PSI Briefing on: The way forward – public sector water
Problems with Privatization of Water Supply and Sanitation
Financing water – distortions and prejudiceTopic 10: Multilateral Agencies and Restricted Access to Finance
SummaryA. Multilateral finance and conditionality 1
B. Loans for the private sector only 1
C. Supporting profits, not performance 2
D. Distortions of public finance 2
1.
International financial institutions like the World Bank are promoting private sector participation in water supply and sanitation as the way forward. The approach of these multilateral agencies is:
· Acritical, as the distortions caused by the privatization of water supply and sanitation are not taken into sufficient consideration;
· Limited, as it does not consider other viable solutions to the challenges of managing urban water systems in transition and developing countries.
Multilateral agencies themselves seriously affect the achievement of development objectivesdistort the choices available by their policies in providing financial support to water and wastewater projects. Distortions due to multilateral agencies’ involvement in water include:
· Imposing water privatization as a conditionality of loanson cash-starveding governments;
· Selective Ffinancing e to multinationals, even when this means penalizingin preference to efficient public enterprises;
· Securing multinationals’ profits rather than operating performance or public accountability;
· Failure to protect the interests of consumers.
Multilateral Finance
A. Multilateral finance and conditionality
and Restricted Sovereignty
Multilateral agencies financing water operations restrict the sovereignty of governments in transition and developing countries by means of conditionality. Conditionality in the provision of loans, or the granting of debt relief, can results in the effective imposition of water privatization to cash-starveding governments. Multilateral agencies have exerted similar pressures in extremely controversial circumstances
· Mozambique was forced to privatize its water services in 1999 as .one of the conditions imposed by donors and funding agencies for the provision of $117 million to improve the services. This privatization was also one of the reasons for extending Mozambique’s debt relief .[1] The agencies include the World Bank, the African Development Bank, the Dutch government and the European Union. Urban water and sanitation services for 2.5 million were privatized to a consortium led by SAUR, a subsidiary of Bouygues, which expects revenue of about $9m per year from these concessions. [2]
· Privatization seems to have become a more important objective than eleiminating corruption. In Kenya, for example, the IMF and World Bank have been bitterly criticized for resuming aid after the privatization of Nnairobi’s water, despite the fact that the government had made no progress in eleiminating corruption, which was also supposed to be a condition of aid. [3]
·
B. Loans for the private sector only
The multilateral agencies often provide finance only through private companies now, however efficient the public sector alternative might be.
· The World Bank has insisted that the Bolivian government look to the private sector for investment in water supply and sewerage. As a consequence, in December 1997 the government refused to guarantee a $25m World Bank loan to finance the investment programme of the co-operative SAGUAPAC despite its “excellent track record in the use and repayment of past loans”. Now the World Bank is to provide technical assistance to privatize Bolivian water co-operatives including SAGUAPAC [4].
· The EIB (European Investment Bank) is one of the largest providers of finance for water projects, in all continents [5]. However, it can only support investments outside Europe when the project involves European multinationals – and so requires privatisation.
· The EBRD’s first ever loan for water and sanitation in eastern Europe was granted not to a government but to a multinational: “a $90m equity and loan facility with Lyonnaise des Eaux to support the French utilities and communications group's planned $300m investment programme in the region.” [6]. (Just one month earlier, Thierry Baudon had left his post as deputy vice president of the EBRD and joined Lyonnaise des Eaux as managing director, international project finance.)[7]
Among multilateral agencies,
Ø tin Asia and Latin Americais of “mutual interests”, which means that governments needing financial support are forced to privatize water to(***Check the source for “mutual interest”***)
Ø
Ø The World Bank has been bitterly criticized in Kenya for demanding that water privatization should proceed while corruption was still prevalent (Hall & Bayliss).
A. Restricted Access to Finance in Bolivia
The World Bank has insisted that the Bolivian government look to the private sector for investment in water supply and sewerage. As a consequence, in December 1997 the government refused to guarantee a $25m World Bank loan to finance the investment programme of the co-operative SAGUAPAC despite its “excellent track record in the use and repayment of past loans”. Now the World Bank is to provide technical assistance to privatize Bolivian water co-operatives including SAGUAPAC (Nickson, 1998: 10)[8].
***Also treat EBRD multi-project facilities???***
C. C. Secured Multinationals’ Profits and Unsecured PerformanceSupporting profits, not performance
Multilateral agencies take part in water projects considered of strategic political importance. Political motivation for privatization can leadM multilateral agencies to directly support multinationals’ investments use their funding to encourage financial and political support for privatisation and the results of multinationals, rather than their irrespective of their operational performance. .
· The key financing for the ‘flagship’ water privatization in Buenos Aires was supposed to have come form the multinationals, who promised $1 billion investment in the first year. But Suez-Lyonnaise only invested $30m of that money – the rest came from the IFC, a world bank agency (raised $115m. to $250m. dollars in loans, and put up $300m. itself), the IDB ($100m), and local Argentine banks.
· The EBRD has given a will ECU 22.7m loan to re-finance the 25% equity stake acquired by a Vivendi-led /Berliner Wasserbetriebe consortium in the privatization ofed Budapest Municipal Sewerage Company (FCSM). The ECU 22.7m loan This is appears designed to reduce the investment costs of the two multinationals and, so to enhance the financial profits performance of the special-purpose coconsortiummpany rather than the operational performance of FCSM [9]. Another Another stated objective of the project loan is to “ease political resistance to private sector involvement” (EBRD, 1999: 26)[10]. Yet the concession contract lacks basic requirements of transparency: documents relating to the privatisation of FCMS are in fact kept secret, even from council officials, and Budapest City Council debates related issues only in closed sessions [11].
D. ***Also treat World Bank’s involvement in Aguas Argentinas???***
E.
F. D. Multilateral Agencies and Neglected Consumers’ Interests
G.
H. The EBRD also provides a clear example of a multilateral agency involved in a water project protecting the interest of multinationals at the expenses of consumers.
I.
J. Despite the EBRD’s commitment to ensure that consumers’ interests are “fairly balanced” with those of the municipality authorities and private sector parties[12] (EBRD, 1999: 26), the concession contract seems to lack basic requirements of transparency. Documents relating to the privatisation of FCMS are in fact kept secret, even from council officials, and Budapest City Council debates related issues only in closed sessions[13].
K.
L. E. Further Reading/References
M. European Bank for Reconstruction and Development (1999) Municipal and Environmental Infrastructure – EBRD involvement to date in the MEI sector. London: published for the European Bank for Reconstruction and Development.
N. Hall, D. & Bayliss, K. (2000) Privatisation of water and energy in Africa, 1999, PSIRU report for PSI, February 2000.
O. Lobina, E. & Hall, D. (2000) “Public Sector Alternatives to Water Supply and Sewerage Privatization: Case Studies”, International Journal of Water Resources, 16(1), pp. 37-57.
P. Nickson, A. (1998) Organisational structure and performance in urban water supply: the case of the SAGUAPAC co-operative in Santa Cruz, Bolivia. Paper presented at 3rd CLAD Inter-American Conference, Madrid, 14-17 October 1998.
Q. Wells, L. (1999) ‘Private Foreign Investment in Infrastructure: managing Non-Commercial Risk’ (Preliminary Draft). Paper for Private Infrastructure for Development: Confronting Political and Regulatory Risks – Conference, 8-10 September Rome, Italy
R. What about the SABESPA issue during the financial crisis? Beyond JWG’s criticism about not including unions/workers in the planning, what about the Bank’s role to support the municipalities that must deal with the MNCs that are foisted on them? Why so many references to EBRD, and not IFC and the slice it takes in consultancy fees (see Bobet’s MWSS paper on women) ?
S. NotesDistortions of public finance
The preference for privatisation is also heavily affected by the fact that a public authority’s own budget may be considerably improved by the sale of a water company – regardless of the benefit or cost to the water and sanitation service.
· The sale in 1999 of half of Berlin Wasserbetriebe, a municipal company which was both efficient and profitable – but Berlin city council needed the proceeds of the sale to reduce its debts.
· The same was true of the Chilean water and sanitation privatisations – EMOS in Santiago was described even by the world bank as a highly efficient utility – yet was partly privatised last year for political and fiscal reasons.
· In 1997 the bid by Lyonnaise des Eaux and RWE for Budapest Water Works was successful, even though the prices it proposed were higher than rival bids – because Lyonnaise offered to pay an extra Forint 3 billion to the city council.
Conclusions
The lending policies of the multilateral agencies force privatization to be adopted as an option, without any critical evaluation of alternatives. The multinationals depend on this international public sector funding for a high proportion of their activities.
Public Services International www.world-psi.org
Research by PSIRU, University of Greenwich, London SE10 9LS, UK www.psiru.org
[1] Africa Financing Review 1 July 1999
[2] Mozambique news Agency 1/10/99; Africa Financing Review 1 July 1999
[3] Jan 6 Interpress Service 6 Jan 2000
[4] Nickson, A. (1998) Organisational structure and performance in urban water supply: the case of the SAGUAPAC co-operative in Santa Cruz, Bolivia. Paper presented at 3rd CLAD Inter-American Conference, Madrid, 14-17 October 1998. See also saguapac “Saguapac next up in waterworks privatizationprivatisation” – bolivia, World Reporter, 07/01/00; source: PSIRU database..
[5] The EIB revealed that the amount lent for projects "of mutual interest" in Asia and Latin America from 1997 to 1999 could reach ECU 900m. Source: PSIRU database; EIB loan for water in Manila – Philippines, Press Release, 27/01/99: www.eib.org.
[6] FT 31.7.95
[7] FT 27.6.95
[8] Nickson, A. (1998) Organisational structure and performance in urban water supply: the case of the SAGUAPAC co-operative in Santa Cruz, Bolivia. Paper presented at 3rd CLAD Inter-American Conference, Madrid, 14-17 October 1998. See also saguapac “Saguapac next up in waterworks privatizationprivatisation” – bolivia, World Reporter, 07/01/00; source: PSIRU database..
[9] Source: PSIRU database; “EBRD Board backs Budapest scheme”, Global Water Report, FT Bus Rep: Energy: 4 Dec 1998. More precisely, the stake acquired by Vivendi/Berliner Wasser Betriebe is to be sold to a special-purpose company, with the EBRD as a shareholder. The EBRD will hold 30% of the special-purpose company (ECU 22.7 m), while Vivendi and Berliner Wasser Betriebe together will hold 70%. Part of the EBRD’s 30% equity stake in the special-purpose company will be sold to the sponsors at a pre-agreed price (covered by commercial confidentiality) at an agreed moment (also covered by commercial confidentiality). This is likely to allow the two companies to re-finance their equity participation in FCSM at more favourable conditions than those offered by the private banking sector.
[10] Source: PSIRU database; “EBRD Board backs Budapest scheme”, Global Water Report, FT Bus Rep: Energy: 4 Dec 1998. The EBRD’s interest in the special-purpose company is in fact associated with a political and regulatory risk “carve-out”. In other words, in case of political and regulatory risks the EBRD will not exercise its right to sell the equity to the private sponsors until the cessation of those risks.
[11] Source: PSIRU database; “Data of public interest and secret contracts”, NEPSZABADSAG: 7 Dec 1998. The same applies to the documents relating to the privatisation of Budapest Water Works Rt, which is responsible for supplying water to the city. The company was privatised in April 1997, when a 25-year concession was granted to a consortium of Lyonnaise des Eaux and the German RWE Aqua.
[12] European Bank for Reconstruction and Development (1999a) Municipal and Environmental Infrastructure – EBRD involvement to date in the MEI sector. London: European Bank for Reconstruction and Development.
[13] Source: PSIRU database; “Data of public interest and secret contracts”, NEPSZABADSAG: 7 Dec 1998. The same applies to the documents relating to the privatisation of Budapest Water Works Rt, which is responsible for supplying water to the city. The company was privatised in April 1997, when a 25-year concession was granted to a consortium of Lyonnaise des Eaux and the German RWE Aqua.