, ultimately, the contract was intended to be a short-
term measure and public opinion is not helped by continuing black-outs
combined with high payments to consultants.
160 Kate Bayliss
Electricity tariffs increased substantially in the 1990s with tariffs

nearly doubling in local currency between 1993 and 1995 (ESMAP
2005). The tariff structure has changed since the late 1990s although lev-
els have not increased dramatically. Previously there was a cross-subsidy
in place with industrial users subsidizing domestic customers. In addi-
tion there was a more complex pricing structure with higher unit
charges for higher levels of consumption. Since 2002, for domestic users,
there is a flat rate tariff for all units consumed above the lifeline of
50 kWh per month. The lifeline has been reduced from 100 to 50 kWh.
The rates payable by industrial users have fallen since the late 1990s.
The Ministry and TANESCO are considering establishing an
Automatic Tariff Adjustment (ATA) but such a policy is not currently in
place. Electricity pricing is supposedly based on the Long Run
Marginal Cost of power supply, covering fixed and variable costs
(Mwihava and Mbise 2003). However, costs are currently subsidized
due to the high cost of power from the thermal power plants (see
Section 7.3.2). Tariffs are, therefore, currently described as ‘cost-reflec-
tive’ but full cost recovery is not currently in place nor will it be for
some time as consumers cannot afford the levels of price increase that
would be required.
7.3.2 PSP – in generation

In 1992 the government opened up electricity generation to private sec-
tor participation. There are now two major IPPs, Independent Power
Tanzania Ltd (IPTL) and Songas, which supply to the national grid.8
There are also some small self-generators. It is reported that around
60 per cent of the revenue generated every month by TANESCO goes to
paying for power from the two private producers9 and the cost of fuel
from these plants is a serious threat to the financial sustainability of
TANESCO. The World Bank provided emergency finance for TANESCO
to purchase power in 2004. The cost of electricity produced by these
plants is high in part because they require high-cost imported fuel and
because they are underwritten by contracts that secure high returns for
private investors to cover their risk exposure. According to press reports,
these electricity projects have been criticized by international officials
because they were ‘extremely poorly negotiated’.10
In 1995 a 20-year PPA was signed with IPTL – a joint venture between
Mechmar corporation Malaysia (70 per cent) and VIPEM of Tanzania
(30 per cent) – to build and run a 100 MW power plant. The plant was
built using a lower cost system than that on which the original PPA was
based, leading to a dispute over the appropriate tariff which eventually
went to the World Bank’s International Centre for Settlement of

Investment Disputes (ICSID). The tribunal concluded that the power
was overpriced, and the tariff was negotiated downwards but the agree-
ment remained fixed for a 20-year period. The outcome of the arbitra-
tion was heralded as a success by both TANESCO and IPTL. There were
widespread allegations of systematic corruption in the award of the con-
tract (Cooksey 2002).
Independent Power Tanzania Limited finally began to produce
power in 2002. Despite the tariff reduction, the capacity charge is
beyond TANESCO’s means and a subsidy is paid to the company
directly by the government. In 2002 TANESCO reported that the com-
pany’s cost of sales increased by 30 per cent largely due to an 80 per
cent increase in generation and transmission costs, attributable to the
capacity charge levied by IPTL which is payable whether or not elec-
tricity is purchased (TANESCO Annual Report, 2002). In contrast to
expectations from PSP in power generation, the experience with IPTL
in Tanzania has been expensive and inflexible. Rather than freeing up
government funds which could be diverted into social spending, the
project has tied the state into paying a fixed capacity charge.
Furthermore, the contract is inflexible in the face of changing circum-
stances. When the price of crude oil increased, the contract terms still
had to be met rather than allowing the government to consider alter-
native energy sources. In January 2006, it was reported that the
government was negotiating with the Malaysian owners to take over
IPTL in order to reduce the electricity tariff and lower the subsidy paid
to the company. It seems that the deal would save the government
around US$1.5m a month,11 suggesting that the country would have
been better off if the plant had been built by the state rather than the
private sector in the first place!
The country’s second private power generation project, the Songas
power project started producing electricity in 2004 following years of
planning and negotiations after the discovery of natural gas on the island
of Songo Songo. The project involved the laying of a 220 km gas pipeline
between the island of Songo Songo and the Ubungo plant in Dar es
Salaam. This was previously a highly polluting oil-powered power station
that has now been converted for gas. The plant was expanded in 2005
and now produces 180MW, a third of Tanzania’s electricity needs.
The gas is brought ashore and converted to electricity by Songas
Limited, a limited liability company registered in Tanzania. Shareholders
in Songas include Globeleq (a subsidiary of UK company, CDC), the
Tanzanian Petroleum Development Corporation (TPDC), TANESCO, the
162 Kate Bayliss
European Investment Bank (EIB) and the Netherlands Development

Finance Company (FMO). Funding for the project has been provided by
the World Bank (US$188m), CDC Capital Ventures (US$18m), EIB
(US$40m). The International Finance Corporation (IFC) (the private
lending division of the World Bank) lent US$50m to Indian firm Larsen
and Toubro which won the development contract for the Songo Songo
field. The World Bank has been heavily involved in the project both
directly and through the IFC.12
Most of the plant’s output is being sold directly to TANESCO, while
some of the gas is being directly supplied to large-scale industrial
consumers, including Tanzania Breweries Limited and Tanzania
Portland Cement. The project is underwritten by a 20-year PPA between
TANESCO and Songas which takes the form of a fixed capacity charge
and a charge per unit of power. Songas has been able to mobilize finance
but much of this has been from development agencies. The Government
of Tanzania obtained concessionary loans that were on-lent to the
project sponsor (Gratwick 2006).
7.3.3 Conclusion
Results from PSP in the electricity sector have failed to meet expecta-
tions. The vision of the PSRC of a competitive electricity sector tamed by
regulation is far from the current reality in Tanzania. There is no com-
petition and there is little independent regulation (see Section 7.5). The
Ministry envisaged a role for the state in the event of ‘market failure’ but
market failure is the norm rather than the exception. TANESCO remains
vertically integrated, although the management have said that they
plan to adopt vertical segregation in accounting in order to improve
internal business management. The experience with PSP in power gen-
eration has not been inspiring. The idea of reducing public expenditure
and debt by transferring risk to private capital is also way off course. The
private sector does not accept risk lightly and requires financial com-
mitments from the state in the form of long-term, high-cost PPAs to
minimize risk exposure. These are both expensive and inflexible. Both
Songas and IPTL required a return on equity of 22 per cent, reflecting
perceptions of risk (Gratwick 2006).
The management contract does seem to have brought some benefits
to TANESCO, increasing payments from government departments and
improving the management culture, for example, but market forces
have had little impact on the electricity sector in Tanzania. Electricity
prices are subsidized because of the high costs of generation. Reforms
have so far done little to increase access especially given the very low
access rates to start with. Rural electrification has only just started.
By far the aspect of service delivery that will have the most significant,
long-term impact on economic and social development is the massive
load-shedding due to drought. Improvements in financial management
are welcome but the onerous and inflexible commitments to long-term
PPAs reduces the scope of the Government and the utility to diversify
power sources and to provide long-term sustainable low-cost power. In
short, what stands out from the experience of electricity sector reform is
how little has changed. Some investment and structural reorganization
has been achieved but no less than what might have been expected irre-
spective of the pressures to privatize (and with the benefit of aid). What
is possibly most disappointing is the continuing weakness in institu-
tional capacity to deliver electricity from managing the creation of new
capacity through to the appropriate regulation and policy of old.
7.4 Water and sanitation
The expansion of the water supply in Tanzania has been a policy target
since soon after independence. The water supply system dates back to
the 1930s when it was limited to urban areas. In order to redress the
urban bias, the government launched a 20-year Rural Water Supply
Programme in 1971, that aimed to provide access to an adequate, safe,
dependable water supply within a walking distance of 400 metres from
each household by the year 1991. Under this programme, water was
provided without charge and investments were funded by the govern-
ment, NGOs and donors. In 1985, a mid-term review of the programme
revealed that only 46 per cent of the rural population had access to
water supply services. Various reasons have been put forward to account
for the failure of expansion policies in the 1970s including the non-
involvement of the beneficiaries, the use of inappropriate technologies,
use of a top-down approach, and lack of decentralization (MWLD 2005).
By the mid-1980s, the national economic crisis was affecting the
delivery of water and sanitation services. The government was unable to
meet recurrent costs and spare parts were not easily available. To ease
the financial problems the introduction of user charges for water and
involvement of the community in delivery systems were recommended
(Messkoub 1996). As with the electricity sector, a recurring theme in
water sector policy since the late 1990s has been the withdrawal of gov-
ernment from service provision in favour of non-state actors. However,
in practice, the state continues to be vital for water services.
164 Kate Bayliss
The biggest consumptive use of water resources is irrigation which

accounts for about 97.3 per cent of the total (MWLD 2005). Water scarcity
is experienced in many parts of the country and the poor suffer most from
low water supply coverage. A drought at the start of 2006 was pushing up
the street price of water, and an outbreak of cholera was reported in Dar es
Salaam as people began turning to unsafe water sources.13
There are varying reports on rates of access to water. According to the
Human Development Report (2005), the proportion of the population
with access to an improved water source increased from 38 per cent in
1990 to 73 per cent in 2002 (Table 5.1, Chapter 5). In 2004, the Ministry
of Water and Livestock Development (MWLD) put the coverage rates for
water at about 73 per cent in urban areas and 53 per cent in rural areas
(MWLD 2005). The data from the 2002 Household Budget Survey indi-
cate that overall access to water increased during the 1990s from 46 per
cent of the population to around 55 per cent.14 There are significant
variations with levels of access as low as 27 per cent in Tabora. In some
areas water is so scarce that even supplies for personal hygiene cannot
easily be found. Women and children walk long distances to fetch water
(MWLD 2002).
While the definition of an improved water source is set out in Chapter 5,
this ignores a number of additional factors which affect people’s
consumption of water. The existence of a piped household connection
does not necessarily indicate access as, for many residents of Dar es
Salaam, water has not flowed through the pipes for days, months or
even years. The access figures quoted are often based on census survey
data but these can misrepresent the true picture as, for example, they
only cover the municipal piped systems and omit private boreholes. In
addition, they also underestimate the informal supplies provided by
neighbours with a piped connection to those without (WaterAid 2005).
Table 7.3 shows the sources of drinking water for households in rural
and urban areas, using data from the Household Budget Survey. The fig-
ures show that the proportion of households with access to safe water
increased in the ten years from 1991 to 2001. This was achieved through
a large increase in access in rural areas and a smaller increase in urban
areas. However, the data indicate that the proportion using safe water in
Dar es Salaam decreased over this period while the proportion using unpro-
tected sources has doubled.
Similarly, Table 7.4 shows that the proportion of the urban population
with access to piped water fell from 88 per cent in 1978 to 79 per cent in
2001. This decline may be because of extensive investment in infra-
structure in the 1970s which slowly ceased to operate in the 1980s. In
Table 7.3 Households’ sources of drinking water (%)
Dar es Other Mainland

Salaam Urban Areas Rural Areas Tanzania
91/92 00/01 91/92 00/01 91/92 00/01 91/92 00/01
Piped water 93.0 85.7 72.7 75.6 24.5 28.3 35.9 39.3
Other protected sources 3.8 7.9 10.9 12.4 10.3 17.6 10.0 16.2
Total access to safe water 96.8 93.6 83.6 88.0 34.8 45.9 45.9 55.5
Unprotected sources 1.8 3.6 10.1 11.2 63.9 53.2 52.1 43.6
Other 1.4 2.8 6.2 0.8 1.2 0.9 2.0 1.0
Source: National Bureau of Statistics, Household Budget Survey 2002.
Table 7.4 Percentage of households using piped and well sources for water
1978–2001
Census Census HBS DHS DHS DHS DHS HBS

1978 1988 1991 1991/92 1994 1996 1999 2000/01
Piped Rural 27.7 18.5 24.5 19.4 20.2 24.7 22.0 28.4
Urban 88.0 79.2 78.8 78.6 82.9 77.5 79.6 78.9
Total 37.2 31.5 35.9 33.8 35.4 36.4 37.1 39.3
Well Rural 46.4 60.5 39.2 35.1 34.2 32.9 46.9 39.7
Urban 8.4 17.5 13.8 13.3 13.5 15.4 13.8 15.6
Total 40.4 51.3 33.9 29.8 29.2 28.9 38.3 34.5
Source: MWLD et al. 2002.
addition, increasing urbanization has led to unplanned settlements

many of which do not have access to basic services. The decline in piped
water is matched by an increase in use of well water in urban areas
(MWLD 2002). Access to piped water in rural areas has increased slightly
over the same period, and the total trend mirrors that of the rural popu-
lation because the population is predominantly rural. These figures are
disappointing when compared with the 1991 National Water Policy
which set the goal of providing clean and safe water to the whole popu-
lation. By 2002 over 30 per cent of the rural water schemes were not
functioning properly (MWLD 2002).
7.4.1 Water sector reforms

In 1991 the government adopted a National Water Policy in line with
the new economic orthodoxy that dominated other areas of the economy.
Central government subsidies were removed for water utilities which were
to be self-financing, thereby abandoning the idea of free water. In the
166 Kate Bayliss
1990s, urban and rural water were separated. The rural water supply is
managed through the MWLD. In 2002, the government unveiled a new
National Water Policy, followed in 2005 by a National Water Sector
Development Strategy. The aim of the Strategy is to create an integrated
approach to water resources management. The policy aims to achieve
community participation, a facilitating rather than provisioning role for
government, and commercialization. As a result of the government’s
new role, several institutions will be created: The Water Resources
Advisory Board, the Water Resources Management Council, Basin Water
Boards, Catchment Water Committees, and Water User Associations or
Groups. There is also an interim institutional framework planned
(MWLD 2005).
Aside from the extensive institutional reforms, current funding
sources available to the sector are very low compared with the levels of
the 1970s and 1980s. There was substantial investment in the water sec-
tor in the 1970s and 1980s but, from the early 1990s, there has been a
sharp decline in financing for rehabilitation and new development. The
lack of financial resources is such that existing schemes cannot meet
demand. But finance is vital to the government achieving increases in
access and securing finance is a major challenge (MWLD 2005). Policies
in the past, which have had multiple financiers for capital investment,
have created an urban bias in availability of finance. Furthermore the
main decisions regarding capital investment are made by ‘External
Support Agencies’ (donors). Beneficiaries are not involved in decision-
making and inappropriate technologies are used (MWLD 2005). The
Strategy aims to get round the difficulties by using a Sector Wide
Approach to Planning to streamline financial planning and develop
strong systems to ensure recovery of costs, although it remains unclear
from where exactly the money required for investment will come
(MWLD 2005).
The policy documents are optimistic about the role of the private sec-
tor and make a number of strong implicit assumptions in this regard
without clear justification. For example: ‘Involvement of the private sec-
tor in the delivery of water supply services will improve efficiency and
effectiveness and enhance development and sustainability of service
delivery. … Communities will be educated on the importance of the pri-
vate sector participation in the provision of rural water supply and san-
itation services’ (MWLD 2002, p. 34). This view assumes, first, the
existence of private sector capacity and interest in providing water serv-
ices and, secondly, that the private sector is both efficient and benign
rather than predatory and exploitative. Given the nature of the water
sector (essential for life and non-competitive in market structure) and

the profit maximization goals of private enterprise, private sector
involvement needs to be treated with extreme care. Faith in the private
sector stems more from the failure of the state to deliver rather than the
intrinsic merits of private provision per se. The World Bank’s previous
‘philosophy’ of ‘just do it’ as far as privatization is concerned still seems
to linger.
7.4.2 Urban water

In January 1998, 18 Urban Water Supply and Sewerage Authorities
(UWSAs) were created. These authorities are autonomous public bodies,
responsible to their own Board of Directors rather than to a city or a
national government body. They have control over the revenue that
they collect. These towns serve a total of 3.2 million people, around
9.2 per cent of the population. The Authorities have been divided into
three categories according to their financial capability. Category A towns
cover all their operating costs; category B towns meet operation and
maintenance costs but the government pays salaries of permanent
staff; and in category C towns the government pays salaries of perma-
nent staff and may contribute towards electricity costs. The average
population of the towns served by UWSAs is around 181,000. The
biggest is Mwanza with 476,646 and the smallest is Songea with a
population of 41,549 (EYAS 2005). These units are independent in
that they are autonomous but they are controlled by the Ministry. The
Ministry also had a hand in the creation of the Boards of the UWSAs.
But the aim is for these to operate as private firms in that they will
source employees through advertising of posts. Regulation of the
UWSAs is through a Memorandum of Understanding between
the MWLD and each individual UWSA where the obligations of the two
parties are specified.
It was reported in research interviews that these authorities have been
successful in increasing the ability to respond to local needs. The view
was that there have been great advantages in creating service providers
that were locally accountable and are able to address issues quickly with-
out the need to go through central government.15 These authorities are
encouraged to behave as private businesses, for example, preparing busi-
ness plans and introducing long-run marginal cost pricing. Expansion
of access is seen as increasing market share. According to consultants
Ernst and Young Advisory Services, UWSAs need to have ‘clear market-
ing strategies’ in order to increase ‘market share’ (EYAS 2005, p. 38).
Conventional notions of increasing access to water are replaced with the
168 Kate Bayliss
concept of marketing services which is a major departure from the tra-

ditional approach of water service provision.
A review of the performance of the 18 UWSAs in 2003–04 after about
six years of operation, indicated some improvements in technical per-
formance in terms of reducing water losses and increasing the availabil-
ity of water (hours of services) and coverage (EYAS 2005). Some have
managed to increase the number of connections but little effort has
gone into expanding ‘customer base’ for sewerage services. Coverage of
sewerage services is poor with the highest coverage being 20 per cent in
Dodoma. Only nine UWSAs have a sewerage system. The review found
a big range in performance. For example, unaccounted for water (UFW)
ranged from 86 per cent to 16 per cent. Such losses are due to technical
leaks and to inadequate billing. Some authorities did well where there
was effective metering, accurate record keeping, prompt billing and
close follow-up on payment of bills, customer care, reliable supply of
water and customer satisfaction. The reverse is true of the authorities
that did not do so well. Poor performance is attributed to faulty meter-
ing, lack of record keeping, irregular water services and poor customer
relations.
The review revealed poor performance of internal control systems.
Though all the UWSAs submitted accounts on time, the quality of the
reports was generally poor. It was recommended that each UWSA recruit
suitably qualified staff or train UWSA staff but it is not clear that the
authorities have the financial resources for this, particularly those that
are not performing well. Financial constraints limit investment (EYAS
2005). The consultants find that many UWSAs need external financial
support to increase production. Some UWSAs have seen big increases in
coverage, but this cannot be done successfully without huge investment
and finance from the Ministry. In general, those UWSAs that have
received considerable financial support from donors are in a better con-
dition, have up-to-date water production installations and established
sewerage systems. Old networks (some more than 50 years old) have led
to water losses due to frequent leakage from burst pipes. Old systems
need to be rehabilitated and upgraded. The authorities need to put in
meters to improve revenue management and need computerization to
manage billing effectively and to increase revenue. But computers and
meters are expensive to install, and the UWSAs cannot afford them.
Performance has suffered greatly from electricity shortages and high
electricity costs (EYAS 2005).
Urban water tariffs have been very low resulting in low revenue which
has been inadequate to meet even the basic operation and maintenance
requirements. Provision of water and sewerage has been seen as a social

service resulting in low willingness to pay and difficult revenue collec-
tion. Many water users refuse even to be connected legally (MWLD
2002). The aim now is for cost-recovery principles to be applied to pric-
ing over the next ten to fifteen years which will mean that costs will
vary depending on the ease with which natural water supplies are avail-
able. Where water supplies are deep in the ground, water charges will be
higher to reflect the higher costs of pumping the water to the surface.16
The private sector features in the proposals for urban water but it is
acknowledged that the current state of the authorities are not so attrac-
tive to investors. One of the policy goals (goal 4.8) is ‘to have efficient
UWWS services through PSP’ (MWLD 2002, p. 45). It is seen as one of the
failings of urban water delivery that private investors cannot be attracted
into the sector so that an enabling environment is intended to be created
for potential investors. There will be a limit to the number of urban cen-
tres that one private company can manage in order to avoid monopoly
and facilitate competition. It seems, however, that the key factors that
will lead to improvements are capital investment, recruitment of skilled
staff and a reliable electricity supply but these are not going to happen
without considerable external support. Once the core constraints have
been addressed, then there might be interest from the private sector but
ownership has little relevance to the main limiting factors.
7.4.3 Privatization – Dar es Salaam water

In 2003, a contract was signed with a consortium known as City Water
Services (CWS) for a ten-year concession contract for the management
of the water and sanitation system in Dar es Salaam. CWS was owned by
UK firm Biwater International, Gauff Ingenieure from Germany, which
together held a 51 per cent stake, and a local Tanzanian company,
Superdoll Trailer Manufacturers Ltd.17 This was not the first measure to
introduce the private sector in the city. Some privatization had already
taken place, for example, many private companies had already been
licensed to run water supply and sanitation businesses. Trucks owned by
individuals and private companies now deliver clean water to city resi-
dents, while others empty sewerage tanks, a task formerly monopolized
by the state utility, Dar es Salaam Water and Sewerage Authority
(DAWASA).18 However, the City Water concession was expected to
improve greatly the provision of water and sanitation in the city. Hence
there was great disappointment when the contract was terminated by
the government after just 18 months on account of the poor perform-
ance of the private firm.
170 Kate Bayliss
Privatization of water and sanitation in Dar es Salaam was a pre-condition

set by donors for the Government of Tanzania to receive HIPC funding.
In addition, under the Urban Water Sector Project (of which privatiza-
tion of the water supply in Dar es Salaam was a component) it is clear
that privatization was a condition for funding. According to the project
document (World Bank 2003d, p. 12):
When the Bank was requested late in 1998 to provide financial

support to the project, it was agreed that its processing would be
linked to the ‘privatization’ of DAWASA’s operations. … The Bank is
probably the only financing agency that has been actively involved
in supporting ‘privatization’ of WSS operations in Africa during the
last two decades.
The use of a private operator was intended to reduce physical and

commercial UFW and increase collection of water and sewerage bills
(World Bank 2003d). Ironically, in view of the subsequent collapse of the
privatization contract, the Bank points out in 2003 that this was ‘an
institutional arrangement likely to require several fine tunings during
the coming years’ (World Bank 2003d, p. 12), including, no doubt, its
own privatization rethink.
The state of the water supply in Dar es Salaam before privatization was
dismal with ageing infrastructure and system losses exceeding 50 per
cent. There had been no investment for decades. The sewerage infra-
structure reached only 10 per cent of the population. By 2003, just
98,000 households in a city of 2.5 million people had a direct water con-
nection. Only 26 per cent of water was being billed, 60 per cent was lost
through leaks and 13 per cent through unauthorized use, illegal taps
and non-payment. In low-income areas the vast majority of households
had no water connection, instead buying water from kiosks, water ven-
dors or neighbours, sometimes at more than three times the price of
water from piped connections (Greenhill and Wekiya 2004). According
to de Waal (2005), even if all the water that was getting to customers was
paid for, it would only amount to 26 per cent of the water pumped, such
was the extent of technical losses. Estimates of what the water authority
was being paid range between 8 and 16 per cent of the total water pro-
duction. After years of decline under the state sector there were high
expectations for the rehabilitation of the city’s water supply. At the end
of the project, it was estimated that about 80 per cent of the population
would have access to piped water and that 70 per cent of the service area
would be provided with a 24-hour service (World Bank 2003d).
The process of privatization started in the late 1990s. No alternatives

were presented. The only options considered were different forms of
privatization. Once it was decided that full-scale divestiture was not a
viable option, the process was set in motion for a lease agreement. The
public sector utility, DAWASA, was re-established as an Asset Holding
Authority to own the infrastructure allowing a private operator to lease
the state-owned assets and manage the water supply, thus reducing the
demands on and risk exposure of the investor. A separate regulatory
body, Energy and Water Utilities Regulatory Authority (EWURA) was
established by an Act of Parliament in 2001 to take over the role
formerly played by DAWASA.
Privatization was the key for the release of donor funds under the
Urban Water Sector Project to rehabilitate the water and sanitation sys-
tem in Dar es Salaam. The total cost of the project was estimated to be
about US$164.6m, of which the World Bank was to contribute US$61.5m,
the African Development Bank, US$48m and the European Investment
Bank, US$34m. The contribution from the Government of Tanzania was
to be around US$12.6m while private investor equity was expected to be
just US$8.5m, equivalent to about five percent of the total project
investment (World Bank 2003d).
The UK Government was also involved, with the Department for
International Development (DfID) financing UK consultants Adam
Smith International to promote the water privatization.19 Despite this,
the response to the proposed privatization was surprisingly neutral.
Press coverage reported events with little opinion, and there was little
in the press either to say how good it would be or reporting major
protests over privatization.20 The transaction was presented mainly in
factual terms. This may be due to the lack of participation and consul-
tation that preceded the award of the contract. This has been described
as ‘a deliberate government strategy because it knew that the public
would oppose the reforms if fully consulted’ (Greenhill and Wekiya,
2004, p. 10).
In 2003, responsibility for the management of the Dar es Salaam
water supply was transferred to CWS. This was the culmination of
several years of effort and the process had stalled a number of times.
Firms were initially short listed in 1997. Finally two bids were received
in 2000 from French firms. However contract negotiations failed as the
bidders were looking for a number of concessions to reduce risk expo-
sure (such as compensation payable in case of force majeure and a
government guarantee that its own departments would pay their bills).
The contract was re-tendered but the only bid received was from CWS.
172 Kate Bayliss
Although only one bid was received, it was not until the deadline was
reached that it became clear that there were no other bidders. City
Water Services was awarded the contract on the basis of a bid tariff of
Tshs 322 per m3.21
A number of terms were specified in the contract. For example, CWS
was to make regular monthly payments to DAWASA of Tsh 50m per cal-
endar month in the first year, rising to Tsh 75m in year two and
Tsh 100m in years three to ten. The company was to pay a penalty in the
event of failure to make these monthly instalments. A number of key
performance targets were set with financial penalties due if they were
not met. Targets were set for drinking water quality, numbers of meters
to be installed each year, numbers of new connections, transmission
losses, water distribution losses, collection efficiency, repair time for
reported burst pipes, data collection and water pressure. A number of
other targets were set that were not subject to financial penalties such as
number of customers receiving reliable supplies, number of water
accounts, keeping appointments on time, updating billing records, and
customer billing on actual meter readings.
Soon after taking up the contract, CWS warned that reform of the sys-
tem would not be quick. Graham Gorrod, the City Water acting Chief
Executive Officer stressed the need for patience:22
We understand the immediate need for improvements in the system,

but unfortunately, the residents of Dar es Salaam and Bagamoyo will
not notice a difference overnight. The problems that affect the water
and sewerage systems will take a great deal of work to fix properly. A
quick fix will not work. Dar es Salaam and Bagamoyo need long-term,
reliable and sustainable water and sewerage systems, and that is what
City Water will provide over the ten-year period.
Results, it seems, were promised to be achieved within the decade.

A year after the start of the contract, there had been no improvement
in services. Prices were increasing but customers were still without water
yet customers continued to receive bills. As a result CWS bill collectors
were sometimes ‘chased away with dogs and knives’ (Greenhill and
Wekiya 2004, p. 2). The project was not pro-poor. ‘City Water’s pro-poor
measures are paltry and tokenistic compared to the scale of unmet
needs. In fact, donor resources and the Tanzanian government’s current
and future tax revenues, will be used to fund a project in which 98 per
cent of the money will be spent on the richest 20 per cent of the
population’ (Greenhill and Wekiya, 2004, p. 2). City Water was facing
difficulties with a population unwilling to pay high prices for poor

service. According to Greenhill and Wekiya (2004, p. 14), ‘Rather than
the tidy profit they were anticipating, City Water now expects to make a
loss of $0.7 million this year. If such losses continue the company’s com-
mitment to the project may well be called into question.’
In May 2005 the government terminated the contract with CWS.
According to the Minister, Edward Lowassa, ‘The water supply services in
Dar es Salaam and in the neighbouring places have deteriorated rather
than improving since this firm took over some two years ago’.23 CWS
were also reported to have failed to pay the collected revenue to the
government, and the leasing fee was not paid. In addition, the company
was alleged to have only put in US$4.1m of the US$8.5m investment
which was required in the first two years.24 In November 2005,
Biwater/Gauff filed a request for arbitration with the World Bank’s ICSID,
claiming losses in the region of US$20 to 25 million (ICSID 2006).
The whole experience of privatization has been extremely drawn out
and ended in disaster. Under private management, the very poor system
deteriorated further. In interviews, various reasons were put forward by
observers to account for the outcome (although these views were
expressed on an informal basis in view of a possible court case pending).
These include difficult relations between the international and local
partners, lack of commitment and support from the parent company,
and lack of commitment and loyalty from both the workforce and con-
sumers. The investors committed themselves to taking on all DAWASA
workers which possibly made reform more difficult. The firm failed to
address leakage issues. Eventually the contract was terminated on the
grounds that CWS failed to pay their fixed fee to DAWASA. The expatri-
ate management team was deported. For their part, CWS accepted that
the project was behind schedule but claimed that they had been given
wrong data about water supplies and were willing to re-negotiate with
the government.25 The dispute grew increasingly bitter and in June
2005, Biwater attacked the government’s management of the project
through an advertisement in weekly African publications saying, ‘When
aid flows through political pipes, it sometimes leaks’.26
The failure of the contract raises questions of ownership and account-
ability. Privatization was a condition set by the World Bank for aid fund-
ing and debt relief. The UK Government provided a reported £500,000
to Adam Smith International for public relations to promote the water
privatization. In the face of such leverage, the Tanzanians had little
choice but to privatize the water and presumably were convinced of the
benefits by consultants and donors. Yet, when the contract fell apart,
174 Kate Bayliss
the Tanzanian Government alone was deemed responsible. According to

a spokesman for the UK’s DfID:27
It is for the Government of Tanzania to set its own policies and prior-
ities. It was their decision to introduce private sector participation
in the water sector in Dar es Salaam. It is not appropriate for us to
comment on contractual issues.
So, while donors have great powers of influence over developing

country policies, they have little responsibility when things go
wrong. This is so even when they have themselves funded technical
assistance to the tune of half a million pounds through a think-tank
that derived from the most extreme ideological wing of the Thatcher
years.
Following the termination of the contract with CWS, DAWASA estab-
lished a lease contract with a newly created public company, Dar es
Salaam Water and Sewerage Corporation (DAWASCO) with a new CEO,
an engineer from the Ministry. DAWASCO, with support and assis-
tance from the Ugandan water utility, NWSC, prepared a 100-days
Operational Rescue Plan (ORP) aimed at turning around performance. A
similar approach had been successful in Uganda (see Chapter 5). The
ORP started at the beginning of July 2005 and set detailed targets for key
performance indicators. Three months later, the company published an
evaluation report that showed impressive improvements. The perform-
ance results are shown in Table 7.5. Over the three months of the ORP,
the average revenue collection increased by 36 per cent. Collection for
September was nearly 50 per cent more than the average value before
the ORP (DAWASCO 2005b).28 Arrears on the other hand were supposed
to fall over this period but they actually increased by 5 per cent (DAWASCO
2005b). Over the period, 168 new connections were achieved against a
target of 240 and 1538 new meters were installed against a target of
2,100 (DAWASCO 2005b).
The repair of leaks has been a major priority for DAWASCO. The num-
ber of leakages registered increased from a monthly rate of 212 before
the ORP to a monthly average of 3458 over the three month ORP period.
During this time, a total of 10,373 leaks/bursts were reported in the
July–September period of which 9927 leaks/bursts were repaired
(DAWASCO 2005b). The average number of leaks repaired per month
during the ORP period, July to September, was 3309.
Table 7.5 shows that water sales increased from 3,855,777 m3 in July
to 4,396,808 m3 in September. The computed UFW fell from 48 per cent
Table 7.5 DAWASCO sales and production
4 Dec.–5 May July–Sept.

Average July August September Average
Total sales (m3) 3,855,778 3,929,225 4,396,808 4,060,604

Water Produced(m3) 6,664,925 7,501,700 7,492,173 7,015,878 7,336,854
UFWa (%) – 47 46 37 43
Billing (Tsh 000) 2,164,303 2,328,950 2,696,028 2,442,894 2,489,291
Revenue collection 946,266 1,111,765 1,362,729 1,397,459 1,290,651
(Tsh000)
% customer 78 90 90 98 94
complaints dealt
with
Capacity utilization 78 88 88 84 87
Note: a UFW was not calculated in the ORP due to lack of bulk meters and low metering
efficiency.
Source: DAWASCO 2005a/2005b.
Table 7.6 Dar es Salaam: Water prices for metered water per m3
2003 2004/05
Tsh US$ Tsh US$
Domestic first 5 m3 322 0.33 359 0.35

Domestic ⬎5 m3 432 0.45 406 0.49
Non domestic 725 0.75 725 0.70
Source: Survey interviews.
in July to 37 per cent in September. Billing has improved greatly but

many problems remain with weak and faulty meters, weak staff capacity
and huge problems persist with illegal connections (DAWASCO 2005b).
The proportion of customers with 24-hour coverage is very low.
Prepayment meters are not used but a pilot scheme is proposed.
The approach taken by DAWASCO was, first, to focus on leakage
reduction and so deal quickly with reports of leaking pipes and, second,
to motivate staff. An incentive scheme was introduced where an award
was made for the best achievements according to specified criteria for
one of the ten regional area teams each month. Customer care was also
identified as another vital area to enhance the customer’s willingness to
pay and was accordingly incorporated in the ORP. The average monthly
response to customer complaints of 94 per cent is below the target of
176 Kate Bayliss
100 per cent but considerably higher than the 78 per cent averaged in
the months before the ORP (DAWASCO 2005b).
Most connections are not metered and these consumers are charged a
flat rate depending on their location in the city. Increasing the number
of connections that are metered is a high priority. Tariffs under
DAWASCO are based on the tariff used by City Water which offered in
their bidding documents a customer price of Tsh322 per cubic metre.
This translated into consumer charges of Tsh322 for the first 5m3 and for
higher levels of consumption, the tariff was increased by the amount the
lessor had to pay to the asset holder, DAWASA (see Table 7.6).
Under the terms of the lease there is an indexation formula to take
account of inflation, and prices can increase by around 5 per cent a year.
For a higher price rise, DAWASCO would have to present a case to
DAWASA which remains the Asset Holding Authority. The view of the
CEO is that, rather than raising prices, their focus needs to be on reduc-
ing leakages and increasing revenue collection which would not be
helped by hiking up prices. There is a lifeline supply for the poorest
households and disconnections are avoided as much as possible. The
company investigates individual cases of non-payment and where cus-
tomers are unable to afford the lifeline tariff, a supply of 5m3 per month
is provided without charge. This is effectively a targeted subsidy which
costs little to DAWASCO but secures customer loyalty and reduces the
likelihood of an illegal connection being established.29
These results have reportedly generated a kind of positive spiral where
consumers are willing to pay because they are receiving a better service.
In the past there were reports of piped connections providing no water
for three years or more yet the customer still being sent a monthly bill,
although the issue of dealing with payment arrears has not been entirely
settled. Dar es Salaam Water and Sewerage Corporation uses private
firms for bill distribution and engineering and construction inputs.
They are considering bringing in private firm for revenue collection but
before they can consider such a move the company plans to strengthen
information and data systems.30
7.5 Regulation of energy and water
Despite the widely held view that independent regulation should be estab-
lished before privatization, none was in place before the signing of the lease
contract with CWS. At the end of 2005, there was no external regulator for
water and electricity but the independent regulatory authority, EWURA,
was due to start operating in 2006. Until it is operational, the government’s
interests in the electricity sector are represented by the Board of TANESCO

which is effectively the supervisory body for the Company. The Board is
also responsible for monitoring the activities of the private firm contracted
to assist with the management of TANESCO, NETGroup Solutions. In the
water sector, the UWSAs are regulated by the MWLD. Dar es Salaam Water
and Sewerage Corporation is regulated by DAWASA, the Asset Holding
Company which in turn is regulated by the MWLD.
The Energy and Water Utilities Regulatory Authority was established
by an Act of Parliament in 2001.31 It will provide economic and techni-
cal regulation of the following sectors – electricity, petroleum, natural
gas and water and sewerage. The economic regulation includes setting a
price cap to ensure that tariffs reflect cost of service provision, and that
there will be an adequate return on capital employed. Under the terms
of the 2001 Act, EWURA will have considerable responsibilities. The
Authority is to promote effective competition and economic efficiency,
protect the interests of consumers, promote the financial viability of
efficient suppliers, promote the availability of regulated services to all
consumers including low income, rural and disadvantaged consumers
and enhance public knowledge, awareness and understanding of the
regulated sectors. The Authority will be expected to grant and renew
licences and to establish and regulate rates and charges, to monitor the
performance of the regulated sectors in relation to levels of investment,
availability, quantity and standard of services, cost of services, efficiency
of production and distribution of services. In addition, EWURA will
facilitate the resolution of complaints and disputes. It will be financed
by a combination of charges for licences, levies from regulated supplies
and grants or donations (but not from regulated industries).
While this is all exemplary in principle, there must be doubts about
capacity to deliver in practice. The World Bank is concerned about ‘regu-
latory quality’ and Tanzania’s performance in this regard seems to have
deteriorated continuously since 1998. The country has put in place a new
regulatory framework and is creating a series of corresponding agencies
but a decline in regulatory quality is considered likely. Reasons put for-
ward for this are that with the liberalization of the economy and PSP in
most utilities, regulation comes under greater scrutiny and expectations
are higher. There are also concerns about the delays in the implementa-
tion of the new agencies and the ‘the appropriateness of oversight
arrangements of these new regulatory agencies’ (World Bank 2005b, p. 3).
Yet, that the regulation of utilities has come poor second to PSP,
despite the now widely acknowledged policy line that regulation should
precede privatization is in major part due to the World Bank’s unthink
178 Kate Bayliss
prior to its rethink. It would seem that regulation has not been a core
policy priority coming, as it does, after privatization has been a domi-
nant feature for a decade. It will be some years yet before the regulatory
authority and framework become embedded in the overall delivery of
public services. The Authority will have a coherent framework in place
but whether it will be sufficiently robust to negotiate effectively with
and regulate multinational firms remains to be seen.
7.6 Conclusion
Virtually all aspects of Tanzania’s experience with privatization have

been disappointing. Yet, still policies are oriented towards PSP following
poor state performance in the supply of water and shortages in the
power sector. However, the private sector is not without its limitations as
demonstrated in the cases presented above, and the specific constraints
that these sectors face indicate a need for substantial state involvement.
The sector reforms are all about disengagement of the state but the evi-
dence all points to the importance of the state (e.g., to bail out
TANESCO, to provide support to UWSAs, to take over from City Water).
Having taken the state out under the privatization imperative, it is now
being dragged back in on a piecemeal basis. Furthermore, the perform-
ance of the state as provider has not been entirely bad. TANESCO
remains a state firm, and water in the capital is now being provided by a
public company. These results suggest that it is not so much the state as
provider that is the limiting factor as the way in which state organiza-
tions and personnel are engaged and supported (or not).
The above review has attempted to determine the underlying factors
which led to systems which have or have not been effective. Looking at
the water sector in urban areas, there is far more emphasis on commu-
nity participation and on financial sustainability both of which will
limit the extent to which donor-led ‘white elephants’ feature on the
development landscape. The aim is to create locally owned and account-
able service systems, and there has reportedly been some success in this
regard. But those that have performed better are those with support
from the ministry and/or donors. There is a lack of finance for invest-
ment and of suitably qualified staff.
The reforms that have been introduced are part of a radical reshaping
of social norms, some of which will have affected stakeholders in differ-
ent ways. For example, a key policy objective is to put an end to illegal
connections. While this will be good from the standpoint of the finan-
cial health of the sector more generally and will, in theory, allow for a
more accurately targeted subsidy system with, for example the lifeline
tariff, poorer consumers may lose out. The introduction of meters simi-
larly will be beneficial from a revenue perspective and may discourage
excessive consumption but there will be a social cost where people may
have provided water to their neighbours but no longer do so when their
connection is metered.32
The country has been and remains highly donor dependent, and this
more than anything determines infrastructure policy, not only by way
of conditionality but also in the way that state disengagement has
become deeply ingrained in all aspects of policy. The World Bank may
now have had a rethink of its approach to infrastructure but the evi-
dence from Tanzania shows that a considerable lag can be expected
before this will reach policy documents and ten-year strategies in
developing countries. That said, developments with the Dar es Salaam
water concession may have tarnished the World Bank’s reputation.
One senior official in the water ministry indicated that, following the
disastrous outcome from the experience with City Water, he would
be far more wary about listening to the advice of donors in future and
the conditions that they set, although they hold the purse strings to
some degree.
This is, then, a confusing time as the government has stuck closely to
policy advice from donors and consultants and yet, in practice, these
policies have been disappointing. Government policy and framework
papers, drafted in 2002/2003 under the guidance of international con-
sultants and donor agencies, remain littered with commitments to pri-
vatize and for the government to disengage from service delivery. The
evidence however indicates that ownership is not the issue but that key
structural constraints such as finance and human capacity need to be
overcome to improve service delivery. Moreover, the evidence indicates
that for the foreseeable future, both sectors will rely heavily on the state
suggesting that rather than perceiving of this as an interim phase, this
should be regarded as the status quo and there is a need to rebuild state
credibility and capacity rather than privatizing for its own sake.
Notes
1. The political capital is Dodoma.
2. ‘Tanzania starts rationing electricity due to drought’, Agence France Presse,
2 February 2006.
3. Interview at Ministry of Energy and Minerals, 24 November 2005.
4. Interview at PSRC, 24 November 2005.
180 Kate Bayliss
5. ‘Second Contract for Net Group?’, Africa Energy Intelligence, 31 December 2003.
6. ‘Electricity Utility Placed Under Private Management’, World Markets Analysis,
13 December 2001.
7. www.tanesco.com.
8. See Gratwick et al. (2006) for a detailed review of developments with
Independent Power Producers in Tanzania.
9. ‘TANESCO Wants to Take Over IPTL’, The Indian Ocean Newsletter,
17 December 2005.
10. FT REPORT – TANZANIA, Financial Times, 3 August 2005.
11. ‘Dar Plan to Buy IPTL Could Save $1.5m Monthly’, The East African,
31 January 2006.
12. ‘WB Can Take Credit for Project’, Africa Energy Intelligence, 25 August 2004.
13. ‘Cholera Outbreak Hits Tanzania’s Commercial Capital’, Agence France Presse,
10 January 2006.
14. See MWLD et al. 2002 for details of coverage and sampling methods of
different measures of water access.
15. Interview at Ministry of Water and Livestock Development, 22 November
2005.
16. Interview at Ministry of Water and Livestock Development, 22 November
2005.
17. ‘Private Firm to Manage Water Services in Dar’, The East African, 24 February
2003.
18. ‘Government Moves To Privatize Water Supply’, East African, 23 June 2003.
19. ‘Row Over Aid Money for Consultants’, The Guardian, 30 August 2005.
20. In contrast with Ghana, for example, see Chapter 6.
21. PSRC Press Release, 31 July 2002.
22. ‘Business and Management Practices’, Water & Waste Water International,
September 2003.
23. ‘British, German Firms Lose Contract to Run Water Utility in Tanzania’,
Agence France Presse, 14 May 2005.
24. ‘Row Over Water Contract Could Mean Continued Shortages’, Africa News,
18 May 2005.
25. ‘Flagship Africa Scheme Collapses’, The Guardian, 25 May 2005.
26. ‘Tanzanian Spat Puts Focus on Aid Dilemma’, Financial Times, 29 June 2005.
27. ‘Flagship Africa Scheme Collapses’, The Guardian, 25 May 2005.
28. Revenue collection from government departments was reported not to be a
problem. This was remedied in 2000/2001 when the reform process was set
in motion. The Treasury agreed to pay government departments more so that
they could pay their water bills. Now they can be disconnected for failing to
pay which would have widespread consequences so they do pay, Interview at
DAWASCO, 21 November 2005.
29. Interview, DAWASCO, 21 November 2005.
30. Interview, DAWASCO, 21 November 2005.
31. The Agency framework was established under the Energy and Water utilities
Regulatory Authority Act No. 11 of 2001 (amended through the Fair
Competition Act No. 8, 2003).
32. Interview, Maria Shaba, Tanzanian Association of NGOs, 25 November 2005.
8
Zambia: The Commercialization of
Urban Water and Sanitation
Hulya Dagdeviren
8.1 Introduction
Zambia is one of the poorest countries in sub-Saharan Africa (SSA) with

more than 80 per cent of the population living on less than two dollars
a day. The country has one of the highest rates of urbanization in the
region and a high proportion of people living in informal settlements in
peri-urban areas. Raising levels of access to water and sanitation in these
areas is a key policy objective.
Major institutional reforms were introduced in the water supply and
sanitation (WSS) sector in the mid-1990s. By 2006, ten independent
water utilities, known as ‘commercial utilities’ (CUs) had been established
and these were responsible for the delivery of water and sanitation to
around 90 per cent of the country’s urban population. The CUs are
intended to operate as autonomous concerns and are owned by the local
authorities they serve.
While the CUs are effectively ‘commercialized’ in that their operations
have been ring-fenced and cost recovery is a policy goal, CUs cannot
really be described as ‘commercial’ in the conventional sense. Losses
remain high and CUs are dependent on donor and government support.
They are required to supply water to the poorest consumers. Some pri-
vate sector participation (PSP) was introduced in the Copperbelt region
to supply the privatized mines but, for the rest of the country, reform
has centred on revising the institutional framework for service delivery
largely without the direct involvement of private sector.
A regulator was established in 2000, the National Water Supply and
Sanitation Council (NWASCO). It has had some effect in monitoring
and supporting the activities of the CUs. But there remains considerable
diversity of performance across the CUs and major capacity limitations
181
182 Hulya Dagdeviren
persist. The regulator has a strong social agenda in pushing utilities to

increase access for the urban poor but has little in the way of sanctions
as the practice of penalizing cash-strapped, weak public providers may
be counter-productive.
While privatization is not an overt policy at this stage, that is not to
say that the neo-liberal agenda has been rejected. The structure of CUs
as autonomous agencies rather than, say, as municipal departments,
makes it easier for PSP in the future. Private sector participation is now
being considered as an option for the CU that covers the capital, Lusaka.
This chapter aims to provide an assessment of the water and sanita-
tion sector reforms in urban areas in Zambia. It shows that the objectives
of commercialization (i.e., cost recovery and extension of access to
water, including the poor) are incompatible with the conditions of the
country. The CUs are seriously struggling to attain what they have been
set to achieve and are operating in a vicious circle of low but unafford-
able tariffs, limited investment and high system losses, which make cost
recovery difficult.
The next section sets out the background and context before detailing
the WSS reforms. In the subsequent sections, the commercialization
process in the WSS has been assessed with a focus on four key areas of
impact: the performance of commercial utilities in terms of cost recov-
ery, access rates to services, affordability of water charges and regulation.
8.2 Background
Zambia was ranked as a middle-income country when it became inde-

pendent from the United Kingdom in 1964. Subsequent economic devel-
opment was based on the production and export of copper but a fall in
the terms of trade in the 1970s led to major economic decline. The coun-
try became one of the most indebted in the region and per capita income
fell from US$752 in 1965 to US$351 in 2002 (World Development
Indicators Database). Major neo-liberal reforms were introduced with sup-
port from the World Bank and IMF following a change of government in
1991 but, after more than ten years, there has been little sign of improve-
ment. Economic decline has resulted in social decline with adverse trends
in health and education indicators. Life expectancy has fallen from a high
of 51 years in 1982 to just 37 years in 2002, the lowest in Africa (World
Development Indicators 2005). The Gini coefficient (0.57 in 2003) for
Zambia reflects a highly unequal distribution of income.1
Approximately 4.9 million live in urban areas, and 3.9 million of these
(35 per cent of the total population) live in peri-urban and low-cost
housing (DTF 2005). These areas are typically unplanned settlements
Zambia: The Commercialization of Urban Water and Sanitation 183
with high incidence of poverty, high population densities and with lim-
ited availability of basic services. In Lusaka, over 80 per cent of the city’s
population live in such areas. WSS infrastructure has been decimated
leading to cross-contamination between water and sewerage. In many of
these areas the WSS infrastructure is no longer functional and residents
depend on open wells and pit latrines. Furthermore, population growth
rates are highest in these areas.
At independence Zambia inherited, and initially managed to maintain,
core urban infrastructure built to high standards. Until the mid-1980s
most basic services were readily available and highly subsidized due to
the solid economy and strong social policies (World Bank 2006b). Water
was almost free with little metering, financed from central funds rather
than user fees. Central government funded investment in the water sup-
ply and sanitation systems. Municipalities were responsible for their
operation and distribution at heavily subsidized rates. In the mining
towns of the Copperbelt, WSS was part of an integrated service package
(including electricity, health and education) provided by Zambia
Consolidated Copper Mines (ZCCM) to the mines, its employees and
other residents in the mine townships. With economic decline, mainte-
nance was deferred to the point where urban water and sewerage systems
were on the point of collapse with individuals and firms forced to make
their own arrangements for provision. The urban poor fared worst of all,
and the incidence of water borne diseases increased (World Bank 1995d).
Fiscal constraints and indebtedness are the immediate difficulties for the
government in maintaining services like water, sanitation, health and edu-
cation let alone providing any capital investment to improve the access of
the population. Studies commissioned by the government to identify the
problems in the late 1980s (Coopers and Lybrand 1988) and (MoD 1988),
showed that the water and sanitation sector was suffering from:
1. insufficient financial resources as a result of low billing and collec-

tion, high late payments and non-payments,
2. defective systems of accounting and consumer databases,
3. operational problems (e.g., irregular water quality tests because of lack
of financial resources, laboratory facilities and qualified personnel) and
4. poor maintenance.
8.3 WSS reforms
Initial efforts to reform the water sector began as far back as 1976 but the
failure to achieve improvements is attributed to the proposals not fitting
in with the decentralization policies of the time. Further reports and
initiatives in the 1980s called for greater autonomy in the water supply
and sanitation sector but these also failed to have much practical impact
although the country’s first CU was created in Lusaka in 1989 (NWASCO
2004). It was only after a change in government, coupled with a severe
drought in the early 1990s, that structural reform began to be imple-
mented on a national scale.
A second CU was established in Chipata in 1992 as a pilot scheme and a
new Water Sector Policy was developed in 1994, key components of which
included a separation of the functions of Water Resource Management
(the management of rivers and extraction, etc.) from the services of WSS (the
delivery of water to end-users). There was also a separation of regulatory
and executive functions in the WSS sector. Equally important was a shift
towards cost recovery in the pricing of water and commercialization (and
possibly PSP), all intended to promote efficiency in water utilities.
Under the subsequent Water Supply and Sanitation Act (1997), a total
of 46 water supply schemes in urban and peri-urban areas were trans-
ferred from the Department of Water Affairs to the same number of Local
Authorities (LAs) under the overall supervision of the Ministry of Local
Government and Housing (MLGH) (NWASCO 2004). Under the terms of
the 1997 Act, LAs had the option of establishing a public company for
the delivery of WSS services (i.e., a CU) or involving the private sector in
service provision through joint ventures, leasing, concessioning or man-
agement contracts. Most LAs opted to establish a CU by pooling their
assets with several other LAs. In 2000, seven CUs were established,
mostly with external support. Some cover one town and others cover
more – one covers 17 southern towns. Two were already operational by
then (Lusaka and Chipata), and one more was created in 2003 giving a
total of ten CUs in 2006 (see Table 8.1).
Table 8.1 Zambia’s ten commercial utilities
No. External Population

Start of of support in service
Area of operation operation towns source area (2005)
AHC-MMS Copperbelt Province 2000 5 WB 471,566

Lusaka WSC Lusaka 1989 1 ADB 1,675,556
KabufuWSC Copperbelt Province 2000 3 DTF 432,900
NkanaWSC Copperbelt Province 2000 3 ADB 465,665
SouthernWSC Southern Province 2000 17 Germany 304,838
MulongaWSC Copperbelt Province 2000 3 DTF 234,055
WesternWSC Western Province 2000 6 DTF 137,743
NorthwesternWSC Northwestern Province 2000 7 Germany 187,577
ChambeshiWSC Northern Province 2003 10 Ireland 287,789
ChipataWSC Eastern Province 1992 1 Germany 103,947
Source: NWASCO (2005).

The CUs are monitored by a Board of Directors and these are

appointed by the shareholders (the LAs). The Directors recruit the senior
management of the CU. This structure is meant to ensure that each of
the three different bodies involved in the management structure (share-
holders, directors and managers) has a distinct role in the control of the
CU. But, in practice, these have become blurred (NWASCO 2005).
There are 22 local authorities at present still delivering water and san-
itation services where these functions have not yet been transferred to
CUs. In addition, there are six private water companies that are wholly
owned by companies like Zambia Sugar and Chilanga Cement, which
supply water for their production plants and employees.
In 2005, the CUs served about 4.3 million Zambians – 40 per cent or
so of the total population and around 86 per cent of the urban and peri-
urban population. Local Authorities service 13 per cent and private
providers, 1 percent of the urban population (NWASCO 2005). Table 8.1
shows that the biggest utilities, after Lusaka WSC, are in the Copperbelt
province, and each is supported by external donors or the Devolution
Trust Fund (DTF) which is managed by the regulator and supported by
donors from Germany, Denmark and Ireland. The conditions of com-
mercialization have been uneven across the utilities. The government
had initially promised that the CUs would start their operations without
being liable for the debts incurred prior to commercialization and that
each of them would be provided with some capital to rehabilitate infra-
structure. However, access to funds varied significantly amongst CUs.
Some companies benefited from donor assistance in the process of com-
mercialization while others did not (i.e., Kafubu, Mulonga, Western
WSCs) although they have received support indirectly through the
Zambian DTF. Some donors provided grants while others long-term
loans. Lusaka WSC, as the first and largest supplier to be ‘commercialized’,
was in the most disadvantaged position with no example to follow. Lack
of working and investment capital has been the greatest challenge for
the company. The commercialization of Chipata WSC was better
designed because it received capital injections. All of its connections
were metered and no debt incurred prior to commercialization was left
with the company.
Commercialization has led to some negative developments in the
labour standards of the water and sanitation sector. In some cases, a con-
spicuous rise in the casualization of the workforce was observed. The
number of casual workers employed by the Asset Holding Company for
the Municipal Mining Services (AHC-MMS), for instance, constituted
more than two-thirds of the total workers during 2002. The retrenchment
of the workforce prior to or in the process of commercialization has been

carried out in a disreputable manner. The government has been respon-
sible for separation packages whose cost, according to one estimate, was
around 30 billion kwacha (US$6.5 m). The government did not pay the
separation packages in a large number of cases. By law, the retrenchees
have to be paid regular salaries until they are fully separated but even
their salaries have not been paid. As a result, employment levels have
not fallen in the CUs, at least formally (NWASCO 2005).
While ‘commercialization’ has been widespread, privatization has fea-
tured little in water sector reforms except in the Copperbelt region.
Initially, WSS in the Copperbelt was managed by the state-owned mine
but provision was not taken up by the privatized mining companies
even though, with large industrial customers, it was the most commer-
cially viable area in the country.2 The CUs in the area were not deemed
to have sufficient capacity to provide an adequate service so a manage-
ment contract was signed with SAUR International under the CU known
as the AHC-MMS. The process of privatization was supported and
funded by the World Bank which provided a long-term loan to the
Government of Zambia to finance the legal costs, management fees and
cost of rehabilitating the infrastructure. Responsibility for the water sup-
ply and sewerage in the remaining non-mining towns of the Copperbelt
province was given to three newly formed utilities (Kafubu, Nkana and
Mulonga WSCs). The management contract was terminated in 2005 on
the grounds that SAUR did not show better performance than the pub-
licly owned utilities in the region. Nkana WSC took over responsibility
for supplying the mines as well as the residences of the five towns pre-
viously served by AHC-MMS. The SAUR contract was expensive. For a
relatively small contract, the World Bank spent €2.4 m on Pre Project
Funding including €200k on transaction advisors. The cost of SAUR’s
management fee came to €1.5 m in 2003, 27 per cent of the asset
company’s turnover (Ballance and Tremolet 2005).
According to the World Bank (2006b, p. 4)3 the use of the private sec-
tor was successful as ‘the utility became one of the most cost effective
water utilities in Zambia’ providing a lesson that could be applied else-
where in the country. But the case of AHC-MMS is not typical of Zambia
as the utility could count a number of large industrial companies among
its customers, providing a more secure revenue stream than from resi-
dential consumers, many of whom live in desperate poverty. Elsewhere,
while wholesale privatization has not been adopted, private consultants
have been involved. In 2002 UK firm Severn Trent won a £165,000 con-
tract from the World Bank to act as a private sector adviser to Lusaka
Water and Sewerage Corporation (LWSC)4 and the concept of Public

Private Partnership for LWSC was approved in 2005.5 While privatiza-
tion is not on the immediate policy agenda for most of the country, the
establishment of the CUs provides an institutional framework to facilitate
PSP in the future.
8.4 Impact of reforms
This section reviews key developments in the water and sanitation sector
over their first five years of operation. The successes and the failures of
the commercialization process are evaluated in the forthcoming sub-
sections with a focus on four areas of impact: the performance of com-
mercial utilities, changing trends in the access of population to water and
sanitation, affordability of tariffs and effects of regulation in the sector.
8.4.1 General performance of utilities and cost recovery

It is almost impossible to compare the performance of CUs with the
system that existed before commercialization because of lack of data.
However, since 2001, the regulator has been publishing annual reports
on the performance of CUs which provides reasonably good evidence
on the progress that has been made in last five years. A number of these
performance indicators are reported in Table 8.2 which shows a great
variation in the performance of the ten CUs in the country. On average,
CUs have been serving 58 per cent of the urban population in their serv-
ice areas. The coverage has been reasonably good and considerably
above the average in the Copperbelt province and Lusaka but not so
good in other provinces. Further, the service provision has declined by
around 20 per cent on average since 2001 when most CUs had just
become operational.
The quality of supply in the urban areas is plagued with many prob-
lems. Most important in this respect is the limited duration of water sup-
ply to households during the day. One of the reasons for disruptions in
water supply is power failures. In 2005, only one commercial utility had
24 hours of water supply (Table 8.2). The average hourly supply of sixteen
hours in 2005 for medium and large towns is considered ‘acceptable’
according to the standards set by the water regulator. Despite this, users
regard limited and erratic supply with low pressure in many areas as a
major source of dissatisfaction.6
The existence of proper sanitation facilities and infrastructure is lim-
ited. The connection to the sewerage network of the commercial utilities
was 32 per cent on average in 2005. The rest of the population rely on
Table 8.2 Selected performance indicators in 2005a
Daily % of Collection (O⫹ M)d Unit⫺Cost

Water Sanitation hours of metered as % of Collection tariff ratio
coverageb coverageb supply UFWc connections billing ratio (2002)
AHC-MMSb,e 92 (⫺4) 86 (⫹16) 18 (⫹3) 32 15 82 (⫹17) 71 (0) 54.2

(⫺36)
Lusaka 79 9 (⫺73) 15 (0) 56 39 (⫹22) 77 (⫹38) 75 (⫺42) 80.9
(⫹13) (⫺4)
Kafubu 93 66 (⫹32) 14 (⫺8) 57 7 (⫹75) 65 95 (⫺21) 57.2
(⫹11) (⫹15) (⫹110)
Nkana 62 41 (⫺24) 18 (⫹9) 45 60 (⫹2) 81 (⫹84) 76 (⫺24) 99
(⫹33) (⫺23)
Southern 63 23 (⫺54) 16 56 73 (711) 57 (⫹12) 65 (⫺58) 80.7
(⫹17) (⫹32) (⫹8)
Mulonga 86 85 16 (0) 61 16 (⫺6) 58 (⫹71) 59 (⫺21) 108
(⫺5.5) (⫹963) (⫹7)
Western 47 26 19 (⫺2) 44 17 (⫺6) 76 (⫹12) 61 (⫺22) 122.7
(⫺57) (⫹2500) (⫺34)
Northwestern 15 14 17 45 86 (4200) 94 (⫹9) 52 (⫺5) 42.2
(⫺52) (⫹600) (⫹42) (⫹13)
Chambeshi 39 na 10 na 11 na 60 na 0 76 na 36 na –
Chipata 69 30 24 (0) 29 98 (⫺2) 81 (⫺18) 79 (⫺28) 107
(⫺2.8) (⫹150) (⫹ 16)
Weighted Average 58 (⫺20.5) 32 (0) 17 (⫹4) 49 (⫺4) 32 (⫹53) 74 (⫹25) (75 ⫺33) –
Notes: a Figures in brackets give percentage change in comparison to 2001.

b
Per cent of population in the service area of the respective urban centre.
c
UFW: Unaccounted for water.
d
O⫹M: Operational plus maintenance costs.
e
AHC-MMS: Asset Holding Company for the Municipal Mining Services.
Source: NWASCO (2002, 2003, 2005).
privately constructed facilities (e.g., pit latrines and septic tanks). There
is no proper regulation of these privately managed systems. Users are
responsible for having them emptied, etc. Expansion of shanty towns
makes sanitation planning very difficult. Such poor housing inevitably
leads to the contamination of water sources. Mismanagement of solid
waste disposal is also known to be creating a risk of contamination.7
In Zambia, the Environmental Council, Ministry of Health and
NWASCO are together responsible for monitoring water quality. The
widespread concerns about the contamination of water, especially of
ground water, show that the existing systems of quality control do not
work properly. In its 2003 report NWASCO name a number of towns
where water quality is of serious concern and urge the respective utilities
to increase the number of tests on water quality and review the dose of
chemicals used for water treatment. A consumer assessment survey that
was carried out in the non-mine townships of the Copperbelt, for
instance, found that 80 per cent of respondents had the greatest dissat-
isfaction with water quality.8
Before commercialization, neither the suppliers nor the government
aimed to achieve a match between revenues and costs. The application
of a cost-recovery approach in service and utility sectors like water and
health has been justified on various grounds, including fiscal concerns,
environmental problems and consumer rights.9 In Zambia, none of the
arguments for cost recovery was as pressing as the fiscal considerations.
Under the legacy of austerity and indebtedness since the 1970s the
country has not been able to finance recurrent expenditures adequately
let alone invest in upgrading and extending services and networks of
utilities. Operation of these sectors on the basis of cost recovery has been
expected to reduce the need for cross-subsidization and enhance the
viability of the services in the long term through improved prospects for
investment in rehabilitation, modernization and capacity extension.
Since its inception, the water sector regulator, NWASCO, has argued for
cost recovery in two stages. In the first stage, companies are advised to
aim for the recovery of their operation and maintenance costs. In the
second stage, all costs including the capital costs are expected to be met
by water and sanitation revenues.
While most utilities are able to cover their operational costs fully, they
are still far from meeting their operational and maintenance costs
(O⫹M) in spite of marked increases in metering and revenue collection
between 2001 and 2005 in most CUs (Table 8.2). In spite of increasing
tariffs, metering and collection, their performance in terms of cost
recovery is not better on average in comparison to the late 1980s when
the need for reforms were frequently expressed by various parties. For
example, the revenues collected by the urban suppliers were sufficient to
cover 83 per cent of total O⫹M in 1987 according to a report by Coopers &
Lybrand (1988). Lusaka Water and Sewerage Company, for instance,
recovered only three-quarters of its O⫹M in 2002 although it has existed
as a CU for more than a decade. The financial forecasts of the local
authorities in 1999 predicted that Nkana, Kafubu and Mulonga WSCs
would continue making losses until 2002 and were likely to generate
profits from 2003 onwards (NWASCO 2003). The recent annual reports
of the CUs tell a different story: none of the CUs is close to this prediction
at present.
The main constraints of the commercial water and sanitation compa-
nies in achieving cost recovery are associated with three main difficulties.
First, utilities face different cost structures for various reasons and hence
the current average tariffs are not sufficient for all to cover their unit costs
fully (Table 8.2). Physical conditions for extracting the water determine a
significant part of the operational costs. For instance, utilities like Western
WSC, which rely on ground water, incur much less cost for chemicals
than those which rely on surface water. If water is extracted from a shal-
low depth and from relatively closer distance to the water network, unit
costs are lower because of lower spending on power or diesel for pumping.
Lusaka WSC pumps water from 50 km away, incurring higher costs of pro-
duction. The cost of sanitation adds up to around 10 per cent of the unit
costs but the sanitation coverage is different for each utility. Wages and
salaries paid to workers also vary from one utility to another.10
Second, in spite of improvements in the collection–billing ratios
(partly as a result of CUs updating their customer databases),11 these
rates are still below the acceptable benchmark of 85 to 90 per cent deter-
mined by the regulator, except for Northwestern WSC (Table 8.2). This
is another challenge for CUs in their search for cost recovery. The com-
panies outside the mining towns in the Copperbelt (especially, Kafubu
and Mulonga) were in the worst position in this respect. The managing
company of the water supply in the mining towns of the Copperbelt
province, AHC-MMS, was in a better position as the mining companies
account for the largest proportion of water consumed.
In general, problems in revenue collection are attributed to two factors
in Zambia. One is the administrative capacity in water and sanitation
utilities. Processing information (e.g., creating and updating customer
databases), developing effective payment systems, instituting an enforce-
ment mechanism against non-payment are all part and parcel of the
capacity required for improvements in revenue collection.
At present, most of the commercial companies are either persistent

loss-makers or mixed performers with positive profits in some years.
Improvements in uncollected bills are likely to turn their fortunes
around. For instance, the bad debt provisions of Lusaka WSC which
mostly constituted uncollected bills, were around 160 per cent of the
losses in 2001 (KPMG 2001, 2002). They were around two-thirds of the
losses of AHC-MMS and 42 per cent of those of Nkana WSC in 2003
(AHC-MMS 2003; KPMG 2003).
The other factor contributing to low collection is non-payment by
customers, especially government institutions, failed privatized mines
and domestic users. Lusaka WSC, for instance, supplies around 50 per
cent of its water to government institutions, which only pay marginal
amounts of their accumulating debt. Most water utilities, on the other
hand, had accumulated electricity debt to the publicly owned power
utility, Zambia Electricity Supply Corporation (ZESCO). In 2004 a sys-
tem of debt-swap was introduced in order to clear the back-log of debts
accrued by government institutions to water corporations.12
In the Copperbelt, RAMCOZ, which purchased the Luanshya Mine
and went into receivership following a disastrous privatization deal, did
not pay its debts to the suppliers, including AHC-MMS. The AHC-MMS
office in Luanshya was only able to collect 8.2 per cent of total billing in
2003 because RAMCOZ accounted for 73 per cent. The water supplier
could not consider the disconnection of such customers as an option
because they are bulk water buyers.13
Non-payment by residential customers also contributes to low collec-
tion. The managers of the utilities tend to explain this by reference to
‘a culture’ established prior to the reforms in the 1990s when water
charges were small and part of the rental payments for housing.
Households were not even aware of the symbolic payments for water
and considered it to be a ‘free commodity’. On the other hand, increases
in water charges in the 1990s and more recent years as well as deteriora-
tion in the incomes of households in general since the 1980s have also
been instrumental in non-payment by the poor and low-income residen-
tial customers. In the Copperbelt, redundancies after the privatization of
mines pushed many households into poverty. A survey conducted by
the World Bank in 2002 in the Copperbelt found that most domestic
users were in arrears amounting to 86, 41 and 25 per cent of average
income for low-, medium- and high-cost housing residents, respectively
(World Bank 2003e).
Some companies carry out extensive disconnection campaigns from
time to time to improve payments. For example, AHC-MMS disconnected
13,721 supply points in 2002–03 (AHC-MMS Annual Report 2003). High

reconnection fees which vary between 30 and 50 thousand kwacha are
expected to act as a disincentive to non-payment. Some of the discon-
nected households are said to be turning to their neighbours while
others may be forced to utilize unsafe water sources. In general, little is
known about survival strategies in such circumstances.
Finally, high levels of Unaccounted for Water (UFW) pose the third
obstacle for cost recovery in the water supply system. Leakages in the
system before water is delivered to the customer (leaks on mains and
service connections, overflowing storages), excess use of water due to
fixed monthly payments, inaccurate estimates of water consumption
resulting from administrative errors, inadequate maintenance of customer
databases are some of the causes of high UFW. Commonly, the rate of
UFW is considered to be ‘acceptable’ when it is 30 per cent of production
or less (Mitlin 2002). For the CUs in Zambia, this rate has remained
around 50 per cent on average since 2001 (Table 8.2).
Waste of water due to missing taps (so that water runs constantly) and
widespread vandalism is known to be common.14 Metering connection
is often recommended as the most powerful solution to reduce UFW. But
the cost of connecting meters is too high for most users to bear.
In Zambia, it was around four hundred thousand kwacha per meter in
2002 (approximately US$90). Also, due to low water pressure, meters are
said to be ineffective because they hinder water flow as in Lusaka.
Notwithstanding the importance of reducing the amount of water
wasted by residential users, the principal cause of high UFW levels is the
poor state of infrastructure, which is also a key factor for high unit
production costs. Lack of investment under the fiscal austerity of the
1980s continued into 1990s when under the pretext of commercializa-
tion government transfers to water sector for investment were almost
entirely eliminated (NWASCO 2003).
Much of the existing infrastructure was built in the 1970s. The donor
grants or loans provided to some CUs at the start of the commercializa-
tion process were not sufficient to rehabilitate the existing networks
fully, except for Chipata.15 Similarly lack of investment in the sector
may have serious implications for future prospects in the city of Lusaka
and the province. The CU in Lusaka recorded no major investment in
the recent years. It had a water production capacity of 220 million litres
per day in 2002.16 This was far below the estimated aggregate demand
for water which was 300 million litres per day in 2002 and was expected
to rise to 390 million litres per day in 2006. The water network is more
than 30 years old (Lusaka WSC Annual Report 2002) while some pipes
in the city’s sewer network are more than 40 years old.17 Tackling
increasing population pressure in the province requires urgent upgrad-
ing and extending of these structures.
Therefore, the volume of losses in the system before delivery is con-
siderable especially in densely populated urban centres like Lusaka. It is
estimated that around €20million will have to be mobilized to meet the
Millennium Development Goals (MDGs) for water in urban Zambia. For
sanitation, the figure is €15million in addition over 11 years (DTF
2005). While access is low in rural areas, the focus of reforms is on the
overcrowded urban areas where the public health risk from lack of water
and poor sanitation are greatest.
To sum up, the performance of CUs varies greatly. Overall trends
indicate considerable improvement in revenue collection and metering.
However, in other key areas, such as extension of service coverage,
UFW and cost recovery, the change has been either trivial or negative.
The figures suggest that the focus of reform has been on tightening
financial control (collection and metering) as well as raising tariffs,
discussed in detail under Section 8.4.3. The data and evaluations in this
section make it clear that these must be complemented by funds from
the government and donors to tackle the problems of long-term under-
investment in the sector, which contribute to the high levels of physical
losses. Investment is also necessary to extend the access of the population
to water and sanitation as well as to improve the quality and long-term
sustainability of the sector.
8.4.2 Access to water supply

Access to safe water has been uneven in Zambia since the start of the
reform process although the reliability of the data is questionable (DTF
2005). The overall water supply coverage is reported to have fallen from
73 per cent in 1990 to 53 per cent in 2005 (World Bank 2006b). The
2004 Human Development Report of the UNDP indicates an increase in
access from 50 to 55 per cent of the population between 1990 and 2002.
The National Water Supply and Sanitation Council claims that the reli-
ability of data on coverage rates for water and sanitation is questionable
and estimates vary widely. Particularly, it contends that the rate of access,
especially urban access, in 1990 was overstated because many connec-
tions had ceased to exist. Its own estimates suggest that only around
60 per cent of the urban population has ‘sustainable access’ to water. The
proportion of the urban population without sustainable access to an
improved water source in 2004 was around 40 per cent and this is
considered to be about the same as in 1990. Therefore out of an urban
Table 8.3 Sources of drinking water and access to sanitation (% of population)
Urban Rural Zambia
1992 1996 2002 1992 1996 2002 2002
Access to safe drinking water a 93 88 90.2 31 42 41.4 51.4

Piped into residence 55.5 46.7 42.1 3.3 1.7 2.4 15.9
Public tap 33.6 33.9 38.2 7.2 5.3 4.2 15.8
Wells & bore holes 9 15.2 15.8 40.6 66.9 64.2 47.7
River, ponds, lakes, etc. 1.7 1.3 1.6 48.4 25.5 28.8 19.6
Other 0 2.4 2.3 0.2 0.4 0.4 0.5
Access to sanitation 96 95 95 46 57 57 65
Note: a Excludes water from unprotected wells, river, spring and stream, ponds and lakes.
Sources: Zambia Demographic and Health Survey, 1992, 1996, 2002.
population of 4.9 million, nearly 2 million have no access to safe water

(DTF 2005).
Rates of access for the rural population improved significantly until
the mid-1990s mainly through new wells and boreholes (Table 8.3). A
considerable number of these were funded by donors. Most notably, the
reliance of the rural population on such sources as rivers, streams, ponds
and lakes, which pose greater risk in terms of waterborne diseases,
declined by about one half from 1992 to 1996 but has since increased.
Access to sanitation in rural areas rose considerably between 1992 and
1996 but stagnated in the subsequent period.
The record has been much worse in urban areas. The overall access of
the urban population to safe drinking water as well as sanitation went
down slightly in the 1990s. This is largely accounted for by the decline
in the piped residential water connections. In the 1990s, there was a
25 per cent decline in the number of residential connections, and this
was partly traded off by the increase in the wells, boreholes and public
taps. The move towards the use of communal water sources in the urban
areas has been a direct result of the commercialization process since
1992 and the expansion of peri-urban areas.
Water service coverage by the utilities is quite low except for those in
the Copperbelt province, AHC-MMS, Nkana, Kafubu and Mulonga
(Table 8.2), where higher coverage reflects the legacy of the mines in the
region with a superior water network. The table indicates large varia-
tions in coverage for the water sector. When figures are compared with
those soon after commercialization given in earlier NWASCO reports,
access rates appear to have gone down but this may be the result of
improvements in data collection rather than a specific policy impact.
Certainly, the numbers living in low-income urban areas without access

to safe water and sanitation remains high. Access to sanitation in urban
areas managed by the CUs is generally much less than the national
average because a substantial portion of the population relies on septic
tanks and pit latrines in addition to those who do not have access to safe
sanitation facilities at all.
Access to water in the peri-urban areas is mostly based on communal
taps and boreholes.18 Many of them were initiated and run by donor
institutions and NGOs with the ultimate aim of transferring the man-
agement of the schemes to the communities. The sustainability of these
systems has been questionable. Many of them went out of use after the
donors left. Efforts at community management have led to the diversion
of funds and neglect of quality and maintenance. In some cases, where
community-managed schemes break down, the LAs or the CUs reluctantly
intervene.
Small-sized water-providing units with their own water source and
treatment cannot escape charging high tariff rates as they do not bene-
fit from economies of scale. If not properly managed, the pipes, pumps
and other structures frequently break down due to widespread vandal-
ism. Taps are left on or broken, so water runs constantly for long periods.
The World Bank financed a number of small-scale water supply schemes,
mostly kiosks, in the Copperbelt in the late 1990s. A large proportion of
these units went out of operation because very few members of the com-
munities paid the monthly fee. Cash collection by vendors, who work
for a fee, was insufficient. Sales remained as low as a few litres per capita
per day. For instance, the number of public taps in the service area of
Nkana WSC was reduced from 290 in 2001 to 75 in 2002 as they were
considered to be economically unviable.
In Lusaka, small-scale outlets were initially managed by communities
themselves on behalf of Lusaka WSC for a commission. This arrange-
ment soon came to an end when Lusaka WSC claimed that the commu-
nity officers reported augmented costs and some misappropriated the
sale proceeds. At present, the company employs its own cashiers who
visit a number of water posts and sell water to the communities at each
facility for a few hours a day. By August 2004, households were allowed
to draw 210 litres of water per day for a cost of 3000 kwacha per month.
Currently, Lusaka, Kafubu and Southern WSCs have the greatest number
of public taps for community use. Frequency of supply differs from one
area to another, ranging from 12 hours to several hours a day.
There are also independent and relatively larger schemes as in
Kamanga and George Complex in Lusaka. These were initially intended
for community management but they could not be sustained because

community managers lacked the required skills for maintenance of the
schemes. The operations of the Kamanga Complex had to be transferred
to Lusaka WSC. The water supply system in George Complex was estab-
lished by Japan International Cooperation Agency ( JICA) and served
around 120,000 people. It became unviable for similar reasons. Lusaka
WSC provided a manager and took over certain functions such as finan-
cial management, carrying out major maintenance work and monitor-
ing water quality. Lusaka WSC considers the scheme to be viable at
present with a collection rate of over 70 per cent which enables the com-
pany to reserve a part of the revenue for maintenance costs. Despite this,
and partly as a result of ring-fencing under the current water supply
arrangements, Lusaka WSC seems to be viewing these extra-territorial
activities as a burden because it receives nothing in return.
For urban areas, the regulator, NWASCO, sees such community-managed
schemes as an interim phase that can now draw to a close (DTF 2005).
Community-based management has been found to be successful in rural
areas but not in urban districts that lack social cohesion (NWASCO
2003). NWASCO has been emphasizing the importance of water supply
in peri-urban districts and supporting initiatives for the development of
viable schemes but CUs have remained unwilling to provide services in
these areas. The majority of the poor access water through kiosks and
increasing the number of kiosks can have a significant impact as a high
number of residents can be reached through a single installation. In a
recent report (DTF 2005), the regulator promoted water kiosks that are
owned by the CUs and managed by water vendors in the peri-urban
areas as a medium-term solution towards achieving the water-related
MDGs for Zambia.
Lack of access to water is also a major impediment for industrial
development. In Zambia, 60 per cent of firms have built their own wells
as a result of problems in access to water. In this respect, the country com-
pares rather poorly against other countries in the region (e.g., 34 per cent
in Kenya, 13 per cent in Uganda and 35 per cent in Tanzania) (World
Bank 2006b).
8.4.3 Changing tariffs and affordability of water

Prior to the start of the reform process in the 1990s, water consumption
was heavily subsidized for all households. It was provided as a service
rather than as a commodity. The degree of subsidy was determined
according to housing status which was classified as low-, medium- or
high-cost. The socio-economic status of the households was considered

to be reflected by the nature of housing.
After commercialization, the responsibility of setting the water tariffs
remained with the government until 2000 when NWASCO was estab-
lished and was authorized periodically to review and endorse the tariff
requests by individual utilities. Since the early 1990s, efforts to intro-
duce pricing systems based on long-run marginal costs (LRMC) in line
with the orthodoxy of the 1990s, have met specific challenges in Zambia
due to low levels of metering, inadequate accounting systems and high
levels of poverty, such that even if the LRMC were known, it would not
be affordable for most consumers. These constraints shaped the nature
of reforms in Zambia at the time when the government embarked on its
programme of water tariff rationalization in 1991. Lack of metering
implied that the government could only raise the tariffs according to the
average cost of operations and then price water according to housing
classification.
Table 8.4 provides an overview of the trends in water charges in US
dollar terms in three sub-sections. The first set of data in the top four
rows gives details of the fixed monthly charges (irrespective of the
quantity of water used) for unmetered connections (classified by the
types of housing) before (1990) and after commercialization, including
the recent tariffs (2002–03) applied by seven of the ten existing com-
mercial utilities. The growth rates of fixed water tariffs in comparison to
its level in 1990 are given in the middle rows. The final part provides
the estimated spending by metered households assuming that they
consume either 15 or 25 cubic meters of water per month.19 These esti-
mates are based on the rising block tariffs applied by each CU in
2002–03.
Prior to commercialization, in 1990, households on public taps and in
low-cost housing paid much lower rates than those in medium- and
high-cost housing. In 1990, the monthly expenditure on water was less
than 1 per cent of average per capita incomes for people using public
taps and less than 3 per cent for people living in low-cost housing. Water
tariffs peaked in 1994 with successive annual increases from 1991. Monthly
charges in US dollar terms went up to around five, nine and sixteen
dollars for families in low-, medium- and high-cost houses, respectively.
The greatest burden, with a 12-fold tariff increase, was laid on users rely-
ing on public taps. The political tension generated by the new rates
eventually forced the government to lower them in 1994 and very few
adjustments were made to the water charges until 2001.
Table 8.4 Domestic water tariffs before and after commercialization
Fixed monthly payments by unmetered households, US$a
2002–03
1990 1994 Chipata Nkana Lusaka Mulonga AHC-MMS Southern Western
Public 0.1 1.3 – 0.8 0.6 2.7 – 0.8 0.7

Taps
Low cost 0.5 5 7.1 2.7 3.8 4 4.6 1.8 4.6
Medium 1.5 8.8 14.8 4.4 6 5.1 7.5 2.7 7.9
cost
High cost 1.5 15.8 14.7 8 21.2 7.8 10 4.7 7.9
The growth of tariffs for unmetered households from 1990 to 2002–03 (%)
Public Taps – 1200 – 700 500 2600 – 700 600
Low cost – 900 1320 440 660 700 820 260 820
Medium – 487 887 193 300 240 400 80 427
cost
High cost – 953 880 433 1313 420 567 213 427
Payment by metered householdsb in US$, for monthly water consumption of:

15 m3 – – 4.5 1.6 1.6 1.3 2.3 2.3 1.9
25 m3 – – 8.3 4.8 3.1 2.2 3.7 4 3.8
Notes: a Kwacha – US dollar exchange rate was 40 in 1990, 400 in 1994 and 4500 in 2002–03.
b
These estimates are based on rising block tariffs made available by NWASCO.
Source: Tariffs for earlier years are from Department of Water Affairs (Ministry of Energy and Water) and for recent years from NWASCO.
Further examination of the figures in Table 8.4 reveals a number of

points. First, while tariffs have risen considerably since 1990, the largest
increase was in the rates applied to either low-cost housing or public tap
users, except for Lusaka WSC. A likely purpose of this trend amongst
water utilities is revenue maximization since a greater proportion of
population in the urban centres live in low-cost housing or peri-urban
areas. Overall, residents in the medium-cost housing faced proportion-
ately lower escalation in water prices.
Second, most water and sanitation suppliers applied relatively lower
rates for metered connections in comparison to those where fixed tariffs
applied. In fact most users with a piped water supply in their house
would have been better off with meters if they did not consume more
than 15 cubic meters. For instance, families in low-cost housing with
15 cubic meters of maximum water consumption could save 30 to
60 per cent of their current spending. Users in high-cost houses con-
suming not more than 25 cubic meters per month could pay only a
small fraction of their current water bill.
When the first and second points are considered together, it is clear
that the CUs are employing pricing methods that would maximize their
revenues under the conditions of Zambia since the proportion of poor
and low-income groups is large and metered connections in the service
area of these utilities is not above 40 per cent except for Nkana and
Chipata. Perhaps, this is why Nkana, with a 55 per cent metering ratio,
was applying higher rates to metered connections than the fixed rates
for medium- and low-cost housing customers.
The success or the failure of the commercialization process, when
viewed from a socio-economic perspective, can also be judged on the
basis of the affordability of the services supplied. Assessing the afford-
ability of water tariffs requires data that enable a comparison between
the actual income status of the households with access to water and the
rate they pay. These did not exist at the time of the research.
Instead, two different sets of proxy estimates of affordability are pre-
sented in Tables 8.5 and 8.6. The former presents monthly expenditure
on water by households that are billed for a fixed amount (i.e., those with
unmetered connections) assuming average incomes given by the
Zambia Living Conditions Monitoring Survey (LCMS) for low-, medium-
and high-cost housing are valid for every household with access to water
(i.e., assuming away the variation in incomes within each category). So,
for example, households paying for water at high-cost housing rates
spent around 4 per cent of their incomes on water before commercial-
ization. More than a decade after commercialization, they were devoting
Table 8.5 Monthly spending on water by households with unmetered connections (% of average house-
hold income)a
2002–03
1990 Lusaka Mulonga Western AHC-MMS Southern Nkana Chipatai
Public taps 0.3 1.2 5.3 1.4 – 1.6 1.6 –

Low cost 1.3 3.4 3.5 4.1 4.1 1.6 2.4 6.3
Medium cost 3.8 2.4 2 3.1 2.9 1.1 1.7 5.8
High cost 3.8 3.9 1.4 1.4 1.8 0.9 1.5 2.7
Note: a Tariffs of individual utilities are obtained from NWASCO. Mean monthly incomes of 51, 113, 255 and 545 US$ is
used for people on public taps, low-, medium- and high-cost housing, respectively as suggested by LCMS-2002–2003. Real
monthly income of US$40 is used for 1990 and US$34 for 1994 due to lack of income data by housing classification.
Source: Department of Water Affairs, Ministry of Energy and Water Development, Zambia Living Conditions
Monitoring Survey: 2002–03.
Table 8.6 Proximate rates of affordability of water tariffs for low-cost housing, 2002–03
Monthly expenditure on water by income

groups (as % of max. income in each bracket)a Unaffordable % of Zambian
(% of HHb) HHb
⬍ 50 50⫺150 150⫺300 300⫺450 450⫺600 600⫺800 800⫹ in province) in province
Lusaka 33.9 11.3 5.7 3.8 2.8 2.1 – 36 13.52

Western 41 13.7 6.8 4.6 3.4 2.6 – 65 8.22
Eastern 64 21.3 10.7 7.1 5.3 4 – 89 13.79
Southern 16 5.3 2.7 1.8 1.3 1 – 18 11.09
Unaffordable (% of 0.7 8.7 12.13 2.07 0.97 – – 24% of HH –
HHs in Zambia) in Zambia
Notes: a Income range is in ’000 Kwacha.

b
HH: Households.
Source: Tariffs from NWASCO, income distribution data is from LCMS (2004).
a much smaller proportion of their income to water consumption,

except for those settled in Lusaka. There is a similar pattern for users in
medium-cost housing. On the other hand, people relying on public taps
and living in low-cost houses have to allocate a greater part of their
income in comparison to 1990. If housing conditions reflect more or
less the income status of households,20 it is clear that people with better
incomes have been better off after commercialization.
So are these expenditure patterns on water affordable? One of the
benchmarks that is widely used in the literature is that household
spending on water should not constitute more than 5 per cent of house-
hold income.21 If this threshold level of spending is used as basis for
comparison, then the figures in Table 8.6 suggest that water is affordable
(i.e., below 5 per cent of monthly household income) for the majority of
the users. The only exceptions are the consumers using public taps in
the peri-urban areas served by Mulonga WSC in the Copperbelt province
and the low- and medium-cost housing population in the urban centres
served by Chipata WSC in the Eastern province.
Note, however, that the estimates in Table 8.5 may be misleading to
the extent that they do not properly reflect the variation in income levels.
These estimates are refined further in Table 8.6 by using Zambia LCMS
2002–03 data. The Copperbelt province was excluded as it was served by
four different utilities each of which had a different tariff structure. The
four provinces included in the table are served by a single utility. Forty-
seven per cent of households in Zambia reside in these four provinces.
The purpose of the estimations reported in Table 8.6 is to find out the
proportion of people in Zambia who cannot afford water charges
applied for low-cost housing by each regional CU. Zambia LCMS defines
seven income categories from kwacha 50 to 800 thousand and above as
detailed in Table 8.6. The size of the regional population in each income
bracket is also given by LCMS. Note that the estimates cover all people
of Zambia irrespective of whether they have access to water or not. This
may appear a pointless exercise since many people, especially in the
rural areas, do not have access to piped water. Nevertheless, wider access
to water is a political ambition expressed in various national and inter-
national projects such as MDGs. The current rates applied by the CUs
are the minimum to be applied to new connections given the desire in
the sector for a substantial rise in the present rates. Affordability of the
current rates for the Zambian population as a whole (irrespective of
access) would have implications for future policy-making on extending
network and pricing of water.
Monthly expenditure on water by income groups is found by dividing

low-cost tariffs in each region by the maximum income in each bracket.
If water is unaffordable (i.e., spending on water is more than 5 per cent
of income) by people earning the maximum income in each bracket, it
will not be affordable by anybody in the respective bracket. So, summing
up, the proportion of the population in categories where spending on
water is above 5 per cent gives a proxy measure for the affordability of
low-cost tariffs in Zambia as a whole. Of course, these estimates are far
from being precise. It is likely that they underestimate un-affordability
for two reasons. First, in some income categories water is affordable for
people on the upper boundary of income but may not be so for those
closer to the lower boundary. Take, for example, the third income bracket
(300–450 kwacha ) in the Western province. With a low-cost water rate of
20,500 kwacha, water is affordable for people earning 450,000 kwacha
but not by those who earn less than this. The affordability of low-cost tar-
iffs in the Western province (65 per cent of people in the province) is
overestimated since we do not know the proportion of people in this
range and used the maximum income (450k) in our estimation. Second,
we used low-cost rates in estimations but there are many low-income
groups living in medium- or high-cost houses in Zambia, paying higher
rates and finding it difficult to meet water charges.
In spite of all these caveats, the results are revealing and dissimilar to
those suggested by the data in Table 8.5. The price of water for those liv-
ing in low-cost housing is unaffordable – above 5 per cent of monthly
income – for households earning up to three hundred thousand kwacha
per month in Lusaka (or for 36 per cent of households in the province).
In the Western and Eastern provinces, low-cost charges are beyond the
means of 65 and 89 per cent of the population, respectively. The tariffs
are more affordable in the Southern province in comparison to the others.
The households for which water is unaffordable in these four regions
account for a quarter of the total households in Zambia. These results
clearly show that affordability estimates based on mean incomes as in
Table 8.5 can be highly misleading as they hide a considerable degree of
variation across different income groups.
These results are even more interesting in regional perspective.
Zambia has one of the lowest water charges in sub-Saharan Africa
(Ballance and Tremolet 2005). High inflation in the country has wiped
out some of the gains of tariff increases by the utilities since 2000. In
fact, this is why the stakeholders in the water and sanitation sector push
for further tariff rises. Hence, the Zambian case presents the policy-makers
with a paradox. If the lowest water charges (i.e., those for low-cost housing)
cannot be afforded by at least a quarter of the population in Zambia

where the average tariffs are already lowest in comparison to other coun-
tries in the region, the aspirations of extending access to water can remain
futile with the current strategy of reliance on tariff increases for cost
recovery and generating funds for investment to extend the network.
8.4.4 Regulation
The regulatory body, NWASCO, was established in 2000. In order to
maintain a degree of financial independence, NWASCO is financed
through a charge on licensees of 1 per cent of turnover, with the balance
made up by the Ministry of Energy and Water Development and donor
support. It is operating on the basis of limited resources (e.g., it only had
thirteen employees as of 2005 – six support staff, seven regulatory
experts, inspectors and managerial staff). The institution is still in the
process of developing basic guidelines and regulatory tools. Despite this,
it has made significant improvements in a number of areas.
In developed countries, controlling utility tariffs is a major task for
regulators. Various systems like ‘cost-plus pricing’ or ‘price-caps’ are used
to strike a balance between the interests of the users and incentives for
the suppliers. None of these is relevant for Zambia because many utili-
ties cannot cover their full production costs, including those for invest-
ment. At present, the WSCs send their tariff proposals to NWASCO for
approval. Once approved, tariffs remain in application for one year, after
which a company can apply for further rises. Since its inception,
NWASCO in the majority of the cases either accepted the proposed tariff
or requested minor revisions. In 2001, it reduced Lusaka WSC’s tariffs
(which operated without being regulated until 2000) by more than
30 per cent.
The regulator is trying to develop ‘yardstick competition’ in the sector
as in other developing countries by publishing information on an
annual basis on a selected number of benchmark indicators revealing
the comparative performance of individual utilities. For this purpose,
the commercial utilities have been regularly producing reports, data and
information (about their transactions, performance, tariffs and other
charges, connections and disconnections, wages, employment, the
number and results of water quality tests and the number of customer
complaints and responses) and these are made available by the compa-
nies and the regulator to users and other stakeholders. The regulator is
encouraging CUs to improve performance through a ‘Performance
Oriented Incentive Scheme’ where the performance of individual personnel
is monitored and rewarded. An independent and more transparent
mechanism for user complaints is in the process of being developed. The

annual reports of the regulator seem to have a visible impact on CUs in
that their engagements and actions are more transparent, their capacity
to tackle routine and other issues seems to be improving. The dynamism
created and improvements made in the CU sector are absent amongst
the municipal water suppliers. Not much data and information about
their operations are readily available, for instance, from the ministry
overseeing their work.
The enforcement capacity of the regulator, on the other hand, appears
to be ‘weak’ which can be justified to some extent by its being an evolv-
ing institution with limited resources. It carries out, for instance, limited
on-site inspections. Its actions in some areas currently do not go beyond
giving a sort of ‘feedback’. The NWASCO reports identify the weaknesses
of each utility and make recommendations.22 Whether the regulator has
the power to remedy these in cases where the utilities do not comply is
uncertain. This is a contentious issue given the possibility that compa-
nies can always come up with a rationale for poor performance. For
example, they may keep their service in peri-urban areas at an absolute
minimum on the basis of economic viability. Thus, the regulator can
encourage extended service coverage in peri-urban areas but cannot
enforce it.
The experience of Zambia with the commercialization of WSS raises serious

questions about the effectiveness of such strategies in low-income
economies. The two most crucial objectives of commercialization (cost
recovery and extension of access services) have not materialized and it is
doubtful if they can be achieved in the foreseeable future unless sub-
stantial sums are invested in the sector.
Deterioration in access rates in urban areas is related to commercial-
ization. The urban sector has been the traditional service area of the
municipal and commercial water and sanitation suppliers. Overall,
access to piped water (through public and private taps) declined by
about 10 per cent in the urban areas. Piped residential connections in
the urban areas saw the greatest deterioration in a decade from 1992.
More of the urban population now relies on public taps. In general, no
conspicuous progress has been made in access to sanitation. Access to
water and sanitation remains low and service delivery in the shanty
towns, where a large proportion of the urban poor reside, is one of the
greatest challenges for achieving MDGs. Supply through public outlets
(standby units, kiosks, etc.) can relieve the pressure in the medium term.
Nevertheless, a long-term strategy must be developed for re-locating the
population to permanent settlement areas with enhanced ‘quality of
access’ to water and sanitation since the pressure in peri-urban areas is
part of wider trends of urban migration with causes beyond water sector
policy.
Since 1992, water prices have seen regular increases. Some of the tariff
gains of the utilities have disappeared as a result of inflation. Charges for
the low-cost housing increased more than other housing categories. The
average tariffs in Zambia at present are low in comparison to other
providers in SSA. Despite this, some of the lowest tariffs that are highly
subsidized are unaffordable for a quarter of the population.
Cost recovery for most utilities is a far-fetched dream in spite of
notable progress in metering, collection efficiency and ‘rationalization’
of water charges. The figures show a negative trend in this respect since
2001. The commercialization is achieved only on paper as the government
still has to bail out the WSCs in any case. Further improvements in
metering and collection are still possible. However, cost recovery through
reliance on further tariff increases is likely to come at the risk of reduc-
ing access to services which is already low.
Cost recovery and profitability for the CUs is more likely to be feasible
if the physical losses in the water sector can be brought down. All water
and sanitation utilities in Zambia suffer from very high levels of UFW. In
Lusaka for example, 15 years after commercialization, UFW is still over
55 per cent. This is largely due to poor infrastructure and aged network
as a result of withdrawal of investment funds from the sector by the
government after commercialization.
Investment in the sector is not only necessary for reducing UFW but
also vital for improving the access of population to these services. Many
countries and cities in the developing world suffer from old infrastruc-
ture which keeps the cost of operation and maintenance very high, and
hence makes cost recovery a mission impossible. The current strategy is
to increase tariffs first to achieve cost recovery (when the costs are
already inflated due to poor infrastructure and the small size of the net-
work) and invest later. This has been tried for a while now with little suc-
cess. An alternative approach is to invest first to extend and renew the
infrastructure and set tariff levels accordingly with some cross-subsidization
to achieve cost recovery and improved access.
There are many cases which show that public utilities are efficient in
many respects (affordability, high revenue generation, cost recovery,
service reliability, resource conservation) when the second strategy is
followed. This is demonstrated by the case of Chipata WSS whose net-

work was totally renewed by donors (especially Germany). The utility has
shown very good performance since then in comparison to other provin-
cial water and sanitation utilities, including the private management
company AHC-MMS in Kitwe. Experience from elsewhere indicates that
initial investment in infrastructure can precipitate performance improve-
ments in utilities (Beddies et al. 2004; Eberhardt et al. 2005).
In summary, the case of Zambia demonstrates that the improvements
in cost recovery and operations can be achieved in much the same way
without resort to ‘paper commercialization’. The process of commercial-
ization whereby water utilities are created as stand-alone companies
does not in itself have a major impact on performance as losses remain
high and many remain without adequate access to safe water and sani-
tation. While the process might make for a more robust institutional
framework, large amounts of finance are required to upgrade the infra-
structure, to train and remunerate staff and to increase levels of access.
Without this, it is impossible to break out of the cycle of low invest-
ment, weak infrastructure, poor revenue collection and low levels of
access to water and sanitation services.
Notes
1. Living Conditions Monitoring Survey of Zambia, 2002–03.
2. Bids for this contract were received from 23 companies.
3. The Bank does not name AHC-MMS but refers to a ‘water utility’ formed to
manage the water and sewerage assets of a former mining parastatal (World
Bank 2006b).
4. ‘Water Deal’, Birmingham Evening Mail, 7 March 2002.
5. ‘Lusaka Council Approves Public Private Partnership Over Provision of Water’,
The Post of Zambia, 3 July 2005.
6. The reports of Nkana WSC (2003) and Lusaka WSC (2002).
7. See, for example, Lusaka WSC (2002).
8. Reported in World Bank (2004f).
9. See McDonald (2002) on the rationale for cost recovery.
10. AHC-MMS and Kafubu are relatively high wage utilities with bulk of the
employees being paid around 200–300 US $ equivalent per month. Close to
half of the workers Lusaka WSC and Northwestern WSCs receive wages
equivalent to 150 and 200 US$ and a good portion of the remaining half earn
between 100 and 150 US$. Chipata and Western WSC pay around 100 and
150 US$ equivalent to the majority of their workers while Nkana takes its
place at the bottom of the list with the bulk of workers earning less than 100 US$
equivalent per month.
11. Some of the WSCs such as Nkana are in the process of creating enhanced
computerized geographic information and mapping systems.
12. ‘State to Debt-Swap With Water Firms’, The Times of Zambia, 23 July 2004.
13. AHC-MMS Annual Report (2002).

14. A study by the World Bank estimated that about two-thirds of low-cost
houses in the Copperbelt region had at least one missing tap.
15. For example, Lusaka and Nkana WSCs each received a loan of around 25 million
US$ from the World Bank and African Development Bank for financing the
expenditures in the process of commercialization and rehabilitating the
infrastructure (e.g., improved treatment plants, reservoirs, main transmission
lines, installation of meters). The loan enabled Nkana WSC to modernize/
rehabilitate 60 per cent of its infrastructure. For the same purposes, AHC-
MMS received a grant of US$37.5 m from the government of Zambia, which
borrowed the bulk of it from the ADB and the World Bank. The German gov-
ernment provided grants of up to (Euro 22 m to Southern, Northwestern and
Chipata WSCs for commercialization. In many cases, grants or loans were
provided on conditions, especially, of tariff increases. On the other hand,
Kafubu and Mulonga WSCs in the non-mining towns of the Copperbelt have
received no such funding during or after commercialization. The same
applies to Western WSC.
16. 110 million litres per day from surface water sources (Iolanda and Kafue
river) and 120 million litres of water per day from 57 boreholes.
17. ‘Lusaka In Sewerage Disposal Nightmare’, Panafrican News Agency, Daily
Newswire, 24 November 2004.
18. A study by DTF in Kabwe, for instance, found that one-third of households
in the peri-urban areas relied on public or communal taps and half of them
on open wells boreholes. This is considered to reflect the situation in other
unplanned residential sites in Zambia.
19. NWASCO considers 25 cubic meters of water to be adequate per household
per month. The World Health Organization, on the other hand, suggests 15
to 20 litres water per capita per day (lpcd) for daily intake and basic hygiene
as an absolute minimum, 50 lpcd for intermediate access and between 100
and 200 lpcd for optimal access to water (WHO 2003). Other studies in the
literature, consider 15 cubic meters per month per household as minimum
benchmark (Mitlin (2002)).
20. Note that some poor and low-income households are known to be living in
middle- or high-cost housing.
21. See Mitlin (2002) and World Bank (2004f).
22. These include encouragement of more involvement in peri-urban areas,
reduction of foreign staff and consultants, improvements in accounting
techniques, financial data and statistics, development of complaint and dis-
pute resolution systems. The regulator also reduced the tariffs of Lusaka WSC
by more than 30 per cent in 2001.
9
Namibia: Lessons from
Commercialization
Kate Bayliss
9.1 Introduction
Namibia is one of the few countries in sub-Saharan Africa (SSA) where

there is no World Bank or IMF involvement in the water and electricity
sectors. However, while wholesale privatization of the utilities is not on
the cards, recent reforms are along similar lines to those in other
countries in the region with the removal of subsidies and shift to full
cost recovery. Changes in the electricity sector echo those of other gov-
ernments with plans to develop a ‘single-buyer’ model and the ultimate
aim of creating a competitive wholesale market.
Since the country’s independence from South Africa in 1990, there
has been extensive investment in infrastructure, extending networks so
that the country has one of the highest rates of access for both water and
electricity in the region. Decentralization has also been important for
the post-independence government, cutting across shifts in policy, and
substantial responsibilities have been transferred to local authorities. In
practice, though, in the delivery of electricity and water, decentraliza-
tion has also led to fragmentation with discrepancies in pricing and in
capacity for service delivery. Some local authorities have accrued very
high debts to the national water and electricity utilities, Namwater and
Nampower, which have suspended services to whole communities in
response to non-payment. As a result, a re-centralization has been taking
place with electricity now coming under the control of five regional
distributors and, in the water sector, the bulk provider stepping in to
support local councils that have not been able to manage the water
system effectively.
This chapter explores developments in the delivery of water and
electricity in Namibia, starting with the context. The findings are based
208
Namibia: Lessons from Commercialization 209
on interviews with key stakeholders, carried out in August 2004, as well

as a review of literature, press reports and statistical data. Despite
becoming independent almost 30 years later than many other African
countries, some similar patterns have been adopted with the growth in
parastatals and the expansion of infrastructure immediately after inde-
pendence. The following section examines developments in the electric-
ity sector followed by analysis of the water sector. Until recently, local
authorities were responsible for the distribution of electricity but this is
now in the process of being transferred to new specialized institutions.
Hence, the detailed discussion of the role of local authorities comes
under the water section. The concluding section demonstrates that there
are examples of both successful and of weak performances from both
public and private operators in water and electricity in Namibia. This
indicates that the ownership debate has deflected attention from the
more important challenges in the delivery of basic services such as
reaching the poorest and financial sustainability.
9.2 Context
Not until 1990 – much later than the rest of the continent – did
Namibia became independent from South Africa when the South West
Africa People’s Organisation (SWAPO) came to power, and SWAPO has
held the Presidency ever since. Namibia is large and sparsely populated
with one of the lowest population densities in the world at just two
people per km2 (World Bank 2004e). This presents a challenge for net-
work services which can face high transmission costs. The country is
divided into 13 regions and each has a regional council. There are also
46 local authorities of which 17 are classified as municipalities, 13 are
towns and 16 are villages. Some functions are carried out at the
regional level (education and health and some rural water) and some
functions are the responsibility of the local authority (water and, until
recently, electricity). Generally the regions in the north fare worse
than those in the centre and the south with lower rates of access to
basic services. A high proportion of the population lives in rural areas
although this has fallen to 67 per cent in 2001 from 73 per cent in
1991 (NPC 2001). The population has been growing at a rate of about
2.6 per cent per year according to the 2001 census. The region of Khomas
(where the capital city, Windhoek, is situated) has the highest growth
rate. Some regions have relatively large urban populations (Erongo,
Karas, Khomas) while others are predominantly rural and these are
mainly in the north (NPC 2001).
210 Kate Bayliss
GDP per capita has been fairly constant since the mid-1990s. Namibia
is classified as a lower-middle-income country with a per capita income
in 2004 equivalent to about US$2120 (Chapter 5) and an economic
growth rate in 2004 of 6 per cent (World Development Indicators Database
2006). Despite relatively high per capita income for the region, more
than half the population lives on less than US$2 a day. Namibia is noto-
rious for having the world’s most unequal income distribution – a result
of divisive policies inherited from the apartheid era and the country’s
high dependence on capital-intensive mineral resource extraction.
Compared with other South African Development Community (SADC)
countries, Namibia has relatively high rates of literacy and school enrol-
ment. However, with the spread of HIV-AIDS, life expectancy has fallen
since 1991. This has major implications for the country’s economic and
social development. According to the National Planning Commission,
38 per cent of the population live below the national poverty line. One of
the Millennium Development Goals (MDGs) is to halve this proportion
by 2015.
There are a total of 48 state-owned enterprises in Namibia including
Namwater and Nampower. Most of these have been created since inde-
pendence in 1990. There have been concerns about the degree of trans-
parency surrounding the operation of these parastatals and the firmness
of budget constraints (Motinga 2004). The government has recently
created the State Owned Enterprises Governance Council (SOEGC)
which consists of five members of Cabinet to monitor corporate gover-
nance of parastatals. Towards the end of 2005, the government unveiled
a programme to improve the performance of parastatals and to monitor
the performance of their directors.1
9.3 Electricity
On independence the new government inherited a national grid that

connected mainly commercial centres and some large users such as
mines and some commercial farms. Expanding access through rural
electrification was a key policy and in 1991 the Rural Electrification
Fund was established, with donor assistance, to connect rural centres to
the grid. Many new connections were added and, as a result, electrifica-
tion rates in Namibia are relatively high at over 37 per cent compared
with 23.5 per cent for sub-Saharan Africa (WEO 2004; Chapter 5). The
proportion of the total population that has access to electricity for light-
ing increased from 21 per cent to 32 per cent in the decade to 2001. Of
the urban population, nearly 68 per cent has access to electricity but in
rural areas the corresponding figure is still below 10 per cent. Major
regional disparities persist with the highest electrification in the centre
(Erongo and Khomas) and the lowest in the north of the country
(Omusati and Ohangwena) (CBS 2001).
The electricity sector is dominated by the parastatal, Nampower,
which evolved from the South West Africa Water and Electricity
Corporation (SWAWEK) formed in 1964. As a parastatal, all the share
capital is owned by the government. It receives no grants, subsidies or
soft loans for its day-to-day operations (Nampower Annual Report
2003). Nampower is a profitable company, paying taxes and dividends
to the state. Revenue almost doubled between 2000 and 2005. In
December 2005, Nampower became the first company in Namibia to be
classified as investment grade for both national and foreign currency
ratings by the agency, Fitch. Funding for the rural electrification pro-
gramme comes from Nampower’s own resources, the Ministry of Mines
and Energy and concessional loans.
Nampower is responsible for the generation and transmission of elec-
tricity throughout the country and has had some involvement in elec-
tricity distribution. The structure of the electricity supply industry (ESI)
was similar to that of the water sector where local authorities were
responsible for the distribution of electricity in urban areas but now
the ESI is in the process of major structural reform. In the late 1990s in the
face of rising demand, two key constraints on the development of the
electricity sector were identified: first a shortfall in the supply of elec-
tricity, and, second, a fragmented distribution network with local
authorities adopting different policies regarding tariffs. As a result, the
government is planning to increase domestic generation capacity and
a process has been set in motion to revise radically the institutional
framework of the ESI.
There are two main elements to the institutional restructuring pro-
gramme. First, the existing vertical monopoly is to be replaced by a
‘single-buyer’ model. Under the existing system, the parastatal,
Nampower, is responsible for the generation and transmission of
electricity which is then sold to distributors or large end-users (such as
mines and government ministries). Ultimately, the aim is to create a
Single Buyer that will purchase electricity produced by competing elec-
tricity providers including Independent Power Producers (IPPs) as well as
imports from neighbouring countries. Nampower is effectively the single
buyer with inputs from its own generators as well as imports. The
single-buyer model is only effective if the generation functions are
separated allowing alternative providers to compete to sell to the buyer.
212 Kate Bayliss
So within Nampower, generation, transmission and distribution

activities have been separated and ring-fenced as independent business
units. Second, the reform process will consolidate the fragmented elec-
tricity distribution sector. Instead of the large number of electricity dis-
tributors which included local authorities, some private large consumers
and some private distributors, the aim is to replace these with just five
Regional Electricity Distributors (REDs) to cover the whole country. The
REDs will buy electricity from Nampower. These major reforms are
themselves perceived as temporary in that they are steps on the road to
a fully competitive sector. The single-buyer model is considered as an
interim arrangement leading to a multi-buyer, multi-seller market
structure. The idea is that, in the long term, pricing competition will
determine electricity generation prices through market principles so
price regulation will not be required. According to the regulator, the
Electricity Control Board (ECB) ‘it is envisaged that the single-buyer sys-
tem will last for about five to eight years after which the market shall be
fully liberalised’ (ECB Annual Report 2001, p. 3).
As part of the reform process, a greater role for the private sector in
the ESI is envisaged to provide finance and to ease public sector capac-
ity constraints (ECB Annual Report 2001). Private sector involvement
may take the form for instance of IPPs, Build-Operate-Transfer (BOT)
schemes and management contracts (Ministry of Mines and Energy
(MME) 1998, p. 25). There is some private sector involvement in the
electricity sector already. Private contractors are used for construction
work and consultants are used for policy advice. In addition, some dis-
tribution activity has been carried out by the private sector (see
Section 9.3.2). While private firms will be involved in sourcing new
generation capacity, there will be measures to prevent private
investors selectively supplying electricity to specific customers with-
out contributing to the national grid. For the viability of the trans-
mission system, foreign utilities will not be allowed to ‘cherry pick’
large customers without contributing to the overheads of the
transmission system (MME 2000).
9.3.1 Generation and transmission

Power generation comes from a combination of Nampower’s three
domestic power plants and imports. The number of units sold by
Nampower increased by about 50 per cent between 2000 and 2005. This
was achieved with a large increase in imported electricity from the
South African utility, Eskom. The units imported over this period
increased from 766 in 2000 to 1514 in 2005 – an increase of 98 per cent.
Units produced by Nampower increased from 1407 to 1660 over the
same period – just 18 per cent (Nampower Annual Reports).
Namibia relies heavily on imports from South Africa but the utility,
Eskom, is facing rapidly growing domestic demand and cannot be relied
upon to meet Namibia’s future needs. Identifying alternative sources of
power is an urgent priority in Namibia. Imports have increased from
Zambia and Zimbabwe but these are a small proportion of overall
requirements. A project is underway to develop natural gas reserves in
the Kudu gas fields off the coast of Namibia. There is substantial private
sector involvement. A contract was awarded in July 2004 to Energy
Africa, a subsidiary of Irish oil and gas company Tullow Oil PLC, for the
development of the Kudu oilfield. The state-owned National Petroleum
Corp (Namcor), has a 10 per cent stake in the development. Under the
terms of ongoing discussions, Kudu gas would be piped ashore for treat-
ment and delivery to an 800 MW power station near Oranjemund, by
the South African border. Tenders have been received for the private
sector to construct the power plant. While there is much resting on
the Kudu plant, its completion is by no means certain as, for example,
the costs could be prohibitively high depending on negotiations with
private investors.2
9.3.2 Electricity distribution

The distribution of electricity is in a state of transition. Until recently the
bulk provider, Nampower, sold electricity to local authorities that were
then responsible for distribution to end-users. Outside urban areas,
Nampower was directly responsible for distribution through rural electri-
fication. Now the local authorities and Nampower are being replaced by
five REDs, which cover the whole country. The REDs are to be owned by
the stakeholders that were previously involved in service delivery – local
councils, regional councils and Nampower. They are to take over the
assets that were previously the property of the local authority or owned
by Nampower and they have taken over the customer base. While
regional and local councils will have shareholdings in REDs they will be
asset-based so small councils will have little representation. The
ErongoRED, for example, is dominated by Walvis Bay and Swakopmund
which between them account for more than 75 per cent of the weighted
average shareholding (based on assets and kWhs sold per month) in the
214 Kate Bayliss
company. The city of Windhoek is expected to have a stake of 80–90 per

cent in Central RED.
The main aim of establishing the REDs is to bring in standardization
in price-setting methodologies and to allow benchmarking by compar-
ing the performances across distributors. In addition, restructuring is
intended to consolidate capacity and generate economies of scale
which will ultimately lead to lower costs. The REDs are intended to
operate as commercial entities and are regarded as private sector com-
panies even though their shareholders are in the public sector. A fur-
ther advantage is considered to be that there will be greater
opportunities for private sector involvement as investors can buy a
stake in a RED more easily than they could contribute to a local
authority. The transition to REDs will relax bureaucratic procedures.
Employees working in electricity distribution for local authorities have
been governed by a centralized, fairly rigid, pay structure. The REDs
will be able to set their own pay levels in the way that parastatals do at
present.3
The transition process has been challenging with some difficult
issues to be resolved. Historically, local authorities have made a
surplus on the provision of electricity which has subsidized other
council services. It is this arbitrary mark up which the establishment
of the REDs is intended to dismantle by clarifying the price-setting
process. However local authorities are concerned about their lost rev-
enue. For some, including the City of Windhoek, the sale of electric-
ity is the biggest income earner for the council. In addition, councils
are losing an effective form of credit control as it is easier to discon-
nect an electricity supply than to recover revenue such as property
tax. Councils will be able to recoup profit that they made on the sale
of electricity through a surcharge that will be paid by the RED to the
local authority. But this contravenes the government policy of cost-
reflective tariffs so the surcharge, once established, will remain fixed
in nominal terms and will be eroded over time by inflation and then
phased out. The aim in the future is to provide a replacement revenue
source in the form of dividends from the REDs. In 2005, Nored, the
RED covering regions in the north of the country, paid out a dividend
of about N$2 m to its shareholders (ECB 2006). Local authorities have
reservations about the surcharge and the role of ECB. The City of
Windhoek has expressed concerns about handing over its electricity
assets to CentralRED in part because of the role of the ECB which will
determine when the surcharge will stop being paid as well as how the
surcharge is spent.4
When Nored, the first RED, took over distribution in the north of
the country in 2002 it replaced a private firm, Northern Electricity (NE) that
had been operating under a five-year licence from 1996. Before then, the
distribution was carried out by local authorities, often at a loss. NE,
owned by a local entrepreneur, was the country’s first private electricity
operator. Private sector participation (PSP) in this case was not intro-
duced in response to a privatization initiative but in recognition of the
difficulties faced in the region – mainly absence of capacity. At the start
of the contract, the distribution system had been in poor shape. In order
to make the contract attractive to potential investors, there was little
demand on the private sector to invest in the infrastructure. NE was the
only bidder for the contract and the company managed to transform the
performance of the system after a short period through effective man-
agement and customer services. Customer satisfaction levels were high
even though a strict disconnection policy was in operation (EconOne
2002). When the company became profitable, it was reported that there
was hostility from the local authorities. First their revenue source had
been removed and second they were expected to finance infrastructure
and network extension, leading to more profit for a private firm. The
contract was not renewed. The participation of the private sector
through NE is described as both a great success and a great failure
(EconOne 2002). There were reportedly good intentions at the start but
the contractual framework drawn up was not adequate to cope when NE
began to make profits (EconOne 2002).
NE was replaced by Nored in 2002. The regulator, the ECB, had reser-
vations about Nored. As a newly created company, Nored lacked techni-
cal capacity and a proven record in electricity operation. However, the
company was issued with a one-year licence which was subsequently
extended for 25 years. According to the ECB chairman, Klaus Dierks, the
ECB had been ‘squeezed into approving this recommendation’.5
Political pressures were also influential in the running of Nored when
the company’s Managing Director was suspended in July 2004 allegedly
for insulting the President.6
Two further REDs began operating in 2005 – ErongoRED that serves
the coastal region and Cenored that covers the central northern region.
Two more REDs were due to become operational during 2006 – Central
RED that includes the capital, Windhoek, and Sored in the south of the
country. Progress with the Central RED has been slow due to disputes
regarding key principles and resistance on the part of some shareholders
to the formation of the RED.7 Creating the RED in the south of the coun-
try is complicated by a 15-year contract awarded to a private firm,
216 Kate Bayliss
Southern Electricity Supply Company (Selco), in 2000 for the distribu-

tion of electricity for three local authorities covering a total population
of about 55,000. There have been long-running disputes between the
councils and Selco over the prices charged and the company withheld
royalties due to the Municipality after the council rejected proposed tar-
iff increases. The Keetmanshoop Town Council has been trying to ter-
minate the contract.8 When Sored is created, Selco will not be a
shareholder but it will be compensated for the assets invested in the
region (ECB Minutes March 2006).
9.3.3 Prices and revenue

There are two components to billing and pricing. First the parastatal sets
prices which are charged to the distributor (the local authority or the
RED) and, second, the distributor sets the prices that are charged to end-
users. Electricity tariffs are supposed to be based on ‘sound economic
principles’ and to reflect the long-run marginal cost of supply (MME
1998, p. 22). Since 2003, all prices have been subject to approval by the
ECB. Nampower charges a universal tariff across the country but dis-
criminates between categories of consumer, depending on level of con-
sumption. Smaller consumers pay a higher cost per unit. The delivery of
power is more expensive in some areas than others. One particular area
that has had difficulties is the Caprivi region in the north-east of the
country due to the high costs of power imported from Zambia, and
there have been frequent power failures in the area. The ECB recom-
mended that the high bulk supply tariffs be brought into line with those
of all other customers in the country through cross-subsidization (ECB
Annual Report 2003).
The approach to tariff setting was changed in 2003 when the ECB
implemented changes following a detailed study with a view to har-
monizing tariffs and making them cost-reflective. Nampower prices
incorporate a charge for both generation and transmission. Generation
prices are based on prices charged by the South African utility, Eskom,
and transmission charges are based on rate of return and so on cost of
supply plus a fair return on assets (ECB Annual Report 2004).
Transmission prices are expected to increase substantially in the future
due mainly to the renegotiation of the bilateral contract with Eskom
(ECB Annual Report 2005). Table 9.1 shows that prices increased at a
rate higher than inflation in 2003 following changes in the pricing
policy.
Table 9.1 Nampower prices compared with CPI
1999 2000 2001 2002 2003 2004 2005
Average price per kW/h (N cents) 18.1 18.9 20.2 21.6 27.6 30.1 33.8
National consumer price index –
annual % change 8.6 9.3 9.2 12.9 7.3 4.2 2.2
Average annual increase in
price per unit 4.1 4.5 6.3 7.1 28.1 8.9 12.1
Price – inflation gap ⫺4.5 ⫺4.8 ⫺2.9 ⫺5.8 20.8 3.3 9.9
Source: Nampower Annual Reports/National Accounts.
There have been wide variations in electricity pricing policies across

the country. In 2004, a review of prices charged by Nored, Windhoek
City Council and Selco indicated that for 2004–05, domestic consumers
in Windhoek paid 26.75 cents per kWh while in the north, the price was
around 50 cents. Data for Selco, in the south, which was for the previous
year (2003–04) shows that the firm charged a higher rate of 61 cents to
domestic consumers. Also in 2004–05, prepaid meters cost 57.30 cents
per unit in Windhoek compared with 62 cents in the Nored area.
Windhoek provides lower charges to Old Age Homes whereas the others
do not allow such concessions. Furthermore, only in Windhoek is there
a surplus made on electricity to subsidize other services provided by
the council. Despite this, the rate charged by the council is the lowest of
the three.
Revenue collection in the electricity sector is dominated by the
introduction of prepayment meters (PPMs). In the north of the country,
in 2004, 91 per cent of Nored’s customers had PPMs compared with
47 per cent of Selco’s customers. In Windhoek, out of a total of 52,563
connections, 22,850 (43 per cent) have PPMs and all new Nampower
connections are required to do so. Extension to the rural communities is
expected only to use PPMs. The price charged per unit for PPM is higher
than for metered customers but consumers do not have to pay a basic
charge. There seems to be widespread acceptance of the use of these
meters in the electricity sector. Some consumers reported that they
preferred to use them as it meant that they could pay for units when
they had the money.
9.3.4 Regulation
The ECB was created in 2001 to regulate the Electricity Supply Industry,
although, as a parastatal, Nampower, will also be under the control of
218 Kate Bayliss
the Central Governance Agency. According to the Electricity Act (2000),

the main objective of the ECB is to ‘exercise control over the electricity
supply industry and to regulate the generation, transmission, distribution,
use, import and export of electricity in accordance with prevailing gov-
ernment policy so as to ensure order in the efficient supply of electricity’
(para 3.1). The ECB has five members appointed by the Minister of Mines
and Energy on a four-year term. No organization is allowed to generate,
transmit, distribute import or export without a licence from the ECB and
prices are stipulated on the licence. The activities of the ECB are financed
in part by a levy on electricity sales that amounts to about 5 per cent of
the price charged to consumers. The ECB is also responsible for the man-
agement of the restructuring and creation of the REDs.
Since its inception, the ECB has been regulating a shifting landscape.
The key players in the distribution sector have changed and the rules
and regulations have evolved over the years. The ECB has adopted new
regulatory measures, such as quality standards for which licensees have
to pay a penalty where these are not met (ECB Annual Report 2005).
Even the legal framework has had to be revised as a number of loopholes
emerged in the legislation of the 2000 Electricity Act in the transfer of
assets from Windhoek City Council to the Central RED. The council has
maintained that it will not join a RED until a new Electricity Bill is
promulgated (ECB Minutes March 2006).
As an organization that raises the level of transparency and scrutiny of
the electricity sector, the ECB is effective. Whether it will be sufficiently
robust to withstand politically motivated policy directives remains to be
seen. There was, for example, some concern that the Board bowed to
political pressure in its decision not to renew the licence to NE but
instead to give it to Nored (EconOne 2002). There is also the question of
who regulates the ECB which has emerged in the light of the concerns
of Windhoek City Council regarding the extensive control that the ECB
will have over their funding when electricity distribution is transferred
to Central RED. Inevitably, policies relating to the electricity sector,
which affects all areas of the economy, are not independent of political
considerations. This has been demonstrated recently by the shortages in
power generation. Due to reduced supplies from South Africa and increased
reliance on expensive alternatives, costs have increased greatly. Under
the current pricing policy, prices are supposed to be cost-reflective but
the latest proposed power price hike by Nampower is described as too
high by the ECB because customers cannot afford it. The matter is being
debated at ministerial level and opinions are divided as to whether or
not the government should ‘bail out the consumer’ (ECB Minutes March
2006, p. 3). So independent tariff-setting formulae can only work up

to the point at which the question of who pays for power becomes a
political one.

Despite independence from the World Bank and IMF, a market-oriented
policy reform framework has been adopted in Namibia. The creation of
the REDs largely mirrors that adopted in South Africa where RED 1, the
first of 6 REDs, was established in 2005. The fortunes of the Namibian
electricity sector have for decades been allied to those of South Africa
and the Namibian programme was designed by South African consult-
ants. Donors have also had a role in shaping policy design. For example,
the US Trade and Development Agency9 is providing a grant to the ECB
of US$275,700 for consultants (that must be from the US) to provide
technical assistance for the development of the investment market
framework and IPPs in Namibia (ECB Minutes March 2004).
Impressive results have been achieved in the electricity sector in terms
of increases in access, thanks to government-led initiatives in rural elec-
trification, but huge investments are now required to increase genera-
tion capacity and expand access further. The government is planning to
seek additional resources from the private sector, and the ECB has been
established with a clear mandate to regulate a competitive electricity
sector. The prospect of competition in generation and the single buyer
model is a long way off at present. A competitive electricity market has
limited attractions for private investors, reluctant to commit the high
levels of finance required for such a capital-intensive industry where
they will then have to compete with other providers. The commitment
of such funds is not likely to be viable for private investors unless there
is a secure (rather than competitive) market for energy produced. Power
purchase agreements are set for long periods in order to weaken com-
petitive pressure. The level of demand for electricity in Namibia may not
be sufficient to be attractive to investors – although the prospect of
exporting to other countries in the region could provide a larger market.
So far, the record of the private sector has been mixed, with NE which
has been a fairly successful private sector distributor as well as Selco in the
south which has been more problematic. The stumbling block with Selco,
as with many other privatizations in the region, has been tariffs. In distri-
bution there are minimal requirements on the private firm in terms of
investment. The positive performance of Nampower highlights the irrele-
vance of ownership for the prediction of performance. The parastatal is
profitable and contributes to government revenue through the payment
220 Kate Bayliss
of taxes and dividends. As a public company, Nampower has a long-term

investment perspective and a national system allows for cross-subsidy
where revenue from sales to high usage electricity consumers can con-
tribute to the national infrastructure. Nampower as a national state com-
pany can participate in transactions and contracts with international
companies and private sector operators (as with the Kudu oilfields explo-
ration) representing interests other rather than those of a private operator.
9.4 Water
Namibia is the driest country in SSA and so careful management of

water resources is a high priority. Despite this, the percentage of the
population with access to safe water has increased from 58 per cent to
80 per cent since independence in 1990 (Table 5.1). Access rates in rural
areas have risen substantially and around 80 per cent of the rural popu-
lation has access to safe water.10 But there are regional disparities and
access rates are lower in the north where large proportions of house-
holds have to cover long distances to get their water (CBS 2003). As with
other sectors, water policy is underpinned by the two key themes of cost
recovery and the drive for decentralization. Subsidies in the water sector
have been gradually reduced to zero since 1997.
There is some overlap between ministries when it comes to responsi-
bility for water and sanitation. The delivery of water at the national level
comes under the control of the Ministry of Agriculture, Water and Rural
Development (MAWRD), which controls the parastatal bulk water
provider, Namwater. However, in urban areas, the Local Authority
(which comes under the control of the Ministry of Regional and Local
Government and Housing (MRLGH)) is responsible for all aspects of dis-
tribution within the specified boundaries.
9.4.1 Bulk water supply

Originally a government department, the bulk water supply was com-
mercialized in 1997 with the creation of the Namibia Water Corporation
Ltd (Namwater), incorporated as a limited liability company. The state is
the sole shareholder and owner of the corporation. Namwater supplies
water to the country’s 46 local authorities, to government ministries and
departments, and to a number of other bulk consumers such as mines
and the Namibia Wildlife Resorts as well as Water Committees in rural
areas. When the company was first established, a German Chief
Executive was recruited who was instrumental in the restructuring of
the company along business principles. Namwater has the power to fix
tariffs (in consultation with the Minister) on a full cost-recovery basis.

The number of employees fell from 1150 in 1998 to 982 in 2001.
There is no specialist regulatory authority in the water sector in
Namibia although various government agencies have some kind of involve-
ment resulting in an unclear and piecemeal framework. Ultimately, the
Minister is responsible for all aspects of the water supply, and the opera-
tions of Namwater are controlled by the company’s five-member board.
As a parastatal, Namwater comes under the Central Governance Agency
which was established to oversee the corporate governance of the coun-
try’s parastatals, but this agency has no specialist water sector capacity
and still, two years after it was established, the enabling legislation for
the agency had not been established (IMF 2005c). In addition, some
aspects of the water supply are managed by local authorities that are
monitored by the MRLGH.
In Namwater, as with other parastatals, there are rumours of political
machinations behind decision-making. In May 2003, the German CEO,
Helge Habenicht, was fired after a four-day disciplinary hearing into
more than 30 charges including fraud, theft and forgery.11 It has, how-
ever, been suggested that there were other motives behind the sacking.
Habenicht was reported to have blocked the award of a contract for a
desalination plant and, according to Habenicht, there was evidence that
top-ranking government officials and board members had wrongfully
attempted to influence the tender decision. Blocking the tender award
was believed to have made powerful enemies in the government for
Habenicht. According to national newspaper, The Namibian, ‘another
element in the brew is the campaign by sections of the governing
SWAPO … for the appointment of party loyalists to senior government
and parastatal posts.’12
9.4.2 Water distribution

In urban areas, water distribution is carried out by the 46 local authori-
ties according to the Local Authorities Act 1992. Decentralization was a
core component of SWAPO’s election manifesto in 1989. The policy was
designed to achieve participatory democracy at the grass-roots level. The
aim was to increase accountability by strengthening the link between
taxes paid and the quality of services provided. It was expected to be
easier to collect revenue where people could see clearly how their money
was spent.
At the time of the research, in August 2004, there was no central data
source on the activities of local authorities in connection with the
222 Kate Bayliss
provision of water. Information presented below is from questionnaires

sent to local authorities and interviews with council staff. There is sub-
stantial variation in the size, structure and capacity of the local authori-
ties. Some are villages, one with a population of just 1050, while the
largest is the City of Windhoek with a population of more than 260,000.
Some local authorities have a high proportion of residents living in
informal settlements while for others this is a low percentage – in one
case, zero.
In rural areas, outside the remit of local authorities, water is managed
by the Directorate of Rural Water Supply (DRWS) a division of the
Ministry. According to the Census around 80 per cent of the rural popu-
lation had access to safe water in 2001, up from 43 per cent ten years ear-
lier. There are considerable regional discrepancies with access rates in
some regions as low as 62 per cent (Kavango in the north). But these
rates are still high compared with other countries in the region. The
Directorate has been establishing water supply points around the coun-
try (a total of 6687 had been provided by 2003) and these are supplied
by Namwater. In addition to providing the infrastructure, the
Directorate provides training to communities on management of the
water point, creating Water Point Committees (WPCs) which may join
together to form Local Water Committees (LWCs). After training is com-
plete then management and, eventually, ownership is transferred to the
community. Within the LWC or WPC, the committee members are
responsible for allocating costs and collecting revenue to pay Namwater.
It is up to the community to determine how to cover their costs and
how much is paid by each household. By August 2004, while great
progress had been made with infrastructure provision, the Directorate
was way behind schedule with the number of WPCs for which manage-
ment was to have been transferred to communities, and no WPCs had
reached the stage of ownership transfer. Of those that had completed
training, many had accrued substantial debts to Namwater.13
9.4.3 Prices and revenue

Namwater took over the assets of the Department for Water Affairs that
related to the bulk supply of water including pumping stations, dams,
pipelines and boreholes and associated installations which are known as
‘schemes’. Prices are calculated for each scheme, based on cost. The
company adjusts tariffs for water to each specific water supply point to
a level that enables full recovery of the cost, including overhead costs.
However, there was substantial variation in the amount by which indi-
vidual schemes were subsidized and the cost of providing water to each
pipeline and borehole may differ, depending, for example, on the age of
the investment, creating large variations in prices if they were charged
according to strict cost-recovery criteria. Hence the large discrepancies
that would arise were smoothed over by price setting on a zonal basis
which evens out the bulk water price across the schemes on a local level.
More than half of Namwater’s 280 or so schemes are under-recovering
(i.e., the costs exceed the revenue). These are often small rural schemes
that are not financially viable. However these schemes are subsidized by
those that are over-recovering.
Table 9.2 summarizes price changes for each of Namwater’s ten ‘areas’
in the six years since commercialization. Prices have increased substan-
tially. The average increase in area water prices over the six-year period
is 114 per cent. Price increases have been greatest in the north of the
country and lowest in Khomas in the centre. This is demonstrated more
clearly in Table 9.3 which summarizes the figures presented in Table 9.2
to highlight the growing discrepancy between water prices in the north,
central and southern regions.
Table 9.3 shows that the average price increase across the five north-
ern regions between 1998 and 2004 was 123 per cent compared with 99
per cent for the three central regions and 115 per cent for the two
regions in the south. Similarly the gap between prices charged in the
north compared with the central region has increased from 5 per cent in
1998 to 16 per cent in 2004. The North central area around Oshakati
and Gobabis in the East of the country remain the most expensive
Table 9.2 Bulk water prices by area 1998–2004
Price Price
No. of Regional (cents) (cents) %
Region Area schemes office 1998 Rank 2004 Rank increase
Brandberg Central 25 Otjiwarongo 2.16 7 4.74 7 119

Cuvelai Northwest 40 Oshakati 2.78 1 5.58 1 101
Hardap South 18 Mariental 2.17 6 4.75 5 119
Karas South 26 Keetmanshoop 2.25 5 4.75 5 111
Khomas Central 31 Okahandja 2.39 3 4.60 8 92
Kunene Northwest 24 Ruacana 1.79 9 4.82 4 169
Namib Central 12 Swakopmund 1.90 8 3.54 10 86
Okavango Northeast 31 Rundu 1.73 10 3.83 9 121
Omaheke Northeast 18 Gobabis 2.67 2 5.58 1 109
Waterberg Northeast 25 Grootfontein 2.33 4 4.96 3 113
Average 25 2.22 4.72 114
(unweighted)
Source: Government Gazettes – various years (kindly supplied by Namwater).

224 Kate Bayliss
Table 9.3 Average price changes grouped by region
Average price Average Price Average %

1998 (N cents) 2004 (N cents) increase
Northern Regions (5) 2.26 4.95 123

Central Regions (3) 2.15 4.29 99
Southern Regions (2) 2.21 4.75 115
Source: Adapted from Table 9.2.
because these regions rely on surface water (which needs more treatment
than ground water) and, because their aging infrastructure has been
recently replaced, the zones are charged a higher rate of depreciation.
Local authorities set their own prices for water subject to approval
from the Ministry (except for the three largest municipalities,
Windhoek, Swakopmund and Walvis Bay which do not need approval).
They have been allowed to make a surplus on water and electricity
(although this is being or has been phased out for electricity, depending
on the stage reached in development of the REDs) to subsidize other
services. In Windhoek, for example, the council has had a policy of
delivering all services at or below cost (including overheads) except for
electricity on which it makes a surplus. The Council is self-funding and
has three international loans (from EIB, DBSA and KfW) although loans
have to be approved by central government as the Council cannot raise
international finance directly. The City operates a rising block tariff pric-
ing structure. The first 6 kilolitres each month is provided effectively at
the cost charged by Namwater plus 10 per cent. The next step of tariff,
up to 45 kilolitres, is at cost-recovery price (including overheads), and
the highest rate is at a penalty tariff subsidizing poorer consumers which
are charged below cost-recovery rate. This stepped tariff aims to ensure
that the basic amount of water needed for sustaining life is highly subsi-
dized. In addition the tariff structure aims to discourage the excessive
use of water, a scarce resource. Communal water points (which are in
informal settlements) are charged at cost recovery and are not stepped.
This pricing policy means that those that consume the least water pay
the cheapest rate below cost, which is similar to policies adopted in
other countries. In South Africa the first block is provided free although
prices then increase sharply.
All councils are supposed to publish their water prices in the
Government Gazette but some fail to do so. Prices were analysed for
25 authorities (just over half of the total number) that were Gazetted in
2003. There was a wide range of practices regarding water pricing. Of
these 25, seven had a stepped tariff while the rest had a flat rate. The
highest price per cubic metre charged by a local authority to domestic
consumers was N$6.75 in Ondangwa. The cheapest was the village of
Bethanie which charged a rate of N$3.10, substantially lower than other
authorities. Monthly flat rate charges also varied across the country. In
some (but not all) cases, prices were stepped depending on the diameter
of the water inlet. The highest was Otavi at N$63 and the lowest at
N$15.40 was Aroab.
To some extent price variations reflect differences in prices charged
by Namwater (see Table 9.3) but there were also variations in the
proportionate annual increase. For example in 2003–04, following a
12 per cent price increase from Namwater, the council of Eenhana was
proposing price increases in the region of 17.5 per cent while
Ondangwa Town Council was planning increases in the region of
2.5 per cent for most charges (although unit charges were to increase
by 13 per cent). Targeted discounts are at the discretion of the local
authority. Walvis Bay for example charges pensioners a flat rate of
4.50N$ per kl. Walvis Bay also charges higher rates to industries and
lower rates to schools. Some offer lower basic charges to churches and
charitable institutions.
As with pricing there are large variations in unaccounted for
water across the country. Research in 1999 found that this ranged from
7.5 per cent in Otjiwarongo to 58 per cent in Khorixas (NWRMR 1999).
In the northern town of Rundu it was discovered in 2004 that there were
more than 3700 illegal connections along its water supply network. The
council had been incurring losses of up to 70 per cent on water supplied
to residents. This was reduced to 48 per cent when the illegal connec-
tions were shut down.14 In Windhoek, distribution losses in 2003 (i.e.,
the gap between amount pumped and amount billed) were about 10 per
cent, down from 17 per cent in the previous year (Windhoek City
Council correspondence).15
Local authorities and rural Water Point Committees owe millions of
N$ to Namwater. According to original plans, Namwater had five years
to break even over the period of the withdrawal of the company’s sub-
sidy but, from the start, the company faced the problem of non-payment
on a major scale. There was a loss at the end of the first year, mainly con-
sisting of bad debts. Many of the customers of Namwater (local authori-
ties) were unable to collect revenue from their customers and did not
have proper accounting systems in place (Namwater Annual Report
1999). Namwater has accumulated losses every year since its inception,16
although it was reported in an interview with the CEO that the start of
226 Kate Bayliss
2005 was profitable.17 By April 2004, local authorities’ payment arrears

reached around N$70 to N$80 million.18 In 1998 the government was
spending N$67.3 m on subsidizing the water sector (NWRMR 1999,
p. 125). In 2004, Namwater was owed more than this amount. So,
despite efforts to remove the government subsidy, payment levels have
failed to increase sufficiently to fill the gap.
There is a wide disparity in the ability of local authorities to meet pay-
ments to Namwater. Some have had major difficulties in securing pay-
ment from residents for water and this, in turn, has affected the ability
of these authorities to pay Namwater, while many do not have problems
with payment. When local authorities were contacted, 13 local authori-
ties out of the 14 that responded reported that they had no outstanding
debts to Namwater, and 11 owed nothing to Nampower. In Windhoek it
was reported that the recovery rate19 on water was 96 per cent. In con-
trast, a smaller council reported in interviews that almost all households
had debts that had been outstanding for more than 30 days and that
non-payment was a major problem. In some cases, household debts
have accumulated high levels of interest and are unlikely to be paid off.
There are also large amounts outstanding from rural WPCs. Setting aside
interest charged on outstanding balances, water committees only paid
about 32 per cent of their bills between 2001 and mid-2004.20
Namwater has been cutting the supply of water to those customers
that do not pay their bills. This might be government institutions,
whole towns or rural communities. The company has usually reduced or
rationed supply but complete disconnections have also been reported.21
In some cases the arrears have been cleared or reduced by a cash payment
from the MRLGH. In 2005, Namwater entered into agreements to help
with or take over the management of, water distribution in a number of
towns in 2005 (Karibib, Opuwo, Katima Mulilo and Arandis).22 One
town, Karibib, managed to avoid disconnection because of a large dona-
tion from a big business in the town. Some rural LWCs have had their
water cut off as a result of non-payment, according to press reports, with
residents reportedly turning to unsafe water sources as a result.23
Non-payment is due to several factors. First, there is weak capacity in
a number of councils which is demonstrated by, for example, erratic
billing systems.24 Second, some towns have a weak revenue base with lit-
tle industry and high unemployment among domestic consumers.
Third, some consumers are reluctant to pay their bills where the council
has a weak financial structure because residents believe the money will
be wasted or pocketed.25 There have been stories of corruption as, for
example, an investigation into non-payment in Okakarara by the MRLGH
found that top councillors were among the non-payers. Fourth, before
independence, not paying for services was a way of undermining
support for those complicit with apartheid and hence was used as a
political tool. This mindset continues. Fifth, some consumers have been
living in rural villages for years and are not used to paying for water. In
addition, water was subsidized until 2002, and this has created the
impression that water is plentiful and of low value. Some council mem-
bers have referred to a culture of non-payment in the sense that people
are not used to paying for water.26 Sixth, many people are poor. The high
incidence of HIV has made it difficult for some consumers to pay as people
spend their money on treatment. Many children are orphaned, creating
children-headed households. Meanwhile prices have escalated. Seventh,
some councils have high debts because government agencies fail to pay
their bills. In rural areas, payment is further undermined by the fact that
many residents have to travel far (up to 140 km) to make payments to
Namwater. Some communities have had difficulties working out the rel-
ative contributions of different community members.
As debts are rising and utilities have been disconnecting services, coun-
cils are becoming more strict in their policies for dealing with non-
payment. Two key policies that have been adopted are the use of
prepayment meters and disconnection of non-payers. PPMs allow con-
sumers to buy a key or card from the municipality that is used in the
meter to allow the release of a specified amount of water or electricity.
Responses from local authorities indicated that on average, the propor-
tion of connections that were prepaid was about 18 per cent of water con-
nections and 49 per cent of electricity. More are reportedly being
introduced.27 The PPMs have been installed in many informal settlements
where it has proved difficult to organize a collective payment system.
While PPMs have obvious advantages in terms of revenue management,
they have a questionable impact on social and physical welfare as poor
households effectively disconnect themselves from access to water and
electricity. In addition, in the water sector in Namibia, the machines are
highly sensitive to their environment and often break. The demands of
after-sales service have exceeded the capacity of the firms that provide the
machines. Broken meters can have a crippling effect on local authority
revenue as they allow water to flow freely with no charge. In August 2004,
in the town of Katima Mulilo, malfunctioning pre-payment water meters,
which had often provided free-flowing water for months on end, were
removed.28 One council interviewed had converted all water meters to
PPMs but in about 20 per cent of cases the meters allowed water to flow
freely without consumers paying. This has been devastating for the
228 Kate Bayliss
council’s finances. The council now has to pay the cost of replacing all
prepayment meters with normal meters.29 Another local authority
which responded to the survey, cited ‘the inefficient operations of the
prepaid water systems’ as ‘a factor killing the local authority’ (faxed sur-
vey response). In rural areas, despite difficulties in securing payment
from water point committees, the DRWS do not use PPMs because of the
technical difficulties, the lack of after-sales service and the fact that they
can contribute to an atmosphere of non-payment where people have
the option of trying to vandalize them.
Local authorities have different approaches to the use of disconnection
as a penalty for non-payment. In some cases, the policy is rigidly imple-
mented while other councils are more tolerant and sympathetic.
However, one council reported that a lenient approach was now back-
firing as arrears were mounting. While disconnecting a water supply is
an extremely harsh measure with potentially severe social and health
implications, in interviews with councils there was little sympathy with
the suggestion that non-payers could not afford to pay. The prevailing
view was that most of those that did not pay could afford to pay but
tried to avoid doing so.
In rural areas, there are suggestions that wealthy consumers are
refusing to pay and according to Helmut Angula, the (then) Minister
for Agriculture, Water and Rural Development, these are ‘hiding
behind the rural poor’. These he distinguishes from those who are
genuinely unable to pay.30 To address this issue, the DRWS is encour-
aging communities to arrange cross-subsidies internally, and the
DRWS is considering creating a reserve fund for possible subsidies to
marginalized communities. Subsidies would only be provided in
extreme cases and would only apply to a lifeline consumption of 25
litres per day. To receive any subsidy, users of a water point would be
expected to follow strict rules, detailing existing cross-subsidy
arrangements, the identity of the beneficiaries and the criteria to clas-
sify marginalization.
Local authorities disconnect non-payers every month but also some
are reconnected after paying off outstanding bills. Thus, there is a flow
of connections as households are disconnected and reconnected.
Twelve authorities provided data on dis- and re-connections in June
and July 2004. The results indicated that in the water sector, out of a
total of 86,833 connections, 1984 were disconnected in June and July
2004 and 1386 were reconnected. This means that 2.3 per cent of con-
nections were cut while 1.6 per cent were re-activated. In Swakopmund,
one of the largest municipalities, at the end of July 2004, the number of
connections inactive amounted to 1.4 per cent of total connections. In

the capital city, Windhoek, the total number of inactive connections
due to non-payment was about 1.7 per cent of total connections.
Although disconnections are widely used, the rate of disconnection in
Namibia is not high when compared with other countries in SSA.31
There are two categories of consumers that are disconnected: those
who repay within a few days of disconnection and can afford to pay and
those that have been disconnected for months or years. This latter group
is likely to be too poor to pay. The use of informal networks enables
poorer consumers to survive. One authority reported that some resi-
dents had been disconnected for up to two years but seemed to get by,
presumably by obtaining water from neighbours. There seemed to be lit-
tle evidence of water vendors emerging. Disconnection of water creates
major social tensions with reservoirs guarded by police in some cases.32
The review of local authorities found that, of those that responded to
the survey, on average about 30 per cent of their populations live in
informal settlements. Providing water and charging for consumption in
these areas is a major challenge. These areas change in shape daily and
one council reported that meters ‘got lost’. Rising prices have made
water unaffordable for many. Evidence from a large informal settlement
in Swakopmund indicates that water is a major concern for the local res-
idents, many of whom live in ‘absolute squalor’ and that people have
been negatively affected by the introduction of PPMs in 2001. A Report
for the Labour Resource and Research Institute (LaRRI) finds that the
meters often do not work and many cannot afford the water. It docu-
ments the tension arising between local authorities and local residents
following rising prices after the abolition of subsidies and indicates that,
for many consumers, water is unaffordable. According to the Report, as
a result of the introduction of PPMs, many residents are resorting to
unsafe water sources (McClune 2004). In the worst cases, where house-
holds accumulate debts to councils, residents can be evicted from their
homes. Debts can grow quickly with interest accruing on unpaid sums.
In Windhoek, residents from Goreangab, a poor settlement on the out-
skirts of the capital, filed a human rights lawsuit against the Windhoek
municipality, the Government and Namwater to stop the municipality’s
practice of terminating water supply to the poor and to declare uncon-
stitutional the eviction of poor people from their homes.33

The commercialization of Namwater has improved financial manage-
ment. By ring-fencing the company, the costs and revenues associated
230 Kate Bayliss
with service provision are more clearly identifiable, providing essential

tools for effective financial management. The removal of subsidies has
led to substantial price increases.
Although not a donor-financed initiative and there is no privatiza-
tion, in common with reform programmes in the rest of Africa, the focus
in Namibia is on the financial health of the sector at the expense of mat-
ters relating to equity and distribution. For example, the focus of
Namwater on full cost recovery has meant that inequalities have been
exacerbated with poorest regions having least access and highest prices.
The policy of decentralization, while aiming to increase participatory
democracy, has reduced the scope for cross-subsidy. There is a large dis-
crepancy between the revenue base of different councils. Some have a
strong industrial base while others have high unemployment. In Katima
Mulilo in the north, there is little industry so the council’s financial
position is extremely fragile. In the words of an interviewed MRLGH
official, referring to this town, ‘Who subsidises whom?’
Decentralization fails to address the high levels of inequality as wealth
stays in regions where people are wealthy. For example, local authorities
pay a 5 per cent charge to their regional councils. In Khomas in the centre,
local authorities are relatively wealthy so this charge can amount to a
substantial sum. However in the north, regional councils get nothing
because towns cannot afford to pay. The discrepancies could be further
accentuated as the few authorities that are managing to provide services
effectively (such as Windhoek, Keetmanshoop) are attracting people
from areas where services are poor.
The decentralization scheme in water has run into severe capacity
constraints in some areas. Effective management of water distribution
requires a level of technical expertise which is beyond the scope of some
smaller councils. The town councils do not have the capacity to collect
the rates and taxes that are due. Some of the weaker councils sell land to
pay salaries which indicates either a financial crisis or a lack of under-
standing of revenue management, or both. Some local authorities are
close to collapse. In addition, the objectives of decentralization are often
not met as, for example, the interests of many residents are not ade-
quately represented when it comes to the poorest and those in informal
settlements where PPMs, disconnections and evictions are imple-
mented. A high degree of autonomy for local councils can undermine
accountability as was revealed in the case of Okakarara where those in
public office were themselves not paying for services.
Efforts to run Namwater according to business principles are faltering
because of the lack of capacity within local authorities and low payment
levels within rural communities. This shows that sustainability at the

sectoral level is about far more than ring-fencing of finances but requires
sector-wide initiatives to address non-payment. It is not possible to cre-
ate pockets of a delivery system without working through the impact on
the system as a whole. Town councils officially receive money from cen-
tral government only for specific infrastructure projects to help the
council become more financially stable but unofficially there are bail-
outs of recurrent budgets particularly to towns with aging infrastructure
and weak capacity (survey interviews and according to some press
reports, as for example in Usakos in 2003).34 In some cases, such as
Karibib, discussed above, the council has been bailed out by a large local
business. Such ad hoc bailouts effectively constitute a subsidy for those
that do not pay their bills. The evidence above suggests that these are
not necessarily the most needy, and non-payment is not necessarily an
indication of inability to pay. However, the current system is failing to
meet the needs of the poorest who cannot afford to pay for services. The
policy of allowing municipalities to set prices makes it difficult to have
a national strategy of subsidy. Yet addressing the needs of the poor is
beyond the scope of the councils.
9.5 Conclusion
The experience of Namibia indicates that the public sector can be an

effective provider of water and electricity as demonstrated through
Nampower, Namwater and some of the more successful municipal gov-
ernments such as Windhoek City Council. The performance of the
Namibian system is partly the result of the policy framework but can
also be attributed to wider contextual factors. Namibia became inde-
pendent relatively recently compared with other countries in the region
and the transition process has been intentionally slow. On independ-
ence, the government adopted a strategy of national reconciliation so
there was little disturbance to public services. In addition, the timing of
independence in Namibia means that the global policy environment is
different from that which faced countries becoming independent 20 or
30 years earlier. Parastatals do not dominate the Namibian economy as
they have done in other post-independence countries in the 1960s and
1970s, largely an era of state-led development.
The country has a high level of expertise and capacity as well as a
fairly stable economic environment and a reasonably sound public sector
which means that the utilities are not hindered by not being private. For
example, Namwater and Nampower need government guarantees to
232 Kate Bayliss
borrow internationally but this is not a major constraint. In other coun-

tries where government capacity is very weak this could present a sig-
nificant difficulty. The country has had a well-run water and electricity
system for many years (although the scope of access was considerably
less before independence). Hence, sector policy is about broadening the
system that already exists rather than implementing a radical transfor-
mation as would be required in other parts of the region.
Privatization in the sense of divestiture is off the political agenda in
Namibia, largely because the pool of investors that could participate is
limited to wealthy domestic investors (and so would exacerbate the high
levels of internal inequality) or external investors which would also be
difficult to reconcile politically given the recent transition to independence.
While this political perspective might also apply for other countries in
the region, Namibia has, because of its middle-income status, relatively
little involvement with the World Bank and the IMF and hence does not
face the policy conditionality which is behind privatization in most
other countries in the region. Thus, Namibia has been free to pursue its
own policy agenda in the absence of donor pressure.
There has been extensive investment in infrastructure for water and
electricity, and this has come from the state, donors and, to some extent,
from users through investment contributions from the utilities. While a
sustainable revenue source is essential for service delivery, whether this
can come from user charges is uncertain. The policy of cost recovery has
led to major price increases in both electricity and water, and it remains
questionable whether end-users will be able to pay the full capital cost of
water and electricity. Increases in costs have led to reductions in con-
sumption and may not improve the overall revenue position. In the elec-
tricity sector, while Nampower has been profitable, the anticipated hike
in generation costs is likely to be unaffordable for many consumers. In the
water sector, price rises have led to huge arrears accumulating although
the extent to which this is down to avoidance rather than affordability is
not known. In the absence of a targeted social safety net in the water sector,
the current system of ad hoc bail-outs is in reality a subsidy from tax pay-
ers to non-payers. There is no requirement for a commercialized (or even
privatized) water or electricity supply to adopt a policy of full cost recov-
ery. The policy of ring-fencing relevant expenses in order to know the full
cost of service delivery is a valuable financial tool but the way that serv-
ices are priced should be a separate policy decision. There is no reason
why services cannot be partly (or even wholly) subsidized.
In contrast to the policy objectives of a decade ago, the supply of water
and electricity are being effectively re-centralized in Namibia, as Namwater
takes over the management of some failing councils and REDs take on
responsibility for electricity distribution. Decentralization which aimed to
empower communities has its limits where capacity is spread too thinly.
Internal restructuring of the utilities has little impact without a sustainable
revenue source and reasons for non-payment are complex. The revenue
positions of the electricity and water sectors are very different. The use of
PPMs has been far more effective as a revenue management tool in the
electricity sector than in water where it has been damaging. Furthermore,
self-disconnection through a water meter has far more devastating conse-
quences than disconnection of electricity. The focus of recent policy devel-
opments, despite the absence of World Bank and IMF pressure, has been
on financial and managerial improvements, and servicing the poor has
slipped from the radar. The key challenge for providers is to determine
who cannot afford to pay and who is avoiding payment and to find an
effective means of providing services to the poorest. Such a task is beyond
the scope of most local authorities. To enable the transfer of resources to
areas of greatest need, a national strategy is required.
Notes
1. ‘Govt unveils blueprint for restructuring of parastatals’, The Namibian,
17 November 2005.
2. Africa Power, Vol. 1, Issue 1, January 2006.
3. Interview, Municipality of Windhoek, 17 August 2004.
4. ‘City of Windhoek Not Keen to Hand over Electricity Distribution to RED’,
The Namibian, 1 November 2005.
5. ‘All power to the utility …’, The Namibian, 14 February 2002.
6. ‘Nored MD Faces Dismissal for Criticising President’, The Namibian,
17 September 2004.
7. ‘City of Windhoek Not Keen to Hand over Electricity Distribution to RED’,
The Namibian, 1 November 2005.
8. ‘Former Keetmanshoop Town Council Acted Illegally on SELCo Agreement’,
The Namibian, 4 October 2005.
9. USTDA’s mission is to advance economic development and US commercial
interests in developing and middle-income countries (www.tda.gov).
10. That is, water from pipes and boreholes except those with open tanks.
11. ‘Namwater CEO Faces Boot’, The Namibian, 28 March 2003.
12. ‘Murky Waters At Namwater’, The Namibian, 9 March 2002.
13. Until training is completed, water charges are paid for by the Directorate.
14. ‘Rundu Council Acts to Stem Illegal Water Connections’, The Namibian,
30 July 2004.
15. This figure compares favourably with privatized water systems in other parts
of Africa (Guinea: 47 per cent, Gabon: 14 per cent, Senegal: 22 per cent, Cote
d’Ivoire: 16 per cent (Bayliss 2003)).
16. ‘Namwater Records N$69.1m Loss’, New Era, 28 June 2005.
234 Kate Bayliss
17. Interview with Vaino Shivute, CEO Namwater, 23 March 2006, World
Investment News.
18. According to Namwater’s Chief Executive Officer, Vaino Shivute, reported in
‘Bulk Water Price to Rise By 12per cent’, The Namibian, 29 April 2004.
19. The recovery rate is the proportion of the amount billed that is paid.
20. Interview at Ministry of Agriculture, Water and Rural Development,
18 August 2004.
21. ‘Namibia; Namwater Cuts Off Communal Farmers in Waterberg Area’, The
Namibian, 11 December 2002.
22. ‘Namwater Steps in At 3 More Towns’, The Namibian, 28 June 2005.
23. ‘Namwater Cuts Supply to Villages in Omusati Region’, The Namibian,
13 August 2003.
24. ‘Namibia; New Otavi Town Clerk to Be Appointed in April’, The Namibian,
17 March 2004.
25. ‘Usakos Feels the Pressure’, The Namibian, 5 August 2003.
26. ‘Negonga Raps Uis Council’, New Era, 1 March 2004.
27. Based on 16 responses regarding water connections and 14 regarding the
electricity sector.
28. ‘Katima Residents Feel Pinch as Council Tightens Tap on Debts’, The Namibian,
17 August 2004.
29. Interview with a local authority council, 18 August 2004.
30. ‘Government Water Critics Must Pay Up’, New Era, 25 June 2004.
31. Disconnection rates are reported to be around 12 per cent of connections in
Dakar, Senegal and as high as 20 per cent in Abidjan, Cote d’Ivoire (Bayliss
2003).
32. ‘Dry Karibib ‘Teetering On Edge of Violence’, The Namibian, 24 May 2005.
33. ‘Watershed Case Set for July 29’, The Namibian, 28 June 2004.
34. ‘Usakos Council Moves to Settle Namwater Debt’, The Namibian, 29 August
2003.
10
Conclusion and Alternatives
A number of general conclusions can be drawn from our study. In point

form, these can be summarized as follows:
● The rise of privatization both reflected and promoted a shift in thinking

about the economic role of the state as an aspect of the simultaneous
rise of neo-liberalism and the Washington Consensus.
● There is neither theoretical nor empirical evidence to favour private
over public provision of public services.
● The transposition, if not imposition, of privatization from developed
to developing countries has been especially unfortunate.
● Much of this is borne out by the (World Bank) rethink, mea culpa even,
that is accompanying the acknowledged failures both to privatize
and of privatization, especially in sub-Saharan Africa (SSA).
● Despite the rethink, state provision of services is not encouraged and
privatization is still a goal, albeit in the more diluted form of short-
term management contracts, at least as an interim measure, in much
of the region.
The analysis presented here does not underestimate the severe weak-
nesses in state provision in the 1980s and 1990s and does not advocate
a return to such systems. Furthermore, greater transparency and scrutiny
of the state are to be encouraged although this is not necessarily an out-
come from privatization or commercialization. We do not aim to pres-
ent an invective against all forms of private sector participation (PSP) in
the delivery of water and electricity. We acknowledge that the local pri-
vate sector has been involved in service delivery to varying degrees in
much of SSA, for many years. At the risk of repeating the words of the
World Bank, each case is different. However, this chapter presents a
235
236 Conclusion
deeper, if not different, form of specificity to that superficially promoted

by the Bank.
While, at least in principle, the neo-liberal approach to privatization
has gone into decline in its purest form, this has had little to do with the
power of argument. The scholarly synthesis on private versus public
provision – ownership as such is of secondary importance relative to com-
petition and regulation – has been in place for some time. Nor has the
emergence of experience of privatization and empirical evidence been of
direct and decisive importance. Rather, it is the faltering programme of
privatization itself that has convinced the International Financial
Institutions (IFIs), and others, of the need to take a more rounded
approach. It is for this reason that the ‘synthesis’ is being adopted in place
of neo-liberal dogma. For it holds the possibility of addressing what is nec-
essary in order to allow privatization to proceed, albeit at the expense of
accepting, in principle and extreme circumstances, that public sector pro-
vision may be preferable, at least as an interim measure.
As already indicated, the rethink including attention to regulation,
whilst welcome, should be treated with some caution. For it is not prima-
rily about adopting best policy for public service provision but more a
guide to identifying how private provision of public services can be pro-
moted, and smoothing the way for it to do so. This means that the rethink
on privatization (and regulation) should not simply be accepted because
of its more palatable implications in principle if not in practice. For, the
rethink and other studies of privatization that depart, at least nominally
from neo-liberalism in its pure ideological form, have been heavily driven
by the insights gleaned from mainstream economics. Increasingly, not
least in the evolving synthesis around the significance of regulation and
competition as opposed to ownership as such, the theory of market
imperfections has been brought to bear, involving economies of scale and
scope and informational asymmetries across various combinations of the
state, providers, regulators and citizens. Even where public services have
come under scrutiny, this has allowed longer-standing traditions, espe-
cially those concerning the sociology of the welfare state, to be totally
ignored. Thus, Blank’s (2000) treatment of the privatization of social serv-
ices from health, through education to childcare, and presumably inclu-
sive of water and energy, ultimately settles on four influences in assessing
the case for or against public/private provision (pp. C47–C48):
The degree of concern with agency problems and the degree of
belief in government’s ability to be wisely paternalistic.
The degree of concern over the difficulty in collecting and
disseminating information on quality of services.
Conclusion 237
The extent that equity and universalism is emphasised.

The level of trust in the public sector.
Such abstract truisms offer very little purchase on the nature of public
service provision, whether in developing countries or not. Indeed, there
is a paradox that a general, market imperfections approach to the issue in
principle, comes up with the conclusion that a case-by-case approach is
required, in order to put flesh and bones on these universal principles in
practice.
To push for a distinctive analytical position with policy impact is far
from easy in view of the capacity of the more rounded orthodox
approach to incorporate any omitted factor as a market or institutional
factor to be corrected – with unspecified public provision to serve in the
interim as a stopgap measure until privatization is deemed to be appro-
priate and feasible. One way out of this syndrome is to take an alterna-
tive starting point to that of the new-found critics of privatization such
as the OECD and World Bank (see Chapter 4). This is to begin not with the
deficiencies of the market (or institutions) to be corrected but with the
economic, political, social and ideological conditions under which pub-
lic services are provided. The point is not to throw away the insights of
studies like those discussed in Chapter 4 by the OECD and the World
Bank but to situate them both in a broader context and, paradoxically,
also more specifically. For the neglect of other approaches to public sec-
tor provision is unfortunate for two closely related reasons.
First, on broadening out, outside mainstream economics and
especially in the sociology of welfare, the literature has been explicitly
concerned with the broader influences at work in the forging of welfare
states as the institutional and systemic underpinnings of public service
provision – the counterpart in the developed countries to public service
provision in developing countries at the latter’s earlier stages of develop-
ment. Second, this literature has recognized that there are differences in
welfare states from one country to another, reflecting differences in their
histories and socio-economic and cultural characteristics. In the political
economy approach to the welfare state, for example, emphasis has been
placed on reform either as the response to working class demands or as a
means to render the economy more productive through creation of a
healthy, educated and compliant workforce, Gough (1979) for example.
More recently, the political economy approach has been eclipsed by the
welfare-regime approach associated with Esping-Andersen (1990, 1999)
that focuses on how political resources and relations are mobilized in
pursuit of welfare provision (Fine 2002a for a critical exposition). Three
238 Conclusion
ideal types of welfare regime are identified – essentially liberal, conserva-

tive and social democratic. And the attempt has been made to extrapolate
the welfare-regime approach to developing countries, interestingly by
Gough (2000).
In short, the political economy and welfare-regime approaches do
seek to situate public service provision within a country-specific context
by reflecting broader systemic factors, exactly the factors to which the
OECD and World Bank approach appeals in piecemeal fashion in depart-
ing from pure neo-liberalism. However, a major deficiency in these
approaches is the tendency to presume that welfare provision in its
various components can be read off from the broader context as, for
example, embodied in the type of welfare regime, or the dictates of
vested and conflicting interests. This is false and has even led to the idea
of regime switches within countries according to the public service under
scrutiny in order to accommodate empirical anomalies by regime across
public services within a single country. Whether in mainstream econom-
ics or broader approaches, setting up ideal types or general determinants
or theory will not suffice.
This all reflects a failure to be sufficiently specific. There is no reason
why broader socio-economic determinants should lead to pre-determined
outcomes in the same way for each public service. The factors influenc-
ing provision, and how they interact with one another, are liable to be
different for education, say, than for health or water and sewerage. In a
limited way, this has been acknowledged by the OECD approach by ref-
erence to the ‘strategic’ specificities of a sector. Similarly, the World
Development Report of 2004, explicitly rejects the idea that one model
fits all in service sector delivery. Instead, it appeals to an eight-model-
fits-all. It does so by questioning whether the politics of provision are
pro-poor (corrupt) or not, the service itself is homogeneous or not, and
whether monitoring of delivery is possible or not, a 2 ⫻ 2 ⫻ 2 matrix of
possible models. Correspondingly, there is a case for more or less
reliance upon state or market delivery in different ways.1
Where each of these approaches is deficient, however, like the welfare-
regime approach, is in failing to recognize the sector-specific factors in
the nature of the service itself. Water and energy, education, health and
so on are different in and of themselves, how they are provided, with
what consequences, and in broader context (hardly reducible to levels of
trust, paternalism, etc., or to simple calculus of politics, homogeneity
and monitoring). An attempt has been made to resolve the conundrum
of posing a general approach that allows for service and context speci-
ficity by extending what is known as the system of provision (sop)
Conclusion 239
approach from (private) consumption to public services (Fine 2002a,

2005b).2 Here emphasis is placed upon the integral and systemic nature
of each public service. In a nutshell, there is a water system, a health sys-
tem, an education system, and so on, each with its own context, struc-
tures, processes and agencies, and each with its own cultural system that
cannot be reduced to some simple mix of vulgar self-interest and more
or less irrational ideology. It is essential to trace delivery of public serv-
ices from production through to consumption and not to focus on one
or other element – whether ownership, financing, pricing, access or
whatever. Each of these elements in the public service system of provi-
sion (PSSOP) is liable to be subject to non-economic as well as to eco-
nomic factors, and to reflect the broader socio-economic environment
including gender, ethnicity, poverty, etc.
To put forward the idea of system (or chain) of provision approach to
private consumption is far from novel. It is well established in the litera-
ture from a number of perspectives but the same has not happened in
relation to public consumption, at least explicitly.3 At the very least, as
already indicated, public service provision can be understood in terms of
the technology of delivery, as the chain of activities surrounding supply
and demand, connecting production (scale and technology, etc.)
through distribution to delivery and use (and disposal). The global com-
modity chain approach, albeit in the context of internationally organ-
ized provision and drawing upon world-systems theory, focuses on the
agents and structures involved – whether, for example, the chain is
driven by large-scale producers or large-scale retailers.
As suggested, the system of provision approach can be adopted, and
adapted, to address public service delivery – a mix of public and private
structures, agents and processes. Associated with the latter are a mix of
economic, political and ideological factors which interact to affect and
effect the level, incidence and quality of provision. Unless a view is
taken of provision as a whole, policy (itself a product of underlying
interests and capabilities) directed at one or other aspect will have
uncertain even perverse consequences.
In this light, the merits of the PSSOP approach are revealed by examin-
ing some of the issues that have been prominent in debate over privatiza-
tion and public service delivery. In case of competition, for example, as
already seen, it is necessary to move beyond a simple prognosis of the
more the number of enterprises, the more the competition and the better
the outcome. There is little or no empirical evidence for this – incumbent
monopolies may be under threat from potential entrants, a fragmented
industrial structure may be governed by formal or informal collusion, and
240 Conclusion
discourage innovation. Further, competition takes many different forms

and is fought in different ways other than through price – it also concerns
quality, range of products, access to finance, skills, pay and working con-
ditions of the labour force, pace and direction of technical change, verti-
cal as well as horizontal (dis)integration through acquisitions, mergers and
subcontracting, and so on. And the range of externalities from one sector
to another is of importance, including impact on government and
international balances through expenditures, revenues, imports and
exports, capital flows, and so on.
In short, provision of public services cuts across competition policy to
incorporate many other areas of economic and social policy, all of which
need to be taken into account. By the same token, this leaves regulation
in an ambiguous position. To the extent that its role is well specified and
implemented, the powers and targets that it can address will be at the
expense of those that it cannot. Crudely, for Hanson et al. (2002), if
hospitals respond to incentives, and number of beds in use is a rewarded
target, these will be over-supplied and occupied by individuals at the
expense of other goals.
This is problematic over and above the difficulties in monitoring pri-
vate corporations, in avoiding lengthy litigation and, over time, remain-
ing free in some sense of capture either by the state and/or enterprises
with which the regulator must interact both to survive and to accom-
plish what is possible. This situation has been acknowledged by Cook
and Minogue (2002, p. 486) in an edited collection on privatization in
developing countries. They observe that there has arisen ‘a new interest
in what is termed ‘regulatory governance’, and [it] has produced litera-
tures by non-economists concerned with managerial, political, legal,
and social issues’ with need to take account of ‘the economic, social and
political contexts of developing countries’. Looked at another way, as
argued in Chapter 2, this suggests that the regulator takes major respon-
sibility for industrial policy. But it does so with limitations on both its
powers and its accountability although this does not mean that these
are confined to its formal constitution.
Interestingly, Cook and Minogue round up their discussion of regula-
tion with that of competition, and seek to embrace Schumpeterian or
other perspectives with less emphasis on ‘equilibrium, characterized by
different market structures, and more as a process of change premised
on the different behaviours of enterprises’ (p. 487).4 This is an explicit
recognition of development as such, and a dynamic context of change
rather than more or less efficient optimization in more or less perfect but
given conditions of market and institutions. For Cook (2002), extrapolating
Conclusion 241
or imposing competition (and regulatory) policy from the developed

world (even if appropriate there) to the developing world is inappropriate
given different conditions, stages of development, and not least the need
to promote and restructure local industry and accrue benefits of scale in
production, sales, distribution and R&D. Not only are regulation and
competition liable to be weaker in capacity and delivery, they must
address entirely different problems. As Jouravlev (2000, p. 1) puts it:5
The shift to private ownership does not simply involve the retreat of
the state. It also requires the state to take on new responsibilities,
acquire new capabilities, often requiring that public sector personnel
acquire sophisticated skills and knowledge. The capabilities that gov-
ernments need in order to effectively regulate private water and san-
itation provision are vast. Accordingly, the challenges to effective
regulation are greatest in developing countries with the weakest
governance capacity.
Consequently, it is worth emphasizing that regulation is both com-

plex and ‘embedded’ because of the necessity of continuing interaction
between public and private spheres, something that cannot be reduced
to a uni-dimensional trade-off between the two (Craig 2001, and for
telecommunications in Caribbean and South Africa (respectively, Lodge
and Stirton 2002 and Cohen 2003). The point is illustrated in the highly
diverse range of methods of privatization – from denationalization
(through various forms of sales with various winners and losers) through
to abolition of statutory monopoly and liberalization or deregulation
more generally. The continuing if shifting relationship between public
and private sectors (themselves very broad and heterogeneous in practice)
needs to be assessed in a developmental context that goes beyond the
distribution and forms of ownership between public and private sectors.
To some extent, this has been recognized by the incorporation of
developmental issues into the privatization literature. Thus, for exam-
ple, especially where public services are concerned, privatization is asso-
ciated with a policy of decentralization, often conceived in highly
simplistic terms of lower, local levels of government thereby overcom-
ing the problems of over-centralization much as the market is perceived
to trump the state in service delivery. However, the case for the virtues
of decentralization is unproven, and cannot be addressed in general
independent of specific circumstances.
Collins (2003) finds that evidence of its impact and benefits in terms
of improved efficiency, governance, equity, development and poverty
242 Conclusion
reduction is still fragmentary. Further, it needs to be tied to specificity

both by country and activity (Prud’Homme 2003; Ribot 2003). In
abstract, the pre-conditions for favouring decentralization are highly
demanding – the nature of the service to be delivered should differ
across localities, there should be limited scale economies and externali-
ties, there should be potential for local funding, capacity of local gov-
ernment to deliver, and limited scope for redistribution (Andrews and
Schroeder 2003). Thus, not only is decentralization complex and not
amenable to generalization but the intended effect of shifting power
from or at the expense of the ‘centre’ is far from certain as it can lead to
an extension of power and control to, and through, a local elite with lit-
tle or no genuine commitment to service delivery in general and poverty
alleviation in particular (Crook 2003; Romeo 2003; Smoke 2003). Thus,
in relations between central and local government, it makes sense to
divide services between those that are required to be met (and, accord-
ingly, subject to financial guarantee from the centre); those that are
encouraged but discretionary and at most partially subsidized by the
centre; and those that are not proscribed by the centre but do not attract
its support. Beyond this, the balance between what is delivered and how
it is funded will depend upon specific circumstances.
Similar considerations arise in the context of the discourse of the citi-
zen as consumer that has increasingly entered the privatization litera-
ture. As Gilliatt et al. (2000) observe, there has been a presumption that
this entails an empowerment of the consumer, to dictate as purchasing
client and possibly to be offered choice between providers. In the
context of privatization of public services, especially in developing
countries, this is to place an extremely heavy burden both upon the sim-
ple act of offering, for example, payment in return for a service and upon
the powers, capacities and control of the ‘consumer’. In short, ‘the bal-
ance continues to shift between what it is normal for service managers to
do, and what it is expected consumers should be able to do for them-
selves … Thus the organization rather than the consumer is empowered’
(p. 347). And the idea that ‘transparency’ necessarily follows from decen-
tralization depends upon ensuring that each of its elements is promoted.
As suggested by Stirton and Lodge (2001), these include availability of
information, choice, representation and voice – to which should be
added active engagement and participation in provision itself.
This is part and parcel of the more general issue of the ethos and ideology
surrounding privatization. Nor is the issue of such ethos primarily, let
alone exclusively, a matter of those engaged in providing public serv-
ices. As is apparent from discussion in Chapter 2 and the case studies
Conclusion 243
that follow it, those who consume public services relate to them in
complex ways that cannot be reduced to a simple rational/irrational
dualism. This is most apparent, for example, in the ideologies both of
‘foreign goods are best and are what I want’ and ‘foreigners are the
unwanted beneficiaries of large-scale privatization’. As Fine (2002a)
argues the culture of consumption, including that attached to public
services, is subject to being chaotic, contradictory, conflictual and con-
structed in conformity to the structures, relations and processes by
which provision takes place.
In sum, the continuing and inevitable relationship between public
and private sectors depends upon:
● Accommodation of shifting economic, political and ideological

interests and factors.
● Many aspects of economic policy – pricing, financing, macroeco-
nomic balances, industrialization, poverty alleviation, labour market
conditions, etc.
● Many aspects of social policy – from provision of basic needs through
urbanization, migration, reproduction, gender, ethnicity, and
regional imbalances, etc.
● Many cultural aspects such as indigenization of entrepreneurship and
the ethos of citizenship.
Analytically, these considerations underpin the PSSOP approach. But

where does this leave policy making for the public services, given the
complexity and specificity of these factors in practice? For it is a tall
order for scholarship, let alone policy-making, to comprehend every ele-
ment of a PSSOP before offering strategic proposals. At the very least,
however, it is desirable that the leading elements in provision be identi-
fied and these related as far as possible to overall functioning.
Clearly the policy focus needs to be on the state which dominates
service delivery throughout the region. One way of proceeding is to
establish a number of public service authorities, one in principle for
each service. There is no simple or single model for such an authority.
Each will depend upon country, sector and circumstance and, to a large
extent, needs to define and redefine its own role. Kessides (2003, p. 24),
as previously quoted in Chapter 4, accepts that there is need to take
account of specificity in reforming public service provision and that,
‘The cookie-cutter approach to reform is unlikely to work and would
predictably lead to problems’. This leads him to move to a discussion of
‘regulatory governance in developing countries’, emphasizing the need
244 Conclusion
for ‘coherence, independence, accountability, transparency, predictabil-

ity, and capacity’ (p. 34). But there can be no presumption that
regulatory governance is sufficient once the cookie-cutter has been dis-
carded. At one extreme is the state-owned enterprise or even dedicated
department of government and, at the other, at most a lightly regulated
private, or privatized, industry. It will be incumbent upon the authority
to investigate its associated PSSOP, to highlight its strengths and weak-
nesses across each of its components – both public and private – and
how they interact, to formulate, implement and monitor policy. This is
both to make recommendations with respect to its own role and how
these might best be fulfilled not least in building capacity for research
and policy-making.
Privatization and commercialization policies focus primarily and as a
priority on the financial management of the utility but the case studies
show that addressing these aspects of the system of provision can result
in leaks springing elsewhere. In Namibia for example, commercializa-
tion of the bulk water supplier led to downstream effects which were
un-manageable for some water distributors. And high levels of non-payment
from end-users have threatened the sustainability of the system. In the
past, too little attention was paid to the financial management of serv-
ice delivery but the situation is such that commercial principles have
taken over and social issues have been neglected. Hence, improvements
in profitability which may be achieved by disconnecting those too poor
to pay is seen as a success. This is a result of a narrow focus on one aspect
of the system of provision. Similarly in Ghana, merely increasing the
number of connections to the electricity network was not enough to
increase per capita consumption. In SSA, affordability is a major con-
straint. It is not enough merely to provide services. Policy-makers also
need to understand how they are used.
The essence of much of the reforms undertaken and proposed in the
water and electricity sectors in SSA is to reduce service delivery to a
technical exercise but water and electricity services present a series of
tensions and trade-offs and acknowledging these is a first step to recog-
nizing the distributional and political issues that are involved. It is only
by clarifying rather than obscuring these tensions that an effective
political dialogue can ensue. For example, decentralization can lead to
increased local autonomy and less bureaucratic intervention but it can
create fragmentation and can increase regional inequity as in Namibia.
Increasing prices may improve a utility’s revenue position but will also
make consumers poorer and lead to destructive consumption patterns
as shown in Chapter 5. Similarly a policy of disconnection may be
Conclusion 245
counter-productive if poor consumers slip out of the system. The case

studies indicate that non-payment is a complex issue that cannot be
resolved by cutting services to non-payers if policy objectives go beyond
the financial health of the utility. The issue of financial sustainability
needs to be balanced against providing a service for the poor. A situation
where 20 per cent of connections are inactive due to non-payment is
one that is failing, regardless of the level of profit that the utility is mak-
ing. The reasons for non-payment are many and varied. The threat of
disconnection can make those pay that avoid payment, but severing
water supplies to those that are too poor to pay defeats policies to
increase access. Furthermore, each country and system has its own spe-
cific legal framework and social norms.
A PSSOP approach would examine reasons for non-payment to deter-
mine the best way of improving revenue collection. This has been hap-
pening to some degree in an ad hoc manner, for example with the
supply of rural water in Namibia where the government is experiment-
ing with subsidies for marginalized communities and in the capital of
Tanzania where a small free supply is provided where a case can be
made for inability to pay. It is this kind of specific intervention based on
detailed knowledge that can ensure that some social safety net is
provided.
Sector policies are interrelated. For example agricultural policies and
industrialization have led to greater pressures on urban areas and expan-
sion of unplanned settlements where infrastructure services are poorly
provided with major health and social impacts, particularly in Zambia
and Tanzania where rates of access to safe water supplies in their capital
cities have declined. Policy overlap had a major impact in the late 1990s
where the withdrawal of donor support for infrastructure coincided with
fiscal austerity programmes and little expansion in private sector
finance. A PSSOP approach would create a joined-up government when
it came to the delivery of specific services.
To some extent the case studies suggest that the regulatory bodies are
emerging in SSA to adopt a role similar to that of the PSSOP authority
although their remit is not adequate to cover the entire system of
supply. Rather than carrying out the role of technical price setters, the
regulators in Ghana, Namibia and Zambia6 have evolved to assume the
role of researching and analysing the social impact of policies, looking at
the supply chain beyond the utility to secondary and tertiary users and
considering the social impact of price increases. This is not necessarily
part of the traditional role of the regulator but these in SSA are operating
in a vastly different context from industrialized economies.
246 Conclusion
While privatization may have failed to meet expectations, the policy

has created a major shift in the focus of service delivery to the detriment
of the state. The distinction between public and private has been blurred
as the public sector is tolerated as long as it emulates the private sector.
The reasons for state provision have long been forgotten. But there are
reasons for public rather than private provision. The public sector is
associated with particular qualities such as citizenship, equality, repre-
sentation and justice. The widespread adoption of neo-liberal reforms is
replacing these public service principles with market-driven norms such
as efficiency, productivity and profitability. Such an approach encour-
ages public service managers to pay greater attention to productivity tar-
gets rather than responding to changing needs and expectations of
citizens. Similarly, such reforms are associated with a narrowing of the
composition of service recipients, as the public sector focuses on market-
led growth while neglecting the overall well-being of citizens (Haque
2001). The state has typically been the provider for social services which are
not suitable for the private sector because they are not sufficiently attrac-
tive to investors or where profit-oriented provision would work against the
public interest.
The reform process in SSA has led to a rewriting of norms and processes
in terms of the private sector in a way that bears little relation to reality
in the region. For example, in the case study countries (except Namibia),
the state is now supposed to be a ‘facilitator’ rather than provider of serv-
ices and is described as such even though in the vast majority of cases the
state is the provider and will continue to be so for the foreseeable future.
It is as if by wishing hard enough privatization will become a reality and
displace the state. Similarly the idea of a competitive wholesale electric-
ity market is equally unlikely. Yet, governments are still planning to
unbundle integrated utilities to facilitate private investment with a view
to bringing about competition in generation.
Policy-makers seem to have overlooked the reality that the consumers
involved are amongst the poorest consumers in the world. There has
been considerable emphasis on the concept of ‘willingness to pay’
which has been used to justify charging the poor for services on the
grounds that they already pay a high price to water vendors and/or in
collecting water. But expecting market principles to work in the interests
of the poor in the supply of electricity and water is misguided at best.
There are no ‘markets’ for these services in SSA. There are providers that
operate within the confines of the government-created structures and
the rules can be adapted to suit different parties. Increasingly the frame-
work is being adjusted to meet the need of investors at the expense of
Conclusion 247
the (poorest) consumers. For example, the treatment of risk is couched

in pseudo-scientific terms with the argument that each risk should lie
with the party that is best able to manage it. But the reality is that risk
lies with the party that is least able to resist, that is, the consumer. And
new risks have been invented such as demand risk because of their effect
on private sector revenue. A PSSOP approach to risk would focus on
ways to reduce it rather than to shift the onus of exposure to consumers.
Similarly the focus on full cost recovery is nonsensical where consumers
cannot possibly afford charges that will cover full costs. The fact that
poor people do pay heavily for water does not mean that policies should
be based on charging them more. The extensive degree of policy slip-
page implies that the policies adopted in SSA are not appropriate. A
PSSOP approach, in contrast to the pseudo-neo-liberal measures listed
above would be based on existing systems and developing areas of
strength and learning from similar cases but adapting to local situations.
While local ownership and control of electricity and water in SSA is
essential, it is in part an international issue. These sectors need invest-
ment finance on a scale that cannot possibly be raised just using domes-
tic sources. But donor finance has strings attached and private sector
borrowing is expensive. The efforts going into providing funds for pri-
vate firms to invest in African infrastructure could usefully be directed to
assisting state providers to raise affordable finance. There are, however,
tensions between donor funding and donor control over policy imple-
mentation. Understandably donors are frustrated at little sustainable
improvement after years of financial support. But donors are not
accountable. For most countries in SSA, donor policy has dominated
government policy due to high levels of aid dependency. Infrastructure
privatization has been largely at the behest of donors with external
consultants offering supportive ‘advice’. Many developing country gov-
ernments have also been persuaded of the benefits from PSP owing to
the vast amount of literature produced by the World Bank and associ-
ated donors and consultants, despite the lack of coherent and convinc-
ing rationale. However, there is no means of redress nor any way in
which those advocates of privatization are called to account. The burden
rests with developing country governments, even where (failed) privati-
zation has been a condition set to receive debt relief, as in Tanzania.
The history of privatization in SSA has been about transposing indus-
trialized country policies into a developing country context, and the
results have not been a success. The fact that these policies have been so
difficult to implement is not just indicative of the degree of entrench-
ment of vested interests in but of their irrelevance to the challenges
248 Conclusion
facing African countries. Industrialized countries have had their problems

with such policies, and in Washington, the home of the World Bank,
privatization of the water sector was specifically rejected in favour of
establishing a semi-autonomous public body (Gutierrez 2003). Policy
design needs to start with local success stories based on effective public
provision in SSA and learning from these cases rather than importing
policies with a dubious record elsewhere.
Notes
1. One way of looking at this approach is as a refinement, or dilution, of the idea
that public goods should be provided by the state, thereby creating the means
by which to reallocate some provision to the private sector.
2. See also Fine (2005a).
3. For reasons why there has been limited discussion of public as opposed to
private consumption, see Fine (2002a, 2005b).
4. Further, why is it when examining private enterprise performance, as opposed
to its state regulation, that the World Bank is able to acknowledge the
importance of a range of factors such as finance, technological capabilities
and learning mechanisms, regulation, competition and employment (Biggs
and Srivastava 1996, p. 2), for example?
5. Unfortunately, though, Jouravlev views the regulatory problem in terms of
‘lack of “information parity” (i.e., asymmetric information)’ rather than one of
economic and political power in specific contexts.
6. There was no regulator established in Tanzania at the time of writing.
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Index
access to water supply and sanitation, 192–93, 203–206, 208, 220–21,

89–90, 92–93, 136–37, 163–64, 223–24, 230, 232, 247
193–96, 220 currency devaluation, 111, 125–26,
access to electricity, 89–90, 93–94, 146
128, 155, 210–11, 220
AFREPREN, 36, 50, 93, 96, 105, Dar es Salaam, 7, 72, 104, 112, 119,
113–14, 121 n.6 152, 155, 161, 164, 169–76, 177,
Argentina, 30 n.11, 35, 41–42, 54 n.2, 179
4, 5, 86 n.5 DAWASA, 169, 171, 172, 173, 174
Automatic Tariff Adjustment (ATA), DAWASCO, 174–76
51, 111, 135, 146, 160 decentralization, 7–8, 119, 142–43,
163, 183, 208, 220–21, 230, 233,
Biwater, 97, 100, 169, 173 241–42, 244
Brazil, 26–27, 42, 77 denationalization, 13, 32, 241
Build-Operate-Transfer (BOT), 45, 212 DfID, 48, 69, 79, 87 n.17, 171, 174
Burkina Faso, 83–84, 89, 99–100, 112,
119 economic contraction, 91, 101, 153
economic decline, 91, 130, 182–83
cholera, 148, 164, 180 n.13 Economic Reform Programme (ERP),
commercialization, 7, 91, 95–96, 101, 126–27, 128, 153
109–111, 113, 118, 166, 182, electricity, 1–3, 5, 7–9, 13, 22, 26,
184–87, 189, 192, 194, 197, 199, 29–30, 43, 49–50, 52, 61, 68–69,
201, 203–206, 207 n.15, 223, 229, 71, 86 n.13, 92–94, 96–97,
235, 244 99–103, 105–20, 121 n.6, 122
commercial utilities (CUs), 7, 104, n.26, 125–26, 128–35, 142,
110, 181, 184, 203 145–63, 167–69, 176–77, 179 n.2,
Community Water and Sanitation 183, 191, 208–20, 224, 227,
Agency (CWSA), 142, 143 231–32, 233 n.4, 7, 234 n.27, 235,
competition, 3–4, 6, 9, 18–21, 24–28, 244, 246–47
32, 37–38, 52, 56, 58, 60, 66, electricity distribution, 96–99, 129,
71–72, 74–75, 78–79, 81, 86 n.3, 211–14, 218, 235 n.4, 7
87 n.18, 102, 117, 133, 135, 138, electricity sector, 6–7, 43, 49–50, 68,
142, 156, 162, 169, 177, 180 n.31, 93, 95–96, 101–103, 105,
203, 212, 219, 236, 239–41, 246, 107–109, 111, 113, 116, 120, 121
248 n.4 n.6, 125–26, 128–29, 131–35,
Comprehensive Development 147–49, 155–56, 162–63, 177,
Framework (CDF), 65 208–209, 211–12, 217–19,
Copperbelt province, 184–87, 192, 232–33, 234 n.27, 244
196, 203 empirical literature and research, 3, 5,
cost recovery, 7–9, 54, 84, 104, 18, 31, 33, 37, 39, 53, 101, 105,
106–112, 114–15, 118–19, 115, 119
125–26, 143, 146, 149, 151, 160, Energy and Water Utilities Regulatory
169, 181–82, 184, 187, 189–90, Authority (EWURA), 171, 177
265
266 Index
Energy Commission, 133, 134, 135 investment, 2, 4–6, 9, 26–27, 30–32,

European Investment Bank, 41, 162, 39, 41, 43–49, 61–64, 67–69, 71,
171, 224 79, 81, 86 n.4, 96, 99–100, 106,
exchange rate, 46, 82, 110–11 110, 112, 117, 119, 125, 127, 131,
134, 137, 139, 142, 148, 151, 153,
finance, 2, 5–6, 24, 31–32, 39, 41–42, 155–57, 161–63, 166, 168–71,
44–46, 48, 65, 68–69, 74, 80, 86 173, 177–78, 182–83, 185, 189,
n.3, 87 n.19, 106, 111–13, 119, 192–93, 203, 205–206, 208, 211,
131–34, 138, 140, 142, 145, 150 219–20, 223, 232, 234 n.17,
n.14, 152, 154, 160–62, 166, 168, 246–47
178–79, 186, 189, 206, 212, 215,
218–19, 224, 228, 230–31, 240, Kenya, 94, 96, 99, 100, 111,
245, 247, 248 n.4 112, 117
financial management, 2, 6, 76, 92, keynesianism, 14, 16–17
95, 163, 196, 229, 244
financial support, 68, 91, 112, 168–70, labour market, 15–16, 24, 243
247
financing, 43, 45–46, 79, 83, 87 n.19, management contracts, 5, 44, 92, 97,
103–104, 111–13, 127, 139, 99–100, 112, 118, 134, 184, 212,
165–66, 170, 207 n.15, 239, 243 235
Manila water concession, 40
generation and transmission, 129, Millennium Development Goals
158, 161, 211–12, 216 (MDGs), 9, 43, 112, 117, 137, 193,
Ghana, 6, 35, 50, 92, 99–105, 196, 204, 210
107–109, 111–13, 118, 120, Multilateral Investment Guarantee
125–41, 142, 144–49, 180 n.22, Agency (MIGA), 67–69
244–45
Ghana Water Company Limited Namibia, 6–8, 90, 92, 99, 101,
(GWCL), 139, 140–42 103–104, 107–108, 110, 111–15,
Global Partnership for OBA (GPOBA), 119, 208–211, 213, 215, 217,
69 219–21, 223, 225, 227, 229–32,
234 n.21, 244–46
HIPC initiative, 6, 127, 130, National Coalition Against the
134, 170 Privatization (NCAP) of Water,
139, 141
ideology, 1, 3, 14, 16, 22, 56, 73, National Energy Policy, Tanzania,
86 n.7, 239, 242 155–56
Independent Power Producers (IPPs), National Health Service, 21
45, 99, 103, 132, 135, 158, 160, neoclassical economic theory, 17–18
211, 212 neo-liberalism, 13–14, 30 n.1, 55,
industrial economics, 18–19 235–36, 238
industrialized countries, 9, 33, 36–37, new development economics, 55
49, 103, 247 New Public (Financial) Management
informal settlements, 114, 119, 181, (NP(F)M), 76
222, 224, 227, 229–30 New Public Management (NPM), 84
infrastructure investment, 43–48, 67, Nordic Development Fund, 140
80–81
International Finance Corporation Operations Evaluation Department
(IFC), 41, 67–69, 162 (OED), 49–50
Index 267
Output-Based Aid (OBA), 69–70 regulator, 6, 18, 25–27, 45, 49, 51, 54,
ownership, 3–4, 13–17, 19–21, 24–25, 76, 102–103, 107–108, 111, 117,
27–28, 30–32, 34–42, 54–56, 58, 126, 130, 132–33, 136, 141, 145,
60, 62, 65, 67, 73–75, 77, 80–81, 156, 176, 181–82, 185, 187,
83, 88, 105, 115, 119, 138, 142, 189–90, 196, 203–204, 207 n.22,
144, 149, 153, 169, 173, 179, 209, 212, 215, 236, 240, 245–46, 248
219, 222, 236, 236, 239, 241, 247 n.6
rent-seeking, 17, 20
parastatals, 57–59, 100, 107, 127, 151,
153–54, 209–10, 214, 221, 231, Sector Wide Approach (SWAP), 8–9,
233 n.1 145, 166, 231
population growth, 93, 152, Senegal, 97, 105–106, 108, 115, 116,
154, 183 119
post-war boom, 14, 16–17 single-buyer model, 96, 102, 208,
post-Washington Consensus, 55–56, 211–12
65–66, 85 social capital, 23
poverty alleviation, 3, 8, 45, 47, 55, social issues, 2, 92, 113, 118, 126, 147,
71, 242–43 240, 244
Poverty and Social Impact Assessment South Africa, 73, 83, 97, 98, 109, 114,
(PSIA), 147 140, 147, 156–57, 208, 212–13,
Poverty Reduction Strategy Papers 218, 219
(PRSPs), 69, 71 state-owned enterprises (SOE), 35, 38,
Power Purchase Agreement (PPA), 40, 58, 62–63, 65, 127, 210
45, 46, 103, 129, 135, 158, 160, state ownership, 77, 81, 88, 105, 153
162–3 structure-conduct-performance (SCP),
power sector reform, 27, 113, 131, 19
135 synthesis, 3–4, 16, 18–21, 23–25,
power shortages, 100, 108, 131 27–29, 32–33, 36, 56–57, 66, 75,
principal–agent theory, 18, 20, 26, 27, 78, 236
74 system of provision, 238–39, 244
Private Finance Initiative, 69
Private Sector Development (PSD), 50, TANESCO, 102, 154–55, 156–60,
63, 65 161–62, 178
privatization contracts, 97–98 Tanzania, 6–7, 59, 90–92, 97, 99,
property rights, 17, 21, 24, 27, 28, 74 101–107, 109, 111–12, 115–16,
public choice theory, 17, 23, 28, 74 120, 151–55, 159–65, 169,
public utilities, 32, 48, 62, 71–73, 75, 171–76, 177–80, 196, 245, 247,
83–84, 107, 128, 133, 205 248 n.6
Public Utilities Regulatory tariffs, 7, 46, 50, 83, 95, 102–103, 109,
Commission (PURC), 107–108, 111, 114, 131, 142–43, 145–47,
109, 128, 133, 136, 141, 156, 160, 168, 176, 177, 182, 187,
145–48 189–90, 193, 196–97, 199–200,
202–203, 205, 211, 214, 216, 219,
regulation, 3–4, 20–21, 24–32, 38, 45, 221–22
48–53, 56, 61, 67, 71, 74–78, telecommunications, 15, 38, 43, 59,
82–83, 86, 91, 95, 102, 107–108, 61, 63–64, 71, 73, 78, 86 n.10,
133, 139, 145, 151, 156, 162, 167, 241
176, 182, 187, 189, 203, 212, Thatcher, 1, 13, 73
217–18, 236, 240–41, 248 n.4 transition economies, 33, 38, 52
268 Index
Uganda, 73, 83, 93, 94, 96, 97, 104, Windhoek City Council, 8, 217–18,
108, 113, 114, 174 225, 231
Unaccounted For Water (UFW), 116, World Bank, 1–5, 7–8, 23, 30 n.3,
168, 188, 192, 225 36, 40–41, 43–44, 46, 48–53,
unemployment, 15, 25, 72, 112, 114, 55–59, 61, 63–69, 73, 76–81,
226, 230 84–88, 91–92, 94–95, 98,
urban water, 6, 7, 99, 104–106, 111–12, 100–101, 106, 112, 116, 118, 120,
125, 136, 138–41, 142, 148–49, 126–27, 129–30, 131–32, 134–36,
167, 168–69, 171, 181, 183, 185, 139–40, 148–49, 152–53, 155,
187, 189, 191, 193, 195, 197, 199, 160–61, 167, 170–73, 177, 179,
201, 203, 205, 207 n.18, 22 182, 186, 191, 193, 195–96, 206
n.3, 8, 207 n.14, 15, 21, 208,
Washington Consensus, 5, 14, 30 n.2, 209, 219, 232, 235, 237–38, 247,
55–57, 65, 85 n.1, 235 248 n.4
water sector, 6–7, 37, 43–44, 49–50, 53, World Development Report (WDR),
68, 80, 96, 106–107, 112, 116, 118, 58, 66, 238
137, 139–40, 145, 147–49, 163,
166–67, 178, 183, 192, 194, 205, Zambia, 6–7, 88, 90, 92, 100–101,
208–209, 220–21, 226, 228, 233 103–104, 107–108, 110, 112, 114,
welfare, 15, 18, 38, 59, 63, 73, 77, 79, 119, 181–87, 189–97, 199–207,
130, 227, 237–38 213, 216, 245

Privatization and Alterrnative Public Sector Reform in Sub-Saharan Africa

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Privatization and Alterrnative Public Sector Reform in Sub-Saharan Africa

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Privatization and Alternative Public Sector

Reform in Sub-Saharan Africa

List of Tables and Figure viii

1 Introduction and Overview 1

5 Water and Electricity in Sub-Saharan Africa 88

Part II Case Studies

6 Ghana: Privatization – A Work in Progress 125

7 Tanzania: From Nationalization to Privatization –

7.4 Water and sanitation 163

8 Zambia: The Commercialization of Urban Water

9 Namibia: Lessons from Commercialization 208

10 Conclusion and Alternatives 235

4.1 World Bank Group support for the electric

9.1 Nampower prices compared with CPI 217

6.1 Per Capita GDP (Constant 1995 US$) 127

Rudolf Nsorwine Amenga-Etego is Executive Director of the Foundation

and poverty: The distributional impact of utility privatisation’ Annals of

ATA Automatic Tariff Adjustment

MAWRD Ministry of Agriculture, Water and Rural Development

UWSA Urban Water and Sewerage Authority (Tanzania)

BPC Botswana Power Corporation

ONEA Office National de l’Eau et de l’Assainissement (Burkina

We are extremely grateful for the excellent research assistance provided

Whither the Privatization

The United Nations Development Programme (UNDP) has supported the

* Terry McKinley is Director, International Poverty Centre, Brasilia, UNDP.

The ultimate test in judging each modality is whether it is the most

to come from general public revenue, not from the commercialization

to the ills of state provision with little theoretical or empirical support.

ownership. It is not even a simple exercise to isolate different forms of

withdraw from provision in deference to the private sector, to requiring

of (preparation for) privatization has been erroneously based on an

councils, known as local authorities. While some of these, most notably

more closely associated with coordination of donors to a given policy

evidence, countries have been encouraged, or bribed through donor

Half a century ago, economists were quick to favor government

Indeed, in an era of decolonization, the issue was posed of whether

resources, would be (re)nationalized, possibly without compensation

2.2 Ownership and theory as such

Whatever its impact in the real world, privatization came as a great

Recent theoretical research suggests that market conduct depends in

private firms to promote regulation and to resist corruption and perverse

nationalization took place in the United Kingdom after the Second

The current ethical challenge to the public service emanates basi-

further decline in its legitimacy, because there is no reason to believe

In this respect, there is a striking paradox in the World Bank’s strong

Similarly, Besley and Ghatak (2003, p. 247) conclude that, ‘ownership

2.3 Lack of regulatory capture – analytically

Fourth, the process of privatization itself will be eased and initial

energy companies to design and implement energy efficiency and

It is imperative that such benefits should accrue, but it is to stretch

Under conditions of perfect competition, perfect information and

developments in public choice theory have concentrated on the

wide-ranging are the variables to be incorporated. Theory can be exact

2.4 Concluding remarks

Once put into practice, the policy of privatization reveals itself as

3.2 The impact of ownership

On its own terms, and at an early stage, the mainstream ‘synthesis’

review studies of privatization in 38 countries including 16 transition

We know that privatization ‘works’ in the sense that divested firms

Shirley and Walsh (2001) examine 52 studies that empirically assess

United Kingdom, Chile, Malaysia, Mexico and Argentina. The fourth

These conclusions have to be extrapolated with caution to other

Put more strongly, privatization in one (rich) country as opposed to