Global Policy Forum

The Downside of the G8 Debt Deal


By Hannah Goff

July 8, 2005

The G8 deal to wipe out $40bn (£23bn) of debt owed by 18 of the world's poorest countries has been hailed by some as a great act of western philanthropy. Campaigners complain that donor countries are using the debt relief package to force privatisation and a liberal economic agenda.

Few can forget the floods that devastated Mozambique five years ago. Television pictures showed people clambering up trees to escape the rising waters. One woman even gave birth while she waited to be rescued from the tree-tops. What most concerned viewers would not have realised was that Mozambique's water system was privatised the previous year at the World Bank's behest.

To gain Highly Indebted Poor Country (HIPC) status - to qualify for aid and debt relief - the country had to privatise its urban water supply. In 1999 the Aguas de Mocambique consortium, headed by the French firm Saur, took on a 15-year contract. But after huge swathes of the country were left under water, at an enormous cost, Saur announced it was pulling out.


No reason was given but reports at the time said the increasing returns on which the consortium's business plan was based were not realised. The firm still will not comment on the reason for its withdrawal. But such a pull-out would not have been an option for a state-owned utility. It was three years before a reformed consortium could begin an investment programme.

Although the Mozambican privatisation was sealed before the G8 debt relief deal was drawn up, the qualification process under the HIPC scheme remains the same. War on Want campaigns director John Hilary explains: "To qualify for debt relief and have the opportunity to tackle poverty, countries have to do these sometimes very damaging things like privatising their water or education systems. They only get to be a chosen country by jumping through all these hoops."

He highlighted the case of Tanzania, which was told it would qualify for HIPC debt relief if it privatised its Dar es Salaam water programme. In May, two years after signing a deal with consortium City Water, led by British firm Biwater, the Tanzanian government stripped the firm of its contract, saying services had deteriorated. Biwater, which is suing the Tanzanians for breach of contract, denies this claim and says its plans to invest £8.5m over three years were on schedule. It also claimed there was more water in the system since it took over, saying some people had access to water for the first time.

The government's decision to ditch the company was seen by many Tanzanians as long overdue, according to the BBC's Noel Mwakugu, in Das es Salaam. "What's worse," said Mr Hilary, " is that the Tanzanian government had to take out a whole tranche of loans to get the system ready for privatisation."

So far 18 countries have been judged to have reached HIPC "completion point" by the World Bank. A further nine are expected to do so soon. The UK Treasury says it is pushing hard to ensure "no new conditionality" is attached to the G8 agreement stressing that its main objective is to ensure savings are used for poverty reduction. "This does not involve 'strings' as we would not be imposing new conditionality on countries, but it does imply that a government must be committed to transparency and poverty reduction."

But for development campaigners like George Mombiot, commentators need look no further than the second paragraph of the G7 finance ministers' statement on the deal back in mid-June.


This says developing countries must "tackle corruption, boost private sector development, and attract investment" and remove "impediments to private investment both domestic and foreign." For Mr Mombiot the enforced liberalisation and privatisation the deal contains "are as onerous as the debt it relieves."

But the Treasury says this is simply how economies grow and not an attempt to enforce privatisation. Director of global and national economics at the New Economics Foundation David Woodward says subjecting vital services in developing countries to the rigours of market forces can have very serious consequences. "If you have a context where half of the people exist on less than a dollar a day they simply can't afford to pay what would make it worthwhile for a commercial operator to charge."

Another case, where the World Bank encouraged Mozambique to increase its user charges for health care, shows just how damaging liberal economics can be, he says. "In this case if you don't pay - you don't get the services. It actually kills people."

The Treasury says it recognises concerns developing countries and NGOs have about the use of conditionality and that it has responded by publishing a new policy. The World Bank and IMF are also reviewing their approach to conditionality this year. But whether that will be in time for those hoping to win a reprieve from the crippling burden of debt remains to be seen.




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