Saturday, March 21, 2009

"Sustainable Finance": the apolitical temptation

Martin Pigeon (CEO)

Wednesday 18 March, in the afternoon, I attended two sessions on "sustainable finance". The first one (5.1.3) was entitled "unlocking the demand for finance: how to enhance the "bankability" of the sector?".
I won't comment extensively on it as the word "bankability" explains it all: in this framework, water utilities are seen in a banker's perspective, which means that the analysis perimeter is restrained to the cash flows plan ("credibility of future cash flows", as one panellist said), a positive EBITDA and other sexy ratios measuring the financial performance of the utility. The key is therefore to create an "enabling environment", which means guaranteeing the autonomy of the utility ("protect the utility from political interference", as someone said) and allowing its profitability with full-cost recovery.

Pierre-Alain Mahé from GRET made an interesting presentation on a micro finance scheme in Cambodia where GRET acted as a financial intermediary between local micro-entrepreneurs and local commercial banks: because water projects take a lot of time (at least 5-6 years in this case) to recoup investments and because their average beneficial rate is around 6% a year, it was necessary for GRET to intervene because normal commercial loans conditions there are, if I got the figures correctly, something like a 20% yearly interest rate and a 2 years credit line. GRET therefore provided financial backing to some entrepreneurs and negotiated better loans conditions with local banks, with some results.

Still, I don't understand this insistence on private sector development. Those micro-entrepreneurs develop on a demand born out of governmental failure or the dismay of local communities unable to organise themselves to create communal services; the service these entrepreneurs deliver is clearly vital and having a costly service remains better than no service at all, but is it relevant to insist on developing the symptom of a failure? Of course I'm being falsely naive here, it is the wet dream of any corporation to create the conditions that would enable the exploitation of the ultimate commodity of them all. Demand for water is almost inelastic, meaning that water demand will remain constant whatever its price is, and the water "market" is absolutely monopolistic. The only thing that prevented such a market creation so far, and explains the numerous failures of privatisation attempts, is the political super-sensitivity of water prices; governments very rarely let water utilities increase water prices to a level that would endanger their popular support, and this is likely to continue. This is why, by the way, even Aquafed, the international lobby of water corporations, has renounced asking for full-scale privatisation and pushes for what it calls "sustainable cost recovery": let water utilities be remunerated with a combination of user payments (tariffs) and public subsidies (taxes). Public money subsidising private profits: bail-outs are really fashionable these days. A "new concept", as they say.

The following session (5.1.4, "Pooling resources to close the financing gap: how can financing for the sector be optimised?") was very interesting in the sense that it combined some very sound statements with some of the most narrow-minded assertions I have ever heard on this topic (ok, I haven't been that long in the field, about 3-4 years only). On the positive side, I'm particularly thinking about what John Maguire (DABLAS Task Force, EU Commission) said, when he criticised IFIs unaccountability, expressing anger at the fact that those institutions detained a power with huge political consequences but were free from political accountability. He added, which is for me the bottom-line, that "the sector is ultimately legislative-driven"; in other words, politics have the last word. M. Rakatobe, from the African Development Bank (AFDB), also said something nice around accountability not being pure performance but truly responding to the needs of the population, a rare sentence in a banker's mouth.

On the other hand, I think the most grotesquely greedy statement of the day - and there were many - was uttered by Christopher Gasson, editor of "Global Water Intelligence", the voice of the water industry (which recently created the lobby group "sustainable water alliance" together with another lobby group, the International Desalination Association). Speaking from the floor, he expressed his frustration at not witnessing a water business model as "successful" as mobile phones'. Indeed, the business of mobile phones might have been the fastest-developing and most profitable commercial success ever. But some slight differences between mobile phones and water might have escaped his attention: the cost of infrastructure, the level of technology required... and the sheer possibility to survive without it.

More seriously, a series of exchanges illustrated quite well the issues at stake. After one hour and a half of discussions about water business profitability, a woman was given the microphone and there was a sudden change of tone. She very simply said that she thought that water was life, a non-profit public good, and wondered what all this profits thing was all about (sorry Madam, I didn't get your name, but thank you for this intervention). The voice of the industry, a few seats behind, couldn't help sniggering. One banker in the panel half-jokingly answered her that although water might be a gift of God and no one would charge her for collecting rainwater in a bucket, water services had a price, etc. I was given the microphone just afterwards, which was the opportunity for me to inform this gentleman that in France, since 2006, collecting rainwater actually costs thanks to the lobbying of water corporations (they managed to obtain the creation of a tax on rainwater collection devices). A woman in the panel from Seattle then answered that although the Seattle water utility was public and one of the best in the US, it was prohibited to collect rainwater there because these collected waters added up to the volumes channelled in the sewage networks and thus increased the utility's costs - which is true. This same women earlier wondered how to channel pension funds into water investments, and concluded that at the end of the day it was all a matter of business model.

Again and again, at least two visions of water collide: on the one hand, a technical vision of water seen as something produced and sold by a water plant, a high-tech, complex and standardised good, very costly to produce and whose management must be financially optimised within the framework of an autonomous entity. On the other hand, a holistic vision of water as the element that allowed life to appear and remains its irreplaceable vehicle. This latter vision leads to conceive water policies in an integrated way, both from an environmental and social point of view. The progressive European water management cases we have studied all include this transversal dimension, integrating democratic processes of transparency, accountability and participation, and/or successfully integrating rural water management - for example by using water money to subsidise organic agriculture which pollutes much less and uses less water.

I want to think that there is hope for truly "bridging divides for water", as this Forum's motto says: the necessity for such an integration is understood by its organisers, who have been promoting "integrated water resources management" for many years. What remains decisive obstacles, in my opinion, is:

- the mono-dimensional accountability of multinational corporations, whose constraints are purely financial - for instance, Veolia just decided to cut into its investment plans to distribute dividends to its shareholders after its shares collapsed on stock markets this year - but whose ability to play worldwide gives them an overwhelmingly superior negotiating position over local public authorities; the combination of these two factors simply cannot deliver local public interest policies.
- the power of financial management language and culture, which tends to blind water managers who only think of water in terms of cash flows. Bankers should be serving utilities, not the contrary.
- the lack of a real democratic culture in many places, which could go far beyond the simple representative system. As the case of Cordoba, in Spain, shows (see above-mentioned paper), truly participatory and empowering processes can lead to truly responsible behaviours. Amartya Sen and other authors have been repeating this for decades: real democracy might be the only truly sustainable solution at hand.
- the lack of understanding of water issues by national authorities, who can be tempted to undermine water utilities' budgets for other purposes.

Again and again: politics will have the last word, and time is ticking away. So let's play politics, and hope for the best.


Anonymous said...

Martin - Nice post. I'm the woman from seattle who noted that it's all about the business model. Note that in my mind, a business model is agnostic from whether it's public or private - perhaps a better term is "operating model".

At the end of the day, for public health reasons and economic development reasons, water is a service and a good, not just a right from god. And because humans are involved in providing services, and humans are inherently flawed, there's a role for understanding organizational dynamics (i.e. the operating model) to identify improvements in service delivery, i.e. technical, managerial, operational and financial stuff.

I understand your point that the water is a public good. But beyond the ideology, that water still needs to get to customers. What should it matter if the person providing the water is public or private, provided that the water quality is safe, and at a cost that is affordable?

A further note: you seem to be saying that I contradicted myself by talking about local currency investment. Seattle's water utility raises local currency money all the time, through municipal bonds. Which creates an accountability link between the utility's debt, and rates charged to customers. Why is encouraging local investment into developing country water service providers - e.g. pension funds, which are often public sector based, highly regulated, and with union contributions - a bad thing? It's a constructive, cost-effective, lower-risk, and democratic way to finance water infrastructure AND strengthen a local economy, rather than rely on the largesse of charitable donors in the north! Increased local investment in water infrastructure also yields better accountability at a local and national level, and is more aligned with the path to the democracy you seek, than grants and loans by international development banks and agencies.

Why do you think otherwise?


Martin Pigeon said...

Dear Rachel,

sorry I found your post only now, hope you'll get this answer. Thanks for your comment, first of all, it's an interesting discussion. Let me answer you briefly:

"But beyond the ideology, that water still needs to get to customers. What should it matter if the person providing the water is public or private, provided that the water quality is safe, and at a cost that is affordable?"

My point is not ideological but pragmatic: water "quality" cannot be summarised in simple financial performance and hygiene standards but needs to be included in a broader framework, that only an accountable political entity can deliver and manage for at least two reasons: water is a totally transversal issue, and water supply is the embodiment of a natural monopoly (so very little market incentive to deliver good service). And political entities are public...

About your point on local currency investment: I didn't understand that you were talking specifically about local pension funds; as a matter of fact these funds tend to operate on an international scale, which breaks the local accountability link you mention. I have no problem with local investment, on the contrary for all the reasons you describe! And I share your views on IFI's and charities' "largesses". But I didn't know US pension funds had such a commitment to developing their local economies... I know some of them have been investing in "water funds" that are pure financial players. And I think just relying on private funding is not enough, even potentially counter-productive because the accountability link is mostly financial and having to pay an interest deprives the utility of funding it could get at a cheaper price (public utilities can borrow at a lower rate than any private agent). So, in short: I think public management is the best potential option, so it's more relevant and cost-effective for the community to improve the public management than reach out to global private actors...