Tuesday, May 15, 2012

Privitize Cambo - Giving Away the Farm

Cambodia now has its first stock exchange and the country’s political and economic leaders are all fired up about entering the world of ‘high’ finance. Well, maybe it’s not that high, but still they are proud of making a beginning.
The first stock listed is Phnom Penh Water Supply Authority, two others to follow are Electricite du Cambodge and Telecom Cambodia. All three are public utilities. All are reasonably well-run though the telecom company, the only one that’s not in a monopoly position and thus subject to market forces, is behind the times and not very competitive.
The capital’s water company is highly regarded amongst developing country public water systems: it’s well run and efficient. That means it’s well placed for privatization and public officials are giddy with having such a good candidate for their new stock market.
For the longest time, as far as everybody including the media was concerned the sell-off of public assets was considered all positive and there was no in-depth reporting as to the details and possible consequences of the move. However, anybody who keeps up with these trends in the world knows that privatizing essential services like water in a low-income country has almost invariably turned into a disaster. As well, private water companies have also often had a well-deserved bad reputation in rich countries. Privatization is also high on the agenda of the International Monetary Fund, the World Bank and conservative financial and political establishments. They hate to see potential profit centers go unexploited regardless of any possible negative impact on the people served.
There are often good rationales for privatization, since, according to prevailing economic philosophy, publicly owned enterprises are likely to be inefficient, uneconomic, poorly run and repositories for political patronage. Private companies, on the other hand are so well run, or so the ideology goes, they do everything cheaper and better and the people ultimately save money and receive better service by selling off their public enterprises to the free market.
You certainly wouldn’t want a government involved in a competitive market, like making shoes, for instance, as in Soviet times, because it would never work out well. However, if you’re dealing with an absolutely essential service which enjoys a monopoly market position the dynamic is totally different.
The first thing that happens when a public utility turns private is that rates go up. That is ostensibly to extend and improve service; in reality, in most cases, private utilities spend the absolute minimum on improvements, especially if they involve very long paybacks. The only way to keep them honest is to have strong regulatory systems in place, which, in the case of Cambodia, would constitute near miraculous intervention.
The purpose of a privately owned water company is to make a profit, everything else the company does is incidental and secondary to that primary goal. On the other hand, the mission of a public water utility is to provide clean water at the lowest possible price. When providing water, the most essential ingredient of survival, to a population in which many people are living right on the edge of existence, minimum cost is imperative.
Cochabamba, Bolivia provides a good example of the perils of privatizing water. As per the demand of international financial organizations - IMF, World Bank - Cochabamba’s water system was sold off to a multinational corporation. They immediately raised the rates to the point where large numbers of the peasantry could no longer afford water; which resulted in demonstrating and rioting and in no time at all, the utility was back in public hands.
At the very same time that the capital’s water company was put in the process of privatization, a small water provider was privatized in Ratanikkiri Province. Rates nearly doubled along with vastly improved service, but large numbers of people affected by the changes resisted and fought them. The government relented and gave the people a choice, either the old system which provided cheaper but relatively low quality water for about 12 hours a day, or the new privately owned system which offered 24 hour, better quality water at the higher rate. A lot of people, already barely scraping by, chose the cheaper lower quality public service.
So, after about a year of hearing about the privatization of Phnom Penh’s water company, without any details appearing in the media, I wrote to the Cambodia Daily to ask for better, more in-depth coverage. Maybe the information was ready to come out anyway because the stocks were about to be sold, but it turns out that only 15% of the company is being sold so that the municipality will retain complete control. They expect to gain about $20 million they can use for improvements and expansion at a much lower cost than borrowing. So, it may not be such a bad deal for the people after all; still, people don’t invest money without the expectation of returns. Sometimes returns on investment come as a result of rising stock values, but chances are that the utility is going to have to pay dividends so the money will hardly be free and the end result will have to wait for the passage of time.
Cambodia is actually a poster child for the conservative fixation on privatization and free markets. There are few import controls, except occasionally when specific industries are threatened, so Cambodian entrepreneurs are forced to compete. There are also few restrictions on investment, leaving the economy wide open. As often as possible provision of public services and development of public spaces has been left to private investors.
Cambodia is very well positioned to take advantage of this openness compared to surrounding nations. The decimation of the country’s industry and commerce in the Khmer Rouge years took the country all the way down to square one, so it needs a lot of imports for goods it can’t produce itself. Moreover being a small country it can’t really compete for investment in industrial scale operations, though if the ASEAN group ever gets its tariff free zone happening it won’t matter which country an industrial operation is located in.
Higher education provides a good example. The Royal University, founded in the fifties after the country became independent, was Cambodia’s first tertiary institution. The first private university, Norton U., was established in 1997. In the ensuing 15 years some 30 or 40 higher institutions have been opened, meanwhile the Royal U. has remained static, with no investment over the years. It works fine for the government, people get educated and it doesn’t have to pay for it. All it has to do is try to regulate the sector and establish standards, which, in the event, vary wildly. The drawback is the relative high cost of tuition in private institutions. Many potential students are left out because of the dearth of subsidized public education.  
Recent privatizations of public space in Phnom Penh also provide a good example of its pitfalls. In the last few years two large, centrally located pieces of land were traded away to rich Cambodians with no controls whatever. One was the former police headquarters at Streets 154 and 51, the other was the old T-3 prison site at Streets 154 and 13. Both sites are large enough, prominent enough and important enough to have warranted international design competitions. Both could’ve included large developed areas with quality buildings as well as substantial public squares and green spaces. What did we get instead? Most of the former police headquarters is now a public market with adjoining car park. The building is okay but nothing special - a cheap metal-roofed structure with a modicum of interesting design - though to its benefit, it does include a bandstand for music events. However, except for the market stalls fronting the streets, 80% of the stalls remain empty even after years on the market; it’s obviously wasted space. The former T-3 prison site is a hodge-podge of car repair shops, parking lots and buildings that range from non-descript to trashy. A tremendous opportunity for adding quality urban spaces to the city has been lost, at least temporarily: there are no structures of any real value at the T-3 site so a better designed future space is still a possibility.
Dam construction also provides a good example of the trade-offs inherent in depending on others for financing and construction. Cambodia heaps boatloads of gratitude on China and Vietnam for their willingness to fill the country with dams without it having to pay for them, but in the end it may rue the day. Often hidden in the fine print of the contracts are provisions that require Cambodia to not only pay a high price for the energy generated, but also a high price even if the energy’s not needed or produced. That’s leaving aside the environmental degradation and loss of fisheries that is always a corollary to large dam construction.
It makes sense for the dam builders: they’re not going to put hundreds of millions of dollars into dam construction without guarantees that they’ll get a return on their investments. However, so many dams are under construction or in the planning stages in addition to two coal-fired power plants in the works for Sihanoukville - one is a large 700 megawatts - that the country could soon be awash with power and require years of increasing demand before the electricity is needed. For instance, peak power demand in Phnom Penh, which is easily a large majority of the country’s total demand, is 350 megawatts, whereas the one S-ville coal plant, by itself, will produce 700 megawatts. Cambodia may well find itself paying through the nose for power it has no use of.
The other alternative is to become a power supplier to neighboring countries. Electricity from the controversial Lower Sesan Dam in Stung Treng is intended almost exclusively for export to Vietnam. It’s one thing to sacrifice one’s own environment for the sake of needed electricity, but to do so strictly for export is pure folly, the free market gone wild; though in truth, sacrificing one’s land for quick bucks is nothing new and happens as easily in America as it does in developing countries.
  Finally, probably the most discouraging aspect of Cambodia’s give-away-the-farm mentality is the granting of economic land concessions on a grand scale. Twenty-two percent of the country’s entire land surface, nearly 4 million hectares, has already been given away in land and mining concessions and the give-away is continuing apace. That includes large swaths of national parks and conservation areas.
The largest concession - 315,000 hectares which is equal to 3150 square kilometers - was granted in 1997 to a ruling party senator. Even with that vast holding, he still has frequent conflicts with the locals; he can’t stand to let villagers living within the concession have a few hundred hectares… typical of the filthy rich.
That was before a 2005 law that limited concessions to 10,000 hectares, equivalent to 100 square kilometers. However, there are ways to get around that limitation: in one case four adjacent concessions, each nearly 10,000 hectares, have been granted to four companies owned by the same corporation, a Vietnamese one at that. Isn’t it ironic that individual foreigners are not allowed to own small plots of land but immense holdings are granted to foreign corporations?
A prominent CPP lawmaker quoted in the Cambodia Daily strongly defended the practice of granting concessions as important for the country’s development and said the poor people being displaced should be willing to sacrifice for the good of the country. It’s easy for a rich lawmaker to speak about the need for the peasantry to give it all up for their homeland. While many of the villagers displaced by land concessions are given plots of land elsewhere, they’re often either poor quality land or in places where they have a hard time earning money. There will be jobs offered in the rubber, oil palm and sugar plantations but they’ll be low paid, not very desirable jobs. Nearly every concession involves displacing local people or the destruction of the forests they depend on for their livelihood. In some cases, the government discovers years later that the area has been logged, the grantee has pocketed the profits and then has failed to develop the land as proposed. They then yank the concession, but by then the damage has been done.
The plan to convert immense areas of the country into corporate plantations reminds me of the great inequality that exists in many Latin American countries as a result of the colonists taking land that was previously held in common and dividing it up amongst themselves. The result has been that a few percent of the population descended from the original colonists owns almost all of the land. The rest are landless peasants. In a sense, Cambodia is being recolonized: large areas are going from public ownership into corporate ownership.
It’s easy to understand the leadership’s eagerness to give away the farm: they get permit fees and the land is developed without any cost to the government. In my mind, rather than give 10,000 hectares to a corporation, it’d be far better to grant 100 hectares each to 100 people, or 10 hectares each to 1000 people and then provide the training and wherewithal needed to plant the rubber trees, etc. That way the profits and benefits are spread around to large numbers of people rather than the profits going to corporations or the wealthy and the peasantry left with low wage, peon work.
That of course would require planning, investment and organization, rather than simply pocketing the commission fees (both overt and under-the-table) and walking away. Unfortunately, that goes against the prevailing wisdom that corporations always know best and privatization is the only legitimate way to develop a country.
All in all, the mania for giving away the farm may well bring development to the country - rubber, oil palm and sugar cane are all likely to be in high demand in the future - but it’s a very big question whether that growth will benefit the people at large. It may turn out to be a classic case of the folly of trickle-down economics where, in the event, a lot of money goes directly to the top, while only a pittance trickles down to the bottom.
I don’t doubt that Cambodia’s public officials are sincere in their beliefs that they’re doing the right thing for the country, whether or not they are personally benefiting. There’s also no question that development is desperately needed, but in their zeal to give away the farm I fear they will also be giving up a lot more and that all Cambodians, outside of the elite few, will, in the final tally, be losing out.