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Why busy with the right to water instead of 'governance'?

Saturday, April 3, 2010

Right to water skeptics normally pose this typical question: Why the right to water instead of governance?

Here's a short answer: you can't go to the court asking for good governance.

Illustration:

If you are disconnected from the services, you can't say to the judge:

"For the sake of good governance, please, reconnect me to the network."

compare with this statement:

"There is a human right to water in the constitution, I should, at least be permitted to pay in arrears, the disconnection is illegal."
 
Put it simply, the right to water creates rights and obligations. It can even create obligation for a good water governance. Remember, governance does not stand by itself. One of the indicator is the rule of law.

 

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The Pertamina Bribery Case: R v Innospec Limited

As you might be aware, the Indonesian Commission for the Eradication of Corruption (KPK) recently investigated the alleged bribery of former Indonesian's Pertamina (State owned oil company) top officials for delaying the enforcement of TEL-free gasoline policy and securing the TEL supply contract to Pertamina. 

The bribery was allegedly conducted by Innospec subsidiary in Indonesia through a series of ad-hoc funds and financial engineering. Some of the important points in the UK's Serious Fraud Office document:
65. It is not known how many ad hoc funds there were, nor responses for one off payments, though there is reference to a number within documentation provided to the SFO by Innospec. These additional payments were variously referred to as the “Lead Defense”4 fund; “Lim WS account”5; “compensation fund”6; “extraordinary costs”7; “cumulative costs”8; “special funds”9; “promotion fund”10 or “exceptional promotional work”11; “special bonus”12; “cranes” 13 and the “Rachmat Sudibyo fund”.
 66. This fund was conceived and largely operated during a period predating the Indictment. In the first instance between 2000 until his departure in August 2002, a recipient of ad hoc bribes was Rachmat Sudibyo (“Sudibyo”). The “Rachmat Sudibyo Fund” was a corrupt vehicle to pay Sudibyo, the Indonesian Director General of Oil and Gas at the Ministry of Energy and Mineral Resources. He was in post until August 2002, whereupon he was appointed Chairman of BPMigas – the newly established oil and gas authority.
69. The Special Committee retained KPMG to examine all payments made to PTSI. KPMG found two large payments, one in 2001 ($265,000) and one on 8 January 2002 ($295,150) with invoices stating that they were: “For payment all Pertamina/Migas & Lemigas Personnel (sic) travel, hotel, daily expenses overseas during the year 2001 spent in promotion of OCTEL’s products, as earlier agreed.”.

76. Innospec’s agents therefore made corrupt payments to public officials at Pertamina which were not dependent upon or related to specific orders for TEL being made. Corrupt payments were made as general sweeteners “to clear the air”, through various mechanisms including the agents’ general commission, to “buy of [sic] some Pertamina people”, to maintain or increase market share.

77. Furthermore, Innospec’s agents also requested further funds in order to make corrupt payments to a rival agent – Wisnu – who had apparently been tasked with marketing Chinese-sourced TEL to Pertamina.

83. In 2003 and 2004, Innospec’s agent, Sebastian, targeted Suroso, who became the Refinery Director of Pertamina. It is believed that this position was second only to the President or CEO of Pertamina. In effect Suroso had authority, at least until 2005, to sign and agree purchase orders on behalf of Pertamina. Even after the creation of MIGAS, individual refineries and Pertamina more generally had certain autonomy to enter into contracts with particular suppliers.


Read the full document at the SFO's web here.


The UK's Innospec had pleaded guilty to the offence. The UK's DoJ is currently carrying criminal investigation into the matter.





 

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What do we mean by 'regulatory governance'?

Thursday, April 1, 2010


The origin of this whole governance debate can be found in the 'grandfather-paper' of this topic written by Levy and Spiller (1994). The 1994 paper distinguishes "regulatory content" (as in technical regulation dealing with the input, process and output) from "regulatory governance arrangement "which focuses on restraining the regulator's discretion. The governance arrangement deals with among other, how predictable the regulatory law is and the track record of the courts in hearing and settling disputes impartially. So the focus of the governance debate is on the commitment of the state in regulating and in constraining the discretion of the regulator. It appears to me that the focus is more on the investor side of the regulation, and not really on the consumer side. 

When privatization was carried out in the UK during the 90s, experts considered that in practice, it is hard to stick to the black letter of the regulatory mandate. The mandate, according to them, has to be continuously reinterpreted. In fact, as we can see many English legislation, regulatory mandate always contain some 'public interest' clause, which broadens the scope of discretion.

Legal scholars such as Graham and Prosser thus considered that the regulator is responsible for, not only in performing regulation in technical sense, but also in furthering social objectives. This duty is both implicit (such as found in the public interest clauses) and explicit in the regulatory mandate. 

Back to the governance debate.

When Levy and Spiller (1994, above) argued that regulatory governance is primarily about restraining regulatory discretion, 1997 papers onward (for example, this one) considered that some discretion is inevitable instead, especially when it comes to the regulation of industries with rapid tech-changes. Of course, these papers still focus on the investor protection side of the debate. 

However, recent literature on governance pays more attention to the consumer side of the regulation, rather the investor side. Consider for example, Dunleavy's seminal paper "New Public Management is Dead -- Long Live Digital Era Governance" which argued that people are no longer a passive recipient of a public service, but also an actor and a partner. Other literature argued that the case where customer has no say on how the store is run, is no longer the trend. Disempowering customer from regulation has, in many instances, produces failures. For example, a steep increase in water tariff results in inability to pay. Inability to pay leads to disconnection. Disconnection leads to unpaid investment (in installing water meters and extending  pipelines to household) and in water theft. Water theft and unpaid investments leads to even higher tariffs. Finally, in the end of the day, the whole system collapse. 

Thus, the literature suggests the shifting trend from customer paradigm-- where they are a passive recipient of the service into citizen paradigm, where people are involved in the decision making process in service delivery (for example, in setting tariffs). How this is done (see paper), is through accountability, transparency and participation mechanisms. This is the new focus of the recent regulatory governance debate.

 

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What is the best indicator for a regulatory transparency?

Wednesday, March 31, 2010

Gutierrez (2003, paper here) tried to come up with an operational elements of regulatory governance.  He considered that autonomy and independence should be reflected in financial and budgetary independence and no free removal of commissioners; accountability is reflected through clear mechanisms for solving disputes, while clarity of roles and objective is manifested through the regulatory authority’s ability to impose fines and set tariffs. Finally, he opined that "..transparency and participation are operationalized by the existence of hearings for the setting of tariffs and other issues" (see pages 18, 19 and 24). 

However the argument that public hearing is the best proxy in determining regulatory transparency was disputed by Stern and Cubin (2003, paper here), who argued that it is too american-centric. Stern and Cubin argued instead that the requirement for regulator to publish their decision is the better proxy.  

Now the hard task for lawyers is in translating this into a legal concept.  First we need to choose which one is the best proxy. Should we obligate public hearing, or instead, it is adequate for the legal framework to require regulator to explain and justify their decisions? The devil will of course be found in the detail. Public hearing without adequate information disclosure is a non-sense. The legal requirement to explain and justify decision is also not clear in itself unless it is detailed further on how this should be performed.  



 

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RI water services suffering from a lack of governance

Tuesday, March 30, 2010

Below, I repost my article at today's JP. 
RI water services suffering from a lack of governance

Mohamad Mova Al ‘Afghani ,  Dundee, UK   |  Tue, 03/30/2010 9:48 AM  |  Opinion
From more than 300 water utilities currently operating, only a quarter is said to be financially healthy. The rest is either suffering from high debts or continuously failing to be able to cover its costs.

Meanwhile, the population keeps increasing and the quality of water from surface and groundwater sources is rapidly decreasing due to deforestation, pollution, saltwater intrusion and other problems caused by climate change. Experts are pessimistic that Indonesia will be able to achieve the Millennium Development Goal (MDG) target on water by 2015.

What is the real problem in the water services sector? There are funds out there ready to be invested by the private sector, but yet, most private sector participation in the water sector is failing.

Water is also abundant in this country, but in the form of floods or waste. Many reports consider that the real problem is not the lack of financial or natural resources, but the serious lack of governance.
 
Given the seriousness of water for our daily lives, it is a pity that we do not have any single national legislation dedicated specifically to managing water services.

The reason for this is partially because of regional autonomy, that those are the duties of local governments. 

Has local government paid enough attention to governing water services? No. What I hear most is the fuss about regional bylaws regulating the decency and morality standards of their citizens, such as those related to gambling, prostitution, alcoholic beverages or women’s clothing.

I am not suggesting that public morality cannot be regulated. It’s just that in terms of priorities, we are certainly losing our sight. There are obviously more people dying and ill because of waterborne diseases rather than from gambling or prostitution.

It is the lack of access to sufficient and safe water which contributes to the escalation of criminal and socially immoral activities.

Within the world of water activism itself, the debate is often sidetracked. In Indonesia, people tend to always debate between public versus private ownership of water utilities. I think they are asking the wrong question.

We know so much about the failure of privatization but yet so little about the success of public water utilities. So the real question should be aimed toward a solution: What governance mechanisms work for either public or private water utilities? In what circumstances can water be privatized and in what circumstances is a public ownership desirable?

This sidetracked debate has contributed to a bitter reality, that is, that both privatized and nonprivatized services develop without adequate governance.

Jakarta, for example, which has a population of more than 10 million in daylight, is regulated through bylaws enacted in 1992 and 1993, way before privatization (by way of concession) was carried out in 1998.

These bylaws are poorly drafted and do not reflect the need to incorporate post-privatization reality. What is happening now is that, in practice, Jakarta drinking water services are regulated mainly through concession contracts.

This fact is appalling because water is a political good that contracts alone are never enough to regulate.

When a Jakarta citizen asks to what rights are they entitled as a water customer, there’s not much that the 1992 and 1993 bylaws can answer because the 1998 privatization has changed the landscape of accountability from Jakarta’s local government and PAM Jaya to its concessionaires.

Some of the answers could be provided in the concession contracts. Unfortunately, the concession contracts are said to contain a confidentiality clause and therefore are never to be found in the public domain.

On the other hand, a citizen in Bogor can obtain clarity that they are entitled to a discount and even exemption from payments if their water utility delivers substandard services because Bogor municipality enacted a bylaw in 2006, stipulating the rights and obligations of the customer.

This is not to say that Bogor’s water services bylaws are perfect as there are many clauses which need amendment.

This is to say that when local government has a strong will to govern water services, it can.

Currently, there are several other water services cooperation, concessions and joint ventures taking place or being planned, oftentimes with the support of International Financial Institutions (IFI).
Reading their reports, I am skeptical that enough attention is given toward transparency, accountability and participation, all of which constitute an important element of governance.

Some reports even modeled water services as a sale-and-purchase transaction like other ordinary goods, whereby the Regional Water Company (PDAM) bought water from the private sector and re-sold it to customers, away from the scrutiny of local parliament and other accountability mechanisms. 

If this is the way to go, then we are doomed to another failure because no privatization is ever successful without proper regulatory governance.

If local government wishes to privatize, they should tightly regulate the private sector. No contracts can be above the law, especially when it comes to an essential element of human life such as water.

If they don’t regulate, they will soon realize that they will lose control. Prices rising, taps not flowing, no investment made to extend the network. 

When this happens, the citizens will come after them to demand responsibility. If they find no favorable answer, they can start taking matters into their own hands, such as by stealing water from the network.
This, in turn, will raise the burden on those who actually pay the price. If the local government decides to terminate the contract, the private sector will threaten to use international arbitration.  

Thus, local governments should start establishing the framework for transparency, accountability and participation through regional bylaws. If the services are to be privatized, they must ensure prior consent from the citizen.
Contracts should be available in the public domain, rights and duties of both customer and the service provider should be stipulated under bylaws, complaint mechanisms should be set up, redress should be available to customers, service levels and the consequences of violations thereof should be
established.

No contracts can be above the law, especially when it comes to an essential element of human life such as water.

The writer is a PhD candidate at the UNESCO Centre for Water Law, Policy and Science at the University of Dundee, UK.

 

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Legal System and Governance Transparency

Friday, March 26, 2010

Bushman, Piotroski and Smith (2004) distinguished between two elements of Corporate Transparency: Governance Transparency and Financial Transparency. The factors of financial disclosure are segments, r&d, capex, accounting policies and subsidiaries. Meanwhile, the factors of governance disclosure are major shareholders, management, boards, director and officer's remuneration and officer's shareholdings.

The results of their study is very interesting. They found that financial transparency is correlated with political economy, while governance transparency is correlated to legal systems. Financial transparency is higher in states where state ownership of enterprises and bank is low while governance transparency is higher in common law systems compared to civil law tradition.

One of the explanation for this result is because governance transparency is highly dependent of efficient judicial system and legal framework, and it appears, civil law countries are not that efficient with respect to their judicial system. 
 
On the qualitative side, it will be interesting to evaluate if legal frameworks in civil law countries are -- independently of the efficiency of their judicial systems -- adequate with respect to corporate reporting.  It would also be interesting to see if this situation in civil law tradition can be rectified using both mandatory and voluntary disclosure policies combined with incentive.
 


 

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[RTWS Update] Consultation on the Human Right Aspects of Private Sector Participation in the Water Sector: more responses from the private sector

The UN Independent Expert launched a consultation a few months ago regarding the human rights aspects of private sector participation in water services. As of today, several companies including Suez, Veolia and American Water had sent their responses. Reading the consultation responses, I feel that there are growing anxiety from the private sector that the Right to Water movement will use human rights instrument to outlaw private sector participation from the water services sector. 

This view is incorrect and absurd. It is not possible for the human rights system to dictate on a specific ownership model. The stance of RTWS with respect to private sector participation is already clear from the General Comment 15: there is a state duty to regulate. Hence, when it comes to PSP, the only question is what and how to regulate.

To read more on the responses, click here.