Water Regimes

Beyond the public and private sector debate

Dominique Lorrain, Franck Poupeau, Dominique Lorrain, Franck Poupeau

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138668218
• eBook ISBN: 9781317211914
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Ecology
• Index: Technology & Engineering

In recent years the water sector has undergone profound institutional, economic and political transformations. Some countries have encouraged privatization of water services, but in many cases this has provoked adverse reaction to such a neoliberal and market-based approach to this common shared but essential resource.

This book goes beyond the ideology of the public versus private water regime debate, by focusing on the results of these types of initiatives to provide better water services, particularly in urban settings. It provides numerous examples of alternative models, to show who is responsible for implementing such systems and what are their social, institutional and technical-scientific characteristics. Policies are analysed in terms of their implications for employees and residents.

The book presents a new combinatory approach of water regimes, based on several international case studies (Argentina, Bolivia, China, France, Germany, India, South Africa and the USA, plus a comparison of three cities in Africa) presenting specific challenges for water models. These case studies demonstrate the successes and problems of a range of private sector involvements in the provision of water services, and provide examples of how small-scale systems can compare with larger-scale more technical systems.

Part I
Unorthodox models and practices

1 The "embedded actor"

A water joint venture in Chongqing

Dominique Lorrain

The contracts governing the private sector’s involvement in the management of networked services¹ take a wide variety of forms (World Bank, 2001; Lorrain, 2008b). In order to reduce the risks of asymmetry, of opportunistic behaviour by companies and of regulatory “capture”, the economic theory of regulation has recommended a whole array of solutions: complete contracts, separation between the principal who decides and the agent who executes, independent regulatory agencies (Baldwin et al., 1988). These solutions should have been enough to provide a good balance between the public authorities and private sector firms. However, they have not. One lesson learned from the past 15 years is that rates of contract failure have been high; it is not easy to navigate devaluations, changes in political majorities and economic crises. The international institutions are wondering how to find fixes for orthodox solutions that initially showed every sign of being robust (Harris, 2003; Marin, 2009).

Among the new institutional approaches, one which deserves attention is the joint venture, although it runs completely counter to the theories. The central principle on which it rests is not separation between a principal and an agent, or the signature of complete contracts. In joint ventures, the partners cooperate at all levels: they are shareholders in the operating company; they share the management functions; they operate the system in concert. The central principle is co-production. This was a solution that began to develop in China in the water sector in 2002. It was introduced after 15 years of reforms during which the Chinese authorities pragmatically explored all forms of cooperation. Within a few years this approach had increased in importance, to the benefit of French companies, but above all to the advantage of Chinese companies, new entrants to the market. It is an approach that has been implemented in parts of cities in Shanghai, Shenzhen or Chongqing, as well as in smaller cities.

Total outlier

In the 1980s, China was characterized by a model of direct administration, with little organizational autonomy, little use of price mechanisms and a major emphasis on plans and budgets (Pairault, 2008; Bergère, 2013; Sanjuan, 2006). Initially, Chinese officials turned to the industrial countries and the development institutions to obtain subsidized loans for the acquisition of technologies in all sectors. In the water sector, these loans were used for the rapid construction of potable water treatment plants to international standards. In the early 1990s, forms of partnership began to be explored – an experiment for an integrated industrial park with the support of the Singapore government, partnerships for drinking water production only – and by the end of the decade there were 25 such partnerships in the country, including nine with Lyonnaise des Eaux (Bellier, 2002: 85). In parallel, two experiments with BOT (build operate transfer) contracts for the production of potable water were conducted. One was an unofficial contract with the Thames Water company in Shanghai in 1995, which terminated after a few years, the other an official contract in Chengdu with Compagnie générale des eaux in 1998. Following these experiments and learning processes, the Chinese authorities decided in 2002 to allow partnerships extending to the whole water cycle – from pumping to distribution – in the form of joint ventures (see Appendix 1.1). In order to accelerate the introduction of urban water systems, they felt that it would be beneficial to have a single operator who would invest, operate and carry out regular modernization work. In short, they recognized the fact that the strength of a chain depends on the strength of its weakest link, and that it was pointless to finance a new plant if the water produced mixes with water from old plants, deteriorates in quality and is wasted in poorly maintained pipes.

This experiment is interesting not just because it highlights changes in China, but also for the light it casts on several theoretical currents. As regards China, the example is relevant to work on social change and the theory of path dependency (Thelen, 2003). The country had, of course, changed massively since 1992: the experiment in reform in the water sector is therefore an invitation to see what levers were employed to break with business as usual. It also shows how China has devised its own way of doing things. Initially, it mirrored international practice, but it quite quickly came to distance itself from the recommendations of donors, and to carry out reform in its state-owned enterprises (SOEs) at its own pace, despite pressure from the development institutions (Shirley, 1995). In the networked public services, it enacted a law in 1995 preventing foreign companies from having contact with end users. Reforming the SOEs to increase their efficiency would have led to massive layoffs (already substantial in the northeastern provinces) (Kernen, 1999) which, because of the lack of a social safety net, would have created risks of political instability. Similarly, introducing concession schemes at that time, like those in Latin America, would have caused numerous practical difficulties: the accounting records were incomplete, there were no regular maintenance policies, and prices remained very low. This kind of solution would therefore have disrupted the working environment for staff and would have led to reactions from users to price rises associated with the arrival of foreign firms. Faced with the choice between maintaining political balances or immediate reform, China’s leaders preferred to introduce reform at their own pace, in stages, in a so-called “step-by-step approach” (Bergère, 2013). This desire for independence from the Washington Consensus is particularly apparent in the modernization of public services.

The experiment is also interesting because it challenges the common understanding of monopoly markets and their regulation. Underlying theories of regulation and contracts is the idea that the firm is powerful (asymmetry), especially in a situation of monopoly, and that it therefore poses a risk to the public authority. One way of safeguarding the public is: (1) to clearly define the terms of the problem (through studies) and to select the “right” firm (by competitive tendering); (2) to define the rights and obligations of the parties from the start (complete contract), and (3) to monitor the firm (independent regulation agency). In principle, if followed, this doxa is supposed to produce the right outcomes. Compared with this set of precepts which were mainly drawn up by the World Bank (Kessides, 1993, 2004; Guasch, 2004), the experiments with joint ventures in China represent a complete departure: the studies were cursory; firms were not always chosen by competitive tendering; the contracts set only very general objectives; there is no regulatory structure in the strict sense, and in fact the joint venture constitutes a structure of cooperation at all levels, in which the principle of separation between the public authority (the principal) and the firm (the agent) dissolves over time. And yet results are achieved.

Investigations in Chongqing

In relation to these dominant currents, the research we did in Chongqing² began with the principle that before looking at performance and outcomes under the contract, one should start with the problem to be resolved and the policies undertaken. First, what is the history of the joint venture and why did the local government decide to pursue that option? Of course, we looked at the formal process: the studies and selection. How were the institutions organized in terms of the contributions of capital and human resources? How were the management functions divided up? What were the terms of the contract, even if it could not be described as a complete contract? Next, in recognition that institutions provide a framework for the actors and offer incentives (North, 1990), contract theories and institutional approaches should be granted their appropriate role but no more, and our focus was on the substance of the action: the object concerned and the reality of the practices. What does the actor do? If private water firms exist, what are the specific capacities that differentiate them from any other newcomer? How much of the result is explained by industrial policies rather than by creative financial engineering? This led us to look at industrial policies, the big absentees in works that concentrate on the role of contracts. Are not all the factors of success to be found in these policies? While exogenous factors have an influence (major market cycles, local political factors), it remains the case that if the firm controls anything, it is these policies. That is why time must be taken to study the industrial policies pursued by the firm, rather than making the contract (what it says and doesn’t say) the universal explanation for the outcomes of an action.

The substance of the survey was to document this material component of the action: investments, action on the infrastructure, personnel policies, and new services for users. This descriptive approach, which keeps at arms’ length from the doxa, makes all the more sense in that the introduction of reform in China was not based on any fully established theoretical framework. The approach was much more pragmatic. Under the pressure of problems, relying on a few general principles, the actors explored and negotiated. What may seem to be an unorthodox solution becomes fully understandable if we consider the starting point. In other words, rather than emphasizing the “right” institutional framework that would launch the contract into orbit and provide a standard for performance assessment, and from an understanding that the approach to these problems in China is not fully predetermined, we focused on an approach via “the problem to be solved”.

Chongqing is the major city in Sichuan Province, in the centre of the country, at the intersection of the Yangtzi (Changjiang for the Chinese) and Jialing rivers; the terrain is steep, the river wild at flood periods. In May 1997, the central government gave it the status of a national central city, alongside Beijing, Tianjin and Shanghai. This “greater” Chongqing extends over an area of 82,300 km² and at this time had a population of around 30 million, distributed across several cities (Chonqing, Fuling, Wanxian, Qianjian) and rural districts. The city of Chongqing – if we define a city as a continuous built- up area – then had three million inhabitants, but this figure rises to more than five million if we add together its urban districts (which include rural areas) and if 15 million inhabitants if its rural districts are included. In 2010, the population of greater Chongqing was around 34 million, and that of “urban” Chongqing five million. All in all, the municipality controls a very large area, with a population of around half that of France. The city can grow through demographic growth, but also by incorporating territories previously classified as rural areas.

The institutional upgrade to national central city status in 1997 took place against the background of the Three Gorges Dam Project. The central government wanted to establish a framework that would give it direct control, without going through the province. Apart from the building of this massive structure, the aim was to run a large number of supporting projects. As the water level rose, several cities would be flooded and rebuilt. To prevent outflows from the catchment areas turning the reservoir into a gigantic pollution trap, public investment programmes were needed, with the additional goal of developing the centre of China in order to keep part of the rural population in place. From this time, therefore, it was known that Chongqing municipal authority would need to invest considerable sums in its infrastructures, and in particular in the environment. The World Bank conducted studies and granted loans for several projects. In Chongqing, it supported a massive antipollution plan, consisting of an initial phase in which interceptors would be built, followed subsequently by the construction of a wastewater treatment plant. While the potential problems were diagnosed fairly quickly in the years 1997 to 2000, implementation had yet to begin. At this time, Chongqing municipal government was still operating through direct administration. Its organization was hierarchical. Most of the municipal departments received their resources from the finance bureau or from other public transfers. As a public system, the accounting framework included no depreciation or autonomous operational units (such as cost and revenue centres). To obtain revenues, the authorities created a range of additional taxes, but nobody knew whether they were “fair” for the inhabitants or how much they cost to collect.

Within a few years, Chongqing underwent considerable changes, both physical and institutional. The city grew and attracted investment. The central part (between the two rivers) bristled with skyscrapers; the urban space was crisscrossed with bridges and elevated urban expressways; a light subway was built; and development also took place along the north bank of the Jialing. The old Jiangbei district was renovated, taking advantage of the deconcentration of state services which were moved out of the old centre of Chongqing. Further north, business was boosted by a production joint venture with the Ford Corporation. In other words, within a few years, the capital of Sichuan emerged from its torpor. At institutional level, the municipality undertook reforms: its public service boards were converted into companies; it set up development and investment companies (Chengtou) through which it could raise capital in the form of bond or share issues. The 1993 accounting reform was applied. This was the background to the establishment of a joint venture with the Sino French group for drinking water operations (see Appendix 1.2).

Setting up the joint venture

In November 2002, Chongqing municipality formed a joint venture between its water company (Chongqing Water Group)³ and Sino French: Chongqing Sino French Water Supply Company (see Appendices 1.2, 1.3 and 1.4). It granted this new company an exclusive 50-year right to operate the potable water service for Jiangbei, an urban district located north of the historical centre, on the other side of the Jialing River. The contract also included the plan for very early expansion to encompass a town in the Yubei district near the airport, and the development zone where the Ford Corporation’s automobile production joint venture is located. This operation, which received less media coverage than the Shanghai Pudong contract, illustrates the readiness of the Chinese authorities to explore the partnership option as a way of running an entire urban service.

There are several explanations for the contract. The municipality was growing so fast that it had to modernize its urban services quickly. This partnership was a way to mobilize financial resources and acquire operational expertise without losing control: the joint venture maintained a balance of power between the two partners. Moreover, it only applied to part of the urban area. Most of the city continued to be served by the municipal board (Chongqing Water Supply Company), a subsidiary of its public holding com...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of illustrations
• Notes on contributors
• Acknowledgements
• Introduction: what do the protagonists of the water sector do?
• PART I Unorthodox models and practices
• PART II Questions of legitimacy: private interventions in a public service
• PART III When small water systems meet the large technical system
• PART IV Conclusion
• References
• Index