Welcome back. In this fifth session, I'll examine a different kind of policy intervention. Instead of thinking about policy interventions that existing institutions can adopt and implement, we will consider a more radical structural change. Maybe the problem in the water and sanitation sector is the existing institution itself and the solution is to change that. This is the argument that many proponents of privatization have made. Involving the private sector in the delivery of water and sanitation services is hugely controversial and you may already have strong feelings about this subject. In the ancient instincts video, I tried to identify some of the reasons why both privatization and water pricing elicits such strong emotions. I encourage you to carefully observe your emotional responses to the materials on privatization that we will cover in the videos for this fifth session. Think about the origin of your feelings and the extent to which they're based on your study of the empirical evidence about how well privatization actually works in practice. Please share your opinions on the discussion forums for this session. Deng Xiaoping, the leader of China from 1978 to 1992, famously said, it doesn't matter whether a cat is white or black, as long as it catches mice. Some people might make the same argument about private or public management of water infrastructure. It doesn't matter whether water services are delivered by the public or the private, as long as water is reasonably priced, safe to drink, and available 24/7. But this argument overlooks the fact that people do have strong feelings, or ancient instincts, about water. Some communities may be willing to sacrifice some of the attributes of service to maintain local control in public management. But other communities may not. Water problems are mostly local and require solutions that reflect local political and technical realities. This may seem obvious, but too often people want to make sweeping generalizations about policy interventions like privatization. I think you should be open to the idea that involving the private sector might work in some local situations. But it might not work in other locations due to differences in politics, history and culture, as well as differences in the local water resources situation itself. If that is true, then the challenge is to figure out whether privatization might make sense in a particular time and place. In other words, at what point in a city's water and sanitation development path might privatization be an attractive policy alternative? Thomas Jefferson, the third President of the United States, said that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical. Suppose we accept the notion that the attractiveness of privatization depends on timing and sequencing. In this case, it is possible that a shift from public management to private management might yield benefits at one point in time. And conversely, a shift from private back to public might make sense at a different point in time. In other words, a little rebellion in the water sector now and then may be a good thing. This raises the question of how reversible privatization is. And this depends on the local political context, but we can certainly observe shifts from public to private management of water assets and also from private back to public. So like other policy intervention, privatization is not irreversible. My friend and colleague Professor Wu Shun uses the analogy of swimming with two sharks to describe the challenge of finding the right balance between the public and private sectors. His point is that there are risks associated with relying too heavily on either public or private sector management. Neither is a panacea, either shark can bite you. For example, we know that corruption can happen in the water and sanitation sector under public management of water infrastructure. Professor Wu argues that both the public and private sector require checks and balances. What might such checks and balances look like? If a private sector operator is engaged in the delivery of water services, a regulator's typically needed to represent the public's interests. We will discuss regulation in later videos. If a water system is publicly owned and managed, the challenge is to design an institutional arrangement in which citizens' voices can be heard. Managers of a water utility must be incentivized to listen and act on the public's wishes. You will recall that in the fourth session on information treatments, I mentioned the water utility that supplies my own household in Chapel Hill, North Carolina, OWASA. OWASA's executive director reports to a governing board of local citizens. Local citizens run for election to this board. And this board is responsible for hiring and firing the executive director of the utility. This is one way to make a water utility responsive to the public. I wanted to tell you a personal story that may help you understand how the push to involve the private sector in the delivery of water services in developing countries began about 25 years ago. In the late 1980s, I worked in the infrastructure department at the World Bank in Washington DC. Jon Brisco and I designed and directed a large multicountry research project on household water demand for improved water services in developing countries. And I got to know many of the senior water professionals at the bank, who had spent their careers making loans to governments to assist large publicly owned water utilities in low income countries. Many have participated in water and sanitation sector loaned one to city x and then loaned number two to city x and then loaned number three to city x. Each loan had conditionalities designed to improve the performance of the water utility. Some loans had a conditionality that water utility increased tariffs. Some had a conditionality to reduce the size of the labor force employed by the water utility in order to improve efficiency and reduce costs. And some loans provided technical assistance for improving the capacity of staff. Others had twinning arrangements so that water utility staff could go to the UK or France and work with staff there to see how modern well run utilities worked. Some of these professionals at the World Bank had spent most of their careers working on a sequence of such loans. They knew that water utilities were not getting better, and that the conditionalities were not working. John Maynard Keynes is attributed with the saying, when the facts change, I change my mind. And that's what happened at the World Bank. Water professionals changed their minds. They had to face the fact that what they'd been doing wasn't working. Initially, they believed that public management of water utilities was the best institution arrangement for the delivery of improved water services. But then they changed their minds. They were frustrated and they wanted to try a new approach, a different policy intervention. They didn't have to look far for an alternative. The neoliberal consensus on the new public management was all the rage in Washington at the time. Both the UK and France provided concrete, although different models for involving the private sector in the delivery of water and sanitation services. And the World Bank and the International Finance Corporation staff were eager to try out these models in developing countries, especially the French model. I have to confess that I didn't see this revolution coming. In fact, at the time, I met with IFC staff who were planning to take the French model over to Latin America. The IFC staff were not water professionals. They wanted to talk to me about household demand for improved water services and willingness to pay higher tariffs, the focus of much of my research. But I couldn't really imagine private investors putting at risk the large capital investments needed, and that the IFC staff was expecting. Anyway, I was blindsided by the breadth and power, the push to privatize water utilities in developing countries. Even though I was right there when it began. In the next video, I will look at the different deal structures that are used to engage the private sector in the delivery of water and sanitation services. And some of the strengths and weaknesses of each. But it is important to understand that there are several different kinds of contracts, and thus different ways of deploying private sector expertise. In a particular time and place, you might like one of these but not the others.