Another Hole in the Boat: Suez’s “Private Corruption” in Bolivia


The idea of privatizing public water utilities in the Third World was never a good one. Driven by neoliberal ideology, international financial institutions (IFIs) such as the Inter-American Development Bank and the World Bank have worked hard throughout the past decade to convince state reformers that inviting multinational water companies to run local water and sanitation systems would bring the new capital, managerial expertise, and technology thought necessary to bring water to the poor. Whether these reformers had their hands greased by bribes or simply bowed to IFI pressure, several governments in heavily indebted countries follow suit and transferred control over public water and sanitation works to multinational corporations. Fifteen years later, many of these contracts once heralded as models of “pro-poor” policy-making are sinking into the mud.

Multinational are withdrawing from the Third World water market, instead focusing their sites on “emerging markets” such as Europe and China where there is much more money to be made. The recent decision of the Argentine government to cancel the privatization contract in Buenos Aires is just one of the series of failed and cancelled contracts in Latin America, where privatization made the largest inroads. As the authors of the report, “Pipe Dreams” argue, in Buenos Aires, Suez only achieved 54% of the promised connections between 1993 and 1998. A the authors conclude, given the systematic failure of the private sector to invest in new infrastructure, “there is no compelling evidence that private utilities out-perform public utilities.” [1]

Indeed, the idea that the private sector would bring water to the poor is nothing less than a farce.

Brief History of Water Privatization in La Paz-El Alto, Bolivia

In the mid-1990s, the central government of Bolivia received a large loan from the World Bank to prepare the public water utilities in its three largest cities for sale to the private sector. With this money, the government was also supposed to create a regulatory framework that would protect the interests of consumers and “create a free market economy”. About a month after the regulator was appointed, the first water company to hit the chopping block was the municipal water utility that served the neighbouring cities of La Paz and El Alto. In 1997, the public utility was transferred in a 30-year concession to the only bidder, Aguas del Illimani (Illimani), a company involving Bolivian and Argentinean capital, and controlled by the French multinational Suez.

While local residents in La Paz and El Alto were never entirely happy with the performance of their previous public provider (which also failed to reach the poorest neighbourhoods), they were even less impressed with Illimani. Over the seven years of the concession, there were scattered protests by residents over high tariffs and the inadequate service offered by Illimani. However, thanks to the consciousness-raising work of a coalition formed between the militant local resident’s association-the FEJUVE-and activists from the Coalition in Defence of Water and Life and other organizations from Cochabamba in mid-2004, resistance strategies eventually became more effective.

In late 2005, the FEJUVE brought media attention to two basic problems with Illimani’s service in El Alto. First, in 2002, the company and the “independent” government-appointed regulator claimed that Illimani had achieved “full service coverage” (or, 98.85% as reports the press release). The FEJUVE claimed, by contrast, that over 200,000 residents were excluded from the “served area”, which left about one-fifth of the urban population to purchase contaminated water from vendors, drill their own wells or collect rainwater. [2] Another 70,000 were excluded from service because they could not afford a connection: they were counted as “served” when the pipe passed by their house. Second, the company outsmarted other companies in the region by raising fees for new connections rather than tariffs for existing customers. Since new customers only find out about the fees when they arrive at Illimani’s office, it is more difficult to organize a protest about the costs of new connections than a tariff hike where comparing water bills becomes an important organizing tool. To get water and sewerage connected to your home in La Paz or El Alto, it cost US$445, the equivalent of almost 9 monthly salaries working at minimum wage.

In late 2004, the FEJUVE began to negotiate with the government to try to get the regulator to change the terms of the contract. After six months of fruitless negotiations, the FEJUVE called an indefinite civil strike for the beginning of January, this time calling for the cancellation of the contract. Thousands of residents of El Alto hit the streets to pressure the government to return the water company to public control and kick Suez out of Bolivia. Fearing that protests would destabilize the country, former President Carlos Mesa promised to cancel the contract on January 12, 2005.

Since Mesa made this promise, the government dragged its heels looking for a way to cancel the contract without prompting an international lawsuit. Under the terms of the contract, Illimani has the right to sue for damages in international court should the contract be terminated in a “unilateral” manner.[3]  All along, however, local activists claimed that Suez was actually the one who did not respect the contract. Facing pressure from the FEJUVE, the government commissioned an independent audit of the companies’ investment activities over its eight years of service (1997-2005). Despite the frustration that the delay has caused for local residents, the audit was well worth waiting for. It demolishes Suez’s claim that it respected the terms of the contract. Indeed, it turns out that Suez is the party who should pay for damages.

“Private Corruption”: Lies, lies, all lies!

In a public statement issued in March 2005, the company boasted that 92% of the money it made was “invested back into the community”. [4] The auditors found, however, that Illimani was paying at least US$1 million per year to Suez for management fees, which could not count as its “investments”. The auditor also found that Illimani systematically failed to respect local environmental laws and has been dumping raw sewerage in Rio Seco, which flows directly into Lake Titicaca. Perhaps most devastatingly for the company, contrary to Suez’s claims that it had invested US$63 million expanding water and sanitation infrastructure in La Paz-El Alto, the auditor’s report determined that the net fixed assets of the company amount to only US$22 million. Furthermore, the auditor reports that the company should have been fined by the government regulator at least US$6 million for failing to meet the promised expansion targets for potable water in the cities of La Paz and El Alto. Indeed, although the company claimed that it had achieved “full service coverage” it only installed 22,000 new connections out of the 33,000 required by the contract.

For these reasons, the FEJUVE argues that Suez´s practices in La Paz-El Alto represent a form of “private corruption”, highlighting the fact that privatizing publicly-owned companies does not make the problem of corruption go away; instead, it is transferred to the private sector where less public scrutiny is possible. But of course, under the logic of neoliberal capitalism, what is considered “corruption” in the public sector is merely considered good business in the private sector.

Adding fuel to the fire, Canadian activist Maude Barlow has also recently threatened to take legal action on Suez for misrepresenting other investment activities. Barlow has taken issue with the company’s claim that it financed the expansion of water and sewerage activities in the community of Solidaridad, El Alto, although the money came from Barlow and the system was installed by the residents themselves. In early June, the company took out an ad in a local Bolivian newspaper claiming that it had financed the project. As Barlow states, “Suez has insulted this community by publicly taking credit for this initiative.”[5]

“Regulatory Capture” or a Stupid Idea?

In light of the evidence presented by the independent auditor, the claims by various international financial institutions and neoliberal pundits that Illimani’s contract was “pro-poor” have a rather hollow ring. Seeking to draw lessons from the failure of privatization, many will claim that the problems with the Illimani contract can be explained as regulatory failure. After several disastrous experiences with privatization, the international policy community has finally recognized that the “private hand does not guide itself” and recommend “strong regulation of the private sector”. These observers will argue that the problem in Bolivia is that the regulatory agency failed to do its job because it has been “captured” by the corporation. According to this view, the answer is not to put a stop to privatization, but beef up regulatory institutions to protect consumers against the abuses of a private monopoly.

There is no doubt that the government-appointed regulators in Bolivia failed miserably,  but deeper questions must be asked about whether these regulators were really meant to do something different from what they did. The entire edifice of privatization rests on a naïve assumption that the governments deemed “incapable” of regulating private providers will somehow magically transform themselves into watchdogs of the private sector and protect the poor. The contract signed by the regulator, however, guaranteed Illimani a 13% return on its investments (a common practice in the water sector), which locked the regulator into respecting the company’s “right” to make a profit. The regulatory system in Bolivia was created by Gonzalo Sánchez de Lozada. [6] Did Sánchez de Lozada appoint regulators that he thought would protect citizens’ rights to basic services or his friends who would nod approvingly if the company cut some of its costs? And why did the World Bank insist upon privatizing so quickly but encourage the Bolivian government to fire as many public servants as possible? Did the regulator have enough “capacity” to monitor contracts with powerful multinational corporations? It is rather easy in retrospect to say that the “regulator failed”, but when the privatization process was being planned no one paid much attention to these problems.

Public-Public Partnerships and Participatory Management

Although Bolivia may be one step closer to getting rid of Suez, a large challenge remains. As Oscar Olivera, one of the spokespeople for the Bolivian Coalition in Defence of Water and Life noted at a recent meeting of Latin American water activists, “The big challenge, maybe even bigger than the one we faced in the fight to restore state control over privatized water companies, is the construction of an alternative form of administering this resource, that would be both public and participative.” [7] Local activists in La Paz-El Alto are struggling to create a new utility that will not fall into the hands of opportunist mayors or other power-seeking local elites. According to his public statements, the newly appointed Water Minister, former FEJUVE President Abel Mamani is pushing for the creation of a publicly-owned utility that will have a democratically-elected board of directors. [8] On this front, it is good news that the public sector union representing organized workers at Illimani recently affiliated with the progressive global trade union federation, Public Services International. Creating the conditions for effective worker representation and control within the workplace is the essential if workers are expected to deliver quality public services. There are also plans underway to form a public-public partnership between the newly constituted public utility in La Paz-El Alto and a sister public utility in Europe.

In the long run, the formation of public-public partnerships provides greater hope than public-private partnerships that public water and sewerage networks may eventually be extended to all neighbourhoods, especially poor neighbourhoods as long as public financing is made available. Unlike private companies, publicly owned and operated utilities prioritize the human right to water over the needs of private shareholders to get a return on their investments. As Ryutaro Hashimoto, the Chair of Kofi Annan’s Advisory Board on Water and Sanitation reported at the World Water Forum in Mexico this spring, since public water services provide more than 90% of water supply in the world, even “modest improvement in public water operators will have immense impact on global provision of services.”[9]

Perhaps it is time that the World Bank stop bailing their sinking ship and let the boat sink for once and for all. 

References

[1] David Hall and Emmanuel Lobina, “Pipe Dreams: The failure of the private sector to invest in water services in developing countries”, 2006, available at http://www.wdm.org.uk/resources/briefings/
aid/pipedreamsfullreport.pdf

[2] This is one of the “14 reasons” that a pamphlet produced by the FEJUVE and Fundación Solón names as reasons to break Illimani´s contract. For more information on the struggle for public water in Bolivia in Spanish and English, see the websites of Fundación Solón (http://www.funsolon.org), Public Citizen (http://www.citizen.org), and Food and Water Watch (http://www.foodandwaterwatch.org).
[3] For more information on potential lawsuit see “Suez Strikes Back in Bolivia”, July 12, 2005, available at http://www.zmag.org/content/showarticle.cfm?ItemID=8287
[4] See the company’s press release available at http://www.suez.com/upload/up1335.pdf. The full audit report can be viewed on the Stop Suez website at http://www.stopsuez.org/page.aspx?pageid=3335.
[5] See the press release issued by the Council of Canadians at http://www.canadians.org/
[6] The Bolivian government has requested that the ex-President be extradited to Bolivia. He is charged with order the murder of at least 60 innocent civilians during protests over gas in October 2003. See the “Get Goni” campaign, available at http://www.juiciogoniya.org.bo/
 [7] Olivera quoted by Marcela Valente, “Who Controls the Water?” IPS News, July 21, 2006, available at http://www.ipsnews.net/news.asp?idnews=34056
[8] See Nick Buxton’s interview with Minister Mamani, April 3, 2006 (in English), available at http://www.boliviasc.org.uk/index.php?option=com_content&task=view&id=90&Itemid=44.
[9] Quoted in Olivier Hoedeman and Nami Yamamoto, “The Tide Turns – But Pro-Privatisation Currents Remain Strong”, May 2006, available at www.waterjustice.org/uploads/attachments/106doc.doc

Susan Spronk is a graduate student at York University studying social conflicts over water in Bolivia. She can be reached at [email protected].

 

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