The World Bank , the apostle of privatization, is having a crisis of faith.
What seemed like a no-brainer idea in the 1990s—that developing nations should sell off money-losing state infrastructure to efficient private investors—no longer seems so obvious, especially when it comes to power and water utilities.
Investors who once seemed eager to risk their money on Brazilian power plants or African sewers are pulling back. Commercial banks' power-project financing in the developing world and former Eastern Bloc nations, which peaked at $25.9 billion in 1998, totaled just $5.7 billion last year, according to Dealogic, a British data firm.
Consumers, feeling deceived, increasingly associate privatization with higher rates for them and higher profits for foreign companies and corrupt officials. Rate increases have spurred violent demonstrations against a water concession in Bolivia and private power plant projects in Peru. A 2001 survey of 17 Latin American nations by Latinobarometro, a Latin American polling company, found that 63% of respondents felt that privatization of state companies hadn't been beneficial, up from 45% just three years earlier.
The result of this widespread disappointment is that across Africa, Latin America and Asia, some privatization contracts are being renegotiated and a handful of projects—concentrated in toll roads, power and water—have been canceled. Fewer new projects are getting off the ground.
Privatization hasn't always gone badly. Telecommunications deals have generally been much more successful than water or power projects. When it comes to phones, technology and privatization conspire to provide the public with service that is less costly and better. The advent of cellphones, for example, has made it simpler to introduce competition to improve what was once a state exclusive.
But water and power are tougher. They naturally lend themselves to monopolies, not competition. Why build parallel, competitive sewer pipes or power lines? And, since the public often views low-cost water and light as rights, not privileges, privatization has been the focus of popular discontent.
The unexpected turn of events has left privatization enthusiasts at the World Bank—the main tool the wealthy nations have to influence economic policies in the poor ones—wondering what went wrong.
"There's certainly a lot of soul-searching going on," says Michael Klein, the World Bank's vice president for private-sector development.
Each case, of course, has its own idiosyncrasies. But an electricity project in Armenia offers a typical problem case. In a recent study of the case, the World Bank found that its own staffers had radically underestimated how much electricity prices would jump—nearly 50%—and consumption would fall—17%—when the national power company was put on commercial terms in preparation for eventual sale.
In the end, the government didn't collect nearly as much new revenue as it had hoped, while the poor—the intended beneficiaries of World Bank projects—grew increasingly likely to fall behind in paying their electric bills. Many were left scrounging for wood to heat their homes, causing unforeseen environmental damage.
The Armenia study landed with a thud at the World Bank; it implied that free-market ideology had trumped clear thinking when the World Bank had prodded the Armenian government to commercialize the power company.
"There was never an actual policy that said you shall privatize everything that moves," Mr. Klein says about the World Bank's strategy over the past decade. "But some people interpreted it that way."
And that's how many countries interpreted the World Bank's advice, which carries the weight of the West behind it—not to mention a lot of cash. The World Bank, for instance, pushed the Comoros Islands, off Africa's east coast, to put its power company under private management, an arrangement that ended in bitter squabbling. "We had no option but privatizing," says Mahmoud M. Aboud, charge d'affaires at the country's U.N. mission. "When it didn't work, we ended it."
World Bank officials have now decided it doesn't matter so much whether infrastructure is in public or private hands. What matters is that it be run in a business-like manner, perhaps more frequently combining public ownership and private management. But above all, they now say, bureaucrats, investors and, yes, the World Bank itself must pay far greater attention to the fiery politics of privatization and especially to the effect of rising prices on the poor and disaffected.
On average, the rates charged by state water companies in the developing world were so low that they covered just 30% of their costs in the early 1990s, while power companies recovered only 60% of their expenses, according to World Bank figures. Governments covered the gaps, draining public coffers. When a utility is put under commercial discipline, rates almost inevitably rise.
"In the end, it depends on how politically acceptable commercial tariffs are in a country—that's the issue," says Peter Woicke, head of the World Bank's business-finance arm, the International Finance Corporation. "Somebody has to pay for it—either the users, or the taxpayers, or the donors . . . or future generations." Mr. Woicke predicts that in poor countries it will be some combination of the four footing the bill.
And when the World Bank sings the praises of private infrastructure ownership or management, it will also probably preach louder the virtues of well-targeted subsidies to assist those who will no longer be able to afford the basics of life.
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