[MUSIC] I'm in Singapore today at the Lee Kuan Yew School of Public Policy at the National University of Singapore. And our guest is Dr Wu Xun an associate professor here at the LKY School and the director of the Institute of Water Policy. Professor Wu is the coauthor, with Robby Perry, at the Asian Development Bank, of a new paper entitled, Public Private Partnerships In Water And Sanitation In India, Lessons From China. And he's agreed to talk to us today about his paper. So, Xun, it's great to be here, thank you very much. >> Thank you. >> Thank you for agreeing to talk to us. Maybe we can start and you can tell us about the India story and why has India been so reluctant to involve private sector expertise in its water and sanitation sector? >> There are several reasons why the Indian government has been reluctant, in more development in PPP in water. The first reason is that there's generally a public perception that water, as a fundamental public good, is unsuited for private sector involvement. This has been widely held in Indian among the NGO, and general public, and so forth. And so if you look in the past, there are a few failed attempt in the PVP projects, proposed projects. >> You mean in India, or are you talking about the global experience? >> In India were abandoned because this concern. So that's the kind of one reason. The second reason is that the public sectors are not keen in bidding PPP contract. There are, perhaps, many reasons for that, too. One of the reason is that the price Is generally pretty low across different cities in India. And the second reason is because of the weaknesses in a governments magnets and such as the right capacity as well as the dispute resolution mechanisms are, in general, quite weak. So this actually create a lot of risk for private sectors to be involved in water sectors, right? And the third reason, I think, also quite important, is that if you look at current experiences, the existing PPP in India water sector have often time linked with substantial public funding, right? So this is quite ironic because government want to bring in private sector in to reduce the financing gap. But to the public sector operator, what they are more interested is the availability of public financing for such project. >> So, how that does work? You mean, they keep the prices low in the PPPs, and the government provides money directly to the private operator to fill the gap? >> Mm-hm, right, that's the analyzing of their approach. But largely there has not been able a to get enough private sector players interested. >> What about a public sector, I mean private sector players, from other countries? I mean, like Manila Water, or somebody would they be interested, you think, in bidding on- >> Well I think they will be as reluctant as domestic private sectors in India, because I think if a foreign company will come in to a new country, they potentially they will be confronted with other set of uncertainties, such as unfamiliarity with the political systems and the political structure, and so forth. So I think that the foreign players, the foreign investor, will be very cautious as well. >> Can we switch to China? >> Okay. >> [LAUGH] You tell a story in your paper of China being very persistent in overcoming failure, the involving private sector operators. How do you explain that China was so persistent? Why didn't they sort of back off from their initial failures? >> Okay, we have to first remember that China is a country where one party's rule countries for a long time. It's a essentially one party system. So that in the Chinese government they can afford to learn from mistake and to stay with their chosen policy. This may not happen in other political environment, which is highly contested because the incumbent may only have one shot and if mistakes is made, they have to move on. But this is not necessary to be the cases in China. So the second reason is that within China, there's no fundamental resistances to private sector involvement in water, right? So policymakers believe that the initial failures in engaging private sector are mainly due to technical reason which can be fixed with technical solutions. And the third reason is that the ability to attract foreign direct investment, or private sector investment, is often a key performance indicator for local government official looking for promotion and a career advancement. >> Interesting, yeah. Let me ask you, one of the things that I remember reading in the paper was how initially the private firms from abroad came into China but they were gradually replaced by the local Chinese firms. I guess two questions here. What did the local Chinese firms, I mean, what did they learn from this? And who were they, I mean, what were they doing before they moved into the municipal water sector? >> Well, I'm afraid that there aren't too much lesson they learn from the foreign sort of partners. And the reasoning is that the water sector, unlike many other industries, the innovations in financing and operating the businesses actually quite limited, right? And, actually, I know of some anecdotes where the local partner were quite surprised to learn that little was changed after foreign partner took over the operation, because they expect to see big changes, but in fact that little changes happened, right? So I think that's actually, in a way, perhaps inspired the confidence of the local company to get into these businesses. If I have to mention what lesson perhaps from their experiences in learning from the foreign partner is perhaps that water businesses can be lucrative because of its steady demand as well as the [CROSSTALK]- >> Good cash flow. >> Right. >> So you think that the local Chinese firms have been making good money? And they've been a profitable? >> Yeah, yeah, I think that they are in it for making money, there's no doubt about it. There are three type of local companies now actively involved in water sector in China. One type is the investment company, affiliate with municipal government. Because economic growth, a lot of municipal government have large influx of taxes and the power of money, and they actually are actively looking for areas to invest. So that is a first type of company with lot of resources, lot of investment. The second type of the privatized the water utility that used to work with Foreign partners, right? And for the other group of companies there in Shenzhen in Beijing. So after the experience of working with foreign partners, they actually now become more aggressive in expanding their operations in other municipalities. The third type of company are dedicated operators. So they don't have investment of their own. But, typically, they team with investment companies I mentioned earlier to bid various projects. So there also number of firm quite successful to be dedicate operators. >> So one of the points you make in your paper is the importance of separating out the tariff policy from the ownership of the management and ownership of the water utility. How did China do that? I mean, how did they separate out this issue? Achieve, really, achieve the tariff increases. >> If you look at India experiences, as I mentioned, a lot of proposed PPP project were abandoned because of the public resistance. And the main reason for such resistance is actually the linkage between the price increased and the private sector involvement. There is generally a public perception that there's a causal relationship between private sector involvement and the price increase. That's actually is main obstacles for India and also in many other developing countries involving private sector in water and sanitation service. And so if you look at the China's experiences, China had been able to carry out tariff reform without the involvement of private sectors. The major reform on tariff actually were implemented before the large influx of the investment from the private sector. >> So the private investors haven't been perceive as the ones responsible for the tariff increases. >> Right, yeah, so politically, it is actually make the tariff reform more acceptable if it's not linked with private sector involvement, because the tariff form should have its own rationale and logic. Tariff form can be conducted due to the requirement for cost recovery or the desire to improve economic efficiencies. There's no need to connect the tariff form directly with the ownership of the utility. >> Is there a lesson there for India? What kind of advice would you have for Indian water leaders on how to do this? >> Yeah, I think in many developed country, including India, I think one of the goal of engaging private sector is that after the private sector is brought in, then the government can push the tariff reform. So basically the government expect that something that they are not unwilling to push, such as tariff increase, they will expect the private sector to push this agenda for them. I think logically this is wishful thinking. Government should actually carry out the tariff reform before they are looking for investors from public sectors. >> Another point you make in the paper is that China was slow to develop its regulatory capacity. Could you tell us something about this? I mean, why was it slow and what lessons, or what advice would you have for China now to build up each laboratory capacity? >> Mm-hm, so China used to be a planning economy, right? So that the policy maker in China quite comfortable with managing state-owned enterprises. They don't have experiences actually in regulating industries with the presence of a natural monopoly, such as waters. So this is in largely reflected the inexperiences in regulation, right? On other hand, they also have a unrealistic expectation of what market and the competition can bring. So there's two factors, lack of experience in regulation and unrealistic expectation about market, actually leads to systematic neglectance of regulations in China. But I think that China have to learn from experiences of other country, because in order to sustain the development in industries with natural monopoly, the relative capacities is essential. There's no time for China actually to delay on this development. >> Well, thank you so much, it's been really interesting hearing your story. Do you have any other advice for our students about things to read in the water privatization area, besides your paper? We're already reading your paper. What else would you recommend to understand this discourse over privatization? >> Yeah, there are many materials on this topic because of high level of interest. Two comes to mind right now is Karen Baker's books on privatizing water. That's actually provide a very comprehensive discussion about different viewpoint in private sector involvement in water. Another very interesting material is a World Bank publication, Public Private Partnership in Water, written by Philip Marine. This also provide an overview of recent development in PPPs in water sectors. >> Great, well, thank you so much. It's a pleasure to be here today. >> Thank you. [MUSIC]
