The 1990s saw an unprecedented wave of water privatisation around the world. Public water utilities’ failure to expand service coverage and improve service quality prompted municipalities in many developing countries to turn to the private sector for investment capital, technical expertise and efficiency improvement (Dosi and Easter, 2003). In addition, water  privatisation was perceived as a means to end government subsidisation by ‘depoliticising’ water pricing; public water utilities often priced water and sanitation services at below cost-recovery level, creating enormous financial burdens for governments in developing countries. The political environment during the decade was highly favourable to water privatisation as pro-market politicians rose to leadership positions in many countries and international financial institutions were actively promoting market-oriented reforms in the developing world through loans and technical assistance programmes (Hall et al., 2005). By the end of 2000, at least 93 countries had experimented with water privatisation in one form or another (Brubaker, 2001).

The ‘exuberant enthusiasm’ for the water privatisation, however, was soon subdued by harsh realities marked by renegotiation, termination and cancellation of privatisation contracts and projects. A World Bank database on infrastructure revealed that, by 2002, 75 per cent of contracts for water privatisation in Latin America and the Caribbean had experienced either renegotiation or cancellation (Gómez-Ibáñez et al., 2004). In Asia, the rate of water privatisation has slowed considerably since the Asian fi nancial crisis, as a number of high-profile water privatisation projects have been abandoned or cancelled due to disputes over water tariff increases (Hall et al., 2004).

Some critics have argued that water privatisation is ill-fated because the public benefits of water services are inherently incompatible with the profi t motive of the private sector (Estache et al., 2001; Birdsall and Nellis, 2002; Smith and Hanson, 2003). Others have held that water privatisation compromises access to water as a basic human right and that it harms the welfare of the poor (Gleick et al., 2002; Scanlon et al., 2004).

Although arguments against water privatisation have gained currency in recent years, the urgency of the water crises that led to privatisations during the 1990s remains unchanged to the present day: more than 1.1 billion people world-wide lack safe drinking water and 2.4 billion lack adequate sanitation (Kessides, 2004). The situation is especially acute for many rapidly growing small cities in developing countries: more than half of the residents in these cities do not have water connections (Hewett and Montgomery, 2001). Inadequate urban water supply systems place a greater financial burden on the urban poor, as a disproportionately high percentage of poorer households lack access to piped water (Johnstone et al., 2001; Marvin and Laurie, 1999). Studies have shown that unit costs for water from vendors (who often supply to the urban poor) can be as much as 10 times higher than for water from piped connections (Crane, 1994; Chogull and Chogull, 1996).

The importance of access to safe drinking water to poverty reduction is highlighted by the stated intention of the Millennium Development Goal (MDG) to halve the number of people without safe water access by 2015. Enormous fi nancial resources are needed to reach this ambitious goal; estimates from the World Bank early in the new century indicated that developing countries would need US$60 billion for the water sector over the next 10 years (Haarmeyer and Coy, 2002). It is clearly unrealistic to expect governments in developing countries to finance this development entirely on their own. Private-sector participation will continue to be among the few options available to municipalities in many developing countries and especially to the increasing number of fast-growing small and medium-sized cities.

Meanwhile, despite the many criticisms levelled at water privatisation, no empirical evidence has emerged to suggest that funding problems are so inherent in the water supply sector as to pose insurmountable barriers to privatisation. In fact, one recent study (Galiani et al., 2005) has shown that water privatisation reduced child mortality by 5–7 per cent in Argentina, with the largest gains in reduction experienced by the poorest population. Although some research has shown that effi ciency was not significantly different in private and state-run water operations (Estache and Rossi, 2002; Kirkpatrick  WATER PRIVATISATION IN MANILA 209 et al., 2004), no empirical study has confirmed claims that private water companies are necessarily less efficient than their public counterparts or that water privatisation  hurts the urban poor. Given the importance of private-sector participation to the success of global efforts to alleviate inadequate and unsafe water supplies, it is of paramount importance to understand where, when and how water privatisation could be successfully implemented.

The voluminous literature on water privatisation offers little information about the impact of privatised water utilities’ management practices on how privatisation  has fared in developing countries. Studies of previous water privatisation cases  have typically focused on external factors such as political support, institutional structure, design of contract, transparency of bidding process, public perception and impacts of unforeseeable events (Johnstone et al., 2001; Shirley and Menard, 2002). These factors, undoubtedly critical determinants in the success or failure of water privatisation, are nevertheless external conditions in the sense that they are outside the control of privatised water utilities. We argue here that privatisation involves transformation in ownership structure and organisational culture within water utilities and that how the transformation is managed at the company level has a direct bearing on the  outcome of privatisation.

One plausible explanation for the lack of scholarly work on the impacts of internal factors on water privatisation is that it is methodologically challenging to assess what these internal factors are and how they function. First, it is fairly difficult to disentangle the effects of internal factors from those of external factors, as they are often intermixed and shaped by particular conditions, such that case studies detailing water privatisation  in a specifi c locality cannot usefully generate definite conclusions about the effects of internal factors. Secondly, external factors are often more visible and thus more tractable analytically than internal factors, because it is easier to obtain information on external factors than on internal factors, which may not be readily available in the public domain. Thirdly, statistical tools such as regression analysis may offer only limited insights on internal factors because localised peculiarities  can be hard to quantify and to  compare meaningfully.

The recent history of water privatisation in Metro Manila presents a unique opportunity as a natural experiment to analyse and compare the effects of internal factors on the success of privatisation efforts in an urban context. When Manila’s Metropolitan Waterworks and Sewerage System (MWSS) was privatised in 1997, metropolitan Manila was divided into two zones and concession contracts were accordingly awarded to two companies, Maynilad (West Zone) and Manila Water (East Zone). Because  the two concessionaires faced the same external factors—for example, political support, institutional  structure, contract design, transparency of bidding process and locally shared unforeseen events—the analyst can concentrate on differences in internal factors and study the effects of these differences on the success and failure of water privatisation.

The discussion continues by developing theoretical linkages between water privatisation and three internal factors: corporate governance, financial management and operations management. An overview of the evolution of water privatisation in Metro Manila sets the stage for analysis and comparison of the performance of the two concessionaires after privatisation, in terms of how differences in internal factors have contributed to the different paths that they took and the outcomes they experienced. The fi nal discussion summarises important results of the analysis and addresses their implications for water privatisation policy and for innovation in public water utilities.

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