Environmental Services Liberalization and Sustainable Development

1. Environmental Services Liberalization and Sustainable Development Luis Abugattas Majluf UNCTAD-DITC WTO Symposium on Trade and Sustainable Development within the framework of Paragraph 51 of the Doha Ministerial Declaration Geneva, 10‑11 October 2005

2. The international community has set clear goals when addressing the issue of environment and development: Millennium Declaration 2000, UN 2005 Summit MDG 7: Ensure environmental sustainability • Target 9 Integrate the principles of sustainable development into country policies and programmes and reverse the losses of environmental resources. • Target 10Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation. • Target 11Have achieved by 2020 a significant improvement in the lives of at least 100 million slum dwellers. Goal closely linked to the attainment of other MDG: 4 child mortality, 5 maternal health, 6 combat diseases, and to a large extent dependent on MDG 1 eradication of extreme poverty.

3. Challenges are enormous • Increasing environmental degradation [climate change, deforestation, soil, water and air pollution, depletion of biodiversity] • 1.1 billion people without access to safe water. • 2.4 billion people lack access to improved sanitation. • 32 per cent of worldwide urban population live in slums. 43% in developing countries, 870 million people without access to housing related infrastructure and services. • Significant investment required [180 billion USD yearly] • A further challenge: How to provide services and develop required infrastructure avoiding an increase in environmental degradation ?

4. In order to achieve MDG 7 it is necessary to enhance domestic capacities to: • Provide essential services to the population [water and sanitation] • Address environmental protection and management in order to conserve critical ecosystems [capacity to prevent and remedy environmental damage] Basic questions: Which are the best policies to achieve the main objectives? And, how international trade and, being the case, binding commitments can contribute to this end?

5. In order to assess policy options for developing countries is necessary to analyse the nature of different services linked to environment and development goals

6. Infrastructure-type services I • Traditionally public services [In 90% of developing countries provided by the public sector. Only 5% of water distributed by private companies worldwide] Increasing private involvement. • Demand function of population growth and urbanization. Issue: conversion of need into effective market demand. • Quasi-public goods; or “merit goods”. Perceived as a “right” by consumers and even legally (South Africa). • Characteristics of network services, capital intensive activities, large sunken costs. Technology available through the market. Main constraint is finance. • Tendency towards natural monopoly [sewage, water treatment and distribution, refuse disposal infrastructure]

7. Infrastructure-type services II • Differentiation between the service itself and the associated necessary infrastructure [solid waste recollection and incinerator or sanitary deposit, water distribution and water pipelines] • Sensitive to “collective action problem”: action of a member affect all others. [sanitation] • Full-cost recovery from users is the ideal long-term goal. Need of subsidisation of low income population. • Regulatory objectives: rates, universal access, standards and quality of the service, competition, and addressing negative externalities. Issue: regulatory and enforcement capabilities. • In most cases liberalization entails privatization.

8. Other non-infrastructure environmental services • Regulation-induced demand [public opinion, profitable environmental protection]. Corporate and State clients mitigating market failure risks. • Knowledge and technology intensive services. • Provided through the market by private sector in competition. Few trade restrictions [government procurement, natural persons mobility, and recognition and accreditation issues] • Regulatory objectives: quality of the service. [assure that the supplier is adequately qualified to provide the service]. • These services are crucial to prevent and remedy environmental damage. • Size of domestic market, needed specialization and technological requirements may limit development of a domestic supply of these services in many developing countries.

9. Policy options for developing countries I Infrastructure-type environmental services Privatization and full market reliance Public provision Private Public Partnerships (PPP) Community-based approaches There is a very rich experience with the application of different policies aimed at improving the provision of essential services. PPP: services contract, management contract, private lease, BOT, concession, and joint-venture. [domestic or foreign companies]

10. Assessment of policy outcomes I Private participation has been actively promoted worldwide to address lack of public resources, low quality service and also as result of pressures to privatize*. What can be learnt? • Liberalization offers potential benefits: capital, improved operating efficiency, technical and managerial expertise. (OECD). Investment flows can not be guaranteed [flows levelling off, desinvestures] The State might still have to play an important role. Potential conflicts, i.e Aguas Argentinas • Positive results can be obtain trough different alternatives. There are numerous examples of success and also of failure under the different policy options. • Some studies demonstrate that there might not be significant difference in the performance of the public sector and private companies in providing some essential services** • For example, In 30% of loans agreed by the IMF in 2000 water privatization was a condition. * * Estache A and Rossi M (2002). How different is the efficiency of public and private water compan*ies in Asia? World Bank Economic Review Vol 16, No 1. Oxford University Press, Oxford June 2002. Clarke, G, Kosec K, and Wallsten, S (2004). Has private participation in water and sewerage improved coverage? Empirical evidence from Latin America. World Bank Policy Research working paper, No 3445]

11. Assessment of policy outcomes II • The regulatory environment is central in determining the outcome of increased private sector participation. Therefore the sequence between liberalization and regulatory upgrading and institution building is crucial for obtaining positive results. • There are no basis for a “one size fits all approach” The best policy is service and country specific. Assessment of domestic market realities, of the institutional capabilities and regulatory framework, and evaluation of policy alternatives is required.

12. Non-infrastructure services • In order to address environmental concerns most developing countries need to develop markets for environmental services, and strengthen the domestic supply of these services. [initial development in environmental consultancy services and other related professional service] • Measures fostering the demand for these services and also supporting the emergence of supply are needed. • Trade can play an important role in assuring the availability of specialized cost-effective environmental services and contribute to the development of a domestic supply of some of these services through association of domestic with foreign firms, improved access to technology, and dynamic efficiency gains brought by increased competition.