FINANCE: Privatisation – Sweeter Waters or Red Herring?

By Pratap Chatterjee Reprint | | Print |

Pratap Chatterjee

WASHINGTON, Oct 3 1995 (IPS) - Sweet is the water that flows from Argentine taps, says a new report from the World Bank, because private companies have helped make the precious liquid both cheaper and more widely available than their state predecessors.

Privatisation works, conclude David Donaldson and Dilip Wagle, authors of the new report, “Privatisation: Principles and Practice.” They work for the International Finance Corporation (IFC), the World Bank affiliate which provides direct support for the private sector in developing countries.

The authors cite the sale of Obras Sanitarias de la Nacion to Aguas Argentinas, a private company owned by Lyonnaise des Eaux of France, as one of the best examples of how privatisation can help consumers.

Wrong, say some water users in Argentina. Wrong, say urban residents from Abidjan, Cote d’Ivoire, to Birmingham, England who complain that privatisation has had a negative impact on their water supply.

Prices have risen, supplies to poor users have been cut while local streams have dried up as a result of careless exploitation, say some residents and activists.

Privatisation has benefitted some, they say. They are the new “water tycoons” — executives who run the few multinationals like Lyonnaise des Eaux, Compagnie Generale des Eaux (CGE) and Bouygues of France that have taken over state companies around the world .

Donaldson and Wagle agree that not all privatisations have worked perfectly.

“To privatise is to drive a two-horse cart. The cart is the enterprise in question. One horse is called political goals and is flighty and fickle, the other is called economics and is slow and steady,” they write.

“Only the most skillful driver can negotiate the road to privatisation – a rough boulder-hewn track up the hill of vested interests, across the stream of xenophobia.”

The IFC report says that Aguas Argentinas has expanded the water network to 600,000 new residents, eliminated water shortages, increased potable water production by 26 percent and improved reliability of service. Aguas Argentinas has promised to cut prices by 27 percent and to invest four billion dollars in improving services over a 30-year period.

“The body of evidence is growing. There are clear net benefits in 70 percent of the cases. In two-thirds, the profitability increased,” Donaldson told journalists as he launched the report.

“It’s a lie. Some people in the centre of Buenos Aires have benefitted, but our water is more expensive and the service has not improved. On many days there is no water,” says Marcelo Paoletti, an activist from an Argentine group called the Ecologist Workshop. He lives in Rosario, the country’s second largest city.

Paoletti’s bills add up to 24 pesos (24 dollars) a month — marginally more than when the water supply was publicly managed. But Paoletti’s complaints pale in comparison to water users in Britain who say their bills have risen sharply since privatisation in 1989.

Users who paid 150 dollars a year for water supplies in 1989 are now charged between 250 dollars and 800 dollars a year for the same services. Two million users were late in paying their bills last year and 1,000 users are cut off every month, according to recent statistics.

Twenty British rivers dried up after privatisation because “companies have no incentive to discourage waste and every incentive to extract water as cheaply as possible,” writes Brendan Martin, who works for Public Services International, an international trade union federation based in France.

Half of the new private companies are owned by the French multinationals, while others are owned by new British companies. Chief executives of these companies received as much as 540,000 dollars in salaries and perks last year.

Some of these companies have diversified into other areas, too. CGE has since bought up waste companies as well private hospitals in Britain. By 1991, CGE, with 173,000 employees worldwide, had an annual turnover of 20 billion dollars from its 1600 subsidiaries around the world.

“Water privatisation is a ripoff, a steal, a plunder, legalised mugging, licensed theft, a dioabolical liberty, a huge scam, a cheat, a snatch, a grab, a swindle,” wrote Joe Rogaly, a columnist for the Financial Times.

Similar complaints come from Abidjan, the capital of Cote D’Ivoire, where consumer complaints have been strong. Jean Saint- Vil, an academic, writes that the proportion of people connected to water supplies dropped from 57 percent in 1977 to 47 percent in 1983.

The state water company contracted with a subsidiary of Bouygues of France to manage Abidjan’s water system in 1977. The number of new connections fell from 8,000 per year in 1977 to 2,300 in 1982.

“The interest of business firms in this kind of game is to low- ball bids and get in and try to create monopolies or niches so that they can increase their price over time and end up collecting much more than the minimum costs required for the service to be provided,” says Max Sawicky, who works for the Washington-based Economic Policy Institute.

This has discouraged some governments. In South Korea the government halted its two-year-old privatisation programme when it discovered that the buyers of state enterprises were the “chaebol,” the national conglomerates created by the government in the 1960s to lead its export growth.

In Mexico the government raised tens of billions of dollars by selling off 220 state businesses over a five-year period that ended in 1993. Today many of these businesses face financial ruin.

Some analysts blame the fall in market prices for the collapse of the newly privatised sugar industry. But others point out that the banking sector has collapsed because of corruption, mismanagement and the creation of cartels.

“In hindsight, experts say the Mexican government should have focussed on who was buying the companies and less on the price being paid. And it should have been more vigilant after the sales,” writes Craig Torres, a staff writer from the Wall Street Journal.

PSI’s Martin, who has just written a book about privatisation called “In the Public Interest” says that the issue is not whether the private sector or the public sector is better. Both have records of failure as well as success.

The real issue is providing good services at lowest cost, which both can do if they follow simple rules. “Seek out the most effective ways to involve users, both collectively and individually, in the design and management of services,” he advises.

This cannot be done through price competition alone because competition does not prevent companies from banding together to create cartels to keep prices high. To prevent this there needs to be an independent watchdog which represents consumers.

“Competition obviously can play a part in improving efficiency but the idea that it is either sufficient or infallible is predicated on a narrow view of the public interest,” adds Martin who says that lower prices may also come at the cost of jobs, pay and worker safety.