Global Policy Forum

By David Hall

One key argument advanced for any form of privatisation is the theoretical benefits of competition. However, as the World Bank has acknowledged, there is very little competition in water. Not only are water systems natural monopolies, but the private part of the industry is dominated worldwide by just two multinationals - Vivendi and Suez-Lyonnaise. A third French multinational, SAUR, holds a dominant position in Africa. A few contracts have been obtained by some UK companies, Thames Water (now owned by the German conglomerate RWE), Anglian Water, and International Water (jointly owned by two construction multinationals, Bechtel of the USA and Edison of Italy). Attempts by the USA company Azurix - owned by Enron - to break into the market have been a failure.

Some of the privatisations have happened without any competitive tendering at all, even between the private sector companies. For example, all the private concessions in Czech republic, Hungary and Poland up to 1997 were awarded without any competitive tendering process, as was the SODECI concession in Cote d'Ivoire, yet they will persist as long-term monopolies.

Higher prices

Privatisation introduces a new set of financial demands on the water system which tend to increase the price of water and sanitation. These include the demands of the company owners for profits and dividends, which may then be globally redistributed for investment in other company activities, and the desire of the public authority for a boost to the authorities' finances.

Water users may pay for government debt reduction

Governments and municipalities usually expect privatisations to benefit their own finances, by using the proceeds of a sale to reduce the debts or deficits of the government itself. But this can conflict with the financial needs of the water service itself, because the price that a company is willing to pay to obtain a concession will depend on the profit stream that the private company can expect, which in turn will be affected by the price it charges to users, and how generous the conditions such as regulation are. So what is good for the government's finances may not be best for water users.

Comparative prices

Private operation is sometimes expected to reduce prices, but this is not the experience in many countries. In France, where some water is managed by municipalities, and some by private companies (or joint ventures PPPs), figures show a consistent picture of the private or PPP concessions charging higher prices - 13% higher in 1999.

A concession is forever

Most privatised water operations are long-term concession contracts, usually of 20-30 years. Build-operate-transfer projects (BOTs), for example to construct and operate a specific water or sewerage treatment plant, usually involve concessions lasting a similar period. Because of legal constraints and the administrative processes involved, these contracts can be very difficult to cancel, even if the performance is unsatisfactory. Such problems have been found in Tucuman (Argentina), Szeged (Hungary) and Cochabamba (Bolivia) - the multinational companies concerned have pursued legal claims for compensation which could make ending these contracts impossibly expensive.

Even in developed countries terminating a water concession can be very difficult. In Valencia, Spain, the local council tried to retender the water concession which was expiring after 99 years with the same company (a SAUR subsidiary). The company threatened to sue for damages if any competitor was allowed to take over the system. In Grenoble, France, even when a Suez-Lyonnaise executive had been convicted of paying a bribe to get the water concession, it still took 5 years intensive campaigning before the council finally replaced the company with a municipal service.

Problems with private management

Puerto Rico: worse finances and services

In 1995 Puerto Rico contracted the management of their water authority, PRASA, to the largest water multinational in the world, Vivendi, through a subsidiary now called Compania de Aguas. In August 1999, an official report condemned the contract for failing on all grounds: "The Puerto Rico Office of the Comptroller (Contralor) issued an extremely critical report on the PRASA-Compania de Aguas contract. The document lists numerous faults, including deficiencies in the maintenance, repair, administration and operation of aqueducts and sewers, and required financial reports that were either late or not submitted at all. Citizens asking for help get no answers, and some customers say that they do not receive water, but always receive their bills on time, charging them for water they never get. A local weekly newspaper published reports of PRASA work crews who did not know where to look for the aqueducts and valves that they were supposed to work on." The finances got worse, and the state has had to provide subsidies. By 1999: "According to the Comptroller's report, under private administration PRASA's operational deficit has kept increasing and has now reached a whopping $241.1 million. This has required the Government Development Bank (Banco Gubernamental de Fomento) on several occasions to step in and provide the agency with emergency funding."

Trinidad: Severn Trent go home

There was a similar picture in Trinidad, where in 1994, the government contracted out the management of the islands' water authority, WASA, to Severn Trent. One of the central features of the original Business Plan submitted by Severn Trent was that they would make WASA financially viable by the end of the three year contract period but the deficit for 1998 actually increased over 1997 to $378.5 million. In April 1999 Severn-Trent's contract expired without renewal and WASA was taken back as a public sector responsibility. WASA has since taken on new local managers, and is reportedly planning significant investments.

Budapest: losses and bonuses

In 1997 the water supply of Budapest was privatised, partly under a management contract, to Suez-Lyonnaise. In July 1999, Budapest Municipal Council rejected a business plan which projected HUF 2.7bn in net losses, a 5% decrease in sales income for 1999, but premiums paid to the managers of almost HUF 250m .

Problems with extending access

For private water companies new connections to households who cannot afford to pay the full economic cost always creates a potential risk to the companies' profitability. The point was succinctly made in December 1999 by UK water company Biwater, who pulled out of a major water supply project in Zimbabwe, because the project could not deliver the rate of return now demanded by private investors. The company manager said: "Investors need to be convinced that they will get reasonable returns. The issues we consider include who the end users are and whether they are able to afford the water tariffs. From a social point of view, these kinds of projects are viable but unfortunately from a private sector point of view they are not".

In La Paz, Bolivia, a concession was awarded to a Suez-Lyonnaise subsidiary in 1997. The contract included explicit targets for extending connections to poor households. The contract has not however provided adequate financial incentives for the company to make extensions in some areas, and it is being suggested that the service offered to the poor should be determined by ability to pay rather than by public policy.

Private cross-subsidies for the multinationals

Under privatised systems it is not possible to stop water profits being used to finance other activities of the parent multinationals, and both the UK and the French water companies have taken advantage of this.

The French multinational Vivendi provides a clear example of a multinational group "milking the cow" of water to finance its other activities. In January 2000, Vivendi loaded the entire debt of the group, equal to Euro 16.5 billion, onto its water, energy, waste and transport operations - the 'environment' division' - while the communications division, which has received most of Vivendi's investment in recent years, became virtually debt free. Based on the 1999 sales in the Environment division of Euros 22.2bn, this is equivalent to a surcharge of about 4% on the bills of every user of Vivendi's water, waste and transport in the world, in order to subsidise the communications division.

Public financial support for private sector

The private sector often enjoys significant financial support from the public authorities, which needs to be properly acknowledged in any decision-making process

Public authorities are also expected to provide financial guarantees, which minimise the risk transferred to the private sector. These include guarantees of loans - development banks especially may require a government guarantee before any money can be lent to a privatised operation; and guarantees of profitability - many water concession contracts include clauses under which public authorities guarantee the profitability of the operator for the duration of the contract - e.g. Pecs, Szeged (Hungary), Plzen (Czech republic) , Cochabamba (Bolivia).

Nelspruit: public financial support for private venture Multiple, global forms of public sector support have been used in Nelspruit, capital of Mpumalanga province in South Africa, where water supply was contracted in 1999 to a private concession operated by Biwater, of the UK. The main argument used at the time for the concession was the need to attract private finance. But since then:

· Biwater has brought in as a partner Nuon, a Dutch municipally-owned company, to provide some of the necessary finance

· The private venture has benefited from a new water treatment plant at Matsulu, a suburb of Nelspruit, which the government of Portugal financed, and the South African government constructed , but is being handed over free to the new private operator

· In July 2000, nearly two-thirds of the total finance for the project was finally obtained by Biwater, in the form of a Rand 125m loan from the state-owned Development Bank of South Africa.

Weak accountability: regulation, secret contracts, and charters

Regulation is supposed to be the way in which the public interest is represented in privatised concessions. But in practice it is rare for regulators to be an effective independent control, and so privatisation may simply increase the scope and incentives for corruption associated with contracting-out.

Commercial operations invariably prefer confidentiality and secrecy, as it protects their ability to manage financial affairs to maximize the benefit to their owners. For example, Aguas del Tunari, the privatised water concession in Cochabamba, Bolivia, refused to disclose the financial model behind its price rises on the grounds that the model itself was a commercial secret.

Even more surprisingly, private operators frequently insist that the contract itself should be a secret document - even from the elected councillors of the authority which has given the contract. In Fort Beaufort, South Africa, the contract prevents any member of the public from seeing the contract without the explicit approval of the company WSSA (owned by multinational, Suez-Lyonnaise).

Documents relating to the privatised Budapest Sewerage Company, where Vivendi is the multinational, are kept secret, even from council officials, and Budapest City Council debates related issues only in closed sessions. In Morocco, a Suez-led consortium was awarded a multiple concession for water and energy in Casablanca by King Hassan, which the city council was not even informed about until later.

Corruption

Corruption is a systematic feature of privatisation processes, in water as in other areas. The reasons for this have been summarised in a World Bank paper: ".the privatisation process itself can create corrupt incentives. A firm may pay to be included in the list of qualified bidders or to restrict their number. It may pay to obtain a low assessment of the public property to be leased or sold off, or to be favoured in the selection process .firms that make payoffs may expect not only to win the contract or the privatisation auction, but also to obtain inefficient subsidies, monopoly benefits, and regulatory laxness in the future".

This is borne out by experience in Europe. In the UK, the police have said that: 'the overwhelming majority of corruption cases in Britain are connected to the award of contracts. Compulsory contracting-out in local government, and the new Private Finance Initiative have produced an explosion in the number of such deals'

Privatisation of efficient public sector water undertakings

There is an assumption in most of the literature that wherever privatisation occurs it must be because of the unsustainable inefficiency of the previous public sector provider. This is not however always true. In the last 2 years most of the water undertakings in Chile have been partly privatised (by selling shares to a number of multinationals), yet these same companies - and especially EMOS - were previously held up as model examples of efficiency, even by the World Bank. Where one of the motives is raising money to finance the public authority's budget, then there is in fact a perverse motive to privatise the most financially efficient water undertakings, because they will obtain a higher price.

Extract from: Water in Public Hands, commissioned by Public Services International Research Unit (PSIRU), University of Greenwich, London UK

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