The myth of ‘healthy’ competition in the water sector: The case of small scale water providers

Habitat International 38 (2013) 175e182

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The myth of ‘healthy’ competition in the water sector: The case of small scale water providers R. Ahlers*, K. Schwartz, V. Perez Guida UNESCO-IHE Institute for Water Education, PO Box 3015, 2601 DA Delft, The Netherlands

a b s t r a c t Keywords: Small-scale water providers Market forces Water supply Private sector Informality Africa

Small-scale independent water providers are perceived to be more suitable in complicated service areas, and, contrary to the ‘formal’ water services sector, these providers are assumed to be truly competitive. Because competition theoretically results in lower prices and improved service, water consumers will subsequently reap the benefits. There is, however, little documentation supporting this claim in practice. Based on field research in Maputo, Mozambique in 2009, we analyze the degree and nature of competition between these providers. We show that the idea of ‘healthy competition’ with ‘free market entry’ is an oversimplification of the function of the market, and in particular the complexities of service provision in this specific sector. Given the inequities between providers, the case demonstrates that the theory behind private sector incentives has little empirical value for improving affordable and high quality water provision. Ó 2012 Elsevier Ltd. All rights reserved.

Introduction The role of the private sector in the water supply and sanitation sector has been a contentious issue in the past decades. In the 1980s and 1990s ‘Private Sector Participation’ and ‘Public-Private Partnerships’ entered into the mainstream when a coalition of international development banks, bi-lateral donors and a group of water sector professionals strongly advocated an increasing role for the private sector in the provision of water services (Nickson, 1997; Panayotou, 1997; Spiller & Savedoff, 1999; World Bank, 1997). Even though this role ranged from full privatization of assets to concessions and contracting out parts of the service delivery, in general, private sector involvement was argued to lead to efficiency gains, remove politics from the sector, and be a source of investment capital (Brown, 2002). For proponents, the initial optimism for the beneficial impact of private sector involvement (or publiceprivate partnerships) was substantial, even if the actual implementation remained controversial1 (Bakker, Kooy, Shofiani, & Martijn, 2008). Considerable faith was placed on the notion that with increased private sector involvement, competition between water utilities would be enhanced, and such competition would lead to both efficiency gains and lower prices (Braadbaart, 2007; Donahue, 1989; Spiller & Savedoff, 1999). In recent years, however, the enthusiasm for private sector involvement has * Corresponding author. Tel.: þ31 15 2151814. E-mail address: [email protected] (R. Ahlers). 1 See Barlow (1999), Lobina and Hall (2000) and Balanyá, Brennan, Hoedeman, Kishimoto, and Terhorst (2005) for critical reviews of increased private sector involvement, for more academic discussions see Bakker (2000, 2003), Bauer (1997), Bond (2004), Cleaver and Elson (1995), Swyngedouw (2005). 0197-3975/$ e see front matter Ó 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.habitatint.2012.06.004

faded. High-profile concession contracts, once presented as representing the future of the water services sector, collapsed or currently face increasing operational difficulties. The best-known collapsed concession contract is the one in Cochabamba, Bolivia, terminated in 2000 following a period of civil protest often referred to as the ‘Water War’.2 Other well-known failed concession contracts include the El Alto-La Paz concession (2005) in Bolivia and the Buenos Aires concession (2005) in Argentina. In Sub-Saharan Africa, ambitious privatization policies never fully materialized because countries such as Uganda and Zambia opted for public service options instead of contracting services out to the private sector. In other countries, such as Mozambique and Kenya, the actual level of private sector involvement remains limited. Apart from opposition from civil society against the increased role of the private sector in providing services, private sector involvement also failed to introduce competition, resulting in the replacement of a public monopoly with a private one (Braadbaart, 2005; Prasad, 2006). In recent years, it has become increasingly clear that private sector involvement, as envisioned and implemented in the 1990s, was far from the ‘golden solution’ that many believed it to be a decade earlier3 (Parker & Kirkpatrick, 2005).

2 For a discussion about the collapse of the Cochabamba concession see Nickson and Vargas (2002) and Assies (2003). 3 The shift away from private sector involvement has not meant that it has not influenced service provision in the public sector. By introducing dynamics of ‘commercialization’ many public service providers are pursuing practices and principles frequently associated with private sector involvement (cost-recovery, client-focus, etc.). See Smith (2004) for a more detailed discussion on what she calls the second wave of neoliberalism.

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Even though the “water privatization decade” ended in 2003 (Franceys, 2008: 45), the original coalition of advocates for private sector involvement has not reconsidered its stance. As one World Bank official noted: “[t]he story on private sector participation is not over, it’s simply being rewritten. When the emotions over this issue subside over the next few years, there will be a robust return to private sector participation that involves subtler forms of risk sharing” (Source Weekly, 2007). The private sector is back on the policy menu through an increased focus on small-scale independent providers4 (SSIPs). Despite being ignored for much of the ‘water privatization decade,’ SSIPs are now being hailed as an essential actor in water provision, and complementary to the formal public or private utility. Njiru, for example, finds SSIPs to be “particularly well placed to provide water services to the urban poor living in informal settlements” (2004: 445). The World Bank (2003: 171) identifies independent providers to be important in enhancing accountability to consumers. Solo argues that SSIPs “play a special role in introducing innovative technologies, market approaches and administrative systems” (1999: 126). Schaub-Jones (2008) argues that, based on customer surveys, SSIPs often outperform larger formal providers. Plummer (2002) envisions an important role for SSIPs in ‘inclusive Public-Private Partnerships’. Similarly, other authors have noted the important role played by SSIPs in providing services (Conan & Paniagua, 2003; Kariuki & Schwartz, 2005; Moretto, 2007; Sansom, 2006; Snell, 1998). Following de Soto’s (2000) call to reconstitute these enterprises as fully fledged private sector actors through the provision of property rights, the World Bank introduced ‘formalization’ as a policy objective so as to bring these so-called informal enterprises into the realm of a market more controlled by the state through policies and regulations (Fernandes, 2002; World Bank, 2003; World Bank, 2009). The potential attributed to SSIPs is basically based on two main arguments. First, SSIPs are said to have a comparative advantage in their detailed knowledge of the area in which they provide services. The assumption is that the SSIPs originate in the peri-urban areas where they provide services and, as such, are more knowledgeable about the services that are being requested and better able to communicate with their local consumers (Njiru, 2004). The second argument, which is the main subject of this paper, is related with the incentive structure under which SSIPs operate. The underlying assumption is that contrary to the ‘formal’ water services sector, which is characterized by monopolistic service provision, the market for small-scale providers is truly competitive. Njiru and Albu, for example, in examining small water providing enterprises in Khartoum, Sudan, emphasize the “healthy competition between enterprises” (2004: 31). Solo, in a frequently-quoted article celebrating the entrepreneurship of small-scale providers, highlights the link between competitive pressures and efficiency gains. She observes that “most countries in the South have enjoyed free entry and competition in water supply for many years among the informal or [...] the independent providers of water and sanitation” (1999: 120). The benefits of this ‘free’ competition, it is argued, will flow to the consumers. Realized efficiency gains from involving small-scale independent providers are argued to translate into better and cheaper services to the consumers (van Dijk, 2008). Kariuki and Schwartz (2005), for example, link competition between SSIPs to (lower) prices charged for water services provided by SSIPs. But, efficiency gains and lower prices for consumers are not the only benefits argued to derive from the competition between SSIPs.

4 Although provision by small-scale providers per se is not considered a ‘best’ solution by the World Bank, it is accepted as a “second-best policy where the broader approach of making services work for all is not possible”(Moretto, 2007: 355).

Competitiveness of the ‘informal’ water services providers is also mobilized to explain why SSIPs have developed such a strong customer-orientation. The competition with other small-scale providers would force SSIPs to adapt the services they offer to “the need of the market in terms of key service characteristics such as mode and time of delivery, quantity, quality, payment mechanism, and so on” (Njiru, 2004: 445/446; see also Solo, 1999). Although the notion of ‘free’ competition between SSIPs drives the arguments that underlie the advantages of incorporating this ‘alternative private sector’ to the model of service provision in the water supply and sanitation sector, little research has been undertaken regarding the underlying assumptions on which this argument is based. In this article we analyze the degree and nature of competition between SSIPs. We argue that the idea of ‘healthy competition’ (Njiru & Albu, 2004) and ‘free entry and competition’ (Solo, 1999) between SSIPs is an oversimplification of the function of the market, and in particular of the complexities of service provision in this specific sector. In the case of water provision, the access to the fruits of ‘efficiency’ has been shown to be limited to certain groups in society (Ahlers, 2010; Bakker, 2003; Bauer, 1997; Swyngedouw, 2005). Using empirical evidence of how competition plays out for small scale independent providers in Greater Maputo, Mozambique, we show how markets function in relation to the context in which they are encouraged to unfold. The market in which SSIPs in our case study operate is shaped by formal and informal institutions, social interaction, and relations of production. Consequently, the materialization of the assumed benefits of competition for the consumers is mediated through these different historic, social, and political economic relations. To assume that theoretical market mechanisms will simply unfold in such a highly complex and varied context is rather questionable (Benería,1999). In this paper we explore if competition exists between SSIPs in Greater Maputo, to what extend this is different from formal (public or private) utilities, and if it results in the expected benefits of low prices and improved service quality for the consumer. To do so, we provide a short historic and spatial analysis of the different water service modalities in Greater Maputo, followed by a description of the variety of SSIPs active in water provision. The final two sections before the conclusion explain how technology and water source determine the costs incurred by the SSIP and how these costs are consequently transferred to the consumer. These dynamics reveal that competition in the SSIP sector is just as murky as the formal sector with as little benefits for the consumer. Case study of Greater Maputo, Mozambique Greater Maputo is characterized by a strong presence of SSIPs. The current estimation is that roughly 450 SSIPs operate in Maputo servicing 37,000e55,000 household connections and 320e450 standpipes (Chaponniere & Collignon, 2011; SAL, 2009). The SSIPs market was estimated in 2006 at approximately US$ 6.5 million, which represents about 46% of the peri-urban market (Blanc, 2008). However, Greater Maputo also shows a large variety between the SSIPs in terms of the scale of operations. SSIPs vary from selling borehole water through a single standpipe to operating five sets of piped systems serving up to 1800 households connections (FIPAG, 2009; SAL, 2009). The fieldwork for this case study took place between July and October, in 2009. In-depth interviews were held with the SSIPs, customers, directors of the two SSIPs Associations, representatives of the water utility supplying water to Greater Maputo, employees of the public entities related to the water sector, representatives of international development agencies and NGOs, and 6 private independent consultants. The 13 SSIPs participating in the research range from a small provider serving 24 connections to a relatively

R. Ahlers et al. / Habitat International 38 (2013) 175e182

large provider servicing almost 2000 connections as shown in Table 1 below. Water services in Greater Maputo Greater Maputo, incorporating the areas of Maputo and Matola, has an estimated population of 1,800,000 inhabitants (World Bank, 2009). Of this population 70% lives in so called peri-urban areas (FIPAG, unpublished data). During the colonial era, the colonial administration developed water services in the historic city center called ‘cement city’, in which housing was only accessible for the colonial and indigenous elite. This resulted in a spatial concentration of improved services accessible only to primarily white elite (Jenkins, 2000). Even though independence in 1975 radically changed Mozambique, the new Frelimo government did little to expand housing and service provision into the unplanned, and rapidly expanding, peripheral urban areas around Maputo. Although tolerated by the Frelimo government, this ‘informal’ urban development grew without any attempt of regulation by formal state organizations. This absence of the state was consolidated by the Structural Adjustment policies implemented from 1987 onwards that curbed public spending on water services and encouraged private sector participation. Today, a clear distinction between the ‘cement city’ and the surrounding peri-urban areas remains. Reflecting this difference, three distinct service provisions modalities have developed. The first concerns the ‘cement city’ characterized by in-house connections, and serviced until 2011 by a private company called Aguas de Moçambique (AdeM).5 AdeM operated under a delegated management framework alongside an asset holding company and an independent regulator. The Fundo de Investimento e Património do Abastecimento de Água (FIPAG) is the public asset holding authority responsible for managing the water infrastructure assets. The Conselho de Regulação do Abastecimento de Água (CRA) is the independent regulator responsible for the regulation of water services and tariffs, consumers’ protection and mediation and arbitration between the contracting entity and the operator. The second modality concerns a ‘mixed’ area which officially lies within the service area of AdeM. Here the utility services only a segment of the area, and a much larger part is serviced by informal water providers. In the peri-urban areas AdeM provides water to 21% of the population through house/yard connections and to 22% of the population through standpipes (SAL, 2006). Where AdeM is unable to provide services, SSIPs have filled this gap, either by resale of water by households connected to the network or through selling water from private boreholes. In some of these areas the formal network has been expanded in recent years and now overlaps with the older SSIP networks (Chaponniere & Collignon, 2011). Finally, a third modality concerns areas of Greater Maputo beyond the official service area of AdeM. This rapidly growing peri-urban area accesses water from private boreholes or through SSIPs. Available data show that SSIPs serve an estimated 31% of the population in peri-urban areas of Greater Maputo. Fig. 1 below shows how the three modalities cover Greater Maputo area, with the cement city roughly in the south east of the map where few SSIPs are present. As we travel north and outward, the number of SSIPs increases substantially. SSIPs in Greater Maputo The SSIPs active in Greater Maputo are quite diverse. The map of Maputo, in Fig. 1 above, is based on available data from 2008 and

5

Since 2011 AdeM has been replaced by Aguas da Região de Maputo.

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Table 1 Characteristics of SSIPs. SSIP

Connections

Year of initiation

SSIP10 SSIP1 SSIP5 SSIP12 SSIP11 SSIP3 SSIP13 SSIP7 SSIP4 SSIP6 SSIP8 SSIP9 SSIP2

24 30 40 42 50 98 100 245 500 540 1393 1540 1929

1999 2006 2005 2008 2007 1997 2000 2004 2005 2005 1999 2000 1997

Source: primary field data 2009.

shows the distribution of the SSIPs in Greater Maputo according to number of connections they serve. The majority of the SSIPs serve up to 200 hundred households. A little over half of our sample (56%) serves less than 100 connections, and within this group 60% manages less than 50 connections. For these smaller SSIPs the income from water provision is usually supplementary as they either have other jobs or other business ventures. Providers with more than 1000 connections have water provision as their main income source. Fig. 2 below shows that the majority of SSIPs serve upto 400 housholds. Almost all SSIPs have their own groundwater source and several water tanks. Distribution takes place either through spaghetti, or a structured network. A spaghetti network is one in which individual distribution lines connect the consumer with the source of potable water. Each consumer basically has an individual distribution pipe or hose. A structured network uses primary and secondary (and possibly tertiary) pipes to distribute the water, followed by individual connections to the customer premises.6 The spaghetti network is mainly used by smaller providers, and the structured network by the larger ones (Hydroconseil, 2008) (Fig. 3). Sunk costs, economies of density and ‘captive’ consumers The monopoly-like characteristics of service provision through a piped-network are a well known cause of market-failure in the water services sector. Two particular characteristics of water service provision cause the distribution of water supply to be “a natural monopoly bottleneck to an urban water system” (Noll, Shirley, & Cowan, 2005: 5). These are: (i) the high level of sunk capital, and (ii) economies of density. The fixed capital costs of potable water generally make up a large part of the overall costs of supplying services (Braadbaart, 2005; Kessides, 1993; Noll et al., 2005). The urban water sector is characterized by a high degree of sunk capital.7 In addition, the sector is sensitive to economies of density, meaning that for a given distribution network, increasing the number of connected households or their consumption reduces the network’s average costs (Spiller & Savedoff, 1999). As such the provision of urban water services is subject to declining marginal cost for service provision. Due to the monopoly-like characteristics, there is little scope for competition in the market between different service providers. Competition in the market (or direct competition) concerns a situation

6 The advantages of a structured network lie in the fact that a structured network makes it easier to manage the line for leakages. Moreover, the structured network also makes it easier to add new connections. 7 Capital is ‘sunk’ in that it cannot be recovered or invested in other uses (Kessides, 1993).

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Siduava

Nwamatibjana

Muhalaze Mathemele Intaca

Nkobe

Khangolote

Matola gare 1e de Maio Magoanine C Magoanine B

Km 15 Magoanine A

Zimpeto Ndlavela Tsalala

Singtala

Mahotas Såo Då maso

Zona Verde

Malhalzine

Bunhiça

Gearge Dimitrov Costa do Sol

Malhampsene Bagamoyo

Sikwama

Patrice Lumumba

Mussumbuluco

Machava Sede

Influlene A

Liberdade

Influlene D

25 de junho A

Acoordos de Lusaka

Matola H

Aeroporte B Polane Caniço Maxaquene D Unidade 7 Aeroporte A Chamanculo D Urbanzicäo Chamanculo C Maxaquene C Polana Caniço A

Luis cabral

Matola G Matola B Matola F

Area de Mozal

25 de junho B

Inhagoia B

Jardim

Trevo

Fomento Matola D

Laulana

Inhagoia A

Vale de Influlene Matola J

Hulene B

Baito T3

Mikandjuine

Malanga Matola C

Coop Malhangalene A

Mafalala

Matola A

Alto Maé A

CFM

Sommenshield

Central A

Alto Maé B

Maputo Bay

Central B Polana Cimento B Polana Cimento A

SSIP connections/1000 habitants None

AdeM Service Area (2004 contract)

< 10

21 – 50

10 – 20

51 – 100

> 100

Fig. 1. Map of Maputo, Mozambique using data from FIPAG, 2009.

140 120

121

93 82

80 60 40

32 18 3

No. of Connections Fig. 2. Distribution of SSIPs according to number of connections in Greater Maputo.

0≤ 90

0-

89

9

0

9 0-

79

9 60

0-

69

59 050

40

0-

49

9

9

9 30

0-

39

9 20

0-

29

9 10

0-

19

9 -9 50

9

3

1

80

4

4 0

70

20

≤4

No. of SSIPs

100

R. Ahlers et al. / Habitat International 38 (2013) 175e182

179

Fig. 3. Distribution networks used by SSIPs in Greater Maputo.

where no exclusivity rights exist and providers continuously compete with each other to provide services within a given market (service area). Rather, the only form of competition possible in conditions of a natural monopoly is competition for the market. In competition for the market, providers compete for a certain market. The provider that wins this competition essentially has an exclusive ‘right’ to provide services in that area. Once a provider has ‘captured’ a market, competition from other providers is limited as the barriers to enter are too high. As a result, consumers are ‘captive’; in the sense that the ability to switch or choose between providers is highly restricted. The concepts of sunk capital, economies of density, competition for the market and captive customers are fully acknowledged in the formal water supply sector (Braadbaart, 2005; Kessides,1993; Noll et al., 2005). The same argument applies to the SSIP sector; although the degree of market failure is influenced by the capital cost incurred by different types of SSIPs as a result of the infrastructure used. The more investment required for obtaining and distributing the water, the higher the degree of market failure. In our case this is true for the kind of network the SSIP uses and the distance of the household from the source. Kariuki and Schwartz (2005) broadly distinguish different types of SSIPs on the basis of their relationship to the source and the distribution technology employed. SSIPs can be either dependent on a formal utility for the raw water (in which case they only distribute the water to consumers) or they may have their own water source. SSIPs with an independent source are likely to have higher capital costs than SSIPs which obtain the raw water from third parties. The distribution technology used may also differ considerably between providers. SSIPs may distribute water as mobile vendors (using carts/trucks, for example), they may have a fixed location (a standpipe or kiosk) or they may distribute water through a piped network. Investment costs increase when the SSIPs use a piped network. In sum, those SSIPs who develop their own water source and distribute water through a grid or network, carry the highest investment costs. Capturing customers in the SSIP sector SSIPs run their billing and collection activities very like a formal utility. Customers pay monthly bills on the basis of fixed charges and/or meter readings and in most cases a fee for connecting to the network, the ‘connection fee’. Due to their informal status, SSIPs have limited access to subsidies or the like.8 They therefore try to transfer the costs for establishing a connection as much as possible to the customer by way of a connection fee. As the costs for

8

Chaponniere and Collignon (2011) discuss a pilot project in Maputo that provides a primary network to the provider, who has to finance the secondary network to the consumers themselves. For every household connection established during the first year of operation, the provider receives a subsidy.

establishing the connection are substantial in comparison to the day-to-day operational costs, the connection fee tends to be much higher than the monthly water bills that customers pay. The connection fee has two components: (i) the fee charged by the operator for the operational costs of establishing the connection; (ii) the connection materials (pipe, meter and fittings). The connection fee varies substantially among the SSIPs, ranging from US$40 to 100 excluding materials, to US$48 to 120 including them. Interestingly, in our sample the smaller scale SSIPs have both the highest and lowest water tariff and the highest and lowest connection fee. Especially with the smaller scale SSIPs, the connection fee does not include the tubing or pipes necessary to connect the household; these are bought by the customer. Hence, the longer the distance from the house to either the main line (in case of a structured network) or to the SSIP premises (in case of a spaghetti network), the higher the cost to connect. The distance to the main line or to the SSIP premises strongly influences which SSIP a household will select; and customers usually opt for the nearest provider. This restriction in choice is confirmed by other actors in the water sector (i.e. members of international development agencies and NGOs, and a Director of one of the SSIP Associations). Once a customer is connected to an SSIP they will rarely change provider. Switching providers would require that they pay the connection fee again. In the case of Maputo this is likely to be prohibitively expensive for low-income households. Assuming that a household in Maputo consumes about 10 m3 per month (Thompson, 2006) at an average tariff of US$1/m3, then a connection fee of US$60 equals approximately a 6 month water bill. Such a connection fee presents a considerable obstacle for consumers to switch between providers. Not surprisingly, none of the customers we interviewed had ever switched provider. The use of the connection fee as a competitive tool to ‘capture’ customers is aptly illustrated by the expansion strategies of some SSIPs interviewed. SSIP2, for example, undertakes connection campaigns, giving the connections for free during a certain period of the year. Between March and May in 2009, SSIP2 managed to establish 267 new connections in this way. SSIP4 allows the consumer to pay the connection fee over a longer period of time. Other providers (SSIP9 and SSIP8) operate with a fixed connection fee irrespective of the distance to the household. These SSIPs subsidize the connection fee from their own funds because they realize that a connected customer is unlikely to switch to another provider.9 Connecting a customer is a means to guarantee a service area.

9 Not all SSIPs follow this approach. SSIP6 argued that he does not do any campaigns but expands the network with loans from private institutions. To pay back these loans, he needs to ensure that the customer will be able to pay their bills. For this SSIP, the connection fee acts as an indication of the ability to pay of the consumer.

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Cartel-forming in the SSIP sector Given that SSIPs have developed outside the purview of formal state regulation or the formal Mozambican water agencies, they tend to be categorized as part of the ‘informal sector’. The informal sector is often perceived as operating outside the bureaucratic regulatory environment. However, formal and informal institutions intertwine and influence each other as a consequence of social, political or economic interaction (Cleaver, 1998; 2002; Leach, Mearns and Scoones, 1997). In this respect, the formal may take on informal features (such as precarious labor relations) but the informal sector also takes on formal features such as regulating prices or allocating market shares by defining customers or territories (Jenkins and Wilkinson, 2002). Concerning the latter, a degree of regulation within the ‘informal’ sector can take place when powerful actors organize themselves to protect the interests of the already established informal providers vis-à-vis ‘new’ competitors. Consequently, certain dynamics characteristic of regulation, take place within informality. In the Greater Maputo case, with its history of co-existing formal and informal urban development and service provision, professional or trade associations formed by the SSIPs also regulate the competition between SSIPs. These organizations in effect distort the “free entry and competition” (Solo, 1999) that is often attributed to the SSIP sector. These associations are usually first established as a “means of organizing collective action to advocate common interests” (Collignon & Vézina, 2000: 41). Over time, however, they move beyond their original lobbying tasks and increasingly take on regulatory tasks. Despite not having a legal mandate to regulate the SSIP sector, the associations, in our case clearly dominated by a few powerful SSIPs, set standard prices, appoint service territories to selected SSIPs and control entry into the SSIP sector (also supported by Collignon and Vézina (2000)). What results is a cartel that controls the prices charged, and the entry of competitors in the market. SSIP associations in Greater Maputo There are two associations in Greater Maputo which claim to safeguard the interests of the SSIPs. The ‘Associação dos Fornecedores Privados de Água Subterrânea’ (AMATI) and the ‘Associação dos Fornecedores de Água de Moçambique’ (AFORAMO). AMATI was created in 2004 and works in the Province of Maputo. It has approximately 85 members. AFORAMO was established in 2006. It is a national association but it has a strong presence in the area of Matola. It has approximately 300 members. Table 2 provides an overview of the membership of the providers interviewed. The table indicates that mainly the larger SSIPs appear to be members of the Associations. Only two of the seven smallest SSIPs joined. Table 2 SSIPs’ membership of associations. Provider

No. households connected

Member of association

SSIP10 SSIP1 SSIP5 SSIP12 SSIP11 SSIP3 SSIP13 SSIP7 SSIP4 SSIP6 SSIP9 SSIP8 SSIP2

24 30 40 42 50 98 100 420 500 540 1311 1403 1929

AFORAMO None None None None AFORAMO None AFORAMO AFORAMO AFORAMO AMATI AMATI AFORAMO

Source: primary field data 2009.

The associations represent members who have no formal recognition as water service providers. In this sense they represent group interests and at the same time regulate the activities of the group. Following Lindell, these associations “become sites of governance in their own right” (2008: 1884). The Associations use different mechanisms to regulate the behavior of individual SSIPs. In 2009, AFORAMO developed an internal guideline establishing technical, administrative, and financial criteria on how SSIPs have to provide services and also included a standardized contract to regulate the relationship between providers and customer (AFORAMO, 2009a,b). Two main elements in this guideline directly influence the level of competition between providers. Firstly, the guideline establishes service areas for the SSIPs. The Association gives authorization before a provider can start a network for service delivery in a given service area. Given that the Association consists of established SSIPs, this means that they can determine whether or not ‘new’ providers can enter a particular area. Clearly, the Association functions as a gatekeeper to protect its members’ market. A second barrier to entry is the ‘rule’ forwarded by the Associations stating that a provider cannot place a pipe where there is one already. Thereby competition is not only weakened but strongly discouraged by the Associations. Both the representatives of the association and SSIP members explained that the purpose of this second rule was to two fold. First of all, it facilitates the detection of leakages in a particular network. Secondly, it protects SSIPs from indebted customers who may try to avoid paying by switching providers With parallel pipes it would be easier for a customer to change provider given that the customer will not have to make many modifications (and incur in new costs) to make the new connection. However, this rule also reduces the customers’ ability to choose (and switch) between providers, given that (as previously mentioned) the connection fee depends directly on the distance from the clients premises to the main pipe. AFORAMO regulations also stipulate sanctions for noncompliance. Non-written mechanisms to regulating the non member SSIPs also exist, such as mobilizing peer pressure. A member of AFORAMO explains: “.[the contract] will guide SSIPs, it will be universal for all the members of the Association. Also there are certain aspects that will apply to SSIPs that are not members, in particular those working in the same area as us. They have to work with us, if not, there is no agreement, and when there is no agreement there is sabotage.”10. The same respondent explains how the Association deals with those SSIPs that do not want to apply the same tariffs as neighboring SSIPs, or when an SSIP tries to expand into the service area where a member SSIP is active. “We [members of the Association] first talk to the SSIP. We explain why she/he should change their behavior and work in harmony with the other SSIPs. But if she/he wants to do things differently it is ok.they are free to do so. But then there will be consequences...”.11 The impact of such practices is explained by a small SSIP, who is not a member of one of the Associations: “.I used to charge 50 cents for one container of water from the standpipe. I was contacted by the Association about the price. I explained that in the area where I live AdeM also has a network so I needed to put the price lower in order to compete. I told them that I will not raise the price. Afterward they approached me again. They talked to me informally. I was not pressured, but I felt that if I did not do what they were asking me it could result in problems that will affect my family. Finally, I increased the tariff.”.12 Another provider13 mentioned

10 11 12 13

SSIP4. SSIP4. SSIP5. SSIP8 1.

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that the Association cutoff the pipes of a provider who wanted to expand the network into an area where another provider was already working. The associations were set up to protect the interests of the SSIPs vís-a-vís the formal water supply sector, being the FIPAG, the water company AdeM, and the regulator CRA. Over time, however, they have incorporated regulatory characteristics common in the formal sector, such as price setting and service area control (Jenkins and Wilkinson, 2002). In this sense, they have become a shadow regulator, not one safeguarding the interest of the general public (what officially a state regulator is expected to do) but in the interest of the larger providers and their commercial interests. For example in terms of price regulation, the formal regulator would set a maximum limit price for water services to avoid exorbitant water prices for consumers, while the SSIP Association would be striving for setting a minimum limit price so as to ensure sufficient income for the SSIPs. The interest of the Association lies primarily with its members, hence it is less concerned with controlling the quality of service provision. What remains unclear is to what extend the associations are linked to the formal water supply sector through their links with the political elite. Following Lindell (2008) and Jenkins (2009), the close relationship of association leaders with the ruling party may prevent further formalization as the informality allows the desired space for accumulating political and economic interests.

Conclusion We cannot but agree with Source Weekly that “the story on private sector participation is not over, it’s simply being rewritten” (2007). This re-writing has involved a reappraisal of SSIPs in the provision of water services, as yet another attempt to salvage the wavering faith in the benefits of the market. The underlying assumptions on which this reappraisal has been based are the comparative advantage of SSIPs in complicated service areas, and the possibility within the SSIP sector for a healthy competition between these supposedly small scale entrepreneurs. The suggestion is that the benefits of the competition between SSIPs will subsequently be transferred to the clients of these providers. In this article, however, we argued that the idea of ‘free entry and competition’ does not reflect the complexities of service provision by SSIPs. Rather, most of the current literature on SSIPs presents an overly optimistic view of the SSIP sector. Firstly, the SSIP sector is far from homogenous, and characterized by a plethora of providers, operating on varying scales (ranging from small providers with a dozen connections to large providers with almost 2000 connections), using different technologies, and with diverse vested interests. Secondly, similar to the ‘formal’ water supply sector, the combination of sunk costs and economies of density leads to monopoly-like characteristics. These characteristics mean that, at most, competition for the market is possible. Once a provider has captured the market, the customer is locked in due to the infrastructure used and the high connection fee, and has little (if at all) room to switch providers. Thirdly, market failure is exacerbated by the cartel-forming through SSIP associations by the large providers, who essentially regulate the SSIP sector. The SSIP associations regulate the price to be charged, the entrance of new providers to particular areas, and the extension of infrastructure into existing or newly to be developed service areas. The associations use both formal (contracts, guidelines, etc.) and informal (peer pressure) institutions in regulating the SSIP sector. What is hailed as ‘free entry’ to the market, or ‘healthy’ competition, is in reality a power play determined by economically unequal actors, locationally determined social relations, and historic uneven development, resulting into uneven service provision.

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The implications of these complexities in the SSIP sector raises several question questions regarding the inequities within the current SSIPs model of water services provision. Clearly, SSIPs provide a service where formal public or private utilities have failed, or even refuse to try because these areas are physically or financially unattractive. Nevertheless, the presence of (unregulated) cartels and captive consumers shows a producer-dominated system of service provision, where the most powerful producers pursue their vested interests at the cost of the captive consumers and less powerful SSIPs. While the recognition of SSIPs in the water sector will increase the official numbers on coverage, it seems unlikely that the assumed benefits of competition will flow to the consumers. If, and how, the SSIP sector is to be regulated in the interests of the consumer remains unclear. In Maputo, members of the official regulatory agency CRA have indicated that they have very little authority within the sector, and very few means to actually enforce regulation. A second concern relates to the internal dynamics of the SSIP sector. The case clearly shows the interdependence of the formal and informal domains in water provisions and how each incorporate characteristics of the other. A narrow and forced focus on formality through donor conditionality may do no more than push the smaller SSIPs out of the sector or further complicate their service provision. More insight into the social and political relations between SSIPs, and between SSIPs and their customers could shed a clearer light on the consequences of formalization on the poorer segments of the peri-urban population. The story on the private sector may be re-written, but the elements of the story remain very much the same: the blind faith in the market, its supposed power to increase efficiency through competition, and its assumed translation into consumer satisfaction. From our case, however, we argue that the theory of private sector incentives has little empirical value in improving affordable and high quality water provision. Acknowledgments The authors wish to thank Edwin Rap for extensive comments on earlier drafts of this paper. Also we are grateful for the comments and insights from the anonymous reviewers, which have resulted in greatly improving the argument and the text in general. References AFORAMO. (2009a). Condicoes Gerais de Contracto de Abastecimento de Água Potável pelos Fornecedores Privados, Draft report. Maputo: Associação dos Fornecedores de Água de Moçambique. AFORAMO. (2009b). Regulamento Interno da Associaciao dos Fornecedores de Água de Mocambique, Draft report. Maputo: Associação dos Fornecedores de Água de Moçambique. Ahlers, R. (2010). Fixing and nixing: the politics of water privatization. Review of Radical Political Economics, 42(2), 213e230. Assies, W. (2003). David versus Goliath in Cochabamba: water rights, neoliberalism, and the revival of social protest in Bolivia. Latin American Perspectives, 30(3), 14e36. Bakker, K. (2000). Privatizing water, producing scarcity: the Yorkshire drought of 1995. Economic Geography, 76(1), 4e27. Bakker, K. (2003). Archipelagos and networks: urbanization and water privatization in the South. The Geographical Journal, 169(4), 328e341. Bakker, K., Kooy, M., Shofiani, N., & Martijn, E. (2008). Governance failure: rethinking the institutional dimension of urban water supply to poor households. World Development, 36(10), 1891e1915. Balanyá, B., Brennan, B., Hoedeman, O., Kishimoto, S., & Terhorst, P. (Eds.), (2005). Reclaiming public water e Achievements, struggles and visions from around the world. Amsterdam: Transnational Institute and Corporate Europe Observatory, Accessed July 2006. http://www.tni.org/detail_page.phtml?page¼books_publicwater. Barlow, M. (1999). Blue gold. The global water crisis and the commodification of the world’s water supply. International Forum on Globalization. Bauer, C. (1997). Bringing water markets down to earth: the political economy of water rights in Chile, 1976e95. World Development, 5, 639e656. Benería, L. (1999). Globalization, gender and the Davos Man. Feminist Economics, 5(3), 61e83.

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