In this video, I want to discuss with you a paper that compares the experiences of India and China in involving private operators in the water and sanitation sector. From my perspective, this is an especially interesting topic in the global debate over water privatization. India and China are the world's two most populous countries. And since 1990s, both have experienced dramatic increases in economic growth that has lifted hundreds of millions of people out of poverty. Both are experiencing rapid urbanization, but have taken very different paths and drawn very different conclusions about the benefits of water privatization. The authors of this paper are Professor Wu Xun at the Lee Kuan Yew School of Public Policy at the National University of Singapore and Ravi Peri of the Asian Development Bank. The paper is entitled, Public-Private Partnerships in Water and Sanitation in India: Lessons from China. Public-private partnerships are often referred to as PPPs for shorthand. The paper is available in your readings. I also conducted an interview with Professor Wu to discuss the findings in this paper in more detail, so you can hear directly from him about this research in a separate video. To begin our discussion, let's look at the urban water supply conditions in India and China. There's a stark difference. In Chinese cities, almost everyone has a piped water connection. In India, only about half of urban households do. In Chinese cities, most households have piped water 24/7. In India households lucky enough to have a piped connection typically receive water only a few hours a day. Things are even worse on the Indian cities on the wastewater side than they are for water supply. In 2013, 4,861 out of 5,161 Indian cities did not have even a partial sewer network, and only 21% of the wastewater collected received wastewater treatment. In China, households pay an average of about $0.50 US per cubic meter for piped water service. In India, households with pipe connections pay about one-tenth this much, about $0.05 US per cubic meter. And in China, the private sector is very active in the water supply sector. In fact, from 2001 to 2012, Wu and Peri report that there were 237 private sector projects in the water and sanitation sector in China, 40% of the world's total. But in India, there were very few public-private partnerships in the water and sanitation sector. According to Wu and Perri, between 1990 and 2012, there were 725 infrastructure public-private partnerships in India, but only 13 of these were in the water and sanitation sector. And these 13 consisted of less than 1% of the total public-private partnership investments. Of course, we cannot conclude from this simple comparison that urban water supply conditions in China and India are better because the private sector is involved. We have to dig deeper and try to see what's happening, and that's what Wu and Peri do in their paper. In his seminal work, Exit, Voice and Loyalty, the economist Albert Hirschman described two main responses to conflict. Option one is to exit, to withdraw. This has been India's strategy with respect to water privatization. Water policy makers in India observed numerous highly publicized water privatization failures. For example, in Buenos Aires, Argentina, in El Alto in Bolivia, and in Jakarta, Indonesia. Many Indian water leaders drew the conclusion that public-private partnerships had failed miserably and that water was a public good that should not be managed by the private sector. When India did experiment with a few public-private partnerships in the water sector, private sector operators were typically paid directly by the public sector, not from revenues collected from customers. China took option two. Hirschman described option two as voice, meaning to stay engaged and be heard. China did, in fact, experience failure with its first efforts to involve private firms in the municipal water supply sector. Between 1994 and the year 2000, 12 out of 32 public-private partnership projects were terminated in China, but China didn't quit or exit. In the late 1990s, China began looking for foreign capital to increase investments in municipal water supply infrastructure. Water tariffs were liberalized for projects that attracted foreign capital. In 1998, a new policy called Urban Water Price Regulation was issued that allowed local governments to set water tariffs to guarantee foreign investors a net return of 8 to 10%. This policy attracted foreign investors, mostly German and French companies, but the guaranteed rate of return was understandably controversial in China. In 2002, the General Office of the State Counsel made the guaranteed return illegal and foreign investors left. Foreign involvement in public-private partnerships in China decreased from 100% in the late 1990s to about 40% in 2012. But before private firms left, the Chinese learned key lessons about managing urban water infrastructure. And as foreign private investors left, Chinese private investors entered the municipal water supply business with knowledge and skills that they'd learned from the foreign experts. This figure is from Wu and Peri's paper and is based on data from the public-private infrastructure facility database. It shows the growth of public-private partnership projects in the water and sanitation sector in China and the rest of the world. After 2000, there was a steady increase in the involvement of private domestic Chinese companies. This was possible in part because there was still strong support from the central Chinese government to raise water tariffs in order to finance these capital intensive investments. From 2004 to 2006, some cities saw a three to four-fold increase in average water prices, but these prices were still below full cost recovery. Wu and Peri argue that one of the key advantages that domestic companies had was their ability to navigate political risks. In summary, China learned from these mistakes and continued to engage the private sector until it made public-private partnerships work. Very few public-private partnership projects have been cancelled recently. By 2008, 38% of China's urban population was served by private water companies and the percentage has grown since then. In their paper, Wu and Peri draw three lessons from the China experience that they believe are relevant for India. Wu and Peri's first lesson is that water tariffs have to increase for public-private partnerships to work. Of course, it is possible that government could pay private operators directly for their services and keep prices to customers low. This has been the Indian approach. But direct government subsidies are politically risky for private operators. They'd prefer to put their hands on the revenues, and I can't blame them. Higher prices also reduce water use and lower the need for capital investments and O&M costs. This is particularly attractive to private operators who may be held responsible for water shortages and be required to finance new capital investments to meet rising water demands. Wu and Peri's second lesson from the Chinese experience is that the national government has an important role to play. There must be a strong commitment from national government to make public-private partnerships work. The Asian Development Bank was heavily involved in the water sector reform in China and provided both technical and financial support to the national government. In India, the Asian Development Bank was much less involved, because the Indian government was not very interested in their policy advice. Some Indian policy makers are still promising free water services to households. Wu and Peri's third lesson from the Chinese experience is that credible regulatory mechanisms must be established. Civil society must be confident that a trusted party is looking after their interest and preventing private operators from extracting monopoly rents. In China, the general public has been increasingly critical of water tariff increase. Wu and Peri argue that this regulatory capacity is not currently present in China, and it is a costly mistake for China to neglect the establishment of sound regulatory mechanisms. They believe that regulation needs to be improved to provide credibility to further reform efforts. Transparent benchmarking of utilities by the regulator may help. We will return to this topic of regulation later in the course. In summary, as we've seen in this course, one should anticipate there will be powerful ancient instincts unleashed in civil society against private sector involvement in the water supply sector. That is an important reason why it's essential to separate tariff and cost recovery issues from decisions to involve the private sector. Low water prices need to increase to promote cost recovery and efficient water use, regardless of the choice between public or private management. The China experience shows that strong support and oversight from the government is needed to overcome such political opposition, and to adapt and learn to make public-private partnerships work when obstacles arrive. The China experience also shows that effectively involving the private sector in the delivery of water and sanitation services takes long-term commitment. China initially made mistakes, but the government had the perseverance to fix the problems.
