Interview with Menahem Libhaber
Principal Water and Sanitary Engineer for The World Bank
Finance, Private Sector and Infrastructure Department
Latin America and the Caribbean Region
Interview by CBC Radio's Bob Carty | Oct. 9, 2002

EXPLAIN THE WORLD BANK'S HISTORY WITH PRIVATE SECTOR PARTICIPATION IN THE WATER SECTOR.

We invested a lot of efforts to improve these public utilities. Ten years ago the word privatization was not even known at the Bank or rarely used. But you get to a point where you see this thing doesn't work. Democracy is good thing - but elections every two to three years, a new mayor comes in, he replaces the entire utility management because that is his power, he must reward his friends, and the new management does not have clue what is going on. And that is the reason at a certain point the only way to do it is the private sector because the private sector is not replaced very three years. They have a long-term contract and the people they bring in are professional.

I have found in my experience that with ailing public utilities - it is impossible to improve them. You can put in all the money. The only way to get an ailing utility to work, to transform it, is through the private sector. It is better handled by a private company because they have this business approach.

When you have the private sector, they have a contract and they have targets to meet. Public companies don't have targets top meet. And what can you do -can you fire them? No. But the private sector companies have to achieve targets. If they have to do 100,000 connections per year and most of the connections in the rich areas are already done, they do it for the poor. Today we even have specific targets for the poor.

WHERE DOES PRIVATE SECTOR INVOLVEMENT WORK AND WHERE DOESN'T IT?

If you have an ailing public utility that has been dysfunctional for many years you basically cannot improve this company while maintaining it in the public domain. You need to bring the private sector to help you with this. You need political dedication, it has to come from the political authorities that they are going to support this thing to the end. And you need a good contract. You need the process to be transparent, the bidding process well prepared, and a good contract. Because the private sector's aim is to make money. So if the contract is balanced -in favor of the public but also giving a reasonable profit to the private sector - the thing can work.

I can tell you that sometimes companies that bid for a water contract have other things in mind. Sometimes it's getting into the business -getting in with low tariffs or low commitments and then when we are in, we will renegotiate. The public sector has to be aware of that.

IS THERE A GAME HERE?

In these kinds of cities where you have huge backlogs in infrastructure -even thinking about tariff reduction seems to me unreasonable. You have to increase tariffs to get better service. Yes, sometimes there is a game to get into the business. It's a bidding process, and they have leverage once they are in.

I must tell you that a lot of the processes that failed were non-compliance of the public sector.

WE'VE SEEN A NUMBER OF CASES WHERE TARIFFS WERE INCREASED JUST PRIOR TO THE PRIVATIZATION.

I know that if you have a city with 50 per cent water coverage and 20 per cent sewage coverage, in order to give water to water to these people you need large investments. Where does this investment come from? There are two sources: tariffs and government subsidies. These are the sources. So, it's irrational in a city that has such low coverage rates and low tariffs to expect that you can lower the tariffs and comply with the objectives of giving better service. It doesn't work.

But I think that this approach, of prior to the entrance of the private sector increasing the tariffs - the public doesn't like to know that the private sector increases the tariff. A public increase is okay, private no.

WORLD BANK SUPPORT FOR WATER PRIVATIZATION IN THE THIRD WORLD LOOKS LIKE SUBSIDIES TO LARGE MULTINATIONAL CORPORATIONS.

Why would you say the corporations? I would say it is subsidizing the poor. Look, we can raise the tariffs only by a socially acceptable amount - three to four per cent of income. If you get to more than that, they will not pay. Charging 10-15 per cent of income will not work. Now, if you make the calculation that with this tariff what can any operate invest? You see that you can only provide investment for 20 per cent or 50 per cent of what is needed. So a government can say that from tariffs we can only provide 30 per cent - I will put the rest as a subsidy. They take a loan from the Bank and pass it on to this town and this town completes its system, but on condition that there be a private operator. So you say it's a subsidy to the private operator - no, it's a subsidy to the poor because the way we target it is if there are rich people in this town, they will pay the real price of water. But only the poor will get the subsidies - the poor will pay much less.

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