Privatization and Its Discontents
Some stories seduce by their very improbability — a story so unlikely is unlikely to have been made up, therefore there must be something to it — thus the conspiratorial logic of the Internet. One such story was circulating as recently as 2012, and it involved “the Bush girls,” the daughters of former president George W. Bush. Barbara and Jenna Bush, the daughters in question, were reported to be using family money to buy up aquifers in South America, their purpose opaque but surely aimed at making a profit on the backs of . . . well, whoever owned the water in the first place.
None of this was true, but you can see where it came from. The notion dates back to a 2007 “investigative report” claiming that George W. had bought some forty thousand acres in Paraguay. The story was then floated onto the wilder shores of the Internet by wishful thinkers who assumed he was looking for a political bolt hole in a country that did not have an extradition treaty with the United States, to avoid prosecution for war crimes in Iraq and elsewhere. Later it was noted that this supposed purchase (said to be assisted by cult religious leader Sun Myung Moon, just to layer on another level of improbability) lay atop part of the South American Guarani aquifer, a massive reservoir introduced in Chapter 2. From there, of course, it became “obvious” that the family was intent on profiteering at the expense of the indigenous poor.
As I recounted in Chapter 2, on groundwater, the Guarani has for some reason attracted numberless crank theories in the last decade or so, but even by those standards, this is pretty wild stuff. However . . . is it any wilder than the assertion that a powerful water cartel, sometimes described as a “clique,” has emerged to seize control of the world’s water for its own profit? Listen to this: “The rich will drink only bottled water found in the last few uncontaminated parts of the world, or sucked from the clouds by corporate controlled machines, while the poor will die in increasing numbers from a lack of water. This is not science fiction. This is where the world is headed unless we change course — a moral and ecological imperative.” This is from the Canadian polemicist Maude Barlow.1
Or this, from Joanna Robinson, author of a mostly sensible anti-privatization book called Contested Water:
The politics of water and the initiatives of social movements fighting to ensure protection of and fair access to water will be among the most important in human history. . . . Many activists argue that water is the next oil, and that the wars of the future will be fought over control and access to water. The battles have already begun, as communities around the world, from Cochabamba, Bolivia, to Atlanta, Georgia, and Stockton, California, have wrestled with the question of who should control their water. A matter of life and death, the politics of water, including the movements that mobilize to protect water as part of the commons, is one of the most critical, visible and contested issues of our times.
On the other side of this debate are the think-tankers of the right, for whom the private markets can do no harm. To take a random example, here’s a passage from Fredrik Segerfeldt, whose book, Water for Sale, was Englished from the original Swedish by the always reliably anti-government Cato Institute in the United States: “Concerning water as a raw material, a completely free market with tradable water rights will result in availability increasing, prices falling, and the water going where it does the most good.” There is no discussion of this assertion, just the bald assertion itself, as though it were a truism that needed only nods of agreement. But it is wise to be skeptical when an author declares in his preface: “In this book, then, we will be leaving dogmatism and ideology aside in order to discuss why water distribution in poor countries is in such a wretched state, what has been done, and what can be done.”2
Polemics aside, it is true that a dozen or more financial indexes now exist that list the stocks of private corporations that have been investing in water rights and infrastructure — spending water like money, as the saying goes on the street. It is true that there are mutual funds now entirely invested in water stocks. It is true, as recounted earlier, that the billionaire tycoon T. Boone Pickens has been buying up rangeland in Texas and other places for the groundwater beneath it, with the declared intention of peddling it at a markup to whatever buyers he can find. (It is not true, as per the Bush girls legend noted above, that Pickens is planning to add an antipsychotic drug to the drinking water of every American. At least, I don’t think it is . . .) It is true that at least one large hedge fund has decided infrastructure investing is boring and is buying up what its manager is pleased to call “wet water,” the actual stuff as opposed to the means of delivering it, though this is a bit of a verbal swindle: what it is really buying are rights to use it, not the stuff itself, and rights like this are available only in a handful of jurisdictions. It is true, in those few places where it is legal, that those rights can be bought, hoarded, or resold to anyone, anywhere — in Singapore, Zanzibar, or anywhere in between. Of course, the water itself doesn’t go anywhere — you can’t move it to its new owners in Singapore or Zanzibar if the actual stuff is in Texas, except at ruinous cost.
In the last few years, early investor enthusiasm has begun to cool off, but much of the current rhetoric hasn’t caught up. It is still excitable, having switched from “The wars of the 21st century will be fought over water,” a phrase popularized by World Bank vice-president Ismail Serageldin in the 1990s, to “Water is the new gold,” attributed to a Fortune headline but now so common as to be public currency. It is precisely this kind of assertion, with its underlying sense of smug entitlement, that grates on the sensibilities of the anti-privatization activists. Underpinning all this is the increasing commodification of water, at least partly spurred by the very water overdrafting the UN has identified: in classical economic theory, after all, scarcity equals increasing value and profit opportunity — so water should be profitable, no? The newsletter MarketWatch gleefully points out that, in 2010, global water generated somewhere north of half a trillion dollars of revenue, a number expected to swell by more than 40 percent by 2030, as population, and therefore demand, increases3. . . . Or so say the analysts.
It is really not so simple. And “global water” in this formulation is a lot more slippery of definition than it seems. Nor is the market as “hot” as promised. By some measures, the “private water behemoths” of the anti-globalist polemicists are no longer in rapacious mode, if they ever were, but instead are in more or less unruly retreat. Some polemicists assert that the commodification of water is a wholly beneficial thing, others that it is just another manifestation of the neo-liberal assault on the commons and the common good.
And, of course, maybe it is both. Perspective is everything.
The most famous name in anti-privatization circles is Cochabamba, a Bolivian city of around a million citizens in a reasonably verdant Andean valley, reasonably well watered by glacial melt, surrounded by farmland devoted mostly (until the American war on drugs) to local foods and coca plantations. Pro- and anti-privatization interests concede that the Cochabamba debacle represents the most dramatic failure to date of efforts to improve water supplies through private corporations. It is not the only failure, but it was one of the first and most dramatic, and it emboldened the opposition in many other parts of the world. The whole thing happened quickly. Water privatization in Bolivia was enabled by a law passed in 1998. A mere year later, a forty-year concession was granted to Aguas del Tunari (AdT), a local firm partially owned by the American engineering company Bechtel, based in San Francisco (usually muscled-up in anti-privatization prose as “the American water giant Bechtel,” which is a little misleading: Bechtel is a huge engineering company — it helped build the Hoover dam during the Depression — but water isn’t its main business). Less than a year after that, the company was gone, driven out in a massive public uprising fomented by a coalition of peasant farmers, the urban poor, traditional water vendors, and even sections of the urban elite. This loose-knit group was joined by the highly organized federation of coco-leaf growers, led by the charismatic president-to-be Evo Morales, who brought with him considerable experience in organizing street demonstrations, road blockages, strikes, and general civic disruption.
All of which followed: street protests led to ever more massive demonstrations, followed by a violent response from the military, followed by widespread work stoppages and overall social mayhem. During the rioting, dozens were injured and three demonstrators were killed; the disruption was bad enough that the business-friendly president of Bolivia, Gonzalo Sánchez de Lozada, was subsequently driven out of office, as was his neo-liberal successor, opening the way for the election of Morales. Control of the city’s water was then returned to the municipal utility, Semapa, from which it had been wrested.
So much, both sides can agree on. But there are many devils in the details. The anti-privatization case is this:
Semapa was conceded to Bechtel in exchange for debt relief for the Bolivian government and the promise of new World Bank loans to expand the existing water distribution system. This was an expression of the neo-liberal vision of governance, in which private expertise was always preferred to democratic controls. The contract of concession gave Bechtel an effective forty-year monopoly over water supply in the Cochabamba Valley. Not just over rivers and groundwater, either: the monopoly included private wells on private property, backyard rainwater cisterns, private extractions from creeks and rivers, and a network of water vendors that had been delivering water by truck to poor communities unserved by the utility, as well as the dozens of existing community-based village and rural water co-ops in peri-urban areas around the city. “Even the rain,” it was said at the height of the subsequent protests, “would be owed to Bechtel.” The quid pro quo was that the corporation was supposed to improve and extend the piped-water grid to places it had never reached before. Instead, Bechtel immediately tripled the price of water, cutting off those who could not pay. In a country where the minimum wage is less than $60 a month, many users received water bills of $20, which they could not afford. The company even charged them for rainwater collected in cisterns. The Bolivian revolt is therefore positioned as a consumer rebellion against water privatization, fuelled by price gouging and indignation at the anti-democratic nature of foreign corporations controlling access to an essential service. In the aftermath, the city’s water was successfully returned to public control. The coalition of social movements that had precipitated Bechtel’s ouster, called the Coordinadora del Agua y de la Vida (the Coalition for Water and Life), set out to transform Semapa into a truly democratic public service provider, run under the principles of “social control,” that would give the poorest, who generally had no water or sewage, a voice in how the utility should be run.
Well, it is a nice narrative. But is it true?
By way of background, consider the state of affairs prior to Bechtel. Semapa had been set up in 1967 to bring a semblance of order to the shambolic and uncoordinated ad hoc coalitions of private vendors and small water co-ops that had hitherto delivered what water they could. Thirty years later, Semapa was itself in shambolic condition. It had nearly five employees per thousand connections, double the rate of a well-run utility. Much of what meagre revenue was generated often disappeared through graft, some of it going to city hall and to mayoral cronies. Less than 57 percent of the population was on the municipal water grid at all, and the proportion was going down as the population swelled. Half of all water was lost to leakages in rotten pipes. The poorest people, whose connection rate to the grid was less than 5 percent, paid the most for water, being entirely dependent on a fleet of tanker trucks that showed up in their neighbourhoods on a weekly schedule and charged whatever they could get. A tenth of all connections to the grid were illegal, but scofflaws went unpunished. Many of the larger customers, mostly public sector companies, refused to pay anything for their water, and Semapa lacked political muscle to force compliance. Unsatisfied demand was estimated at nearly 40 percent. In many areas of the city, water was available only for a few hours a week, and rationing was imposed inadvertently: the taps just didn’t run when there wasn’t enough water. And so on.
Part of the plan to fix all this, to rationalize the chaos, was to bring in outsiders with experience — and money. Another part, proposed by the city’s mayor, Manfred Reyes Villa, was to build a large 120-metre-high storage dam on the nearby Misicuni River that would include a nineteen-kilometre tunnel and a hydroelectric plant. To get it started, a new public sector corporation called Empresa Misicuni was set up, consisting of Semapa and the departmental and municipal governments of Cochabamba, with a minority stake held by the national government. The driving force behind all this was the mayor; it was he who insisted on the dam, partly under pressure from some of Bolivia’s biggest and politically connected construction companies, which clearly expected lucrative contracts to build it.
It was at this point and under these circumstances that the Bolivian government, strapped for cash, turned to the World Bank and its advisers. But with unexpected results: a World Bank feasibility study concluded that while extending the grid was desirable, the dam would cost far too much (somewhere around $300 million) and could not be justified by its expected results. The bank therefore declined financing. The mayor then went it alone and sought out private-sector partners. The concession contract with Bechtel, bid without competition and without external oversight, resulted.
It didn’t start well. Under the contract, AdT, the firm partially owned by Bechtel, was indeed given exclusive use of water resources in the valley, as well as “any future sources” needed to supply the city, and was granted exclusive rights to provide water services and to require — a fraught word — potential customers to get hooked up. (But no, the rain wasn’t included, nor were backyard cisterns.) This made enemies immediately, riding roughshod as it did over the informal network of well drillers, small water co-ops, and truck-based water vendors that had been operating to that point. In most privatization concessions, a grant of exclusivity is reasonable, as water delivery is generally a natural monopoly and competition is generally absent. In Cochabamba, though, competition did exist. It was small but it was numerous, and it became a real force in the protests that followed.
To cover the costs of extending the grid and fixing its many deficiencies, the contract stipulated an immediate tariff increase of 35 percent, plus an additional 20 percent by 2002, when, it was believed, water should start flowing from the Misicuni dam. But this 35 percent, which soon turned into 43 percent, wasn’t increased across the board. Instead, it came through what the contract called an “increasing block tariff,” in which residential consumers were divided into categories that included “precarious constructions” (slums), “economic dwellings and functional apartments,” and luxury housing. High-income householders would pay three times as much as low-income householders for the first twelve cubic metres, and twice as much thereafter.
Still, while the tariff was hardly triple, prices did go up sharply enough to cause resentment — and under the contract, AdT was guaranteed a 16 percent return on investment, a ridiculous rate and itself a source of considerable outrage.
On the very poorest consumers, prices went up between 10 and 15 percent, which meant they were on average paying between 6 and 10 percent of their income on water — high but less than what they were paying water vendors in the earlier private market. On higher income consumers (some of them still not very well-off), prices increased as much as 106 percent. On certain others, they increased more than 200 percent — these were generally companies that had fiddled the categories under the old system, calling themselves households in order to qualify for a lower rate, and were now re-categorized, much to their indignation.
The popular rebellion that ensued wasn’t just about water. The conflict took place at a time of continuing social unrest in Bolivia, grave enough for a state of emergency to be declared in 2000. In the wider context, the government’s efforts to restructure the economy, which in practice meant the capitalization of state-owned enterprises and continuing privatization of services, brought in much less revenue than forecast, and economic growth sagged. By the year 2000, as much as 70 percent of the population was defined as poor. In addition, there was a long and quite successful tradition in Bolivia of cooperatives and local management boards, which the new system traduced.
The Cochabamba “water war,” therefore, was of a part with the larger protests that identified the country’s multiple problems with the neo-liberal development strategy, compounded by the angry protest by the cocaleros, or coca farmers. The final element was Bechtel/AdT’s determination to eliminate the traditional non-state water suppliers, well drillers, and tanker trucks, all of whom promptly joined the protests. All this was further complicated by an unexpected success on AdT’s part: a fall in leakage rates led to a reduction in the need for water rationing, and new hookups encouraged many consumers, even the poor, to rapidly increase their consumption. This, of course, put their bills up.
More than a decade after Bechtel ignominiously departed (“fled” is not too strong a word), what is the outcome? Some progress has been made, but the poor are still paying more for their water than the rich, not yet being on the grid. Water is available for only a few hours a day, its quality is deteriorating because too many poorly sealed wells are contaminating groundwater, and the Misicuni dam has not yet been built — tenders went out in 2009, were rescinded, and offered again in 2014. The buffer its water would have offered, and its attendant hydro power, remain a pipe dream. The management company, once again a public body, is still inept and inefficient. The mayor’s office and the union still treat revenues as a convenient opportunity for enrichment. A third of the water is still lost to leakages and clandestine hookups. As Emily Achtenberg wrote, “In 2010, the public water authority was forced to lay off 150 workers, because it found itself with a $3 million cash deficit, due to alleged irregularities such as payroll padding, materials theft, and continued diversion of the system’s water.”4
But there were some real gains. A second water war, this time in El Alto, the poorer outskirts of La Paz, bustled another private water giant out of the country, this time Suez, of France, which had bungled its contract with the La Paz–El Alto water district. In 2003, another revolt, inspired by Cochabamba, forced the cancellation of a plan to sell off natural gas through a pipeline to Chile at rock-bottom prices. Bolivia’s new constitution, enacted in 2009, proclaims that access to water is a human right and bans its privatization, only the second country to do so, after Uruguay. Externally, Cochabamba encouraged and inspired anti-globalists everywhere. At the UN, Bolivia led the successful campaign to recognize water and sanitation as a basic human right.
None of this is yet getting much water to the poor of Cochabamba, who are as water-deprived as they ever were. Ten years after Bechtel fled, the renationalized water management had yet to hire a single water technician.
The lesson is not that privatization is bad, but that bad privatization is bad. Cochabamba was a bad contract and deserved to end, but the manner of its ending made everything worse. “Kicking out a foreign corporation hell-bent on profiting handsomely off water was a major victory,” as water activist Jim Shultz put it.5 But it wasn’t. It just traded one bad system for another.
On the upside, Evo Morales was re-elected president of Bolivia again in 2014 because his government was actually seen to be working pretty well. GDP has grown steadily under his presidency, and Bolivia has seen the highest rate of poverty reduction in Latin America, admittedly from a high base. UNESCO declared Bolivia free of illiteracy after a massive infusion of money into education. Morales’s socialist-style nationalization of key industries, which the neo-liberals confidently expected would lead his country to ruin and to the exodus of major companies, had no such effect — the companies stayed, and the country prospered, more or less. As Benjamin Dangl put it in an Al Jazeera commentary, exaggerating just a tad, “Consider the fact that before the 1952 National Revolution, indigenous people weren’t even allowed to enter the Plaza Murillo in front of the presidential palace because they were believed to be too dirty and unsanitary. Now an indigenous president and poor farmer without a college education sits in the presidential palace itself.”6 And, he might have added, is doing rather well. Cochabamba was, even if indirectly, at least responsible for that.
What Exactly Are You Privatizing When You Privatize Water?
Are we yielding control of our most precious resource to . . . to someone? Or something? Are we, as opponents of privatization fear, in the process of allowing for-profit companies to own the world’s water and resell it for profit? Is it true, as the American journalist and irrigation crank William Ellsworth Smythe once colourfully suggested, that “next to bottling the air and sunshine no monopoly of natural resources would be fraught with more possibilities of abuse than the attempt to make merchandise of water?”7 Or is it a much lesser affair — are we just assigning ownership to water delivery or contracting out management? If so, to what purpose and to what effect?
Water, as we have seen, is elusive. As the American legal scholar William Blackstone once wrote, “Water is a moving, wandering, thing, and must of necessity continue to be common by the law of nature; so that I can have only a temporary, transient . . . property therein.” It moves, runs away to the sea. It is absorbed. It vanishes into the earth. It falls down as rain. Your body transforms it as it runs through you. How do you own such a thing? And how can you privatize something that is not ownable?
In fact, privatization alarmists aside, there are very few systems, anywhere, with completely privatized water assets and completely deregulated supply. Almost always, “privatization” means various degrees of partnership between public and private sectors.
A useful way of looking at the issue is to differentiate between ownership and use; a common saying in the water world is that you can own a bottle of water, but after you drink it, you don’t own the water anymore, only the bottle. So the real question is not about ownership, it is about who is allocated the right to use the water that passes through. John Briscoe, the Harvard professor I quoted earlier, puts it this way: “There is no logical [or necessary] connection between the ownership of the resource and the way in which the service is provided. You can have any combination of . . . bulk water right, on the one hand, [and any] form of provision of services, on the other.”8
So there are multiple ways in which water and its uses can be structured. In the United Kingdom, rights to both water and its delivery are owned privately by regulated quasi-monopolies with tight performance controls. In France, to take another rich-world example, there are no private rights to water, but in many cases, water services are provided by private companies under concession contracts. The Australian case is almost the reverse. There, farmers, cities, and corporations have private, tradable, “owned” rights to water, but the actual services are still provided by public utilities. Even in Australia and the western United States, what are traded are usufructuary rights, not ownership.
Another point is to recognize water’s special value. It can be treated as a commodity and priced accordingly. But it is not like aluminum, say, or gold, which can be extracted from the earth, and then moved and repurposed effectively. You can’t do that with water, except under limited circumstances. There is no economically feasible way to get the water from, say, Oregon to Yemen, even if you have a willing seller and a willing buyer. Only watersheds and river basins, and to a more limited extent aquifers, make water commerce possible.
Most of the confusion in the privatization debate, and much of the heat generated, is because the two separate issues of the resource and its delivery for use have been conflated. When we talk about privatization, we are almost always talking about infrastructure privatization. Three main models exist, each with different shadings.
The first is to contract out the operation and maintenance of existing services, with ownership still vesting in the original utility. Operation in this sense could mean not just running the facility but meter reading and bill collection, purification services, and so on, while maintenance could mean repairing and extending existing networks and providing new hookups.
The second, generally used where distribution systems either don’t yet exist or are in such parlous shape that they might just as well not exist, is called DBO, which stands for “design, build, and operate.” This calls for a comprehensive operating agreement and is also where anti-privatization activists get their ammunition, because many such contracts have proven poor value to the community, very often exempting the private contractor from the cost of fixing a system that goes wrong. There are dozens of examples, and we’ll meet a few of them in due course.
The third is a simple asset sale. That means selling all community-owned assets in water and wastewater to a private contractor, albeit with maintenance and safety provisions built in. Rich-world countries hardly ever do this, though in the United States some small water utilities have been sold.
There are shadings in all three of these models. The most basic version is a limited-service contract in which the private contractor is hired to maintain existing networks or run the distribution system, which remains public property. Or a contractor can build and operate a system and then lease it for a fixed term. Or, under a concession contract, a private company can rent available infrastructure but undertakes to achieve a set of fixed targets, such as extending the network, maintaining pricing, and monitoring quality. That is, concessions grant a licence to run but not own the system, usually for a fixed term. This is by far the most commonly employed privatization.
You can also privatize other aspects of the hydrological system. Private companies can build desalination plants, for example. They can build pipelines and aqueducts, perform laboratory work, install purification systems, and accumulate grey water and stormwater, cleaning it and returning it for reuse. They can bulk-transfer water from one location to another (or at least they can try — so far no one has found this in the least practical, though many entrepreneurs are having a go). They can bottle ordinary water and sell it at outlandish prices. They can even build dams, or design and build turbines. These and other activities like them account for much of the market capitalization of water companies on the world’s stock markets, and most of them are also not very controversial. What matters is not whether a dam builder makes a profit, or whether a pipefitter can price its wares for long-term profitability. What people care about is getting plentiful, clean, safe water to ordinary people at a price they can afford.
It is certainly possible to price water too cheaply and thereby encourage its profligate use — this is, alas, too often the norm in the rich world. It is also certainly possible to price it out of reach of the poor. That’s what the privatization debate is really about, in the end.
Hype aside, how big is the private and corporate water business?
If you are going to include just the international water companies (like Suez and Veolia Environnement and Thames Water and Trent Severn and Bechtel) that have contracted to run water and wastewater utilities in countries around the world, and the dozens of service and ancillary industries that have sprung up around them, a popular analyst’s estimate of the market, based on no particular evidence that I could find, is that it represents somewhere between $400 billion and $500 billion annually. This is probably conservative. If you are going to include a host of extraneous matters that are related to global water, such as infrastructure repair and creation, or virtual water, desalination plants, and even household filters and purification systems, meters, and gauges and bottled water, there is no realistic way of totting it up and arriving at a global total, except to say that it would run into the trillions.
A trillion is a nice round number. It is probably the number that got the stock markets and their business-press toadies so fluttery in the early part of this century. That, and the heady notion that with water you have got, at last, a product for which demand will never shrink. One typically extravagant extrapolation came from an economist, Willem Buiter of Citigroup, who should have known better: “I expect to see in the near future a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that exceed the capacity of those for oil and gas today. I see fleets of water tankers . . . Water as an asset class will, in my view, become eventually the single most important physical commodity-based asset class, dwarfing oil and agricultural commodities.”9
Here’s the text of the MarketWatch newsletter I mentioned at the start of this chapter. Its language is altogether typical:
In 2010 global water generated over a half trillion dollars of revenue. Global world population will explode from 7 billion today to 10 billion by 2050, predicts the United Nations. And over one billion “lack access to clean drinking water.”
Climate and weather patterns are changing natural water patterns. And industrial pollution is making water a scarce commodity. So the good news is that huge opportunities exist for businesses that can figure out how to keep the pipes flowing.
Yes, it’s a hot market. So, expand your vision for a minute. How many bottles of water do you drink a week? How much did you use for a shower? When you flushed a toilet? Wash your car? Cooking? Lattes? And my guess is your city water bill’s gone up in recent years.
So ask yourself: What happens in the next 40 years when another three billion people come into the world? Imagine adding 75 million people every year, six million a month, 200,000 every day, all demanding more and more water to drink, to shower, to cook, to everything. All guzzling down the New Gold that’s getting ever scarcer.10
The social justice people are not the only ones to find this distasteful. A combination of gloating and ignorance is never very pretty.
Meanwhile, if you want to cash in on the new gold or the blue gold or whatever the enthusiasts are calling it, there are many ways of doing it. Below, a look at the world’s biggest water companies.
Suez Environnement of France, was spun off from the much larger Suez SA and is primarily an electricity and natural gas supplier. Its revenues in 2011 were slightly better than 12 billion euros, earning a profit of 533 million. Among its many subsidiaries you can count the Barcelona water-treatment and supply company, a number of Chinese water-treatment companies, Fairtec, and Lyonnaise des Eaux, which runs utilities in France and many others in multiple countries. In the United States, Suez owns United Water, the former Hackensack Water Company of New Jersey, and has contracts with half a dozen Canadian municipalities, including Montreal. Suez ran the water system in Buenos Aires for a few years but pulled out when rates were frozen. The company has been actively pushing the notion of public-private partnerships that the cynical interpret as a way for private companies to get their mitts on taxpayers’ money. (In at least one case, a private corporation actually filed for status as a municipality under Canadian law so as not to be taxed; it was denied. Jim Southworth, president of Consumer Utilities, expressed his dismay that the Canadian tax code seems, inexplicably to him, to favour public projects.)
Veolia Environnement, also of France, grew out of a company created by Napoleon called Compagnie Générale des Eaux and was recently spun off from the ailing conglomerate Vivendi. Veolia generates most of its revenue in Europe. It was expanding into the United States but has recently backed off; it is still present in the Canadian oil sands. Veolia also operates energy and transportation services, and manages waste in a dozen countries. In general, it now prefers to manage rather than own. Its 2012, revenues were around twenty-nine billion euros, with profits of a little over a billion euros.
RWE AG of Germany, Europe’s biggest power generating company, assembled an international water empire in the first decade of this century that included American Water in the United States and Thames Water in the United Kingdom — both now divested, as RWE scurries out of the water business. RWE’s expansion was typical of the heady enthusiasm of the past decade: in its 2001 report, the company appropriated the phrase “blue gold,” and paid a huge premium for American Water after declaring the United States “the world’s most attractive water market,” ponying up $7.6 billion and assuming $3 billion in debt. After RWE bailed, American Water was left with more than $1 billion in “legacy costs.” Nevertheless, the company still serves fourteen million people in thirty US states and two Canadian provinces. It is well known in the anti-privatization world for its active lobbying against regulation and its creative use of “surcharges” to get around regulated price ceilings. As of 2012, it found a new revenue source to its liking, and began laying water pipes to serve natural gas drillers and oil frackers.
For its part, Thames, now on its own, supplies water to more than a quarter of the British population. It is tightly regulated after a rocky start in the Thatcher years, when it was accused of price gouging and cutting off customers who couldn’t pay. Other English water companies are Biwater, Severn Trent, and Anglian Water. In 2014, the British government introduced more competition to the water business in an effort to improve customer service. As of 2017, new water companies will be able to tap into the incumbents’ networks for a price agreed upon by the national regulator and sell the service downstream, much as in the market for broadband or mobile phones.11
For investors queasy about ethics, a little nose-holding was usually required to invest in many of these corporations, who were seldom scrupulous about their partners. In 1998, to take one example, the British company Thames Water and the French firm Lyonnaise des Eaux had their contracts to manage Jakarta’s water supply suspended after their private contracts with cronies of the dictator, Suharto, were revealed.
But direct investment isn’t the only way of entering water markets. Standard & Poor, Bloomberg, and Dow Jones have all set up indexes to track the performance of companies involved with water. And dozens of mutual funds have water portfolios.
Some companies trade directly in water rights, in those few jurisdictions where it is possible. WaterBank of New Mexico is one of them, buying, trading, and selling water rights, springs, bottled water, and water utilities, mostly in the southern United States but also in British Columbia. Another is the Summit group, operated by a former CIA analyst, John Dickerson. Summit started in the conventional investment way, by buying into companies that made equipment used in the water business — so-called hydro-commerce companies. But Dickerson soon tired of having a limited number of companies as a target, so he founded a separate hedge fund, Summit Water Development Group, with a very different purpose. It accumulates water rights from willing sellers, mostly in the Colorado basin and along the Murray-Darling system in Australia, not coincidentally places that have recently experienced monumental droughts and among the few places that permit trading in water. The aim was, and is, to resell his accumulated rights to parched towns up and down the basin, a market that looked ever surer every year as municipalities began running out of easily reachable water.12 Dickerson calls this “wet water,” as opposed to the hardware for shifting it around and cleaning it up.
Does all the foregoing constitute the anti-privatizers’ much-feared “global water cartel” that will keep prices high for ordinary users? A cartel is, after all, an association of manufacturers or suppliers that agree among themselves to maintain prices at a high level and to restrict or eliminate competitors. In that they differ from monopolies, in which one supplier crowds out all the others, sometimes with government and community blessing. Electricity supply was one such legalized monopoly before competition was introduced in some regions, and some water utilities are run along the same lines.
In most industrialized countries, cartels are illegal — except where they are allowed. Major League Baseball in the United States is an example of a legalized cartel. Canada’s supply-management system for agricultural products is another, though it is not called a cartel by the governments that regulate it. So in a way, cartels can be relatively benign. The rationale is that it makes for stability of supply and insulates small suppliers. In popular definition, though, there is nothing benign about most cartels, which are correctly identified with, say, the drug lords of Columbia and, more loosely, the Mafia.
In almost all aspects of the supposedly trillion-dollar business of water, there is clearly no cartel. The vast majority of investments in water, and companies involved with water, have little or nothing to do with supplying the actual stuff. And in all water sectors, there is unrelenting competition.
For example, when the Southern Nevada Water Authority, facing critical water shortages, decided in 2008 it must build a third and deeper intake pipe to Lake Mead, it never contemplated building the tunnel itself. The authority put out a call for tenders and got more than a dozen bids, including one from Bechtel. In the end, the contract was awarded to a consortium formed for the purpose, called Vegas Tunnel Constructors, owned by the Milanese construction giant Salini Impregilo and its American subsidiary, the S.A. Healy Company.
A cartel would have prevented competitive bids, in exchange for an uncontested project elsewhere — that’s what cartels do. But in this case, there were plenty of competitive bids.
The same is true in other aspects of the water business. Pipeline contractors, desalination plant builders and operators, and others routinely bid against each other. So far, no one is opposing ongoing efforts to tanker water from Alaska to the parched Southwest, but not because it is “cartel policy,” but rather because everyone else believes the proponent is going to lose his shirt. In any case, the project continues to languish.
In none of this is there any evidence of price-fixing collusion or restraint of trade by closing out competitors, both hallmarks of true cartels. I am not trying to assert that privatization is entirely benign. It is just that worrying about cartels is a distraction from the three main, if narrower, issues at stake.
The first is how much water corporate interests are allowed to extract from publicly owned reservoirs and aquifers, and at what price. Several examples have raised local and activist ire. The most prominent example in the anti-globalization literature concerns the Coca-Cola plant in the Indian village of Kaladera, in the state of Rajasthan, where groundwater levels dropped from nine to thirty-eight metres in the two decades leading up to 2006, increasing costs to local farmers and indirectly reducing milk yield. That became an easy target: Who could argue for sweet sugar-water over milk? Still, Peter Gleick has pointed out that (a) the water table was dropping before the plant even opened, and (b) even at the height of production, Coca-Cola extracted only somewhere between 2 and 8 percent of available water, but it got blamed for all of the losses.13 In a similar Indian case, Coca-Cola ponied up $48 million in compensation after being accused, on thin evidence, of damaging community water supplies in the village of Plachimada, in Kerala State. There are also examples in rich-world countries: a bottle-water company was accused of depleting an aquifer near Montreal; and the Campbell Soup Company in Napoleon, Ohio, supplies itself with vast quantities of Maumee River water to make its products, at no cost to itself. The company defends itself by pointing out that other users pay nothing for the water they extract from the river either.14 We need to consider seriously if this kind of free-water access can continue.
The second of the narrower issues is whether private interests should be permitted to hoard water for later resale at a profit. Compared with the first, this one is conceptually trickier and ethically much more dubious, if rather restricted — in only a few places is such stockpiling permitted. An example is Mesa Water, a corporation owned by T. Boone Pickens, who we have already met. Pickens has been a bit of a gadfly in the resources business for years: a decade ago he was floating the idea of a wind corridor of huge wind turbines stretching from Texas to the Canadian border; he frequently turned up on television to promote the Pickens Plan, though he never seems to have pitched the idea to harder-headed audiences, like investors. In any case, Mesa Water has accumulated eighty thousand hectares of rangeland in Roberts County, Texas, not because Pickens’s heart is in the ranching business but because the land comes with associated groundwater rights. (Remember the easement Pickens was obliged to get in order to ship the stuff out of state or to parched Texan cities, like Lubbock, since after it appears on the surface, under Texas law he could no longer own it.)
Another example, from Texas again, is the fate of an aquifer called the Carrizo-Wilcox aquifer in rural central Texas that — or so say the water marketers who buy water rights for resale to cities — holds “many trillions of gallons,” enough to sustain Austin and San Antonio for, well, “centuries.” Opponents, some of whom actually live above the aquifer, supported by a clutch of environmental groups, say that the bundlers’ plans to divert 190 billion litres a year will drain an already depleting resource within decades. This has raised awkward questions. Who is the water for? Who has, or should have, priority? How much will cities drive up the price? Will cities outbid farmers? And who will be compensated if they can no longer afford the water? Some of the water marketers have already offered compensation to landowners to enable them to drill deeper if their water tables drop as a result of over-pumping, but the level of compensation remains an issue. And — a piquant detail this — one of the water resellers, Aqua Water Supply, has filed lawsuits against other such vendors, on the grounds that their pumping would impact Aqua’s ability to serve its customers.15
John Dickerson’s Summit hedge fund is doing the same thing on a more decentralized scale. Neither Pickens nor Aqua nor Dickerson are buying the actual water — instead, they are buying the right to sell rights to water. In Dickerson’s case, as explained above, he has bought historic (i.e., first-in-time) rights to water from creeks, ditches, and canals, previously owned by pioneer families who no longer needed the water, or by successor owners who had bought the same rights earlier and now sought to take their profit. Rights to surface water are more complicated than are rights to groundwater, mostly because if you don’t use the rights, or sell the rights, someone else downstream with second-in-time rights will be able to use yours too. On the other hand, the resource will still be there when the time comes to sell, because creeks replenish themselves — or they did before the major drought set in.
You can see why water reselling (hoarding) causes anxiety: Where is the morality of allowing profiteering on a substance that is entirely necessary for life? What happens if a city or town or neighbourhood or even a family is desperate for new supplies because its own are drying up, and the hoarder charges it extravagant prices? The classic free-market argument is that water will flow to those users who value it more highly, and that therefore its use will become economically more efficient. Which is precisely the point: What about poor users who nevertheless need water and can no longer afford it?
Of course, there are solutions to all this, and we will get to them presently. And this hoarding is not as exploitive as it sounds. For one thing, the water hoarders are hardly ever the only source of water and therefore can’t really control the price. There are always other sellers elsewhere, and there is always the option of “making” more water through desalination — so the hoarders cannot just charge whatever they please. And on the plus side, these hoarded reservoirs do provide a backup supply of water if needed. In addition, state water regulators still get to rule on pricing. Sellers have to apply for permission to raise prices, and such permission is not always forthcoming. So there are hedges against gouging, and as the drought is prolonged and supplies seem vulnerable, those hedges are getting stronger.
The third issue is at the heart of the matter, for what anti-privatization activists are really talking about is not the water business but what the telecommunications industry calls the “last mile” business: who controls how water gets to ordinary people, at what volume, in what condition, and at what price.
In this the water behemoths seem to be losing.
An instructive example, reported in the Wall Street Journal by reporter Mike Esterl, is from the California town of Felton, a community of fewer than five thousand in Santa Cruz County. Felton is on the north side of Monterey Bay, near but not on the coast. It is prosperous enough but not affluent, pleasant enough but not the most picturesque place in the state, though it does have groves of California redwoods that lure tourists. Its municipal water delivery system has been privately owned since the late 1800s, unlike the vast majority of US systems, which are still operated by public utilities. It was part of a larger operator called Citizens Utilities, based in Connecticut.
In 2001, just when the water world’s privatization drive was getting seriously under way and bigger players were entering the market, Citizens Utilities, and with it Felton’s little system, was bought by a company called California American Water, or Cal-Am, a subsidiary of the New Jersey company American Water. Shortly after that, American Water was itself swallowed by the German electricity supplier RWE, then intent, as we saw earlier, on global acquisitions in the water business. For efficiency’s sake, RWE in turn wanted to merge Felton’s system with that of Monterey around the bay to the south, which it had picked up in the same acquisitive binge. It wanted to do a lot of other mergers around the country too but soon learned something that due diligence would have told it earlier: that simply to buy American Water required bureaucratic approvals from more than a dozen states, and that further approvals, often from the state but also from local communities, were needed to raise prices. The sale went through — after sixteen months. Price hikes, not so easy.
For Felton, the proposed merger with Monterey was a minor blow to community pride, and if that were the only change, no one would seriously have opposed it. But as soon as they acquired operating control of the company, Cal-Am’s new owners applied to the California Public Utilities Commission to raise prices by 74 percent over three years, suggesting that the cost of infrastructure repairs made the hike necessary.
Within weeks, a group that came to call itself FLOW, for Friends of Locally Owned Water, launched an advertising blitz and community-organizing drive, opposing both the rate increase and the merger, and demanding that Santa Cruz County set up a public agency to run the water districts affected — that is, that they “re-municipalize” water. Among the complaints was that American Water had centralized its operations, and to complain about a broken water main or some other minor problem meant phoning a call centre in Illinois, two time zones away. The company rather plaintively said that the call centre idea was to boost service, not restrict it, but by that time, no one was listening. After more than a year of mulling it over, the state utilities commission granted a 44 percent rate increase, still far too much for FLOW.
With opposition mounting, Cal-Am’s response became a textbook case of how to do things the wrong way. A prickly press release was issued saying the company was not for sale to anyone at any price, including to the county or the town. A county supervisor up for re-election, who was thought to be in favour of FLOW, was told his election would be “torpedoed” (his word) if he supported a public takeover (the company denies any threat, but nevertheless sent off mass mailings urging people to avoid voting for, well, people like that). Thousands of dollars were paid to a local property association that opposed the notion of re-municipalization, arguing that homeowners would face massive price increases if the public option went through.
In July 2005, the FLOW-sponsored Measure W was overwhelmingly approved in a referendum. The measure approved the issuance of $11 million in new bonds for the explicit purpose of buying the Felton water system. It even approved a tax hike to do so, which Cal-Am had assumed would scuttle the bid. When it didn’t, the company once again announced that nothing was for sale. This was a little disingenuous, since in November of the same year, RWE bailed out of American Water altogether and basically out of the US water market entirely, citing considerable political resistance to privatization in the water sector as a reason for going home to Europe. There had been reactions similar to Felton’s in a slew of other American communities, among them Monterey itself, Urbana, Illinois (which was facing boil-water advisories as water quality deteriorated); Chattanooga, Tennessee; Montara, California; Stockton, California; and Lexington, Kentucky.
The Felton saga wasn’t quite finished. The town’s water system was still privately owned, though once again by an American company, not a German one. A new purchase offer was spurned, so the community turned to the notion of eminent domain to precipitate a buyout. It took two more years of litigation and a hotly contested valuation for the property before Cal-Am finally conceded. There have not been massive price hikes since, but water rates have gone up.
RWE had faced problems elsewhere, not just in the United States. Its other major water property, Thames Water of Britain, was under fire for raising rates without fixing infrastructure problems. RWE, in a kind of Jeez, who needs this? reaction, put that up for sale too. The company also made a hurried exit from Shanghai after its guaranteed profit margin was arbitrarily reduced. All over the world — RWE water divisions operated in forty countries, an empire than took years and billions of dollars to put together — the apparatus was being dismantled. As the Wall Street Journal’s Mike Esterl put it, RWE found that “water turned out to be less like electricity than RWE hoped. It’s heavy and hard to transport, making it difficult to build economies of scale. Regulation is never predictable.”16 That was something of an understatement.
It is not just RWE, either. Suez, most famous for its debacle in Atlanta (a twenty-year contract ended after four years, after residents of even affluent neighbourhoods found brown sludge coming out of their taps), has been backing off bidding for contracts in the developing world, and Veolia has done much the same.
The real reason is only indirectly political. Water, and sanitation with it, turns out to be an infrastructure sector with a high ratio of capital to revenues, with a return-on-investment period that is long, in an environment that is politically sensitive and easily inflamed. Privatization in these circumstances, then, turns out to be a high-risk, low-return investment. As John Briscoe told me, repeating a point he had made many times, “In a typical concession contract there is negative cash flow for about ten years, and then positive flows for the last twenty years. But if a contract is annulled after ten years, the investor loses everything. The credibility [and stability] of a government is thus critical. . . . The number of concessions in telecoms which have been annulled is just 3 percent; in electricity, 8 percent; and in water, 33 percent.”
All kind of investors in water, many of them vainly hoping Big Water will turn out to have Big Profits, have found out — to their cost — that water is not, after all, a commodity like oil. Instead, the asset’s market value depends more on political will than on demand, and in this case, the political will is uniquely vulnerable to citizen persuasion.
There’s another aspect to the relationship of the corporate world to water that has gone largely unnoticed, and it is that growing numbers of corporate executives and their companies are beginning to understand that water — or the lack of it — is about to become a major corporate problem. As the Economist reported in 2014, “An increasing number of bosses say water is or will soon become a constraint on their firm’s growth. They are right to worry, but most firms are not doing much about the problem.”17 At risk are not just companies whose products are largely made of water (beer, for example) but also companies whose products depend wholly on it (food producers), as well as those doing business in water-stressed countries like China.
Privatization’s Pros and Cons
In some places, privatization has worked. In others, not so much. It is useful to look at a few examples.
Originally, I had São Paulo chalked up in the win column for privatization. Clearly, losses can be converted to wins. And vice versa.
You can make the case that the privatization of municipal water systems, at least as envisaged by the World Bank and other international lending institutions, had its origins in the Philippines capital. The water system in the city was a mess. A large percentage of the population had no piped water at all, and nearly half of what water did flow through the system was lost to theft and leakages. Illegal siphoning caused sporadic outbreaks of cholera through contamination of the supply. It is also fair to say that this was fairly typical of public services in the country — the electricity grid was, if anything, worse. The two decades of misrule by Ferdinand Marcos, starting in 1965, were characterized by repeated efforts to upgrade infrastructure, in every case sabotaged by rampant corruption. Four times between 1960 and 1990, the World Bank put up money to fix the system, and four times it failed. The first effort was to try to reduce water losses from 45 to 35 percent, but by 1990 the losses were 65 percent, not exactly a stellar record: after two decades of investment, everything had got worse. The bank had had enough. As John Briscoe put it, “Fundamentally, we realized that without a change in incentives — some very logical, sensible things — this was not working.”
This belated recognition coincided with the fall of Marcos and the election of Fidel Ramos as president. In his early years, Ramos used energy concessions to private contractors to fix the electricity grid, with considerable success. He and the bank believed the same might work for water. His staff rewrote the legal and regulatory framework and, with World Bank support, let two bids for concessions in Manila. At first, it seemed a failure. The concessionaire in east Manila went broke almost immediately, without fixing anything, wrecked by a rapid devaluation of the Philippine peso. A new consortium took over, 65 percent owned by a local conglomerate, Ayala, partnering with United Water and Bechtel. In fairly short order, over two million residents were hooked up to the grid and water losses were down to 30 percent, better than many systems elsewhere (London’s, for example, was 42 percent). It is true that the system is far from achieving 100 percent coverage. It is true that the rates have gone up, sometimes steeply. It is also true that the poor are charged a tariff for water, and not a trivial one. On the other hand, it is true that many of the poor now have piped water for the first time, and true too that the rates they pay are far lower than they were paying to private water vendors before. It is true, finally, that the system is self-sustaining.
Count this one a success.
No success here.
The city government was pushed into privatization, or jumped into it, depending on who you believe. Both are probably true. On the jump side, media reports at the time suggest that the World Bank’s offer to put up more than $160 million to privatize the supply system was met with relief. It was hardly a secret that the water system was a mess, and even less of a secret that the national government had no money to fix it. Opponents suggest, by contrast, that Tanzania was bullied into privatizing through private and World Bank pressure. This, also, was probably true — the World Bank had no reason to throw any more money at a corrupt and inefficient bureaucracy, and had no reason to suspect that private operators would be worse.
In August 2003, the project was put out to tender. The winning bid was a consortium whose main partner was Biwater of Britain. Gauff Tanzania, a subsidiary of a German consultancy, was a junior partner, along with a Tanzanian company that makes trailers, the Superdoll Trailer Company, just going along for the ride. The bidding process saw many of the classic mistakes of failed privatization contracts elsewhere. There was no prior public consultation and, indeed, the contract was not disclosed even to the national parliament until after it was signed. Instead, costs were kept below full-recovery levels by no-interest loans and a few sweetheart construction contracts on the side. A level of public deceit was therefore built in from the start. There was only one bid, quickly accepted.
As the writer Martin Pigeon explains, problems began almost immediately. The consortium called City Water Services (CWS) contributed only half the capital it was supposed to, and within five months had stopped paying its monthly lease fee to the municipal authority that was supposed to benefit, the Dar es Salaam Water and Sewerage Authority (DAWASA), the given reason that what money had been paid had somehow been “disappeared.” What little efficiency had existed seemed to collapse entirely — new customers weren’t hooked up but got bills anyway, existing customers continued to get water but never got a bill. Promised construction projects never began. CWS provided no financial reports to its overseer. Just two years after the ten-year contract was signed, the Tanzanian government shut it down. Biwater-Gauff sued, looking for $20 million in damages. Both the UN Commission on International Trade Law and the International Center for Settlement of Investment Disputes found that Tanzania was technically guilty of illegally abrogating the contract but imposed no financial penalty, so egregious was CWS’s “fulfillment” of its conditions.
So DAWASA, now renamed DAWASCO (Dar es Salaam Water and Sewerage Corporation) regained control in what was a “parastatal company owned and financed by the national government.” The system remained a mess. Three-quarters of the supplied water couldn’t be tracked or accounted for. Slightly more than 60 percent of city residents used piped water, but only 8 percent had taps in their homes — the rest used communal block taps. Connected users got water about eight hours a day. Leaks and illegal connections, along with an increasingly limited (and polluted) supply from the Ruvu River, meant that the system could supply only about a quarter of the demand.18
Matters have improved somewhat. Connections remain low but have gone up 12 percent. More users are being billed, and tariffs, while they have gone up 30 percent, remain low. But capital expenditures are not being made, necessary construction goes unbuilt, staff morale is abysmal, expertise is lacking, layoffs continue, and corruption is unabated. (Most of the illegal connections are actually performed by DAWASCO employees, and overbilling of those that can pay is endemic.)
Most residents continue to rely on private water sellers, who charge high prices. This is de facto privatization of another sort.
Consider this one a failure on all fronts.
This was going to be the poster child for privatization. United Water, the Suez subsidiary that won the twenty-year, $428 million contract to operate Atlanta’s water and sewage system, boasted that “Atlanta will be for us a reference worldwide, a kind of showcase.” Suez was going to cut costs to everyone, improve revenues, and end the quality problems that had been plaguing Atlanta for decades. It would be a model for the hundreds of similar contracts the water companies confidently expected would be signed as a result.
Atlanta certainly wasn’t bullied into offering this contract, not by the World Bank or anyone else. It wanted it because the capital’s water and sewer systems were in disrepair and steadily declining. There were so many outraged communities downstream of Atlanta’s sewer outfalls that the city was obliged to pay penalties of nearly $40 million in recompense. The resource was so mismanaged that, in 2007, Atlanta itself came within two months of running out of water entirely, and the governor, risibly, was reduced to wondering whether it was constitutional to pray for rain. A multinational with deep experience and plenty of capital would surely do better.
The contract was signed in January 1999. It was terminated with cause in January 2003. In retrospect, the company had over-promised: it guaranteed to radically reduce operating costs and to extend environmental protections, promises that, it turned out, it had no way of keeping. Sure, it could reduce operating costs by paring staffing to the bone, but that simply caused an escalating series of quality problems. A major water leak went unrepaired for two years and was fixed only when the state threatened to hire a contractor to fix the problem and charge United Water the cost. In May 2002, the state Environmental Protection Agency was forced to issue boil-water advisories, even to the affluent North Buckhead neighbourhood, where the tap water turned rusty and contained unsightly unspecified brown debris.
In consequence, Atlanta’s water has been “re-municipalized.” The anti-privatization NGO Water-Allies, an offshoot of Food and Water Watch, has claimed at least some of the credit. But the short explanation is that the company screwed up. So much for the vaunted efficiency and expertise of corporate entities.
No question about this one. Not just a failure. A rout.
The world’s driest continent is also the world’s most freewheeling water market. It was also subjected to one of the worst droughts faced by an otherwise productive agricultural sector, the Millennium Drought of 1997 to 2009.
The country started its liberalization drive, which included privatizing formerly state-run enterprises and services, in the 1980s, well before the drought began. This was extended in the early 1990s, again before the drought, and water rights became a commodity to be freely traded on an open market. As in the American Southwest, water was “delinked” from the land it flowed through. Anybody could hold a water right, not just other riparians, with “anybody” defined as persons, farms, corporations, or municipalities. By extension, rights holders could sell their allocations to anyone they pleased, even foreign investors, at whatever price was agreed to by both parties — just like in any other market. There were hiccups along the way: it wasn’t always clear, for example, who owned what rights before the change; entitlements were often poorly documented or not documented at all; there were sometimes competing claims to the same water; and, at least by one measure, there were more entitlements on, say, the Murray River than there was water in the first place. It was also tricky to measure actual water flows in rural areas, from which allocations could be made. At the height of the drought, this was sometimes complicated by what amounted to water theft or water fraud — clandestine hoses and camouflaged illegal dams, pumps running where they shouldn’t. The Australian Competition and Consumer Commission was given the power to develop and enforce the market rules, in effect becoming water cops in addition to regulating the market itself.
In the end, rights were established with a minimum of rancour, based on prior use and seniority. Thereafter, trades were made largely through brokers in the city of Adelaide, the nearest city to the mouth of the Murray-Darling, the continent’s greatest river system. Prices were established by buyer and seller but affected also by evaporation rates, seepages, and other natural forces. Water companies such as John Dickerson’s Summit and the Australian Causeway Water Fund would sometimes accumulate their own water rights, or find buyers for them elsewhere. In the early years, Summit bought ten thousand megalitres that it planned to stockpile and perhaps rent rights back to whoever would pay.19 An Australian investment bank, Macquarie, bought water rights for its investment in almond groves. In 2007, as much as 40 percent of the available water was on the market.
All this caused great alarm among opponents of privatization, which feared, with some justice, that small farmers would be squeezed out and big agribusiness allowed to muscle in. They had a point. But it should be remembered that the water itself remains in the river — a Hong Kong investor may buy the rights but would have to find a willing buyer among those who could actually use the water. That investor couldn’t take the water elsewhere. And the investor did face competition from other sellers, with the result that prices couldn’t escalate at whim. Sure, a hotel in Adelaide could pay more for an allocation than a farmer, but then, that’s what markets are for — the seller could make some money getting rid of something no longer needed. At the height of the drought, many beef farmers, for example, shut off their pumps and sold to someone downstream, often wine farmers. In this way, they would no longer need to irrigate fields to grow crops for their cattle; instead, the sale would give them the money to buy feed elsewhere. Some farmers went bankrupt, but on the whole, economic damage was minimal.
At the height of the drought, available water dropped in the Murray-Darling basin by a remarkable 70 percent, and yet it had minimal impact on agriculture. There were shifts in crops — as water availability went down, prices went up, so the rice farmer (who used lots of water for a low-value crop) would sell to a grape grower, whose product is more valuable; the rice grower got more money than he or she would have growing rice — so there was no one left needing compensation, and nothing for government to do. Two years after the drought ended, agricultural production once again neared pre-drought levels. As a piece in the journal Science argued, producers were buffered by “(i) well-developed water markets that allowed water trade to farmers in the greatest need; (ii) modernization of irrigation infrastructure that increased the efficiency of water delivery; and (iii) establishment of clear water entitlements for the environment that protected critical refuge habitats and populations as water availability declined.”20 In effect, water trading encouraged conservation, because water became more valuable, exactly the opposite of what anti-privatizers feared.
Perhaps it was successful because there were reasonable checks and balances on the freewheeling water market. The actual water service (the plumbing) continued to be operated by public utilities, and as the Science piece noted, the legislation that set up the system of tradable usufructuary rights reserved a considerable quantity of water for ecosystem services — that is, for the river itself and its “environmental flow,” whose preservation remained a high priority. At the same time, farmers were essentially told they could no longer expect drought and debt relief from the government, forcing them into conservation. Even so, it remains true that agriculture, which amounts to less than 3 percent of the Australian economy, uses two-thirds of the available water supply.21
Several other developments helped Australia get through the drought. One was that municipal water use was reduced by nearly 50 percent largely through simple water-use restrictions on activities like lawn watering and car washing that were generally understood and well received by the public, since usage levels have not rebounded after the drought. The other is the rapid construction and deployment of large desalination plants. We will come back to desal in Part Five, on solutions, but it is worth noting here that the city of Perth was, within two years, able to envisage and build a plant that pushes more than 90,000 litres of purified sea water a minute (130 megalitres a day) into the mains. Other plants in New South Wales and Queensland are almost double the size.
The Australian story shows us that, in a world facing increased and prolonged droughts, conservation should become the highest ethic. It also shows us that fully tradable water rights got the country through the drought with a minimum of damage.
The French capital is also the headquarters of the world’s two largest private water companies, Suez and Veolia Environnement, and their ouster from running Paris’s water and sewage is a body blow to their credibility. In this case, though, the abrogation of the contracts (Veolia had the right bank, Suez the left) was driven neither by anti-privatization NGOs and activists, nor by public dissatisfaction, but by the peculiar, inturned, arcane nature of French politics. And it was complicated, in turn, by the peculiar, inturned, arcane character of French trade unions.
Nothing was simple from the beginning. For centuries, water and sewage services had been owned and operated by the prefecture of Paris; the city’s sewers were, rightly, greatly admired by engineers and city managers everywhere and are still a tourist attraction — guided tours are offered to the fascinated and the non-fastidious. In 1985, however, in the same flush of enthusiasm for neo-liberalism on offer elsewhere, the water distribution network was privatized; two years later, so was the water production system, or at least partially — the city owned 75 percent of that, the two multinationals got 12 percent each, and an investment bank the small portion left. Sewage remained entirely in public hands, so to speak.
Generally, this new arrangement did well. Leaks, which were already low by big city standards (around 22 percent), were reduced to 13 percent and then to 3.5 percent, an extraordinary figure. Still, water bills went up at a rate far exceeding inflation, and when the private companies, jealous of each other and zealous in guarding proprietary information, neglected to provide public accounts, political suspicion grew.
In 2001, Paris elected a socialist mayor with the declared aim of taking the water system back in-house. Neither Veolia or Suez took this very seriously — they made a few concessions here and there, offered to lower their profit margin to around 4 percent and to invest more in infrastructure renewal. In this insouciance, they were in error: Mayor Bertrand Delanoë repeated his threat in his second successful election campaign in 2007. In July 2008, the deed was done.
The transition wasn’t easy. Between the private companies and the city, no fewer than fifteen unions had to be placated, and contracts renegotiated. Senior executive fled, and the city didn’t have the money to hire them back, so a management vacuum followed. The city’s finance department, which had not taken the mayor’s promises seriously either, had failed to make any preparations. And under the complicated procurement system of public Paris, all decisions had to be pre-cleared by a commission and then reargued by the board (which contained NGOs and union reps, and well as politicians), resulting in endless delays and frustration. All management hiring was, and is, done directly by city council.
And yet consumers hardly noticed the difference. Excellent water supplies continued as before. Paris sewers did their job as they always had. Even better, the “re-municipalization” saved money — it turned out that the city, with all its cumbersome structures, was a better manager than the multinationals. In January 2011, the water utility, now called Eau de Paris, actually lowered water rates by 8 percent, a humiliation for the private companies that had insisted higher rates, not lower ones, were needed. Even more annoying and embarrassing for Suez and Veolia, the utility has issued ringing declarations against bottled water, has subsidized the poorest forty-four thousand households in the city, and has consistently refused to cut off water to scofflaws, the poor, and those in squats, all this on reduced rates.22
It’s easy enough to find many other places where privatization has worked for consumers as well as for the companies themselves — Chile is an example, as is Phnom Penh in Cambodia, Casablanca in Morocco, Karnataka State in India, Bechtel’s operations in Tamil Nadu, Suez’s in Delhi, and Veolia’s in a dozen cities. Gabon is a good example of a projected countrywide success with Bechtel the contractor. Senegal is another. In cases like that of Bogor, Indonesia, prices were raised substantially in the first year of privatization, but the result was that the grid was extended to many thousands of the poor who had never been reached before, and gripes were minimal.
It is also easy enough to find failures. Suez pulled out of a contract in the Turkish town of Antalya after protests over 130 percent price increases; Guyana cancelled a contract with Severn Trent for non-performance, as did Nepal; Suez has abandoned its projects in Argentina; the city of Quito in Ecuador cancelled a privatization contract when consultants pointed out that it would guarantee a profit to companies that would invest only $7 million compared to the city’s $226 million; Vietnam has terminated its sewage contract with Suez. Many failed for the same reason that Quito identified: poorly written contracts. In other cases, movements similar to the one in Felton, California, derailed privatization efforts, sometimes for good reasons, sometimes not. Portland, Oregon, is a case in point: early in 2015, there was an uproar as the city council assigned a private company, CH2M Hill, to dismantle hundred-year-old reservoirs (elegant enough to be on the National Register of Historic Places) and build new bunker-like ones, covered instead of open. Apart from a great public affection for the older reservoirs, the real issue was one of cronyism. One of CH2M Hills’s vice-presidents was a former chief engineer with the Portland Water Bureau — and one of the prime consultants to an Environmental Protection Agency report that argued for the new reservoirs in the first place. The city’s water managers plead that safety is their prime concern, but their own record is hardly pristine: they have been penalized by state authorities thirteen times since 1998 for water-quality violations, paying fines of around $750,000. At the time of writing, the outcome was still uncertain.23
Further, it is also easy enough to find cases where privatization is working well, at least in the sense of delivering on its promises, but where governments undercut profitability and the viability of the contracts by unrealistic and politically driven pricing. Jakarta is an example on this side of the ledger, though Uruguay is perhaps the best example of privatization succumbing to politics. After years of fairly uncontentious private management, a national referendum declared that water was a basic human right, to be delivered at no profit by public entities — a decision that was later incorporated in the country’s constitution. Politics were served and services stayed pretty much the same.
Water Services to the World’s Poor
One of the charges against privatization is that “untold millions in the Global South” have been cut off from access to drinking water because they either couldn’t afford new rates or simply didn’t pay their bills. Dozens of stories are still circulating that private water companies boosted prices beyond the reach of the poor, and even cut off some of the truly indigent altogether. Where are these untold millions to be found?
Most of the stories I tracked turned out to be false. But not all.
Untold thousands, maybe.
Some of the untold thousands, and then only for a brief period, were to be found in South Africa, one of the few countries other than Uruguay and Bolivia to have declared water a basic human right. As a backdrop, it should be remembered that when the African National Congress (ANC) inherited the country from the last apartheid government, twelve million of a total population of thirty-eight million had no access to clean water. By 2002, that number was down to seven million of a total population of forty-two million. The shantytowns outside the major cities were ghastly still, but there was piped water to public standpipes and basic latrines for the first time. It may not have looked like much to outsiders, but it was progress. The government has achieved this remarkable result through a combination of political determination and a willingness to experiment, devising policies that initially met opposition from both the development banks and NGO lobby groups. It was done by judiciously involving private companies in water management. David McDonald, co-director of the Municipal Services Project, which has been monitoring the privatization of water services in South Africa, says privatization “is most often seen as part necessity, part political choice because of fiscal constraints,” reducing public borrowing, taxes, and outlays.24
Each household in the country, regardless of income, is supposed to receive a basic allowance of six thousand litres per month — not very much, but enough for thrifty use by a smallish family and a lot better than they ever got before. However, in some municipalities, such as the Empangeni region of KwaZulu-Natal Province, prepaid meter cards were introduced in 1998, and those who couldn’t afford them were forced to dip their buckets into local rivers, and drink the polluted river water. The result was a sudden spike in cholera cases, first to ten thousand and then to five times that number. The same thing happened in Phiri township, a part of Soweto. But there, a group of residents in a community long accustomed to collective political action, rebelled — and then sued. The courts have since forbidden water shutoffs to the indigent, and the meters have been redesigned to allow for the free allocation.
In a few South African regions, the private companies anticipated all this by the simple (but apparently revolutionary) expedient of actually consulting with the people they were supposed to serve. In the 350,000-strong community of Nelspruit, in Mpumalanga (Eastern Transvaal), a subsidiary of the British firm Biwater, encountered thousands of “unregistered connections,” made precisely to get around this metering issue. Instead of cutting people off, the company sent rapporteurs into the townships to explain how the system worked, to discuss and encourage the regular payment of bills, and to assure people that they would get a basic allocation regardless. Dozens of local offices were set up where residents could air complaints, report leaks, and generally make contact (the company also undertook street theatre and sports sponsorships to further connect with the population). It worked: leaks were repaired and thirty-three thousand new customers added to the grid. Hardly anyone complained.
More unserved citizens are to be found in Puerto Rico, where the debt-ridden water authority began cutting off supplies to non-payers in the summer of 2014. Among the main scofflaws was the municipality of Arecibo, which had been refusing to pay its $1.5 million water bill. In August, to vociferous protests, the utility began cutting water to non-payers in public housing too. Residents there are charged $19.76 a month, regardless of how much water they use — use is not metered. The utility wanted to up that fee by another $20, mostly to fix what it plaintively calls “deficiencies in the system,” a politically improbable idea.25
But this can’t be laid at the door of privatization. Puerto Rico’s utility is publicly owned.
The most notorious case of shutoffs was still happening in 2015 in the bankrupt city of Detroit. Shutoffs started as early as 2002, which was when Marian Kramer, a social activist and head of the National Welfare Rights Union, discovered that the Detroit Water and Sewerage Department had shut off running water to more than forty thousand delinquent customers without offering help or giving them any chance of appeal. All of which led to the bizarre sight, in a first-world country, of hoses snaking from one house to another as neighbours helped each other out, and of women staggering about balancing large buckets of water. The noisy public campaign led by Kramer persuaded Detroit’s city council to end the shutoffs and to introduce a Water Affordability Plan to help those who really couldn’t pay. And there it rested until 2014, when nearly half the utility’s customers were at least sixty days past due — not just people but schools and businesses too. In March, the city again started sending out shutoff notices. Darryl Latimer, the utility’s deputy director, told the New York Times that “the threat of having service cut will resonate with customers. It’s really more a pattern of behavior — ‘If you don’t come to cut me off, I’m not going to pay until you force me into paying.’”26 Another outcry ensued, resulting in the odd spectacle of Canadian residents across the Detroit River sending relief tankers across the border to help out, an unedifying sight. The shutoffs stopped, only to resume in August. The UN weighed in, proclaiming that shutting off water to those who can’t afford it “constitutes a violation of the human right to water,” and arguing that the shutoffs discriminated against minorities. As it turned out, over half the shutoffs were reversed within a day as delinquent customers indeed found the money to pay their bills.
The Detroit shutoffs have attracted a good deal of activist spleen, much of it justified, some of it not. An anti-privatization screed by Ellen Dannin on the website Truthout put it this way: “Americans used to take water for granted, but the water shutoff in Detroit has taught us all-important lessons. We now know that the private sector is willing to be ruthless in denying access to the most basic needs of living beings, and we also know that even those who have the least resources can also have power — if they are organized.” But wait a minute. This can’t be laid at the door of privatization either. The Detroit Water and Sewerage Department is a public utility, not a private one, though this hasn’t stopped anti-privatization activists from having their suspicions. Martin Lukacs, writing in the Guardian, suggested that the city’s emergency manager, Kevyn Orr, supported shutoffs to make the utility more attractive to potential private buyers. Orr declined to comment, fuelling the suspicions further.
In 2014, the UN, in a little-read report, noted that “courts in India, Brazil and South Africa have reversed decisions to disconnect water when customers don’t pay.”
Water as a Human Right
Partly as a reaction to, and rejection of, privatization, several countries have adopted the notion that water (or, in some slightly watered-down definitions, access to water) should be a basic human right.
The social justice people are pushing this beguiling notion. It seems so obvious, doesn’t it? Everyone knows that, without water, you die. What could be more basic?
In 2004, Uruguay became the first country in the world to declare water a basic right. South Africa and Bolivia followed. By 2009, this was such a non-contentious issue that the multinational PepsiCo, driven by shareholder resolutions, publicly committed itself to respecting the human right to water throughout its global operations.27 A year later, in 2010, Bolivia took a draft resolution to the UN on the human right to water and sanitation. After some hemming and hawing, a resolution was passed supported by 122 countries that declared that “the General Assembly recognizes the right to safe and clean drinking water and sanitation as a human right that is essential for the full enjoyment of life and all human rights,” and it suggested that it was the moral responsibility of rich countries to assist poor countries in getting there. Even the United States signed on.
Does this help getting water to the 1.4 billion people in the world without safe access, or getting sanitation to the more than 2.5 billion without it? Does declaring water a human right persuade the governments of these countries to drop everything and focus on getting water to everyone? I wouldn’t go as far as Harvard’s John Briscoe, who has suggested that “the greatest benefit of declaring water to be a human right is for those people who make this declaration, who think they have done something noble.”28 I think the declaration is probably more manipulative than that: it is part of the bully-pulpit notion that if you declare something important long enough and often enough, it will actually become so, and that will impel people with money to part with some of it for the cause — International Rivers has been using this technique effectively for some time, as we shall see in Chapter 6.
Declarations are all very well, but though the poor have a right in law, they are generally at the very end of the supply lines. The pipes often run dry before the water gets to them, forcing them to depend on private water vendors (not corporations, but guys with trucks) for their supply. It is hardly a secret that too many public utilities in the developing world favour the rich and not the poor; that was true in Cochabamba — the poor are often not hooked up to the grid at all, so the rich get water at 25¢ a cubic metre while the poor buy from trucks at $2 or more a cubic metre.
It is a misconception that World Bank loans favour the private mega-corporations. Over 90 percent of World Bank loans for water infrastructure development worldwide have been to public entities, not private corporations. Contrary to the legend that it uncritically endorses private capital wherever it can, the World Bank has a long record of pouring good money after bad in the water business, making loans to far too many public utilities that operated more like kleptocracies than public services. Indeed, the Fourth World Water Forum harshly criticized multinationals not for profiteering at the expense of poor countries but for pulling out of non-lucrative contracts, asserting that their withdrawal doomed millions to long waits for service. This squares poorly with the counter-narrative that multinationals are cutting off “untold millions” from their precious water, and that privatization has been a catastrophic failure. Well, it has been a failure, but not for the reasons feared.
The Pros and Cons of Privatization
If governments won’t, or more likely can’t, get water to the poor, who can and will?
Privatization was never altruistic, to be sure — no one is that naive — but in many ways it really was (and is) an attempt to bring expertise and capital where they had never existed before. Whether it works or not depends to a surprising degree on the local governments in place. If they are not serious about making reform work, no reforms will work, whether the systems are private, public, or some form of hybrid. If they are serious, almost any system can be made to work.
What Cochabamba proves is that letting multinationals bent on profit loose in a region that is poor, on a contract that is poorly drafted and poorly regulated, is inevitably going to result in conflict.
So how can it be made to work better?
In areas with less than sterling governments, isolating regulation from politicians is a good start, if a difficult one, particularly when politicians line their pockets as well as pad their voters’ lists, as the mayor of Cochabamba did. Openness, or transparency, is essential: let consumers know ahead of time what’s coming, and don’t spring it on them after a deal has been signed, as Tanzania did. Don’t insist on everything happening at once — if there are alternate suppliers to hand, let them operate, at least for a while, then integrate them rather than eliminating them. Bechtel in Cochabamba could have done this but screwed it up instead. Prices should rise slowly on a schedule that everyone understands ahead of time, until utility income reaches parity with expenses. There should be support for the poor, a basic allocation at minimal rates — not free, but cheap. Pay attention to training and human resources; good management is not a luxury.29 Above all, privatization contracts should avoid imposing on the community a moral hazard in which profits are privatized and costs socialized. If a company screws up, it should be obliged to fix it, at its expense. That doesn’t sound so hard, does it? But it seldom happens.
Empower regulators to make real decisions. An instructive example is New York State, where regulatory oversight has been keeping a close eye on the private contractors’ performance, and is not shy of issuing edicts where they seem warranted. For example, in November 2014, the state’s Public Service Commission (PSC) ordered the company supplying water to Rockland and Orange Counties in New York to drop its plans for a desalination plant on the Hudson River that the company maintained was needed to increase supply. The PSC’s chair, Audrey Zibelman, “urged” the company, United Water New York, to instead explore cuts in consumption and other conservation methods, and to locate other water sources. The conservation NGOs Riverkeeper and Scenic Hudson applauded the state’s decision, pointing out that consumption was already declining because of more efficient appliances and toilets, and that the plant was supposed to be built just a few kilometres downstream of the Indian Point nuclear plant, a less than felicitous location.30
Writing proper contracts is one essential for successful privatization. Contracts often contain red-flag clauses that almost guarantee a concession is unlikely to work. One such is the language that existed, for example, in the Lake Ontario city of Hamilton, Ontario, in which the public agency was made entirely responsible for breakdowns in the water system without having any participation in revenues. Under the original contract signed by the city with the contractor, Philips Utilities Management Corporation (PUMC), the city incurred all capital expenditures and major maintenance costs — which soon included cleaning up a sewage spill that affected residential areas and polluted the harbour.
Another red flag is the kind of language now so common in international “free trade” agreements, in which private companies have the right to reimbursement if the public partner does anything, whether by commission or omission, that may deprive the concessionaire of future or even potential revenues. An example from outside the water world is advanced by Ellen Dannin, in a piece on the website Truthout. In this case, a private contractor hired to run a toll road in Virginia demanded compensation whenever car pools (which didn’t have to pay tolls) exceeded 25 percent of traffic.31
Privatization or not, water needs to be priced properly. As South Africa and other places have amply proved, water can be priced progressively, like income tax — the higher the consumption, the higher the rate. But too often it is the reverse: in California’s Central Valley, farmers for many years received volume discounts, instead of paying a premium, though they don’t anymore.
On the Côte d’Azur in France, hardly a hotbed of Bolshevism, everyone pays something for water, though not very much. You pay only a little for what is known as “the first glass” — enough water for essential services. If you use more — you like a hot tub, for example — you get to pay a steeper price. Then, if you want to fill one of those infinity swimming pools so beloved of upscale shelter magazines, the sky’s the limit.
If the water is priced properly, it doesn’t matter what kind of entity delivers the water — public, private, or some hybrid.
In the end, it is hard to see in water privatization the bogeyman so energetically put forward by its opponents. It can be made to work — or not. Private companies are not anti-people, they are just pro something else. Where privatization is introduced, though, it should be with lifeline rates for the poor, strong protection of ecosystem services, and strong regulatory oversight by governments.
My own bias is that governments should provide all basic services: electricity, water, highways and transportation infrastructure, and health services, as well as newer utilities such as high-speed Internet access, and they should generate the tax revenues necessary to pay for them.
It is the opposite bias that declares private capital more creative and capable than government agencies. Sometimes it is, of course, but it’s certainly not a given, as some of the examples provided above have shown. As I wrote in a recent book, “You can trot out example after example of corporate executives looting, and then destroying, the corporations they were hired to run, but it doesn’t seem to matter. You can show evidence of widespread flim-flammery and corporate malfeasance, of bloated middle management and imperial CEOs, of boards running up unmanageable debt and then crying to the public for rescue, but none of it makes any impression. You can show how many corporations have abandoned the quaint notions of service and quality for numbers-fiddling, hidden accounting systems, speculation, outsourcing, mass firings, and chicanery of the most venal sort, and people will nod their heads and look away.”32 Okay, a little over the top, but someone needs to defend the public sector. Company executives cannot be trusted to police themselves, or act in the public good unless they are made to.
In the rich world, municipalities and regions have resorted to private capital because they are too politically timid to raise the necessary taxes to pay for the necessary fixes. In those cases, with good contracts and decent oversight, privatization can be made to work well. In the poor world, private capital is often the only way to get the infrastructure built in the first place. In those cases, with good contracts and decent oversight, privatization will benefit everyone, even the poor.