IMF Forces Water Privatization on Poor Countries

by Sara Grusky
Globalization Challenge Initiative
sgrusky@igc.org

A random review of IMF loan policies in forty countries reveals that, during 2000, IMF loan agreements in 12 countries included conditions imposing water privatization or full cost recovery. (See Table I) In general, it is African countries, and the smallest, poorest and most debt-ridden countries that are being subjected to IMF conditions on water privatization and full cost recovery. Ironically, the majority of these loans were negotiated under the IMF's new Poverty Reduction and Growth Facility (PRGF), a reform announced with great fanfare in 1999 when IMF officials claimed that the new loan facility would re-focus the IMF's controversial structural adjustment measures on activities that borrowing government's would identify as leading to poverty reduction. Rather than contributing to poverty reduction, water privatization and greater cost recovery make water less accessible and less affordable to the low income communities that make up the majority of the population in developing countries. The most immediate impact of reducing the accessibility and affordability of water falls on women and children. More than five million people, most of them children, die every year from illnesses caused from drinking poor quality water. When water become more expensive and less accessible, women and children, who bear most of the burden of daily household chores, must travel farther and work harder to collect water - often resorting to water from polluted streams and rivers.

The significance of finding such a high number of conditions relating to water privatization and water cost recovery in IMF loans is twofold. First, in the hierarchy of international financial institutions the IMF is at the top. Compliance with IMF conditions enables governments to receive the "seal of approval" that permits access to other international creditors and investors. Thus IMF conditions weigh especially heavily upon borrowing governments. Second, it is quite common that World Bank loans have, as their first condition, compliance with certain IMF conditions. This is known as "cross conditionality." In the division of labor between the two institutions, it is the World Bank that has primary responsibility for "structural" issues such as the privatization of state-owned companies.

Therefore, it can be presumed that in every country where IMF loan conditions include water privatization or full cost recovery, there are corresponding World Bank loan conditions and water projects that are implementing the financial, managerial, and engineering details required for such "restructurings."

Table I below identifies the 12 countries and paraphrases the specific IMF loan conditions relating to water privatization or water cost recovery. Eight of the 12 countries identified are in sub-saharan Africa. In six of the countries, the IMF conditions require some form of privatization, in four countries the conditions require both privatization and greater cost recovery, and in two the focus is just on cost recovery.

TABLE I: Countries with IMF-imposed water privatization and cost recovery policies

Country	IMF Program	Loan Condition	Summary of Policy
ANGOLA	Staff-monitored program	Structural benchmark: Adjust electricity and water tariffs in accordance with formulas agreed with the World Bank. Reduce accounts receivables of the water and electricity companies to one month of sales revenue	Adjust water tariffs periodically to recover costs, including a reasonable return on capital.
BENIN	Poverty Reduction and Growth Facility (PRGF)	Other measure: After the revision of regulatory framework, the government expects to complete the privatization before the end of the third quarter of 2001	Privatize the water and electric power distribution company (SBEE)
GUINEA-BISSAU	Emergency Post-Conflict policy	Structural benchmark: Transfer of electricity and water management to private company	Transfer of electricity and water management to private company
HONDURAS	Poverty Reduction and Growth Facility (PRGF)	Other measure: Approve framework law for the water and sewage sector by December 2000	To facilitate private concessions in the provision of water and sewage services, approve the framework law by December 2000.
NICARAGUA	Poverty Reduction and Growth Facility (PRGF)	Structural benchmark: Continue adjusting water and sewage tariffs by 1.5% a month.	Offer concession for private management of regional water and sewage subsystems in Leon, Chinandega, Matagalpa, and Jinotega. Adjust water and sewage tariffs to achieve cost recovery and offer concession for private management in key regions.
NIGER	Poverty Reduction and Growth Facility (PRGF)	Other measure: Divestment of key public enterprises, including the water company, SNE.	Privatization of the four largest government enterprises (water, telecommunication, electricity & petroleum) have been agreed with the World Bank with the proceeds going directly to pay Niger's debt.
PANAMA	Stand-By Arrangement	Structural benchmark: Complete plan to overhaul IDAAN's (state-owned water company) billing and accounting systems, allow to contract with private sector operators, determine need for tariff increase and possible rate differentiation among clients.	Overhaul the water company's billing and accounting systems, allow it to contract with private sector operators, review the tariff structure.
RWANDA	Poverty Reduction and Growth Facility (PRGF)	Structural benchmark: Put the water and electricity company (Electrogaz) under private management by June 2001.	The water and electricity company (Electrogaz) will be put under private management as a prelude to its privatization.
SAO TOME AND PRINCIPE	Poverty Reduction and Growth Facility (PRGF)	Structural benchmark: The new adjustment mechanism for public water and electricity rates will be brought into operation by decree.	The price structure will cover all production and distribution costs as well as the margin of the water and electricity company. The accounts will balance consumption and resources without recourse to government subsidies. In May 2000, the government conducted a study of alternatives for the future of the water and electricity company (restructuring, leasing, concession or full privatization), with assistance from the World Bank. By December 2000, it will select one of the options and adopt a financial restructuring plan, and strengthen the revenue collection procedures.
SENEGAL	Poverty Reduction and Growth Facility (PRGF)	Other measure: Regulatory agency for the urban water sector will be created by end-2000.	Transfer the recurrent costs of water pumping and distribution equipment to the communities. Increase the involvement of private sector operators. Encourage the involvement of private sector operators in the water sector. Assess the possibility of private sector operation and financing of the infrastructure required to meet Dakar's long-term water needs.
TANZANIA	Poverty Reduction and Growth Facility (PRGF)	Condition for HIPC debt relief: Assign the assets of Dar es Salaam Water and Sewage Authority (DAWASA) to private management companies.	Assign the assets of Dar es Salaam Water and Sewage Authority (DAWASA) to private management companies.
YEMEN	Poverty Reduction and Growth Facility (PRGF)	Structural benchmark: Implement adjustments in water, wastewater, and electricity tariffs to provide for full cost recovery.	Implement formulas for automatic adjustments in tariff rates to ensure full pass through of product prices and full cost recovery; establish regional water authorities with private sector participation and independence to set regional tariff structures.

Source: Letters of Intent and Memoranda of Economic and Financial Policies prepared by government authorities with the staffs of the International Monetary Fund and World Bank. The documents are made available at the IMF website: www.imf.org.