Water Privatization in Buenos Aires
Vilas, Carlos M.
Carlos M. Vilas is an Argentine lawyer and political scientist, a member of the Argentine Institute for Economic Development and of NACLAs editorial board. He has served as a top representa-...
...But perhaps it would be excessive to conclude that it represents, as some specialists assert, "un fracaso"-an utter failure...
...The government also allowed the postponement of the concession's most significant and needed construction project-a huge wastewater treatment plant and a major sewerage project, which, by the terms of the contract, were supposed to be built in the first five years of the concession...
...1999 $23.73 Jan...
...The costs associated with sewage service are twice those of water...
...Nor is it, in general terms, different from that of any other transnational corporation.' 7 Concessions and privatization processes have a patchy record, at best: they have been characterized by bribery, corruption, repeated breeches of contracts, mass layoffs, rate hikes and more...
...But many are skeptical of AASAs ability to change...
...Marisa Duarte, "Los efectos de las privatizaciones sobre la ocupaci6n en las empresas de servicios ptblicos," Realidad Econdmica, Vol...
...Also, households with new water services are often forced to dump their sewage into makeshift septic tanks, cesspools or directly onto streets and open fields...
...The leading owners of AASA were two French companies, Suez Lyonnaise des Eaux-Dumez and Vivendi...
...As a result of subsequent share transfers, the current ownership of AASA is as follows: Suez, which shortened its name in 2001, still operates the concession and remains the leading shareholder with 39.93% of the company...
...The government carried out privatization as part of a fiscal and anti-inflationary strategy...
...Some observers contend that the offers were opportunistic, saying predatory pricing reigned from the start...
...Not until late 2003, amid a climate of increased regulatory control under Argentina's new government, did AASA begin to fulfill its commitments...
...prices determined by the "Producer Price Index of Industrial Commodities" and the "Consumer Price Index of Water and Sewage Maintenance...
...Emblematically, the government's representative in the 1997-1999 renegotiation, which produced such favorable results for AASA, was Maria Julia Alsogaray At the time, she was Secretary of the Environment for the Menem administration and constantly implicated in corruption charges...
...And selling off state assets provided the fresh capital needed to ensure the initial viability of the monetary convertibility scheme, instituted in 1991, in which one Argentine peso equalled one U.S...
...The state-run National Sanitation Service (OSN), created in the second half of the 19th century, provided these services until its privatization in 1993...
...The terms of the bidding process stipulated that the concession go to the bidder offering the lowest base rate along with an investment plan for improved and expanded services...
...For its part, the Argentine govemment decided--contrary to the advice of the Bank's specialists-to leave intact the company's vertically and horizontally integrated business model...
...ARGENTINA'S EXPERIENCE WITH AASA RENDERS explicit the tensions between public health, social development, poverty reduction, and the conservation of resources and the environment, on the one hand, and the goals of commercial profit typical of corporations, on the other...
...Aguas Argentinas, gran negocio de la empresa a expensas de los usuarios," Le Monde Diplomatique (edici6n Cono Sur), August 26, 2001...
...The consortium also included the Argentine group Soldati and some minority shareholders...
...Critics believe that the small number of bidders-five at first, with only three making final offers-and the resulting ranking of bids suggest previous coordination among the bidding companies...
...6 Still, one immediate effect of privatization was the slashing of the workforce by 40%.7 AASA was granted the concession because it offered the largest reduction-26.9%-in water rates...
...In principle, the $4.1 billion investment plan would span the 30 years of the concession...
...Shortly before privatization, they rose an additional 8...
...1997 $20.55 May 1998 $21.65 Ian...
...Basic connection fees for water rose 83.7%, for sewage 42%, and other charges increased by between 38% and 45...
...Subsequent rate hikes more than compensated for the initial reduction when the bid was won...
...Private companies are unlikely to invest in service expansion to such sectors, because they see little chance of recovering their investment, much the less making profits...
...Relative costs explain the disTable 3: Evaluation of AASA, 1993-2001 REQUIRED BY THE AMOUNT CONTRACT FULFILLED PERCENTAGE OF SERVICE (POPULATION WITH WATER 88% 79% ACCESS) PERCENTAGE OF SERVICE (POPULATION WITH 74% 63% SEWAGE ACCESS) PERCENTAGE OF PRIMARY WASTE WATER TREATMENT 74% 7% INVESTMENT (U.S...
...Implementing new rates just months after winning the concession profoundly undermines the competitive preTable 1: Average Water Bill DATE PRICE IN PESOS ($lpeso=US$1) May 1993 $14.56 lune 1994 $16.53 Nov...
...The only other offer came from North West Water International Ltd., which allied with local companies and proposed a mere 11.5% reduction...
...eds...
...The single, yet noticeable, exception is the plummet of profits in 2002-a direct consequence of devaluation and the end of convertibility But according to its annual balance sheets, between 1994 and 2000 the consortium enjoyed a net profit-to-sales ratio of 13% and a net profit-to-net-asset ratio of 20% (see Table 2...
...The national government, the provincial government of the province of Buenos Aires-which includes the 17 municipalities of Greater Buenos Aires-and the city government of Buenos Aires decide its directorate...
...The government agency created to regulate the concession, ETOSS, accepted the petition...
...The Bank's involvement, however, did not end there...
...1 5 What is clear, however, is that the company did not fulfill its own self-imposed goals...
...Eux et Rdseaux...
...2002 $27.40 tense that legitimized the tendering of the concession...
...The Aguas Argentinas concession was no exception...
...But that same strategy put AASA in an extremely vulnerable position when the economic crisis hit Argentina at the end of 2001, leading the government to end convertibility and devalue the currency early the following year...
...But several important areas of the concession are rife with persistent problems, including with regard to water pressure and water quality-nitrates and other contaminants are present in quantities above and beyond what is deemed acceptable by sanitation authorities...
...1 0 The contractual renegotiations, which began practically before the ink had dried on the initial agreement, and the government's regulatory policies, or lack thereof, facilitated AASAs monetary gains...
...5. Daniel Santoro, "The 'Aguas' Tango: Cashing in on Buenos Aires' Privatization," in Cholera and the Age of the Water Barons (Washington: Center for Public Integrity, February 2003...
...Daniel Santoro, "The 'Aguas' Tango: Cashing in on Buenos Aires' Privatization...
...This central tenet of the economic elite's ideology had vocal and influential supporters in the media...
...As a result, the groundwater equilibrium has been destabilized and basements have begun to flood, buildings and pavements have started to sink, and water-borne diseases are a constant concern...
...The deep economic crisis afflicting the country towards the end of the 1980s--staggering hyperinflation and the massive hemorrhaging of capital-also won these ideas the backing of a broad social consensus...
...The recent about-face by AASA is attributed to the change in Argentina's political climate with the inauguration of President Nestor Kirchner and his administration's receptiveness to consumer demands...
...2001 $26.25 Jan...
...The strategy permitted the company to avoid parting with its own capital to cover the financial excesses of the concession...
...dollar...
...Providing Greater Buenos Aires with potable water, sewage service and wastewater treatment means servicing around 11 million people...
...In the first three years of the concession, such investments amounted to just 45% of the total required by contract...
...In exchange for the rate hike, AASA again agreed to carry out the expansion of works it had already promised in the 1997 revision...
...Taking advantage of peso-dollar parity and the government's tolerance, AASA decided to indebt itself heavily in international markets, thereby skirting the higher interest rates of the Argentine financial market...
...6. Daniel Artana, et al., Regulation and Contractual Adaptation in Public Utilities: The Case of Argentina (Inter-American Development Bank, 1999), p. 211...
...2. Eduardo Basualdo, Concentracidn y centralizacidn de capital en la Argentina durante la ddcada noventa, (Buenos Aires: FLACSO, 2000...
...1 3 Meanwhile, AASA procrastinated on the promised investments and projects...
...This occurred in a country where, in the first nine years of the concession, the inflation rate was zero...
...Manipulating Argentines' fear of hyperinflation, the government presented the economic dismantlement of the state as a panacea for the country's economic woes...
...It is clear that AASA presented an offer that was technically and financially unviable, using its vast lobbying capacity to push it through...
...The dominant thread in the chorus of angry consumers is the call for a larger and genuinely regulatory role for the state...
...AASA opted to sustain a level of debt far exceeding what it predicted in its initial bid-indeed, far exceeding what is admissible or prudent for comparable companies in other countries...
...During the same period, ETOSS pointed out that AASA had not fulfilled its contractual obligation to implement expanded services and investments, which was the supposed justification for the rate hikes...
...The New Politics of Inequality(New York: Oxford University Press, 1997...
...The stated objective of privatization was to universalize the delivery of quality service by renovating existing, and constructing new, infrastructure...
...The company's extensive links with the upper rungs of political power in France and with multilateral financial institutions-namely, the IMF and the World Bank-have proven extremely useful when Suez negotiates with impoverished and highly indebted countries...
...Banco de Galicia y Buenos Aires, 8.26...
...Les defies de la mondialisation (Paris: IHEAL/CREDLA, 2003...
...Lastly, AASA committed to halting its case against Argentina at the ICSID...
...o c6mo transformar los incumplimientos en mayores ganancias)," Realidad Econ6mica, Vol...
...Daniel Azpiazu and Martin Schorr, Crdnica de una sumisidn anunciada (Buenos Aires: IDEP/Siglo XXI/FLACSO, 2003...
...1 Fiscally, ridding itself of state-owned companies implied reducing the budgetary expenses of the government...
...To the company's credit, the population served did indeed grow, and in recent years AASA accepted the establishment of a "social rate" for poorer households...
...In 2002, it ranked number 99 in Fortune magazine's list of 500 major companies worldwide...
...In addition, said the government, the ICSID has a clear conflict of interest since the Bank's investment arm is a stakeholder in the concession, and the Bank itself a primary lender for the concession...
...1 4 In its ten years of existence, AASA has increased its external debt burden through loans from the Bank's IFC-a shareholder in the concession-and from the European Investment Bank...
...and Anglian Water, 4.25...
...AASA wanted to hold the government responsible for the company's losses due to the devaluation and the end of convertibility...
...The two-term administration of President Carlos Menem applied this ideology fervently beginning in 1989...
...Suez, created in 1858 to administer the Suez Canal, is currently the world's second-largest corporation in the water and sanitation business with 125 million customers in over 100 countries...
...But perhaps more outrageous was that Argentina had lower inflation than the United States, so essentially the consortium was importing U.S...
...Alex Loftus and David MacDonald, "Lessons from Argentina: The Buenos Aires Water Concession...
...He has served as a top representa- tive on the water reg- ulatory body ETOSS since 2003...
...See Nana Bevillaqua, "El servicio de aguas y cloacas...
...Eventually, the Bank's private investment arm, the International Finance Corporation (IFC), acquired a 5% share in the concession...
...In concert with the U.S...
...The latter figure contrasts with the 6% to 12% considered a reasonable ratio for a comparable company in the United States, or 6% to 7% in the United Kingdom and 6% in France...
...34 DURING THE 1990S, AS PART OF THE country's profound neoliberal economic and social transformation, Argentina experimented with a broad process of privatizing state companies...
...According to a technical report, postponing the construction of the wastewater treatment plant called for in the initial contract signified that "over 95% of the city's sewage continues to be dumped directly in the Rio de la Plata...
...While the Menem and de la Rtia administrations looked the other way, AASA apparently squandered its immense wealth on objectives unrelated to its contractual obligations...
...Overall, the consortium has significantly fallen short of fulfilling its commitments (see Table 3...
...Un Estado que actoa a favor de las multinacionales...
...Vivendi, 7.55...
...Nonetheless, AASA solicited an "extraordinary revision" of rates only eight months into the concession because of unforeseen operating costs...
...Driving this process was the idea, born from the previous decade, that the Argentine state is by definition a terrible administrator and should relinquish to the market all of its economic holdings...
...3 Technically, privatization took the form of a concession, meaning the state retained ownership of the fixed infrastructure laid by OSN...
...According to consultants from the Inter-American Development Bank (IDB), hiking water rates before the privatization was "a useful strategy for stemming possible opposition to the privatization process...
...A REVIEW OF THE PROCESS AND THE RESULTS OF privatizing the state's water and sanitation company reveals the dangers involved in shifting responsibility for public services, which ostensibly serve the public interest, to private companies whose mandate is maximizing profit...
...6, May/June 1998...
...1 6 Critics and consumer organizations Concessions and privatization processes have been characterized by bribery, corruption, repeated breeches of contracts, mass layoffs, rate hikes and more...
...The behavior of AASA in Argentina is not unlike that of Suez's other companies throughout the world-including those in the United States and France...
...Shrinking the state, means growing the nation," affirmed a popular slogan of those years...
...4. "Suez: A Corporate Profile," A special report by Public Citizen's Water for All Program (Washington, D.C., August 2003...
...Those who lack access to potable water and sewage services are precisely society's poorest, for whom pay is low and unemployment high, making them the least able to afford the services...
...1 1 The World Bank was a central actor in this contractual renegotiation...
...After nearly a decade of extraordinary profits, AASA defaulted on a massive debt of $700 million...
...In other words, it refused to break up the company through territorial segmentation or by separating the production and distribution of potable water from the provision of sewage and drainage services...
...In other words, they wanted Argentines to compensate them for the damages wrought by the company's own, ultimately disastrous, financial strategy...
...The balance sheet for 2000 shows that the rate of liabilities to net worth stood at 2.49, whereas the original offer for the concession assured the number would never exceed 0.80...
...As a result, millions of people, mostly of meager economic means, face serious health and environmental harm...
...3. Cited in Alex Loftus and David MacDonald, "Lessons from Argentina: The Buenos Aires Water Concession," Municipal Services Project, Queens University, Occasional Papers Series, No...
...The government rejected the ICSID's jurisdiction over the case, arguing that devaluation and the end of convertibility were decisions taken by a sovereign authority under constitutional provisions and not under the terms of any contract...
...On his return to the Bank, that same functionary "became senior water and sanitation specialist for Latin America and was team leader on a $30 million loan made to Argentina in 1999...
...The average rate went up by 25% in February 1991, and another 29% two months later...
...available at: <http://www.corporateeurope.org/water/infobriefl.htm...
...159, October/November 1998...
...Amazingly, the governmentin this case, that of Fernando de la Rila-not only validated AASAs repeated breach of contract, but also awarded the company's dismal record by allowing it to 37NACLA REPORT ON THE AMERICAS REPORT ON WATER charge higher rates...
...The expansion of service to new users is a fundamental aspect of the concession, because the contract stipulates that financing for expansions will come exclusively from rates paid by new users...
...IN ITS TEN YEARS, AASA'S PERFORMANCE SURELY leaves much to be desired...
...AASA prioritized the expansion of water service at the expense of sewage and drainage services, causing the water table to rise in several heavily populated parts of Greater Buenos Aires...
...Corporate Europe Observatory, "European Water TNCs: Towards Global Domination...
...What's more, the renegotiation-approved only two weeks before Menem left office-pardoned $10 million of the fines imposed on AASA by ETOSS...
...Sign, then renegotiate" could be the motto of these companies...
...9. ETOSS (the Tripartite Agency for Sanitation Works and Services) is the federally mandated government organ that regulates the AASA concession...
...In this way, Menem's administration offered potential bidders a sweetheart deal in a monopolistic market with an assured and constant demand for service...
...The company's technical deterioration and lack of government funding caused a dramatic drop in the quality of service in the mid-1970s...
...DOLLARS) $2.2 MILLION $1.3 MILLION parity in emphasis between the two areas of servicewater versus sewage...
...7. Alex Loftus and David MacDonald, "Lessons from Argentina: The Buenos Aires Water Concession," p. 27...
...The de la Plata World Bank provided the Argentine iverfront...
...Daniel Santoro, "The'Aguas'Tango: Cashing in on Buenos Aires' Privatization...
...Few in Argentina claim that the provision of water and sewage service should again be entrusted to the state, but voices 40 critical of AASA resound...
...Raising rates before making investments is just another strategy the company employed to reduce risk...
...Victoria 42 Murillo, "Union Politics, Market-Oriented Reforms, and the Reshaping of Argentine Corporatism," in D. Chalmers, Carlos M. Vilas, et al...
...Between 1993 and 1997, the World Bank's IFC alone gave AASA $911 million in loans...
...4 In Argentina, Suez also holds concessions in water and sanitation services for the provinces of Cordoba and Santa Fe...
...See Amdrico Garcia, "La renegociaci6n del contrato de Aguas Argentina S.A...
...Aguas de Barcelona, which Suez also partly owns, follows with 25.01...
...9 In exchange for its commitment to expand services sooner than originally contracted, AASA received authorization to raise the general rate by 13.5...
...It is worth recalling, however, that these were reductions to rates that had been artificially inflated by the government in the two years prior...
...They also want AASA to be held accountable, bringing on landmark cases against the company-some, already victorious...
...But the government's actions in the ten years of the concession similarly demand indictment...
...angrily denounce AASAs disregard for its contractual obligations and its flagrant contempt for the regulatory decisions of ETOSS...
...According to a consultative report commissioned by the IDB, "allocating ten percent of shares to workers through the Program of Shared Ownership was intended to 'buy' the consent of former OSN workers for the concession and has been a common practice in other privatizations undertaken by the federal government...
...Other contractual breaches include faults in the quality of service, unwillingness to hand over-and repeatedly concealing-information requested by ETOSS, and huge temporary cuts in water service due to preventable technical failures...
...Translated from Spanish by Teo Ballve...
...The rate hike for 2003 was suspended pending further renegotiation, still underway...
...In impoverished neighborhoods, overflowing cesspools cause grave problems...
...5 The terms of privatization offered the incorporation of the old workers' union under OSN through the "Program of Shared Ownership...
...Due to the sheer number of people affected by the water concession in the metropolitan area of Greater Buenos Aires-the city of Buenos Aires and 17 outlying municipalities-Argentina's was the largest act of water privatization ever undertaken...
...Treasury, the International Monetary Fund (IMF) and the World Bank, the public also pointed to excessive public spending and growing fiscal deficits as the causes of the crisis...
...with participation from various Argentine financial groups...
...13...
...the World Bank's IFC, 5...
...In the concession's first decade of operation, the average water bill grew by 88% (see Table 1...
...31, No...
...12 Table 2: AASA Profits, 1994-2002 YEAR OF NET PROFIT AS A NET PROFIT AS A CONCESSION PERCENTAGE OF PERCENTAGE OF NET SALES WORTH 1(1994) 9% 20% 2 (1995) 15% 29% 30996) 15% 25% 4 (1997) 14% 21% 5 1998) 8% 13% 6 (1999) 12% 19% 7(2000) 17% 21% 8 (2001) 13% 17% 9 (2002) -113% -602% In January 2001, another adjustment allowed AASA to implement an annual cumulative incremental rate increase of 3.9% through 2003, despite its suspension in the final year pending the renegotiation of the contract...
...government with technical advice and funds for tendering the contract to national and intemational firms...
...182, August/September 2001...
...these reduced rates were supposed to be maintained for the first ten years of the concession...
...8. Daniel Azpiazu, Las privatizaciones en Argentina (Buenos Aires: CIEPP/Fundaci6n OSDE, 2002...
...She is presently working her way through the courts for fraud and illicit enrichment...
...All sorts of state companiesinsurance, transportation, mail, energy--became privately owned and subject to the vagaries of a market increasingly characterized by further concentration, severe inequality and growing unemployment...
...Most believed that a drastic reduction of government expenditures could pave the way out of the crisis and prevent its recurrence...
...However, some consumer organizations, particularly those from very poor communities, demand the immediate and definitive termination of the concession...
...Suez: A Corporate Profile," A special report by Public Citizen's Water for All Program (Washington, D.C., August 2003...
...AASA), a multinational consortium, finally won the monopolistic concession in 1993...
...Successive revisions to rates went far beyond any technical or financial justification...
...Rates shot up 18% in April 1992 and, as soon as the government established a value-added tax, they climbed again by 21...
...With this new pricing regime in place, AASA went from registering deficits to reaping astounding profits in its second year of operation, taking in $350 million with $50 million in net profits...
...In exchange, AASAs payments on fines imposed by ETOSS have been temporarily frozen...
...The government seeks a major state role in the investment policies of AASA, a more effective oversight mechanism and an honest fulfillment of contractual obligations...
...But for many critics, AASAs failure to fulfill commitments in investment and quality of service-water pressure and purity, among others-while charging the higher rates supposedly intended to fund those changes, is clear evidence of misappropriation of funds...
...The subsequent silence of the second-place consortium, which missed out on the bid by only a fraction of a percentage point, bolsters critics' accusations of collusion...
...The views expressed in this arti- cle exclusively reflect those of the author and in no way imply official regulatory policy...
...According to this interim settlement, AASA will not raise rates while negotiations for a permanent agreement proceed...
...It also denies compensation for losses due to a lack of foresight, negligence or inefficiency...
...Daniel Santoro, "The 'Aguas' Tango: Cashing in on Buenos Aires' Privatization...
...2, 2001, p. 19...
...Daniel Azpiazu and Karina Forcinito, Historia de un fracaso: la privatizacidn del sistema de agua y saneamiento en el area metropolitana de Buenos Aires (Buenos Aires: FLACSO, 2003), unpublished manuscript...
...The fact that the law establishing the convertibility regime specifically prohibited such an arrangement did not inhibit the government...
...The rate hikes were lucrative for AASA...
...In societies with high levels of income this scenario might work quite well, but it proves dreadfully inadequate in countries like Argentina where severe poverty is widespread...
...After several months of intense negotiations, AASA and the Kirchner administration reached a transitional agreement on May 11, 2004...
...Consumer groups are calling for strict sanctions...
...The program gave workers a 10% share of AASA and ceded to them one representative on the consortium's board...
...But tolerance towards contractual breeches and shady deals continued into the de la Rila administration, as shown by the 2001 contractual "adjustment...
...For allowing a transnational corporation to exploit a public asset without charge, the government promised the population healthy and environmentally sound water and sewage services at the cheapest possible rate...
...dollars...
...Daniel Azpiazu, Las privatizaciones en Argentina, p. 143 11...
...The neoliberal ideology that ruled in Argentina until very recently fostered the translation of the motto into practice...
...inflation...
...It paves the way for a new contract to be operational by January 2005...
...Water Privatization in Buenos Aires 1. Daniel Azpaziu, et al., "Menem's Great Swindle: Convertibility, Inequality and the Neoliberal Shock," NACLA Report on the Americas, Vol...
...Aguas Argentinas S.A...
...The company also agreed to invest 242 million pesosUS$85 million under the current exchange rate-in water and sewage expansion and improvements, and promised a substantial increase in benefits for those receiving the "social tariff...
...The vast amount of funds flowing into AASA demonstrates that its contractual failures do not stem from a lack of capital...
...That is, until the crisis hit...
...Emilio Lentini, "La regulaci6n de la concesi6n de Buenos Aires: Diagnostic et Propositions," in G. Schneier and B. De Gouvello (eds...
...they also claim that the bidders and the government understood mutually that the contracts would be renegotiated on successive The contract regulating the concession expressly prohibits the revi- Buenos Aires sion of rates for the purpose of minimizing entrepreneurial risk...
...The second-best offer, a 26.1% reduction, came from a consortium led by Thames Water International Services Ltd...
...The annual collection of rates for AASA amounts to some $600 million pesos, which until 2002 equaled the same amount in U.S...
...Between December 1994 and December 2000, loans given to AASA more than quadrupled from $128.4 million to $561.8 million...
...Minority shareholders include the Program of Shared Ownership, 10...
...In a 1997-1999 renegotiation, the government allowed continuous rate adjustments based on an average of U.S...
...For its part, AASA and its shareholders threatened Argentina with legal action in the International Center for the Settlement of Investment Disputes (ICSID)-an arm of the World Bank that arbitrates investment disputes between governments and foreign investors...
...The Menem government managed to make the company more attractive to potential bidders by raising rates several times before privatization...
...According to some political analysts, the compromise sought to appease the French government so it would continue supporting Argentina in its debt negotiations with the IME AASAs contract is still under thorough government review, which will include an in-depth evaluation of its unfulfilled contractual obligations...
...An investigative report by journalist Daniel Santoro indicated that a "senior World Bank water manager" worked for AASA through the Bank's Staff Exchange Program in 1997: "His job was negotiating rate increases or, as the Bank says, 'preparation of proposals for modifications of existing tariff regime and for their negotiation with the regulatory entity.' The World Bank continued to pay his salary...
...Utilizing the income generated from The most consumers, the concession-holders Important Aguas were to be responsible for investments Argentinas water to expand service and to renovate and treatment plant to expand service and to renovate and for Buenos Aires maintain facilities, and the commer- sits near the Rio cial operation of the service...
Vol. 38 • July 2004 • No. 1
