International Development Planning Review

The limits of insulation: the long-term political dynamics of public-private service delivery

International Development Planning Review (2022), 44, (3), 317–343.

Abstract

Public-private collaboration is deemed critical for improving service delivery in the global South. This article examines how relations between state and private investors develop over time - and, by extension, how they affect service delivery - in different collaborative arrangements. Through a comparative historical analysis of two mixed-ownership water and sanitation companies in Brazil, the article challenges conventional policy prescriptions that focus on the role of institutional rules in governing public-private relations and insulating service provision from politics. The findings show the importance of understanding how organisational factors - such as the type of private participation - intersect with political processes to (re-)configure public-private relations and the direction of service delivery temporally. The cases both unflatten generic treatments of private participation and problematise the emphasis on institutional solutions that seek to depoliticise service delivery. In fact, insulation may risk closing political channels through which more progressive service outcomes can be achieved.

Published open access under a CC BY licence. https://creativecommons.org/licences/by/4.0/

The limits of insulation: the long-term political dynamics of public-private service delivery

Abstract

Public-private collaboration is deemed critical for improving service delivery in the global South. This article examines how relations between state and private investors develop over time - and, by extension, how they affect service delivery - in different collaborative arrangements. Through a comparative historical analysis of two mixed-ownership water and sanitation companies in Brazil, the article challenges conventional policy prescriptions that focus on the role of institutional rules in governing public-private relations and insulating service provision from politics. The findings show the importance of understanding how organisational factors - such as the type of private participation - intersect with political processes to (re-)configure public-private relations and the direction of service delivery temporally. The cases both unflatten generic treatments of private participation and problematise the emphasis on institutional solutions that seek to depoliticise service delivery. In fact, insulation may risk closing political channels through which more progressive service outcomes can be achieved.

Published open access under a CC BY licence. https://creativecommons.org/licences/by/4.0/

Introduction

Public-private collaboration lies at the core of much of the current policy advice on how governments in the South can more effectively and sustainably provide infrastructure services to their citizens.1 Granted, private participation is no longer touted as a panacea - the 1990s yielded important lessons about its equity and accountability challenges (Jomo et al., 2016). Nonetheless, leveraging resources and expertise from the private sector via public-private partnerships (PPPs), for example, remains considered critical for overcoming capital shortfalls, enhancing operations and meeting the Sustainable Development Goals (SDGs) (Mohieldin, 2018; Garcia-Kilroy and Rudolph, 2017). Attracting long-term financial capital, specifically, is a seductive option for cash-strapped governments seeking to address infrastructure gaps by tapping into a large ‘pool of global savings’ (Arezki et al., 2016) - potentially contributing to what Mawdsley (2018) has called ‘financialization-as-development’.2

Unsurprisingly, a number of donor-led programmes have emerged focused on ‘best-practices’ for how governments can create an attractive environment for investors (Bayliss and Van Waeyenberge, 2018). Often, this advice reflects the New Institutional Economics’ development playbook, emphasising well-designed contractual arrangements, governance rules, independent regulation and judicial support for property rights (Trebilcock and Rosenstock, 2015; Guasch et al., 2014; Farquharson et al., 2011). The main concern is with structuring rules and incentives so as to reduce transaction costs and risks for investors related to the breach of contractual commitments, particularly due to ‘governmental opportunism’ (Savedoff and Spiller, 1999). Insulating service delivery arrangements from political interference is, in fact, a crucial concern.

This article is motivated by two important shortcomings of this dominant policy lens. The first concerns the lack of attention to the temporal and relational character of public-private arrangements. Despite the long life-cycle of these collaborations (usually between twenty to thirty years), little attention has been dedicated to examining how relations between state and private actors actually unfold over time - and, by extension, how they affect service delivery. The normative expectation is that institutional incentives such as contracts will govern these relationships and balance the goals of both parties. In practice, however, institutional design has proven to be a difficult - if not elusive - art to master (Sclar, 2015; Miraftab, 2004). Rampant problems with contractual incompleteness, asymmetric resources between partners, trust-building and regulatory weakness have called attention to the limitations of thinking of public-private collaboration simply in terms of rules (Warsen et al., 2019; Post, 2014). Rather than treat public-private partnership models as static institutional arrangements, I propose we treat them as relations between non-fixed actors, examining the socio-political and organisational factors that may impact how state and private actors relate to each other and influence service provision over time.

The second limitation concerns the tendency to treat private participation generically, without greater scrutiny of how different forms of private participation shape the market pressures service providers face. Critical studies of the global geography of private infrastructure investment have pushed this boundary by unpacking capital flows and financial arrangements (Siemiatycki, 2013; Torrance, 2008) that ‘splinter’ infrastructures (Graham and Marvin, 2001). Political economy scholars have also shown that variation in investors’ portfolio strategies may influence contractual and regulatory outcomes (Post and Murillo, 2016). Yet, I argue we also need to understand the concrete organisational dynamics - including ownership and corporate governance structures - through which private investors and financial interests may influence decision-making and affect service provision (Klink et al., 2019; Allen and Pryke, 2013).

This article develops these lines of inquiry through a comparative historical analysis of mixed-ownership utilities, that is, utilities in which assets are jointly owned by state and private actors. I compare the trajectories of two of the largest water and sanitation utilities in Brazil, Copasa (Companhia de Saneamento de Minas Gerais) and Sanepar (Companhia de Saneamento do Paraná) over nearly twenty years (1998-2016) to examine how relations between the state and private investors unfolded following the transition to mixed models and how these, in turn, shaped utility decision-making and service outcomes. Sanepar transitioned to mixed-ownership in 1998, when the privately-held company Dominó Holding became its main minority shareholder - a model I refer to as concentrated private participation.3 In contrast, Copasa adopted a dispersed model, listing shares on the Brazilian stock market in 2006. State governments remained the controlling shareholders in both companies. The variation in form of private participation allows for unflattening generic treatments of private engagement in service delivery, while the temporal sensibility reveals how public- private relations are (re-)constituted historically through political processes that infuse into the state different planning rationalities, that is, value systems and policy commitments.

Defying the prescriptions of dominant institutional frameworks, the cases demonstrate that contractual agreements and governance rules were neither able to fully disrupt historical service delivery practices nor capable of insulating service provision from politics. Rather, I argue that observed temporal variation in public-private relations and the direction of service delivery in each case reflected intersecting organisational and political dynamics. I find that the type of private participation in ownership structure shaped the nature of relations between partners and the opportunity space for investors to influence company activities. However, whether service provision became more or less market-oriented depended crucially on the political approaches to service provision adopted by different state government administrations over time and translated into the day-to-day activities of utilities through the work of political appointees and allied managers - what I call political modulation.

The article is organised as follows. In the next section, I engage critically with economic frameworks that have been influential for thinking about how public and private actors behave in collaborative arrangements such as mixed-ownership companies and situate how my own approach departs from conventional analytical schemes. The third section explains the case selection and research methods, while the fourth and fifth sections develop, respectively, the empirical analysis of ownership structure and political modulation in both cases. Finally, I consider the implications of the study for international planning debates on forms of public-private collaboration for the provision of infrastructure services in the global South. Specifically, I discuss the importance of recovering the analysis of organisations as spaces in which the politics of service delivery takes place and problematise depoliticising policy solutions and institutional reforms that attempt to ‘improve’ the effectiveness of public-private collaborations by attempting to remove politics from the equation.

‘Best of two worlds’ or ‘two-headed monsters’?

To examine the temporal dynamics of public-private relations, I deploy an interdisciplinary lens that bridges economic theories of business ownership and governance with debates about the politics of service delivery and the role of the state in development. From an economic standpoint, mixed-ownership models have mainly been examined through the lens of agency theory. From this perspective, corporate governance - or the rules and structures that organise firm activity - is about aligning the behaviour of firm actors to reduce transaction costs and maximise returns for owners (Jensen and Meckling, 1976). In the case of mixed companies, the concern is with economically inefficient outcomes derived from so-called ‘principal-principal’ problems, that is, from potentially divergent interests between the state and private shareholders (Musacchio and Lazzarini, 2014; Vining et al., 2014; Young et al., 2008).

Agency theory suggests relations between public and private partners in mixedownership companies will lean towards one of two main scenarios. In a ‘best of two worlds’ scenario, public and private actors discipline one another: the private sector reins in unwarranted government intervention that hurts economic efficiency; the state restrains the private sector’s thirst for profits and directs its ability to generate capital to socially desirable goals (Castro and Janssens, 2008). In contrast, a less hopeful scenario suggests that state and private actors have disparate goals that cannot be easily reconciled (Vining and Weimer, 2016). Rather, mixed models are more likely to become ‘two-headed monsters’, with state and private investors disagreeing over service objectives. In the water sector, such tensions may emerge when utilities undertake investments that fall outside their business strategy or price services below cost to support extraneous policy or electoral goals (Boada, 2011). A third scenario is also possible: Vining et al. (2014) call attention to a ‘profit collusion’ model, wherein the state acts in a self-interested manner and supports profit-maximisation in order to increase political benefits or rent extraction.

However, as I will discuss, none of these scenarios fully capture the changing dynamics of public-private relations at Sanepar and Copasa over time. This is because agency theory suffers from important limitations for understanding complex, on-the-ground political dynamics (White, 2020). First, this framework treats the private sector and the state generically, as undifferentiated and coherent actors whose preferences can be deduced a priori, without greater scrutiny of the changing organisational, political and historical contexts in which these actors operate and interact. Corporate governance is thus often reduced to ‘a structured and sanitised exchange’ among principals or between principals and managers (Soederberg, 2010, 4), tending to neglect how power asymmetries and political processes affect decision-making and firm performance (Zingales, 2017). Importantly, ownership and governance structures shape power dynamics. Shareholders may not only have different objectives, but also differ ‘in how likely it is that they can realise their objectives’ (Kang and Sørensen, 1999, 135). Power imbalances may be especially salient when concentrated ownership is coupled with governance arrangements that grant certain shareholders strategic positions within management or other decision-making bodies within companies.

Second, the agency view depoliticises the analysis of service delivery outcomes by privileging concerns with efficiency and neglecting the social and environmental ramifications of ownership and governance. In the water sector, critical studies have shown that private participation may generate perverse incentives for utilities to prioritise profits over equitable service delivery and sustainable management of water resources (Bakker, 2010, 2000; Hall et al., 2005; Swyngedouw, 2005). In particular, private engagement may generate pressures for utilities to augment tariffs and discontinue service to non-payers, adversely impacting low-income citizens for whom affordability is a central concern.

My analysis aims to depart from generic readings of public-private collaboration within mixed models by calling attention to intersecting market and political logics. First, I examine variation in the structure of private minority ownership - that is, whether it is dispersed or concentrated. Most analyses of mixed enterprises focus on assessing their performance relative to fully public or private firms, thus failing to account for differences in ownership structure that exist among mixed companies themselves. Here, I build on insights from scholarship suggesting that the extent to which ownership is fragmented has important repercussions for corporate governance and firm performance (Young et al., 2008; Kang and Sørensen, 1999; Shleifer and Vishny, 1997) as well as durability of partnerships (Colli, 2013). Specifically, I suggest ownership concentration impacts the degree to which investors can exert decisionmaking influence over companies as well as the potential for tension between shareholders.

Second, I take issue with how the state is often conceptualised as a coherent actor that either operates according to pre-established goals - a common depiction in economic frameworks - or has been co-opted under the perverse logic of the market - a recurrent portrayal in critiques of water privatisation. Instead, I explore the mediating role of politics in shaping how the state relates to private investors and approaches service provision at different points in time. By politics, I do not mean simply electoral behaviour or partisan ideology. The fragmentary and personalistic nature of Brazil’s political system often makes it difficult to draw clear distinctions between the ideological programmes of different parties. Moreover, as Abers and Keck (2006, 604) have noted, Brazilian politics - like elsewhere in the global South - is perhaps better understood as a ‘hybrid’ culture in which ‘formalism coexists with informality, and patronage-based standards of authority with meritocratic ones’. This hybridity is particularly relevant at the level of bureaucratic politics and makes salient the role of political appointees in shaping policy-making (Abers and Keck, 2006).

Politically, then, I am interested in the planning rationalities guiding state action and the processes through which these rationalities are translated into the day-today activities of utilities. I argue this occurs through a two-stage process of political modulation. First, newly elected governments may pursue distinct political approaches to service provision. I broadly distinguish between two approaches: a market-oriented one that encourages efficiency and financial gains, and a society-oriented one that is more attentive to social equity concerns. Second, rather than assume these approaches automatically shape service delivery outcomes, I draw attention to the translation role performed by bureaucratic political appointees. I highlight how the state is not a monolithic entity, but rather acts through ‘specific sets of politicians and state officials’ (Jessop, 2016, 247) as well as company allies (such as appointed managers) who infuse into state agencies and organisations different planning rationalities. While in some instances these conform to techno-managerial, market rationalities (Watson 2009), in others they reflect commitments to forms of redistributive politics.

Design and methods

Brazil offers a fertile empirical terrain for this analysis. Although water and sanitation services are mostly publicly owned, closer inspection blurs the boundaries between public and private. Since the 1970s, state-owned companies have dominated service provision, currently providing water services to nearly 75 per cent of Brazil’s urban population (AESBE, 2020). Legally, however, most of these enterprises have adopted mixed-ownership models in which state and private investors may share ownership of assets. This article builds on a comparative historical analysis of two of the largest mixed water and sanitation companies in Brazil: Sanepar and Copasa - located in the states of Paraná and Minas Gerais, respectively.

Following a ‘diverse’ case study strategy (Seawright and Gerring, 2008), the two companies were selected to explore both variation in forms of private participation across companies and political changes across time.4 Table 1 summarises relevant information for each company along these two dimensions. Both companies were relatively similar in size and total population served.5 They also ranked highly among Brazilian water utilities in terms of operational performance (Albuquerque, 2011). It is worth noting that, throughout the period analysed, regulation was either lacking or patchy. In Minas Gerais, the state government created a regulatory agency, ARSAE (Agência Reguladora de Serviços de Abastecimento de Água e de Esgotamento Sanitário do Estado de Minas Gerais) in 2009, two years after the enactment of the national Sanitation Law (Law no 11.445/2007), which required the creation of regulatory agencies to monitor operations and regulate prices. Nonetheless, as I will discuss, for several years Copasa sought to keep ARSAE at bay, limiting the regulator’s ability to oversee its activities. In Paraná, the regulatory agency, Agepar (Agência Reguladora de Serviços Públicos Delegados de Infraestrutura do Paraná) was only created in 2017.

Case summaries

Political transitions
Ownership change Type of private participation Mandate period State governor (Party) Approach to service provision
Sanepar(Paraná) 1998 Concentrated minority ownership (until 2016) 1995-20022003-20102011-2018 Jaime Lerner (PDT / PFL)Roberto Requião (PMDB)Beto Richa (PSDB) Market-orientedSociety-orientedMarket-oriented
Copasa(Minas Gerais) 2006 Dispersed minority ownership 2003-20102011-20142015-2019 Aécio Neves (PSDB)Antônio Anastasia (PSDB)Fernando Pimentel (PT) Market-orientedMarket-orientedSociety-oriented

Source: Prepared by the author

My argument relies on qualitative data gathered through in-depth interviews and documentary analysis of company reports and financial statements, transcripts of investor calls, assessments by financial analysts and news articles. I conducted fieldwork in Paraná and Minas Gerais in January 2017. Throughout the research, I spoke to sixteen interviewees, including company employees and managers, union members and officials in government and regulatory agencies. Respondents were selected through a combination of purposive and snowball sampling. Because I sought out interviewees who could comment on company history, most respondents held senior or mid-level positions within their organisations and / or had several years of experience working for the companies, the public sector or in the water and sanitation sector broadly. I am a native of Brazil and have studied water issues in the country for several years. My cultural background, existing networks, and my position as a PhD student at a well-renowned foreign university likely facilitated access and trust-building with interviewees. Due to confidentiality, I use the codes S1-S9 to refer to the nine interviews related to Sanepar’s case and the codes C1-C7 for the seven interviews related to Copasa’s. With the exception of interviews S8 and S9, held in July-August 2019, all others were conducted in person or via phone between January-February 2017.6 I complement the qualitative analysis with company data on service coverage, operational efficiency, investments and financial performance retrieved from annual company reports and from the National Information System on Sanitation (SNIS), a database maintained by the Brazilian government (Appendices 1 and 2 summarise this data for each company).

Concentrated vs dispersed private participation

Sanepar’s transition to mixed-ownership is an archetypical 1990s story. Internationally, multilateral organisations like the World Bank extolled the merits of private participation (Idelovitch and Ringskog, 1995). Domestically, the Brazilian government advanced a broad privatisation agenda. Utilities also faced financial constraints that rendered private participation attractive. In the 1980s to 1990s, resources for infrastructure investments dwindled due to Brazil’s economic and fiscal crisis, hampering utilities’ ability to expand coverage and improve operations. Against this backdrop, in 1998 the administration of governor Jaime Lerner (1995-2002) in Paraná decided to place 39.71 per cent of Sanepar’s common stock for sale through a public auction (Murara, 1998). The privately-held firm Dominó Holding won with the highest bid. Its main shareholders were a combination of foreign and domestic investors: the French multinational Vivendi (now Veolia), the Brazilian construction company Andrade Gutierrez S.A. and Opportunity Daleth S.A. (a holding company owned by the private equity fund CVC/Opportunity).7

The new ownership structure led to a model of corporate governance in which private investors had significant influence over company decision-making, especially Vivendi and Andrade Gutierrez. The shareholder agreement between Dominó and the state government afforded Dominó the right to appoint three of the nine members of the administrative board, the decision-making body tasked with determining business strategy and investment plans, electing managers and deciding on shareholder dividends. The other six members were appointed by the government, but were required to vote as a bloc. In practice, this meant the minority partner had de facto veto power within the Board (Castro, 2003). Dominó also had the right to nominate three of the company’s seven managers, including the financial and operations managers. This governance structure, several documents and interviewees noted, empowered minority private investors, allowing them to hold strategic positions within the company and to maintain a close rein on its strategy and operations (Interviews S2, S3, S5, S6, S7, S8). As one senior manager observed, Dominó was literally there, working with them, on a ‘daily basis’ (Interview S3).

The scenario was different at Copasa, where semi-privatisation resulted in more passive investor engagement in company decision-making and management. Copasa opted to semi-privatise by selling 30.56 per cent of shares on São Paulo’s stock exchange, Bovespa, through an initial public offering (IPO) held in February 2006. By that point, the political economic context in Brazil had shifted. The administration of President Lula da Silva (2003-2010) began to channel resources into infrastructure investments, breathing new life into the water and sanitation sector. Nonetheless, the administration of governor Aécio Neves (2003-2010) in Minas Gerais shared with Lerner’s in Paraná a belief in market discipline and in the potential for private participation to improve service provision. As soon as Neves took office, Copasa’s new administration began to prepare for an IPO (Oliveira, 2015). A majority (73.7 per cent) of the shares issued on Bovespa were purchased by foreign investors, while the rest were acquired by domestic investment funds, financial institutions and individual investors (Copasa, 2006).

The new ownership structure entailed governance changes in line with neo-institutional prescriptions. Following the IPO, Copasa chose to comply with the ‘Novo Mercado’ listing agreement - Bovespa’s highest level of corporate governance. In addition to transparency and financial disclosure requirements, the agreement establishes a two-year term limit for board members - 20 per cent of which must be independent (Musacchio and Lazzarini, 2014). The rules aim to increase companies’ financial independence and reduce political interference. Indeed, Copasa’s management at the time argued the new structure would minimise the influence of political appointments - a problem considered pervasive among state-owned companies (Andrés et al., 2011). According to one long-time employee, the aim was ‘to use private capital as a regulator of [company] management’ (Interview C5). However, this scenario did not materialise. As the same employee observed: ‘In spite of the oversight of minority shareholders, of private capital, the administration did whatever it wanted to do’.

The dispersed nature of private minority ownership at Copasa helps account for why private investors in the company did not have the same level of influence over decision-making and management that Dominó enjoyed at Sanepar. Copasa’s dispersed private investors mainly exerted indirect pressure over the company through market signals such as share prices on the stock market. In fact, based on quarterly earnings conference calls, intermediaries such as financial analysts and investment banks were the most important interlocutors and sources of market pressure on the company. In light of the relatively passive and distant participation of dispersed private investors, the Minas Gerais’ state government continued to call the shots within the company through board appointments and allied managers - just as it had done prior to the IPO. In fact, whereas private participation occupied a central role in interviewees’ retellings of Sanepar’s history, in Copasa’s case respondents generally shrugged off the effects of semi-privatisation on company practices (Interviews C3, C5, C6, C7). A senior government official in Minas Gerais, for example, noted: ‘Look, it would be unfair for me to say, given what I observed, that Copasa underwent a big change or that the company’s rationale (raciocínio da companhia) totally changed after it opened itself to private capital. It didn’t’ (Interview C3). As some of my respondents observed, in various instances the ‘interests’ of private investors were evoked only when convenient for the company to justify what were otherwise political decisions - an issue I explore further below (Interviews C3, C4, C5).

Political modulation

Distinct forms of private engagement - close and active in Sanepar’s case, distant and passive in Copasa’s - reveal how ownership structure and corporate governance shape the opportunity space for private investors to influence how utilities behave. While concentrated private participation amplified this space in Sanepar’s case, dispersed participation contracted it in Copasa’s. However, the extent to which private participation influenced the direction of service delivery requires understanding how political processes shaped state action and relations to investors over time.

Under the watchful eye of its new private partner, Sanepar pursued sweeping operational changes. Following the ownership change in 1998, a new ‘results-oriented’ approach (política de gestão por resultados), championed by the minority partner, was introduced with the goal of pushing managers to meet performance targets and decrease capital expenditures and operational costs (Sanepar, 2001). The approach produced quick financial results. Sanepar’s operational revenues grew from R$318 million in 1995 to R$925 million in 2002, four years after the ownership transition (Sanepar, 2002). Net profits also increased from approximately R$22 million in 1997 to R$145 million in 2002 (Figure 1). Annual tariff increases indexed to inflation and measures to increase efficiency contributed to these results. The number of employees per thousand connections dropped from 3.13 in 1999, the first year after semi-privatisation, to 2.33 in 2002. Billing losses decreased from 28.17 per cent to 25.34 per cent in the same period (Appendix 1).

Sanepar’s net profits (1995-2015), prepared by the author

Source: Annual company reports

Whether these changes constituted positive improvements, however, was disputable in the eyes of company employees, illustrating the co-existence of different value systems within utilities. Some interviewees lauded the operational gains and reminisced about the early years of concentrated private participation with satisfaction, with one manager referring to them as ‘the good old days’ (Interview S3). However, others bemoaned its detrimental effects on what they considered to be Sanepar’s social mission. Long-time, front-line company workers observed that during this period (1999-2002) the company focused on contracts with potentially lucrative municipalities and placed less emphasis on expanding coverage to poorer urban and rural areas where provision was costlier and generated fewer returns (Interviews S5, S6, S7). Indeed, overall investment in water supply and sewerage collection did not increase substantially in the first few years after semi-privatisation and improvements in access to services were small (Appendix 1). Even the most nostalgic manager recognised that the emphasis on attaining performance metrics produced both ‘good and bad memories:’ ‘Some extreme things ended up happening, such as turning lights off, turning equipment off to save energy… So, we had to stop and think: “what’s inefficiency and what isn’t?” There were places receiving no service because the equipment was turned off’ (Interview S3).

This ambivalent account of Sanepar’s initial years post semi-privatisation matches, to a large extent, the mixed outcomes of water privatisation experiments elsewhere in the world, marked by a divide between efficiency and equity issues.8 Despite the concerns of some rank and file employees, concentrated participation enabled Dominó to exercise influence over management and play an undeniable role in fostering an ‘efficiency-at-all-costs’ ethos within the company (Interviews S3, S5, S6, S7, S8).

Nonetheless, it would be simplistic to attribute service outcomes during this time to inherent biases from private participation alone. Rather, Sanepar’s practices reflected the service dynamics resulting from the combination of concentrated minority ownership and the government’s approach to service provision during Lerner’s administration. Lerner advanced a market-friendly political programme, oriented towards attracting private investment and shrinking the role of the state. Within Sanepar, a circumscribed role for the state meant an expanded role for private investors in shaping the direction of service delivery. The state sought to maintain a relationship of synergy with its private partner (Interviews S2, S3, S8) while government appointees did little to balance Dominó’s influence over management or restrain the company’s growing focus on economic performance. In fact, company reports show the government stimulated Sanepar’s profitability (Sanepar, 2002).

This relationship shifted dramatically following a change in political administration in 2003, when Roberto Requião replaced Lerner as governor. During Requião’s administration (2003-2010), synergy gave way to conflict, configuring a clear ‘two-headed monster’ scenario. Requião favoured a statist and society-centred approach to service provision, opposing his predecessor’s privatisation agenda. Government appointees within the company reflected the change in policy orientation. The President of Sanepar’s administrative board, Pedro Xavier wrote in a 2005 statement that ‘for this government, a [company] committed to making every effort to maximise profits and assure the greatest possible return to shareholders […] simply has no reason to continue existing’ (Xavier, 2004). The new administration moved to curb Dominó’s influence within Sanepar. The government changed company management, maintaining only one manager previously appointed by Vivendi, one of Dominó’s original shareholders (Portal Saneamento Básico, 2003). It also sanctioned a decree attempting to rescind the shareholder agreement with Dominó, arguing the agreement conceded Sanepar’s management to the minority partner, thus violating, in practice, the state law requiring the government to have control over the company (Xavier, 2004). Following a judicial battle, in 2004 Dominó managed to reverse the decree, maintaining the original agreement in place. Nonetheless, the legal disputes continued in subsequent years, as the state government sought to reduce Dominó’s participation in the company.

Unlike the laissez-faire approach of Lerner’s administration, Requião’s team sought to play a more active role in steering company practices towards the achievement of social goals. Sanepar launched a social tariff aimed at increasing affordability for low-income customers and implemented a sanitation programme designed to expand service coverage to 25,000 households in rural Paraná (Sanepar, 2003). These efforts also catered to the governor’s constituents, primarily located in rural and lower- to middle-income regions of the state. Total investments in water and sewerage in the first four years of Requião’s administration increased relative to Lerner’s (Appendix 1), albeit investment figures also reflected greater ease of access to federal credit during President Lula’s government.

Concomitantly, Sanepar’s financial performance took a hit. Profits declined during Requião’s two consecutive terms. One reason was the lack of tariff adjustments indexed to inflation. Between 2006 and 2010, the governor refused to adjust tariffs,9 arguing the company could pursue investments and remain financially sustainable without transferring costs to customers - for example, by reducing operational costs (Castro, 2008). The tariff freeze did not bode well with market analysts. The credit rating agency Moody’s changed Sanepar’s outlook to negative, citing concerns about ‘the company’s ability to generate adequate cash flows’ given the lack of tariff adjustments (Soares and Hess, 2009). Tariffs are a key driver of shareholder value (Interview S2).

But the market outlook changed in the aftermath of the 2010 state elections. The newly elected governor, Beto Richa, reintroduced a pro-market orientation and worked swiftly to re-negotiate the shareholder agreement and restore friendly ties with Dominó (Sanepar, 2015). The minority shareholder regained influence within Sanepar’s administrative board as well as authority over operational and financial management (Interviews S2, S3, S5, S6, S7, S8). Sanepar’s business strategy was also revamped with an eye toward growing the company and increasing liquidity in preparation for a potential IPO, which occurred in late 2016. In just one year (2010-2011), net profits augmented from R$149 to R$284 million - an increase of approximately 91 per cent.10

While the change in administration marked a return to laissez-faire, politics was far from removed from the equation. Interviews with managers and government officials in Paraná illuminated the markedly different value systems of company allies and state agents during Richa’s administration compared to Requião’s, illustrating the modulating role of political dynamics in shaping how these actors construed company goals - and, at the same time, (re-)inscribed public-private boundaries. One senior government official, for example, criticised Sanepar’s previous administration for its ‘ideological bias’ and ‘socialist behaviour’, arguing that Sanepar was ‘a market firm and should behave as such’ (Interview S1). Top managers at Sanepar echoed this viewpoint. While one praised Richa’s administration for placing the company’s financial sustainability above ‘populist impulses’ (Interview S2), another sought to construe the emphasis on efficiency as central to the company’s social mission: ‘You have to be economically efficient so that efficiency will become the interface (ponto de contato) between the public and private sides. […] When something is public, it has a greater obligation to be efficient because the money is not my own, it belongs to the whole collectivity (coletividade)’ (Interview S3).

The role of state agents in shaping service delivery rationales was even more pronounced in Copasa’s case, where dispersed minority ownership limited the role of private investors. As previously noted, Copasa’s model enabled the state government to retain - through political appointees - the level of influence over the company it had enjoyed prior to semi-privatisation. For the majority of the period analysed, company practices followed a ‘business as usual’ - or, perhaps more adequately, ‘politics as usual’ - tone. For example, reflecting on the role of the state within the company, one senior official at ARSAE, the state’s regulatory agency, highlighted how political motives continued to shape investment decisions following the IPO: ‘‘Oh, the governor wants to build a wastewater treatment plant in a small town of 2,000 inhabitants’, that isn’t a priority but then the priority changes to meet a demand from the governor. […] A lot of money was thrown away in projects that ended up not becoming reality’ (Interview C7).

In fact, the most significant changes to company management and practices appeared to occur in the years leading up to semi-privatisation, when Copasa was being ‘prepared for the market’ (Interview C6). In 2003, governor Aécio Neves appointed Mauro Costa - described by one interviewee as ‘a right-wing guy, very tough, but someone who makes things happen’ (Interview C5) - to serve as Copasa’s new president. Costa implemented a series of rebranding and efficiency enhancing measures designed to revamp the company: ‘he came in and he really began to apply the make-up (modelagem) of a firm to Copasa. He got the company to focus on training, on technological development. He placed greater responsibility on the management team and more effectively demanded results’ (Interview C6). Service-wise, Costa and his management team sought to expand Copasa’s customer base by investing in new water and sewerage connections and fostering relationships with municipal mayors. They also expanded its funding sources through the issuance of R$600 million in debentures. Perhaps most noticeably, the company enacted two consecutive tariff increases in one year - at 29.8 per cent and 35 per cent, both were well above inflation at the time. Taken together, these changes helped boost the company’s financial performance. After eleven years of continuous deficits, Copasa ran a profit of R$94.1 million (Figure 2) in the first year of Neves’s government (Copasa, 2003). The make-up effort is exemplary of how administrative and organisational reforms can arguably play just as fundamental a role in infusing market rationalities into public utilities (Davis, 2004) as private participation itself.

Copasa’s net profits (1995-2015), prepared by the author

Source: Annual company reports; Ministério das Cidades (2015)

Operational and financial gains following the IPO built on these earlier efforts (Appendix 2). While investments in water supply and sewerage collection increased following the change to mixed ownership, service coverage growth rates did not change substantially, remaining steady over time. Copasa also benefitted from greater ease of access to credit at the federal level and from other sources of finance, making it difficult to disentangle how much funds obtained through the sale of shares to private investors contributed to capital investments (Oliveira, 2015). Several interviewees suggested that resources from the IPO were actually spent unwisely and contributed little towards coverage expansion (Interviews C2, C3, C4, C5, C7). Interestingly, in 2007 Copasa created a subsidiary, Copanor (Copasa Serviços de Saneamento Integrado do Norte e Nordeste de Minas Gerais S/A.), focused on providing services in low-income areas in the north and north-east of the state. But according to interviewees the overarching aim was to prevent operations in these areas from weighing on Copasa’s balance sheet (Interview C6).

Copasa’s case complexifies the analysis of how public-private relations unfold over time. Unlike at Sanepar, where the ownership structure configured possibilities for synergistic or conflictual relations between the state and minority private investors, at Copasa public-private relations were more one-sided - almost a marriage of convenience. Despite the government’s market orientation, throughout Neves’s tenure and during the subsequent administration of Antônio Anastasia (2011-2014), the interests of private investors were mobilised erratically and often in accordance with political strategies. An example shared by one company employee illustrates this process:

Whatever didn’t align with the administration’s interests, they would say: ‘No, we can’t do it because of our minority shareholders, we can’t justify it to them’. [For example], a tiny city called Fruta de Leite had a hepatitis outbreak because of the city’s water supply and the mayor came to Belo Horizonte to ask Copasa to take on the water system there. [Copasa] said ‘no’ because it was inviable: ‘I can’t, it’s a publicly-traded company, your city isn’t lucrative and it’ll hurt us [financially].’ This kind of stuff. I mean, it isn’t in the archives but you have witnesses. (Interview C5)

Copasa’s ‘business as usual’ trajectory was relatively disrupted in 2015, following the election of governor Fernando Pimentel (2015-2019) of the Worker’s Party (PT). His victory marked the first time in over twenty years that a left-wing administration took control of the state government in Minas Gerais. The political transition reshaped Copasa’s governance structure. Pimentel appointed a number of board members and company managers who generally favoured a strong role for government in the provision of public services and the promotion of social development (Interviews C2, C3, C4, C5, C7).

One of the main effects of the change in administration concerned Copasa’s relationship to its regulator, ARSAE, and to other state agencies. During my fieldwork in Minas Gerais in 2017, Copasa was working with ARSAE to develop a new tariff structure. But while in the past interactions between the company and the regulatory agency were marked by distrust - with Copasa at times attempting to hide information - during Pimentel’s tenure the company sought to collaborate more with the agency. ‘We now have this dialogue, this proximity with Copasa’s management in a very transparent way’, observed a senior official at ARSAE. ‘We won’t open our legs to Copasa, so to speak, but we try to understand their difficulties and needs’ (Interview C7). The company also began to work more closely with the State Secretariat of Urban and Regional Development (SEDRU) to develop a state-wide sanitation plan and to prioritise investments in vulnerable regions in the north and northeast of the state (Interviews C2, C3, C4). In part, this entailed adopting a new approach to Copasa’s subsidiary, Copanor, which had struggled financially since its inception. The state government had agreed to give up a portion of its profit share to support Copanor’s restructuring and eventual re-integration into Copasa (Interview C6).

The change in company orientation was not accompanied by a hostile stance towards private participation. Unlike the administration of Sanepar during Requião’s tenure, Copasa’s new management under Pimentel sought to develop a more balanced relationship with private investors. Transcripts of earnings conference calls, for example, indicate that managers were committed to ensuring Copasa’s financial sustainability and creating shareholder value (Copasa 2015, 2016). The administration also took steps to restore the company’s financial health, which had declined during the administration of governor Anastasia due to growing debt and to a water supply crisis precipitated by a drought between 2013-2014. Steps included reducing the number of high-level, high-paying positions, implementing a voluntary dismissal programme and renegotiating debts. According to one employee, the administrative board also adopted a more active role in guiding company activities - as opposed to simply offering its tacit support for directives already agreed to with the governor (Interview C5). The changes were viewed positively by financial analysts - the main intermediaries between the company and dispersed investors - and increased Copasa’s market credibility (Interview C1). Within a year company shares appreciated 150 per cent in 2016, whereas Bovespa appreciated less than 40 per cent in the same period.

These politically driven changes to governance and company strategy signalled an initial attempt to balance social and financial goals, attending to both the interests of market investors and the government’s own society-oriented approach to service provision. That corporate governance and regulatory improvements were happening under the administration of a left-wing government is not necessarily surprising. Cioffi and Höpner (2006, 463) find that rather than favour ‘markets over politics’, centreleft parties in advanced economies used corporate governance reforms to undermine political economic elites and to establish alliances with the financial sector. In Brazil, however, changes within Copasa cannot be reduced to partisan politics alone, since the Worker’s Party (PT) was not programmatically consistent in the last two decades. Much like in Sanepar’s case, the aligned values of appointed allies within the company were a crucial dimension of political modulation. Take, for instance, a story shared by a senior advisor at Copasa about the challenges the new management team faced after arriving at the company in 2015:

We were complete outsiders, people like me, the [current president], the financial manager […]. We were not from Copasa, nor from the [sanitation] sector, nor from the political parties that had been in charge all of this time. Although we aren’t affiliated with the PT, we arrived and everybody here hated the PT. ‘If Pimentel wins, I die’, some said. You know, we heard this at the time. So, we arrived and there was an enormous information boycott - I don’t even know if it’s still going on. So, we asked some people who in the company was more ideologically aligned with us so that we could place them in key positions. (Interview C4)

This account illustrates the organisational tensions emerging from the encounter of old and new planning rationalities, as well as the importance of having allies within the company to support the implementation of different service delivery agendas. Both at Sanepar and at Copasa, the company floor was an important political space of struggle over the direction of service delivery.

Conclusion

This article illuminates the role of organisational and political factors in shaping the long-term relational dynamics of public-private arrangements for service delivery. First, my analysis of Sanepar and Copasa reveals that different types of private participation may either expand or constrain the space for investors to influence organisational decision-making and service delivery strategies. Concentrated ownership in Sanepar’s case enabled closer and more active investor participation in company decision-making, while dispersed ownership in Copasa’s case precluded this. In fact, Copasa’s case illustrates how private participation may serve to mask other political processes driving company decision-making.

This analysis underscores the need to move beyond commonplace analyses that simply pit private against public provision and to interrogate the conditions under which private interests influence the governance of service delivery across different financial arrangements. Bringing greater empirical nuance to the study of private participation is particularly pressing as the turn to finance becomes a more important feature of development advice and practice (Mawdsley, 2018). O’Brien and Pike (2017, 223) argue that the financialisation of urban infrastructure is not a ‘monolithic juggernaut rolling-out in the same way everywhere’ but a differentiated and uneven process. However, we still lack a deeper understanding of the mechanisms through which such differentiation occurs in practice, particularly outside of traditional investment geographies in advanced economies. This study points to the analysis of ownership concentration and corporate governance as one pathway for disentangling modalities of financial investment and their effects on service delivery.

Second, contra the assumption that profit maximisation will override other service objectives, I find that states retain an important role in shaping the direction of service delivery through what I call political modulation. In the cases of Sanepar and Copasa, I argue that modulation occurred through transitions in government that shifted political approaches to service delivery, which were then translated into the activities of utilities and state agencies through the work of politically appointed managers and bureaucratic officials. In some instances, these approaches were aligned with market rationales, strengthening the interests of private investors and contributing to extreme scenarios such as, in one example from Sanepar, turning off equipment to meet efficiency targets. In others, new administrations pushed companies to prioritise socially desirable goals.

The concept of political modulation is useful for capturing the mutable nature of planning rationalities guiding state action and service provision. Scholars have observed that state capacity is crucial for steering private engagement towards redistributive service outcomes (Miraftab, 2004; Baer, 2014). However, the capacity to act in the public interest may be temporally constructed (or destructed) through political processes that infuse into the state varying policy commitments. Other studies have described similar processes of modulation, driven by policy ideology, in shaping the distribution of city-wide infrastructure investments (Marques and Bichir, 2003) or, more broadly, the content of infrastructure privatisation reforms in Latin American countries (Murillo, 2009). However, beyond partisan ideology or politicians’ policy preferences, I stress the need to examine the role of bureaucratic politics within the state (and within utilities) as a modulation mechanism for shaping organisational values and decision-making around service priorities.

More broadly, attention to political modulation helps to problematise prevailing neo-institutional development policy frameworks that treat politics with suspicion, positioning it as a barrier to more effective service delivery (Dubash and Morgan, 2012). My analysis not only indicates that institutional remedies for political interference hardly remove politics from the equation, they also reveal a potentially positive role for politics in orienting service delivery towards more equitable and progressive outcomes. Without minimising challenges posed by clientelism (Herrera, 2017) or corruption (Davis, 2004), I argue that institutional reform efforts that seek to ‘depoliticise’ public-private service delivery arrangements by reducing the influence of political appointments, for example, risk closing channels through which redistributive concerns enter into the state and shape private participation. Here, it is worth recalling Hirschman’s (1967, 144) warning that the price of insulation ‘can be loss of easy access to political power, and this loss may be crippling, especially for agencies engaging in highly controversial social and administrative, rather than purely technological, innovation’.

Sources: Ministério das Cidades (2015); annual company reports (1999-2016)

Note: Data on net profits was compiled from company reports for all years; the shaded row indicates the year in which the company was semi-privatised

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Cruxên, Isadora Araujo