The Misdeeds and Misfortunes of Water Multinationals in the Cities of the World

, by  Olivier Petitjean

In the 1990s, under the patronage of the international financial institutions and certain governments of the North, the big multinational groups of the sector managed to gain control of the water services in many cities of the world, particularly in the Global South. These privatisations have however led to an incredible series of scandals, price increases and mass protests, as well as legal proceedings. The extent was such, that this wave of privatisations finally started to recede in the early 2000s.

Management of water services by public bodies was historically the rule, and it remains so today, with the management by the private sector being the exception. The situation started to evolve in the 1980s with the privatisation of the water services in Chile and in the United Kingdom. The 1990s were marked by a major global offensive in favour of the privatisation of water services and sanitation that benefited the large multinational corporations. This offensive was orchestrated by the international financial institutions (World Bank and International Monetary Fund), but it was also supported with great enthusiasm by the governments of the countries where these multinational groups originated (first and foremost by France) as well as by the European Union.

The big movement in favour of privatising water was able to make significant progress in the 1990s, particularly (although not exclusively) in the countries of the South. The first explanation for this, is that the international financial institutions, the co-operation agencies and the development banks imposed privatisation as a condition in order to gain access to funding, as well as because local elites supported a trend that enabled them to shrug off some of their responsibilities. (This was all the more true as there were often more or less illicit kickbacks involved.) It was also because the multinationals had successfully taken advantage of the inability of existing systems to serve everyone, and been able to present themselves as prioritising the poor, as opposed to bureaucratic elites. The urban evolution of the big cities in the Global South appeared to be making all the classical institutional and financial water management structures obsolete. This enabled the promoters of privatisation to present “public-private partnerships” as the modern solution to all problems. This was based on the idea that only the private sector could successfully raise the funding required for extending the networks, because of their ability to raise funds on the market, bring in the relevant technology and innovation, and replace the bureaucratic culture by an entrepreneurial one. This led to water services in many towns being privatised, to the benefit of a small number of multinational corporations: Suez (ex-Lyonnaise des Eaux) Veolia, (ex-Vivendi environment, ex-Générale des Eaux), Thames Water/RWE, Bechtel as well as Enron, prior to its downfall.

The term “privatisation” can cover different realities. Water services include different aspects: infrastructure, treatment, distribution, invoicing and maintenance. These can be separated from one another, and managed by different operators. In certain cases, only the distribution and invoicing are delegated to the private sector. At the other extreme, some contracts grant the big multinational groups ownership of all the existing and future water resources of a region. In the case of most of the contracts signed with big cities in the 1990s, the companies accepted responsibility for the infrastructure (promising to extend existing facilities) as well as sanitation, distribution, invoicing, all under the theoretical control of a public regulatory body.

The triumphalism of the 1990s rapidly gave way to disenchantment. The multinationals did not fulfil their promises and the cost of water sometimes rose exponentially. There were clashes with protest movements; the most emblematic of these took place in Cochabamba in Bolivia. Finally, partially due to the financial crises in Asia and Latin America at the end of the 1990s, and to the drop in exchange rates that resulted, they weren’t even able to make the profits that had been projected.

Contracts that were highly favourable to the multinationals but not even respected by them

Although privatisation was carried out in the name of the superior efficiency of the market mechanisms, the conditions under which most contracts for the concessions were decided and approved were enough to dispel any illusions. The specific nature of water means that it is supplied under a situation of “natural monopoly” which does not lend itself to beneficial competition. As a result, the negotiations between multinationals and local authorities were often, in practice, limited to a trade-off setting the conditions under which those multinationals could "acquire" hitherto public monopolies. These “trade-offs” did not necessarily involve the interests of users and of the public, but mostly those of local authorities themselves, or even of trade union leaders in the agencies in question. Corruption is endemic to the water sector, and all the more so in such processes of privatisation. Political pressure often played a non-negligible part in sealing the deals. The French embassies invested considerable efforts in guaranteeing the markets for Veolia or Suez in many countries, such as the Philippines or Argentina. The head of Suez at the time, Jérôme Monod, continued his career as advisor to Jacques Chriac at the Elysée Palace.

As a result of this, the contracts that were signed remained unclear; the tenders were modified a posteriori to justify the fact that a given multinational company had successfully won the tender.

This also meant that in most cases the multinationals had managed to obtain particularly advantageous contracts. In many African countries, for example, the management contracts were limited to implementing the distribution and to recovering expenses, whereas the governments had to cover the higher costs of building and maintaining the infrastructure. Some contracts even went as far as specifying the right of the multinationals in question to a guaranteed level of profits. (It is true that this is a widespread practice in countries that try to attract foreign investors at all costs.)

Finally, to guarantee that they would win the tenders, the multinationals made many unrealistic promises in terms of price and the extension of the network coverage. The local authorities sometimes helped them in doing this. Just prior to the privatisation of water in Buenos Aires and Manila, for example, the price of water was significantly increased, to pave the way for a seductive campaign by the multinationals. Once they had got a foot in the door, they then quickly asked for price increases, using all manner of different pretexts – particularly that the local authorities had given them inaccurate information on the state of the network at the time the contract was signed. We can sometimes see a permanent renegotiation, if the initial contract, as was the case in Buenos Aires, included huge price increases as a result. In general, the companies that had the concessions used all manner of arguments and played on all the legal loopholes possible to avoid fulfilling their commitments. The contract that was signed with a branch of Suez in Cordoba stipulated, for example, that that the company was supposed to connect 97% of the population, but they argued that the fact that there was no mention of certain illegal forms of housing in the contract meant that these people were not included in the contract...

In Manila, everything began well, with an undeniable extension to the network and relative improvement to the service. But it soon appeared that the rate of service that was declared by the two multinationals in question was based on very optimistic and dubious forecasts, with a ratio of 9.2 users per connection point. Each of the companies was responsible for a sector of the town, which was divided into East, which was allocated to a subsidiary of Bechtel, and West, which was granted to a subsidiary of Suez; both companies had developed consortia with the local authorities. Nothing at all was done to solve the problem of loss of water through leakage: the companies stopped short at accusing the authorities of having under-estimated the existing losses in the negotiation phase of the contracts. Contrary to what had been loudly proclaimed by the international financial institutions, the two private operators had no more succeeded than the old public operator in raising the necessary funding. Finally, a series of price increases took place between 2001 and 2003, on the grounds that this was to compensate the companies for losses incurred on the basis of poor exchange rates, although they had promised that there would be no price increases before 2007. At the end of the day, the price of water in the East sector of Manila had increased five-fold in 2003, compared with 1997. In the Western sector it had “only” doubled in 2002. The Suez subsidiary finally announced that they were withdrawing from the market at the end of 2002, leaving the Filipino authorities with a huge debt, that ended up being covered by tax-payers’ money.

A succession of failures and scandals

The promises that were made left, right and centre soon came back to haunt the promoters. It was not merely an issue of over-ambitious objectives: in many cases, everything happened as though the companies never really had any intention of keeping their promises, but rather of making a maximum profit as fast as possible. The promise of easy, generous funding on the financial markets proved to be an illusion. (Even in the United Kingdom, which along with France is the temple of private management, all the water companies gave up the idea of raising money on the financial markets and now exclusively use the method of running up debts, like any other public agency). The multinationals tried to compensate for these lost hopes by increasing the cost of water. They rapidly came up against protest movements, and legal proceedings by the public who rebelled against the price increases. Some public authorities also wanted to denounce the non-respect of the contractual commitments by these firms.

Privatisation has on occasion led to sanitary disasters, like in Johannesburg, where the installation of prepaid water meters obliged some people to draw their water from polluted rivers, and where there were 260 victims in a cholera epidemic. The privatisation of water in Abidjan, in the Ivory Coast, also obliged the poorest people to dig wells that connected to septic tanks, thereby also resulting in many cases of cholera. Suez, Veolia, Thames Water and Wessex Water (then controlled by Enron) were all quoted as being amongst the main global polluters by the British Environmental Agency in 1999 and 2001. The subsidiary of Suez and Veolia that operate in Buenos Aires allowed 95% of the untreated wastewaters to flow directly into the Rio del Plata river.

Grenoble was one of the first cities anywhere in the world to win a court injunction against a water multinational. This concerned the corruption and the irregularities in the way the public services market had been delegated; it led to the cancellation of the concession and the new municipal council voted that water services would become public again. The biggest contract ever signed in the United States on water management – it concerned Atlanta, and was supposed to be effective until 2019 – was rescinded in 2003, as a result of complains by the users about the poor quality of the service and the disruptions to the water supply. The town then cancelled the contract with United Water (a subsidiary of Suez) and reintroduced municipal management of water supplies. In Porto Rico, Trinidad and Budapest, the governmental authorities discovered a serious lack of maintenance, repairs, administration, the general running of business and of financial affairs, and especially a lack of growth, in their respective private operators Veolia, Severn-Trent and Suez.

In other cases, it was pressure that was brought to bear by the public that finally resulted in the multinationals leaving. In Tucuman in Argentina, the local population organised the boycotting of payment of water bills, which forced Veolia to leave. In Santa Fe, again in Argentina, a public referendum was organised, which led to renegotiating a contract that dated back to 1995 with a subsidiary of Suez, and was followed by the departure of this multinational. In Cochabamba, the public protest against the price increases that were announced by Bechtel degenerated into a “Water war” and again led to the departure of the multinational.

In both of these cases, as well as in many more, the multinationals in question rushed to lodge an appeal at the commercial courts of law that were very favourable (the International Chamber of Commerce arbitration court and the International Centre of Settlement of Investment Disputes on of the World Bank), in order to claim damages – so far they have generally been unsuccessful.

A new phase?

In 2002, Suez was the first of the water multinationals to announce a change of direction: they planned to withdraw from towns that had not proved profitable enough, and to withdraw from the countries of the South in general, in a significant manner. The other actors in the sector were quick to follow, which led to a wave of cancellation of contracts affecting towns like Manila, Ho Chi Minh, Djakarta, Maputo, Buenos Aires and Shanghai. It is obviously the end of an era during which the water multinationals were able to “buy” their captive clientele – the citizens – from local authorities and hope for guaranteed profits at all cost. This did not cause them to renounce their planned expansion any more than it stopped the international financial institutions from promoting their concept of water governance. They simply were more careful in their economic forecasts and tried to work in areas where there was a better guarantee for profits – which also implied reorienting their business to countries of the North, where they were still very much under public control. The IMF found nothing better to do, for their part, than to promote new mechanisms that would guarantee the water multinationals against the possible future collapse of local currencies, such as had happened in South America and Asia. Another promising field of development were the new forms of water management and conservation that can be used as fresh arguments in favour of privatisation.

At the end of the day, then, should privatisation be considered as an absolute evil? Several factors (water as a vital need and right, a situation of natural monopoly) contribute to the fact that water services are very ill suited to a purely commercial logic. One could say that ultimately it all depends how the privatisation is carried out. If the contracts are negotiated and approved in transparent manner, if they are balanced and include obligations and appropriate safe-guards, if the activities of private companies are regulated and controlled by an independent public body, it is theoretically possible that private companies can implement better, and even fairer water services than public burocracies. Some cases can be put forward to illustrate this point. But it remains, nevertheless, that the many abuses that occurred during the great wave of privatisations of the 1990s are anything but an accident: as soon as water services are considered as a commercial activity, with profit as the dominant motive rather than the delivery of the service, it is only a small step from there to abusive practice and the failure to respect fundamental rights.

MAIN SOURCES
- Larbi Bouguerra, Les batailles de l’eau ; pour un bien commun de l’humanité, Enjeux Planète, 2003, p. 126-151.
- « The Water Barons » (case-studies of privatisation processes in the world). http://projects.publicintegrity.org...
- Remunicipalisation Tracker

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