Institutions, Politics, and Contracts : The Attempt to Privatize the Water and Sanitation Utility of Lima, Peru
The main reason Lima failed to implement a concession was geographical: the scarcity of water sources meant high marginal costs, partly for pumping water from deep wells and building adequate storage for dry periods. High extraction costs were comp...
| Main Authors: | , , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/11/717450/institutions-politics-contracts-attempt-privatize-water-sanitation-utility-lima-peru http://hdl.handle.net/10986/19761 |
| Summary: | The main reason Lima failed to implement
a concession was geographical: the scarcity of water sources
meant high marginal costs, partly for pumping water from
deep wells and building adequate storage for dry periods.
High extraction costs were compounded by years of neglect;
much of the system needed to be replaced. Attracting private
investors meant setting prices high enough to recover these
high costs and provide a reasonable return on capital. But
the government had subsidized costs for years, so a
concession would have required a sharp and sudden price
increase to cover marginal costs. Moreover, any
forward-looking investor would want to slow the pace of
future investment by curbing demand through more effective
(meter-based) bill collection. And cross-subsidies, which
reduce the incentive to conserve water, would also have to
be reduced. The ultimate cause of the concession's
failure was geographical but the proximate cause was
political. Privatizing a utility is politically tricky if it
involves higher prices and the controversial ceding of
monopoly powers to private parties, especially foreigners.
Private participation in water is further hampered by the
social importance of water and by the lack of international
experience and the technical difficulties in designing
privatization reform in the sector. At the same time, water
offers fewer benefits than other utlities--few revenues to
reward supporters or compensate losers-- and the price
increases likely in Peru would especially hurt the urban
poor, who were important to the president's support
base. After a favorable start, the political equation
shifted against privatization. The concession's failure
was costly, in access goals not fully met, in adverse
effects on health, and in the failure to curb consumption
through metering--and hence in continued depletion of the
aquifer and its increasing contamination by ocean salt.
Peru's institutional weaknesses, especially its lack of
an autonomous judiciary, might have limited how much could
have been achieved. But considering the net gains from
private operation in the much weaker nstitutional settings
in Africa, Lima would probably have been better off with a concession. |
|---|