Water Privatisation, Corruption and Exploitation

Water multinationals admit they cannot deliver to the poor - Startling research reveals that American consultancy set up and funds South Africas Municipal Infrastructure Investment Unit (MIIU)

By Public Services International
Public Services International
August 20, 2002

The Public Services International (PSI) is concerned that the World Summit on Sustainable Development (WSSD) has not come out strongly against water privatisation. New research from the PSI's Research Unit, based at the University of Greenwich in London reveals that the water multinationals privatising water in the developing world are dogged by corruption, close to financial collapse and have long track records of exploiting the poor.

What is worse is that South Africa's Municipal Infrastructure Investment Unit (MIIU) is now revealed to have been set up by USAID through a private consultancy called PADCO! The MIIU has always been touted by the South African government as a Section 21 government owned unit which aims "to help municipalities find innovative solutions to critical problems with the financing and management of essential municipal services such as water supply, sanitation, waste, energy, transport."

Yet not only is the MIIU little more than a local front organisation for USAID, but through PADCO, the MIIU is also part of a newly established shady international organisation of water multinationals as members. The MIIU has in fact been secretly funded by the USAID to spread false information aimed at convincing the public and government officials that the best option for South Africas public water is privatisation.

PADCO: a USAID funded company which secretly set up and funds MIIU

On 21st March 2002 multinationals held a private meeting where they created an organisation called "Partners in Africa for Water and Sanitation (PAWS)" specifically to discuss privatisation of water and sanitation in South Africa, Nigeria, and Uganda. The meeting came out with a confidential document that PSI obtained a copy of: this document, prepared by a USA consultancy called PADCO, was solely aimed at persuading South African municipalities that privatisation of water is not a bad idea.

Just one month before this, in February 2002, an internal newsletter of another private consultancy company, RTI, revealed that "RTI and PADCO created the MIIU as a nonprofit company, with its own CEO and Board of Directors, and began laying a foundation for a mature financial market that will facilitate the flow of private capital into municipal infrastructure projects".

The document revealed that PADCO's objectives are to "help MIIU to maintain a pro-private stance in the internal South African debate." USAID has financed PADCO to do much else with infrastructure finance in South Africa. PADCO describes themselves as "providing long- and short-term technical assistance to the MIIU to support the creation of a sustainable framework for private infrastructure investment in the Republic of South Africa."

PADCO also organised a funded world jamboree for 12 South African officials to observe privatisation of water in South America and Australia. They gave out false information, such as the surprising claim that "Global competition for transparent competitive tenders in the water sector is fierce", whereas only two multinationals dominate the world's water supply!

The PADCO report and detailed critique can be obtained from PSI. Main areas of concern:

  • Privatisation policies are frequently introduced on the basis of consultant reports that were intended to remain secret. This practice hinders democratic debate, leads to bad quality reports and bad advice. Flawed assumptions remain unchallenged, inadequate evidence is not critically evaluated, incompetent work is not exposed, alternative policy options are submerged.
  • Yet secrecy is the normal environment for consultants reports on water privatisation. When they do emerge into the light of day, the contents may look less impressive. For example, PricewaterhouseCoopers (PwC) produced a report on water privatisation for the Austrian government in 2001. It was initially secret, then leaked, and finally officially released. The problems with the report included: inaccurate and incomplete data, unsustainable assumptions, and failure to recognise the importance of local factors. Ernst & Young, commissioned to carry out an environmental impact assessment (EIA) in India, was caught simply copying another organisations EIA from another project. This was identified by an NGO, the Environmental Support Group of Bangalore, which published the evidence on its website.
  • The PADCO report has a very restricted view of opposition to water privatisation, naming only USA trade unions, South African trade unions, PSI, and research units including PSIRU and Ilrig (a South African research unit) as critical. Studies reveal that there is, in fact, organised resi stance to privatisation of water by movements in Brazil, Ghana, Indonesia, South Africa, Paraguay, Poland, Argentina, France, Bolivia, Germany, Mauritius, USA, Canada, Panama, Trinidad, Honduras, Hungary, Sweden. This includes environmentalists, consumer groups, citizens organisations, and even elected politicians frustrated by conditionalities. Brazils Frente Nacional pelo Saneamento Ambiental [National Front for Environmental Sanitation] brings together 17 entities of civil society against privatisation. Once again, a case of false information.

The PSI and SAMWU will be exposing the PADCO report and the dubious behaviour of the water multinationals and their international consultant cohorts throughout the WSSD.

PSI's other research into the water multinationals also reveals disturbing new trends.

World domination by only two companies - warned about anti-competitive behaviour

The water business is dominated by the two largest French multinationals, Suez and Vivendi, who between them hold about 70% of the international privatized water business. Both were warned of anti-competitive behaviour in France in July this year when the French competition council ruled that they had been abusing their market dominance in France, where they control 85% of the private water. The two companies have created joint subsidiaries in 12 areas, sharing the profits of a water concession instead of competing against each other. The council also said that since June 1997 more than 40 tenders had been made uncompetitive by the groups behaviour.

Multinational which privatised water of Dolphin Coast, KZN, admits private companies cannot deliver to the poor

In January 2002, J. F. Talbot, CEO of SAUR International (fourth largest water company in the world) told the World Bank that the private sector could not deliver for the poor. He said instead that the private sector did not have the financial capacity: "The scale of the need far out-reaches the financial and risk taking capacities of the private sector." He also said that developing countries where unrealistic in attempting to European standards in developing countries such as the demand for "connections for all" in developing countries, even though the multinationals who privatise always cite their good track record in Europe.

He also rejected the possibility of cost recovery from users, saying that in developing countries "service users can't pay for the level of investments required for social projects, and that even the US and Europe subsidise water services." He concluded that without subsidies and soft loans from governments (which say they don't have the money so they have to privatise) there is no scope for privatisation of water by multinationals

Water multinational prosecuted for supplying contaminated water to the poor

Vivendi, which attempted to privatise Johannesburg's water, lost another contract this year - this time in Puerto Rico. Its large Brazilian water venture Sanepar, which serves 7 million people in the Brazilian state of Parana was prosecuted for supplying contaminated water and it is being investigated over alleged financial irregularities. In Argentina, there are serious problems since the economic crisis. Privatised water was based on protecting the multinationals, with prices were indexed to the US dollar. Following Argentinas default on the external debt, a new law on "Public Emergency and Reform of the Exchange Regime" provided for the renegotiation of private water contracts. But the multinationals have ignored this law. Instead, Suez and Aguas de Barcelona have since called in the French and Spanish governments to represent them. In February 2002, the management of Aguas Argentinas and the French ambassador met the vice Minister of Economy to inform him that they were unilaterally suspending a number of obligations, including the investment objectives in the contract renegotiated as recently as January 2001. Poor consumers are paying the price whereas if water had remained public there would have been no downgrading of delivery of this vital human right under the same circumstances.

More and more corruption convictions

Vivendi was convicted of corruption three times in last year alone, for offences such as bribery and donations to political parties. The energy subsidiary of Suez, Tractebel, is currently under investigation for alleged bribery in connection with electricity privatisations in Kazakhstan and Peru. The research found that the economic function of a bribe is to provide a financial inducement for an official/politician/public authority to act in the interests of the company rather than the public interest which he/she/it is supposed to represent. The research concludes that:

  • The multinational corporations' interest in water and sanitation services is defined purely by their shareholders interest, their return on capital and the risks involved.
  • With less than a decade of experience with water privatisation in developing countries, the corporations are now experiencing financial problems which must lead them to question their financial interest in continuing.
  • Governments of developing countries need to examine the true long-term costs of giving the corporations protection from currency risks, political risks and demand risks. There needs to be a public process of comparing any private proposals with public alternatives, as part of an open public debate.
  • There remains a constant danger that extending privatisation will extend the opportunities for corruption.

The full report can be viewed at http://www.psiru.org/

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