Water, Politics and Money

Manuel Schi� er

A Reality Check on Privatization

Water, Politics and Money

Manuel Schiffler

Water, Politics and MoneyA Reality Check on Privatization

123

Manuel SchifflerKfWFrankfurt am Main, Germany

ISBN 978-3-319-16690-2 ISBN 978-3-319-16691-9 (eBook)DOI 10.1007/978-3-319-16691-9

Library of Congress Control Number: 2015936038

Springer Cham Heidelberg New York Dordrecht London© Springer International Publishing Switzerland 2015This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part ofthe material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting, reproduction on microfilms or in any other physical way, and transmission or informationstorage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodologynow known or hereafter developed.The use of general descriptive names, registered names, trademarks, service marks, etc. in this publicationdoes not imply, even in the absence of a specific statement, that such names are exempt from the relevantprotective laws and regulations and therefore free for general use.The publisher, the authors and the editors are safe to assume that the advice and information in this bookare believed to be true and accurate at the date of publication. Neither the publisher nor the authors orthe editors give a warranty, express or implied, with respect to the material contained herein or for anyerrors or omissions that may have been made.

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To Susanne, with Love.

Statement on the Use of Proceeds

The international nongovernmental organization WaterAid works to transform thelives of the poorest communities in developing countries by improving access tosafe water, hygiene, and sanitation. WaterAid was founded in the United Kingdomin 1981 and now works in 26 countries.

All net proceeds of this book will be donated to WaterAid.

vii

Acknowledgments

This book has been over 3 years in the making. Without the encouragement andsupport of many people, this book could not have been written. I would like toparticularly thank Dr. Richard Franceys, who kept encouraging me to write the“book that is within me,” for his patient review of the entire manuscript and forimproving the chapter on the United Kingdom. My gratitude also goes to MarineColon, who volunteered her detailed knowledge of the water sector in France,Uganda, and Phnom Penh. Sophie Herrmann was a critical reviewer of several otherchapters, deftly spotting weaknesses of argument. Stefan Ehlert pushed me to go thelast mile and to rewrite the conclusion and introduction one last time so that theyhopefully meet the high standards I have tried to apply to the entire book.

My thanks also go to Professor Mark Oelmann and Edgar Firmenich whoreviewed and improved an early version of the Berlin chapter. Alejo Molinarikindly reviewed the final version of the Buenos Aires chapter. I would also liketo thank Verena Seiler and Hartmut Beck for their comments on the Ugandachapter. Annemie Denzer provided encouragement and advice throughout the finalyear of writing this book. Marc Beschler smoothed over the language of the finalmanuscript.

Any remaining errors are, of course, my own.

ix

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1The Tragedy of Utilities in Developing and Emerging Countries . . . . . . . . . 1The Water Privatization Wave of the 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Role of the IMF, the World Bank and the IFC . . . . . . . . . . . . . . . . . . . . . . 3The Many Faces of Privately Managed Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Extent of Water Privatization and Private Financing:Misleading Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Investment Financing in Water Supply and Sanitation .. . . . . . . . . . . . . . . . . . . . 6Developed Countries: Investment Financing ThroughRevenues and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Developing and Emerging Countries: Investment FinancingThrough Grants and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Foreign Aid: An Overestimated Source of Financing . . . . . . . . . . . . . . . . . . . 8Private Financing: Making Sense of the Figures . . . . . . . . . . . . . . . . . . . . . . . . 9

Utility Turnarounds: How to Assess Their Success . . . . . . . . . . . . . . . . . . . . . . . . 9How to Avoid Comparing Apples with Oranges . . . . . . . . . . . . . . . . . . . . . . . . 10

Chapter Overview .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Part I Latin America: Two Aborted Privatizations and OneThat Endured

2 Bolivia: The Cochabamba Water War and Its Aftermath . . . . . . . . . . . . . 17Before the Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Ambitious Targets, High Returns and High Risks . . . . . . . . . . . . . . . . . . . . . . . 18A First Failed Attempt: The World Bankand the Government Disagree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19The Second Attempt: Enter Bechtel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

The Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Increased Tariffs, Disputed Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Leasing the Rain? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22The “Water War” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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xii Contents

After the Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24The “Heroes” of the “Water War” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24International Arbitration: Bechtel Claims Compensation,Then Withdraws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Cochabamba Revisited: A Sad End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3 Cuba: Water Privatization in a Socialist Country . . . . . . . . . . . . . . . . . . . . . . 27Poor Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Enter the Tourists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Havana Goes Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Loans and Quasi-free Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4 Argentina: A Flagship Privatization and Its Demise . . . . . . . . . . . . . . . . . . . 31Before the Concession .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Preparing the Political Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Dressing Up the Bride . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Ambitious Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35How to Regulate a Private Water Company? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35The Forgotten Poor .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36The Fog of Bidding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36May the Lowest Offer Win . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

The First Half of the Concession Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Corruption Argentinian-Style: The Alsogaray Saga .. . . . . . . . . . . . . . . . . . . . 39The First Renegotiation: Higher Tariffs, More Investment.. . . . . . . . . . . . . 39The Second Renegotiation: Cancelled Fines, Less Investment . . . . . . . . . 40

The Economic Crisis and the Second Half of the Concession Period .. . . . 41Serving the Poor, At Last . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41More Renegotiations Fail to Save the Concession. . . . . . . . . . . . . . . . . . . . . . . 42

Impact Falls Short of Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42After the Concession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Return to Public Management: A Drain on the State Budget . . . . . . . . . . . 43Legal Aftermath .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Part II The Middle East: Reform Deadlock,with an Exception

5 Egypt: Kafka on the Nile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Dismal Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Decades of Tug of War over Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Privatization Stuck in the Mills of Bureaucracy . . . . . . . . . . . . . . . . . . . . . . . . . 49A Kafkaesque Turn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Arab Spring, Arab Fall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

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Impact: Disappointing Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

6 Jordan: Private Plants, Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55The Amman Management Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Build-Operate-Transfer (BOT) Contracts: Concessions forSingle New Plants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

The Samra Wastewater Treatment Plant: A Smart Mixof Public and Private Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56The Disi-Amman Conveyor: 10 Years in the Making . . . . . . . . . . . . . . . . . . . 57BOT Contracts: The Most Common and the Least KnownForm of Water “Privatization” .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Conclusion: Benefits and Risks for Governments and Taxpayers . . . . . . . . . 59

Part III Europe and North America: Private and PublicUtilities Compared

7 The United Kingdom: A Natural Experiment BetweenPrivate and Public Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Before the Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

The “Sick Man of Europe” and Public Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Pondering Alternatives for Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Regulation of Private Water Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

The Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66A Green Dowry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66“Shareholder Democracy” .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67New Labor Turns Against the Private Companies . . . . . . . . . . . . . . . . . . . . . . . 67Institutional Investors Take Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Over Their Head in Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68The Track Record of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Private Water Calls for Government Help: The ThamesTideway Tunnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

The Impact of Privatization in England .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Higher Bills and Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Increased Investment .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Improved Quality of Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Reduced Pollution .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Loss of Employment and Increased Labor Productivity . . . . . . . . . . . . . . . . 72Leakage Goes First Up, Then Down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Operating Costs Reduced .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Welsh Water: A New Model Emerges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Cowboy Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75A Revolution from the Managers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75A Revenue-Making Not-for-Profit Company Builton Ethical Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

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A First Transformation Attempt Foiled by the Regulator . . . . . . . . . . . . . . . 76A Chance Event Creates a New Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Support from the New Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77The Green Wales and Welsh Water Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Performance Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Welsh Water and English Water Companies Compared .. . . . . . . . . . . . . . . . 79

The Scottish Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

8 France: An Improved Partnership in the Motherlandof Multinational Water Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Fragmented Local Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Improved Governance, Step by Step . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84The History of French Water Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

The Emergence of Private Water Companies in theMid-Nineteenth Century .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85The Demise of Water Concessions in the Late Nineteenth Century . . . . 86The Post-war Comeback of the Private Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Nationalization Averted .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88A Too Cozy Relationship with Politicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Paris Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88A Rip-Off in Grenoble .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89A New Law Chastises Private Water Companies . . . . . . . . . . . . . . . . . . . . . . . . 90

International Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90Remunicipalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Grenoble Remunicipalizes After Corruption Was Exposed .. . . . . . . . . . . . 92Paris Remunicipalizes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Eau de Paris: Underinvestment at the Expense of FutureGenerations?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Remunicipalization in Other French Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Marseille: More Competition Instead of Remunicipalization .. . . . . . . . . . 95

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

9 Germany: Healthy Municipal Utilities, but with a Quirk . . . . . . . . . . . . . . 97Tariffs and Affordability .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Cross-Border-Leases: Selling German Sewers to HelpAmericans Save Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Is the German Water Business Profitable to Its Municipal Owners? . . . . . . 100Competition in Water Supply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Performance Benchmarking .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101The Regulators Push Water Prices Down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Utilities Fight Back in Their Own Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

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10 Berlin: Privatized to Fill State Coffers, Remunicipalizedat the State’s Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Before the Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Fiscal Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106Privatization Design: Institutional Acrobatics . . . . . . . . . . . . . . . . . . . . . . . . . . . 107Selection of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108More Acrobatics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Private Management and Rising Opposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109The Citizens Rise Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109The Cartel Office Joins the Fray . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Remunicipalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110The Impact of Privatization.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Tariffs Increase, but Mostly Before Privatization .. . . . . . . . . . . . . . . . . . . . . . . 111Who Gained More: The State or the Investors? . . . . . . . . . . . . . . . . . . . . . . . . . 112Higher Productivity, Conflicting Figures on Operating Costs . . . . . . . . . . 113Transparency and Management Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

11 Civil Society and the EU Concession Directive: DavidBeats Goliath, Using a Few Tricks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115What Is the Concession Directive and Why Was It Introduced? . . . . . . . . . . 115Opposition from Germany .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116The European Citizens’ Initiative Right2Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116A TV Documentary Stirs Up Public Sentiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117A Public Relations Disaster for the European Commission . . . . . . . . . . . . . . . 118A Powerful Mixture of Fear and Brussels-Bashing . . . . . . . . . . . . . . . . . . . . . . . . 118Water Is Taken Out of the Concession Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . 119A Modified Directive Is Passed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

12 The United States: Public Water in a Capitalist Country . . . . . . . . . . . . . . 121Infrastructure Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Reluctance to Increase Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Friends and Foes of Federal Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123The Water Privatization Wave Hits the United States . . . . . . . . . . . . . . . . . . . . . . 123

Enter the Foreign Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124Privatization Fatigue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124Private Equity Firms to the Rescue? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Private Companies Serving Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

New York City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12644 Years to Build a Tunnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126Keeping the Money from the Hands of the Politicians . . . . . . . . . . . . . . . . . . 127The Federal Government Orders More Investments.. . . . . . . . . . . . . . . . . . . . 127

DC Water: A Public Utility Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

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Part IV Asia and Africa: Three Successful UtilityTurnarounds, Public and Private

13 The Philippines: A Delayed Privatization Success Story in Manila . . . 135Before the Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Making the Concession Attractive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Splitting the Service Area in Two Halves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136The Bidding War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Private Management: A Tale of Two Concessions . . . . . . . . . . . . . . . . . . . . . . . . . 138Impact: Increased Access, Improved Efficiency and CustomerSatisfaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Tariffs Go Down and Up, but Remain Affordable . . . . . . . . . . . . . . . . . . . . . . . 140Did the Winning Companies Submit “Dive Bids”? . . . . . . . . . . . . . . . . . . . . . 140

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

14 Uganda: A Public Utility Turnaround, Triggeredby Pressure to Privatize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Before the Turnaround .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

The Heritage of Idi Amin and Milton Obote. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143National Water and Sewer Company (NWSC) in the 1990s:A Basket Case? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144The World Bank Pushes for Privatization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

The Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145Making Customers Pay Their Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147Cutting the Number of Employees by Half . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147Changing the Corporate Culture and Focusing on Customers . . . . . . . . . . 148Performance Contracts Between the Government and NWSC . . . . . . . . . 149Creating a New Corporate Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150An Alternative to Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151Increasing the Customer Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153Reaping the Rewards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

After the Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154Management Fads Galore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154Stagnating Performance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155The Government Provides Debt Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155Doubts on the Accuracy of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156Muhairwe’s Exit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157After Muhairwe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158Are Water Bills Still Affordable?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

15 Cambodia: A Public Utility Turnaround, Ending with Privatization. 161Before the Turnaround .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161The Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

Laying the Foundations of Success by Gaining Trust . . . . . . . . . . . . . . . . . . . 162

Contents xvii

Creation of an Autonomous Utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163Increasing Tariffs, Especially for High-Volume Users . . . . . . . . . . . . . . . . . . 163Expanding the Network the Right Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Impact: Spectacular Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164After the Turnaround . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

From Obscurity to Fame . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166Privatization Through the Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

16 Utility Turnarounds Compared: The Importanceof Corporate Culture and Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169Differences in Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169Performance Compared.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

Similarities in Changes of Corporate Culture. . . . . . . . . . . . . . . . . . . . . . . . . . . . 171Differences in the Sequence of Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171Efficiency Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172Salary Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172Overall Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173Fiscal Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174Affordability .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Part V Conclusions

17 Conclusion: It Is Not About Public or Private . . . . . . . . . . . . . . . . . . . . . . . . . . 179What Has Changed over the Last 25 Years? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179The Impact of Privatization and Remunicipalization . . . . . . . . . . . . . . . . . . . . . . 180Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

Annex 1: Management Modes, Subsidies, Water Use, Bills,and Affordability in Selected Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Annex 2: Nonrevenue Water in Selected Cities Accordingto Different Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

Annex 3: Overview of Privatizations, Public Turnarounds,and Remunicipalizations in This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Annex 4: Chronology of Key Events Covered in the Book . . . . . . . . . . . . . . . . . . 191

Annex 5: Glossary of Technical Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

Annex 6: Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1971. Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1972. Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1973. Cuba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

xviii Contents

4. Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1985. Egypt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996. Jordan .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007. The United Kingdom.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008. France .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019. Germany .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20210. Berlin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20211. Civil Society and the EU Concession Directive . . . . . . . . . . . . . . . . . . . . . . . . 20312. The United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20313. The Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20414. Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20515. Cambodia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20616. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

About the Author

Manuel Schiffler Manuel Schiffler has worked for over 20 years on water man-agement and water utilities in more than a dozen countries in the Americas, Europe,Africa, the Middle East, and Asia. He worked as a researcher for the GermanDevelopment Institute and as a project manager at the World Bank. He now supportswater projects in developing countries at the German Development Bank KfW. Heholds a diploma and a doctoral degree in economics from the Free University inBerlin.

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Chapter 1Introduction

Having a private water company take over a local water supply system brings upelementary fears. Will private water companies overcharge their customers? Willthey cut off those who cannot afford to pay? Will they cut corners, compromisingwater quality or service quality, letting infrastructure deteriorate for the sake ofhigher profits? Only a few people ask other questions: Could private companiesperhaps bring about improvements, beyond and above what publicly managedcompanies have achieved? Where private companies have been brought in, havethey served the people better or worse than publicly managed service providers?

Some people may not be much interested in the empirical evidence about waterprivatization, because they already know the answers. For those who are convincedthat the impact of water privatization must be negative, since the quest for higherprofits inevitably comes at the expense of customers and service quality, thisbook is probably not right. For those who are convinced that the private sector’sperformance in terms of efficiency, service quality and customer service is alwayssuperior to the performance of the public sector, this book is probably not righteither. But if you are not sure about the answers to these questions and are interestedin empirical evidence, this book – which analyzes the reasons and the impact of theprivatization of water and sewer systems in 12 countries – is probably right for you.

The Tragedy of Utilities in Developing and EmergingCountries

About 90 % of water and sanitation utilities in the world are publicly ownedand managed. Unfortunately, in developing and emerging countries, many ofthese utilities are run by purely political appointees. Their employees are oftenunmotivated, poorly trained, incompetent, and sometimes also corrupt. They maybe led by men – and they are mostly men – who lack vision, who may not beinterested in improving how the utility performs, who communicate poorly and

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_1

1

2 1 Introduction

who are reluctant to delegate decision-making powers to their staff. They mayoperate in an opaque environment, without any accountability to outsiders exceptto a strongman who put them in place as a political favor, and without externalincentives to improve their performance. Politicians set tariffs at low levels withoutproviding for alternative funding sources. For example, monthly water and sewerbills in most cities in India or Pakistan are less than two dollars, barely worth theeffort to issue and collect them.

Moreover, the costs of utilities are inflated through overstaffing and water losses.Often, more than twice as many people are employed by water utilities than arenecessary for them to function properly. One third of the water supplied either leaks,is stolen, or is not fully registered by ageing meters – the sum of these losses iscalled “non-revenue water” in the jargon of the industry. Under such circumstances,water does not make money for greedy investors. Rather, utilities leak money atthe expense of people. Labor costs and energy bills use up almost all revenues,leaving next to nothing for the maintenance of pumps and pipes. This predicamentis worsened when customers fail to pay their water bills, or when some customerssteal water with impunity. Such an environment fosters mediocre performance inthe best case, and corruption in the worst, trapping utilities in a vicious circle.

To complicate matters further, there is often no strong public pressure to improveservice quality: Customers in many cities do not expect their tap water to be potable.The middle class increasingly drinks bottled water instead. In India and in manyother countries, people do not expect to receive water 24 h a day. Until recently,there was no single city in India that received a continuous water supply. Instead,for many decades, people have built houses with roof tanks. In many countries, oldpipes are not replaced, an inherent acceptance of contamination or collapse. Implicittrade-offs are made. The United Nations optimistically estimates that more than90 % of the people on our planet have access to safe water. Anyone who has accessto a tap, a standpipe or a protected well is considered by the UN to be a recipientof “safe” water. In truth, many people receive water that is not safe to drink. Forthe poorest who live in slums and who often must rely on purchases of water fromtanker trucks, water is so expensive that they cannot afford the quantities necessaryto cover all their needs. The actual share of people that have access to safe wateron a continuous basis, thus, is certainly much lower than the UN statistics suggest.Poor service quality is tolerated. The result is what may be termed “just enoughutilities” that provide a low-priced service that is accepted by most customers, butthat is below Western standards.

The Water Privatization Wave of the 1990s

In the late 1990s, a wave of privatization swept through the world, starting inEngland in 1989 and then moving to Latin America, parts of Asia and – to a lesserextent – Africa. These privatizations were based on the assertion that the privatesector would be more efficient, more customer-oriented and better able to raisefinancing than the fledgling public sector.

The Water Privatization Wave of the 1990s 3

The Role of the IMF, the World Bank and the IFC

The 1990s were a time during which many governments in Latin America andEastern Europe, as well as a few countries in Africa and Asia, embraced liberaleconomic policies. The International Monetary Fund (IMF) and the World BankGroup, which includes the World Bank proper and the International FinanceCorporation (IFC), were key players in this endeavor. All three are owned by theirmembers, which include almost all countries of the world. They are often perceivedas a tool of Western governments who are said to dominate them. There was somemerit to this argument at the time of the Cold War. Today, while the President of theWorld Bank is still traditionally an American, about half the voting rights are heldby developing and emerging countries, in line with their increased share in the worldeconomy. Also, more than half of the World Bank’s current staff is from developingand emerging countries.

The three entities have different, sometimes overlapping mandates in developingand emerging countries: The International Monetary Fund works like a “fire-fighter” during financial crises, quickly providing massive short-term loans whenneeded. It attaches broad and general “macroeconomic” conditions to these loans,including some concerning privatization.

The World Bank proper provides long-term loans and – for the poorest countries- grants for investment projects, as well as some for budget support.1 These loansand grants are sometimes coupled with “microeconomic” conditions that oftenfocus on specific sectors of the economy. The World Bank’s employees, of whomI was one, often work for many years in one sector. Through the preparation andsupervision of investment projects, many of them nurture long-term relationshipswith professionals in their partner countries. Due to the nature of their work, theyoften gain considerable knowledge of water supply and sanitation in these countries.

While the World Bank works with governments and state-owned companies, theInternational Finance Corporation has a mandate to support the private sector indeveloping countries. It thus is structurally different: While the World Bank propercan help governments to strengthen publicly managed utilities or to establish public-private partnerships, the IFC exclusively supports private companies. In line withthis mandate, it has been involved in water privatizations in Eastern Europe and inemerging countries, especially the larger ones, including the concessions in Manilaand Buenos Aires described in this book. Compared to the World Bank, the IFC’scorporate culture is closer to a commercial bank. Its employees are highly skilledat analyzing commercial risks and structuring financially complex projects, but theyare typically not as deeply involved in one sector as World Bank employees are.

1The World Bank provides financing through two windows. It provides hard loans at close-to-market conditions through the International Bank for Reconstruction and Development (IBRD) toits middle-income member countries. It also provides soft loans at close-to-zero interest rates andgrants through the International Development Association (IDA) to its poorest member countries.

4 1 Introduction

Beginning in the early 1990s, the IMF, the World Bank and the IFC promotedthe privatization of state-owned enterprises, including water utilities, by applyingconditions to loan packages. Their role in the global wave of privatizations hadan ideological element. At least at one time, no matter what the problem and thelocal conditions were, the solution was always more private sector participation –the question was only of what kind it would be. During my early days at theWorld Bank, the virtues of the private sector were self-evident to many but not allemployees. Once the Director in charge of water was confronted during a meetingby an employee who said that in the country she worked on, the publicly owned andmanaged water and sewer utilities were doing a good job, and that private sectorparticipation was not needed there. The Director coldly replied that if she did notlike privatization, she could look for a job elsewhere.

The power of the IMF and the World Bank Group is sometimes overestimated.When a colleague of mine was told by a critical audience that developing andemerging countries were like puppets on strings held by the World Bank, herreply was: “I wish I had only a fraction of the power that you think I have”.While smaller and poorer countries, such as Bolivia and Uganda, are more proneto external influences, domestic politics often play a crucial role, as the chapterson the attempted water privatizations in these countries show. In larger countries,such as China, India or Brazil, external factors have even less influence. Withoutthe support of national governments and at least a large section of society, reformsimposed from the outside are doomed to fail. For example, when Argentinaemerged from an economic crisis in the early 1990s and embarked on an ambitiousprivatization program, its government strongly supported this policy and opponentsof privatization were weak. It is unlikely that external pressure alone could haveproduced such a large-scale privatization without domestic backing.

Less numerous and less well-known than the privatizations are the cases inwhich the World Bank supported publicly owned and managed water utilities. Insome cases, it pragmatically shifted its approach after publicly managed utilitiesimproved their performance, as was the case in Uganda. In other cases, it apparentlynever pushed for privatizations and continued to support publicly managed utilitiesfrom the onset, as it did in Phnom Penh, Cambodia. Over time, its enthusiasmfor privatization waned, mainly during the 2000s. While the idea never completelydisappeared, the World Bank has become less ideological concerning privatizationand more prone to support public utilities again, as it had done in all developingcountries before the 1990s.

The Many Faces of Privately Managed Services

In order to better understand “water privatization”, one has to look at its manyfaces. Most “water privatizations” actually keep the ownership of assets in publichands, while allowing the private sector to run the utility and to finance investments.They may be better described as “private sector participation” or “public-private

The Many Faces of Privately Managed Services 5

„Privatization“ in Drinking Water

Supply andSanitation

Utilities

Asset Sale

FullAsset Sale

England

Partial Asset Sale

Strategic Investor

Berlin 1999-2013

Stock Market Phnom Penh

No Asset Sale

With Financing: Concessions

ManilaWithout

Financing

Lease Contract

Paris 1977-2012

Performance-Based

TechnicalAssistanceNew York

City

ManagementContractKampala

1997-2004

Individual PlantsJordan

Fig. 1.1 The many faces of privately managed water supply and sanitation services

partnerships”. The many faces of water privatization are shown in Fig. 1.1, alongwith examples covered in this book.

The most far-reaching form of privatization in drinking water supply andsanitation is the full and permanent sale of assets, as occurred in England and Wales.However, except for Chile, no other country has followed this model, which remainsvery unusual in water supply and sanitation.

One way of accomplishing the above-mentioned “public-private partnerships” isthrough the partial sale of shares in a company. Shares can be sold to a strategicinvestor, as was the case in Berlin, or to a large number of investors through thestock market, as in the case of Phnom Penh.

Another way is through concession contracts. These are common in Franceand were also the most common form of public-private partnership in the 1990sin Eastern Europe, as well as cites in developing and emerging countries, suchas Buenos Aires, Cochabamba and Manila. They transfer the responsibility forfinancing and operating water systems for a defined period that ranges between 20and 40 years, while keeping asset ownership in public hands.

There are also public-private partnerships without private financing. These arein the form of lease contracts (as in Paris), performance-based technical assistancecontracts (as in New York), or management contracts (as in Kampala). Under allthese arrangements, private water companies can recover their costs and makeprofits, even if water tariffs are below the level that allows for cost recovery. Thecompanies are simply paid by the government, rather than through tariff revenues.

Some forms of “water privatization” only cover a single treatment plant. Underwhat is called a Build-Operate-Transfer (BOT) contract, international privatecompanies invest in a ring-fenced segment of the water sector. This form of water

6 1 Introduction

privatization, separate from the utility as a whole, is now an increasingly commonform of water privatization for newly built plants around the world. Like leaseand management contracts, BOTs can be profitable despite low water tariffs. Twoexamples of BOT contracts from Jordan are covered in this book.

The Extent of Water Privatization and Private Financing:Misleading Numbers

According to the Pinsent Masons Water Yearbook, a publication that tracks theparticipation of the private sector in water supply and sanitation globally, 909million people in 62 countries, or 13 % of the world population, are served by awater or sewer system where services are provided in one way or another by privatecompanies. This figure has more than doubled over the past 10 years. According tothe estimate, it now includes 309 million people in China, 61 million in the UnitedStates, 60 million in Brazil, the entire population of England (53 million), 46 millionin France, 23 million in Spain, 15 million in India and 14 million in Russia. Manyof the private water companies are predominantly active in their home markets,such as the Chinese, American, Brazilian and English water companies. By far,the two largest internationally active private water companies are French: VeoliaEnvironnement, serving 125 million people, and Suez Environnement, serving 124million people. However, the above numbers overstate the importance of privatewater companies. For example, many Chinese companies that provide water andsanitation services are state-owned enterprises that have only a minority of theirshares listed on the stock exchange. Often, they only manage a single plant in acity, and not the entire utility. Likewise, out of the 61 million people in the UnitedStates that are shown to be served by private companies, more than half are actuallyserved by publicly owned and managed utilities that have contracted out only onetype of service to a private company. And most of the 60 million people in Brazilincluded in the above figures are actually served by mixed public-private watercompanies that are listed on the stock exchange, but whose shares are majority-held by Brazilian states. The number of people around the globe who are billed by amajority privately-owned utility that provides all water and sewer services, thus, isprobably less than half the above-quoted figure of 909 million.

Investment Financing in Water Supply and Sanitation

Large investments are necessary in water supply, both to expand service and toreplace assets. Unfortunately, there are no reliable global figures on investmentsand financing in water supply and sanitation. This is why I made my own estimatesbased on national figures from the countries covered in this book, as well as China,

Investment Financing in Water Supply and Sanitation 7

India and Brazil, extrapolating these figures to other countries. According to thesevery rough estimates, more than 300 billion dollars of investment is needed everyyear globally for water supply and sanitation, while actual investments are less than200 billion dollars.

Developed Countries: Investment Financing Through Revenuesand Debt

About 200 billion dollars are needed in developed countries, as opposed to 150billion of actual investments. Self-financing directly from tariff revenues is amajor source of financing. Some cities make self-financing more difficult throughthe requirement imposed by public owners on utilities to pay out profits to thegovernment. Most public owners, however, do not require dividend payments onthe capital they invested in their utilities. Next to self-financing, bonds and loansare major vehicles for investment financing in developed countries. For example,Scottish Water borrows from the state; Welsh Water issues corporate bonds in thecapital market; and German utilities rely mainly on bank loans. In the United States,many utilities finance their investments through bonds issued by State RevolvingFunds, a mechanism that blends funding from federal grants with funding frombonds issued in the capital market. While there are still some investment grants forwater supply and sanitation in some developed countries, their share today is low.Equity capital from private investors also plays only a limited role in most developedcountries.

Developing and Emerging Countries: Investment FinancingThrough Grants and Debt

Out of the global investment need for water and sanitation, at least 100 billion dollarsare needed in the developing world, while only about 50 billion dollars are estimatedactually to be invested there. Of the 50 billion dollars that are invested today indeveloping countries in water supply and sanitation, almost 80 % are financeddomestically and only about 20 % internationally. Private sources finance only asmall fraction of these investments.

Domestic financing for water supply and sanitation in developing countriescomes mainly from three sources: Grants and loans, as well as some limitedself-financing by utilities. Equity capital and bonds only play a limited role. Self-financing is limited to a few developing countries with relatively high water tariffsand efficient utilities. Countries with loss-making utilities exclusively or predomi-nantly provide them with grants. In Egypt, the government provides subsidies forwater supply and sanitation to the tune of two billion dollars per year. This relatively

8 1 Introduction

high investment level corresponds to more than five times as much as water userspay, contributing to spiraling public debt. In India, 80 % of the relatively meagerinvestment financing for urban water supply and sanitation is provided by nationaland state governments in the form of grants, totaling about three billion dollars peryear. Such grants make sense when a new system is built. But they make muchless sense when existing assets need to be maintained. For this reason, and giventheir limited tax base and increasingly high debt levels, governments are unlikelyto increase or even maintain investment grants. Budgetary constraints are likely toforce many governments to use more loans, corporate bonds or equity from investorsto support utilities.

Some emerging economies have already moved away from grant financing toincreased self-financing by utilities and borrowing, mostly from domestic banks. Inthese countries, monthly water and sewer bills are in the range of 10 dollars, fivetimes higher than in India. In Brazil, utilities contribute substantial self-generatedfunds, as do state-owned Brazilian development banks. In China, most water supplyand sanitation investments, totaling about 11 billion dollars per year, are financedby utilities, municipal governments and domestic banks. Only the poorest regionsreceive funding from the national government, and this is in the form of soft loans,not grants.

Foreign Aid: An Overestimated Source of Financing

Only about 20 % of investments in water and sanitation in developing countriesare financed through some form of foreign aid, or as it is formally called, officialdevelopment assistance. Grants by non-governmental organizations (NGOs) thatraise funds through donations account for only a small share of foreign aid:WaterAid, the world’s largest NGO dedicated solely to water supply and sanitation,was able to raise 65.6 million pounds (105 million dollars) in the UK in 2012–2013.Water.org, the U.S. NGO supported by actor Matt Damon, raised only 12 milliondollars in 2013. All NGOs together probably raise a few hundred million dollars forwater supply and sanitation. They thus provide less than 1 % of the 50 billion ofinvestment for water supply and sanitation in developing countries.

Government agencies such as USAID or UKAID and their counterparts in otherrich countries provide larger grants to governments in developing countries. Thesetotal four billion dollars per year for water supply and sanitation. Some foreign aidagencies have shifted some of their support from grants to subsidized loans. Thisallows them to provide larger amounts of funding, because they raise all their fundsin the capital market and use grants to subsidize interest rates, or as collateral tosecure a good credit rating. Such loans from the World Bank, regional developmentbanks such as the Asian Development Bank, as well as aid agencies from Germany,Japan and France, totaled six billion dollars per year for water supply and sanitationin 2012.

Utility Turnarounds: How to Assess Their Success 9

Governments of developing countries have different policies for passing foreignloans on to public utilities: For example, Egypt passes them on as grants in orderto keep water tariffs low. Uganda used to pass them on as loans, but then convertedthem to grants, and subsequently passes the proceeds of new loans on as grants, alsoin order to keep tariffs low. Some countries, such as Jordan, pass them on as loans,but without increasing tariffs and making utilities more efficient, so that the loansmay have to be converted into grants in the future. None of them seems to have founda good way to deal with this question. Only a few countries, such as Cambodia,pass the government loans on as loans, while making utilities more efficient andperforming so that they are able to service the debt and maintain affordable tariffs.

Private Financing: Making Sense of the Figures

The extent of private financing for water supply and sanitation is sometimesoverestimated. According to the World Bank’s database for Private Participation inInfrastructure, annual new investment commitments by private companies in waterand sanitation in developing countries are in the order of three billion dollars peryear. This corresponds to only 6 % of total investment financing in water andsanitation in developing countries. But even this figure is exaggerated. Not allinvestment commitments actually materialize, as many concession contracts areterminated before their contractual end date. And of those that do materialize,little is financed through equity contributions by private companies. Most privateinvestments are financed by loans that come from international institutions such asthe IFC and other banks. And a good chunk of investments are financed directlyfrom ratepayers over the duration of the contract, as was the case, for example, withthe concessions in Buenos Aires and Manila. The actual private investment in watersupply and sanitation in developing countries may well be less than one half of thethree billion dollars per year of investment commitments, split between foreign anddomestic private investment.2

Utility Turnarounds: How to Assess Their Success

Turning around a water utility means that it is transformed from a utility thatperforms poorly to one that performs satisfactorily. Such a turnaround can beachieved in many different ways: through privatization, through remunicipalization,or by making a publicly managed utility work better. To assess whether a turnaroundwas successful or not I ask six questions:

2This figure does not include domestic private investment by small-scale providers and investmentsby households in wells.

10 1 Introduction

• Did access to tap water and sewerage increase or decrease, in particular for thepoor?

• Did service quality deteriorate or improve?• Did tariffs increase or decrease, and are they still affordable, defined as not

exceeding 3 % of household income?• Did the efficiency of service provision decrease or increase, as measured by water

losses, labor productivity and operating costs?• Did subsidies to utilities increase or decrease, and by how much?• Did corporate governance, the corporate culture of the utility and management

styles deteriorate or improve?

This definition is broad. Most analyses of water privatization focus on access,quality and tariffs. Some downplay or neglect changes in efficiency or fiscal impact.Few authors emphasize changes in corporate governance. Ideally, all six abovequestions should be asked to truly assess the impact of a utility turnaround.

There is not a single case where there were improvements on all six counts.A key dilemma with water supply and sanitation investments in most developingcountries is that they do have a high benefit to society, but a negative financial rateof return because of low tariffs. In order to resolve this dilemma in the absenceof significantly increased grant funding, utilities must become more efficient, andin many cases, they will have to charge higher tariffs. But how to assess a utilityturnaround if access increased, service quality improved and it had a positive impacton the state budget, but resulted in higher water tariffs? Is it a success or a failure?Or how to assess a utility whose real tariffs decreased because of inflation, makingwater cheaper for its customers, including the poor, while its service quality remainspoor and the impact on the state budget is increasingly negative? These answers willnecessarily be subjective, and they are for you to find.

How to Avoid Comparing Apples with Oranges

In every analysis, there is a risk of comparing apples with oranges. For example,a World Bank publication estimated that “water public-private partnership projectshave provided access to piped water for more than 24 million people in developingcountries” between 1990 and 2007. This gives quite a positive impression. Whatis missing here is context. Actually 1.23 billion people – 50 times more! – gainedaccess to piped water in developing countries during this period. Only 2 % of theincrease in access was achieved under private management, with some of it beingfinanced by public funds and tariff revenues. Ninety-eight percent of the increase inaccess was financed by states and public utilities. What the World Bank publicationomitted is what scientists call the “counterfactual”, the scenario that would haveunfolded without privatization.

In this book, changes that occurred in one setting are compared, wheneverpossible, to changes that occurred under similar circumstances, but without the

Chapter Overview 11

event whose impact is assessed, be it privatization, remunicipalization, or sectorreform. For example, the UK chapter compares the changes that occurred afterprivatization in England with changes that occurred during the same period inScotland where water utilities remained in public hands. The tariff increases inBerlin before and after privatization of the city’s water and sewer utility arecompared with tariff increases in the rest of Germany. The increase of access inthe Buenos Aires concession is compared to the increase of access during the sameperiod in Argentinian cities where utilities remained in public hands, and so on.

Chapter Overview

The 12 cases included in this book were chosen because of their notability, diversityin terms of different forms of water privatization, and geographical diversity. I do notclaim that these cases are statistically representative. But the findings are coherentwith the results of empirical studies of larger samples of water privatizations quotedin the book’s conclusions.

I start the book in Latin America with three chapters covering Bolivia, Cubaand Argentina. The first chapter tells a thrilling story that most people who take aninterest in water, money and politics have heard of: the “Water War” in the Boliviancity of Cochabamba in 2000. A foreign private water company, partially ownedby the U.S. multinational Bechtel, was chased out of the city amid bloody riots.It had been accused of having “leased the rain” with support from the IMF andthe World Bank. Anti-privatization campaigners use the Cochabamba concession asexhibit number one to illustrate the evils of neoliberalism when it comes to water.The chapter provides a detailed analysis that goes beyond the usual cliché of theCochabamba Water War as a victory against neoliberalism. Instead, it analyzes thelocal politics behind the Cochabamba privatization and how the struggling watercooperative serving the city fares today. The second chapter recounts how theSocialist government of Cuba, frustrated by the inability of its public water agencyto provide water continuously to the people, quietly entrusted the water supply ofHavana to a private Spanish company, Aguas de Barcelona. This case illustratesanother mode of privatization, the mixed public-private company. The third chaptertells the story of what was probably the most important water concession in thedeveloping world in the 1990s, the Buenos Aires water concession in Argentinaawarded in 1993. Supported by the IFC, it was meant to serve as a flagship deal tobe followed by many more around the world. However, the concession was flawedin several ways.

The journey then continues to the Middle East, showing how publicly ownedand managed utilities in Egypt fail their customers and are a drain on the statebudget, despite decades of reform attempts supported by foreign donors, includingthe World Bank. In nearby Jordan, the water supply for the capital Amman hadbeen entrusted on a temporary basis to the French water company Suez under amanagement contract, showing yet another face of privatization. The government

12 1 Introduction

let its contract expire and benefited from the expertise it had received from theprivate sector to build a better publicly managed water utility. The Jordan chapteralso serves to illustrate another face of water privatization: BOT contracts.

From there, the book moves on to Europe, where the water sector in the UnitedKingdom, France and Germany is presented. The United Kingdom is the settingfor an unintended real-life experiment on the merits of different ways to organizewater and sewer utilities: England and Wales privatized the entire sector throughthe complete sale of water companies in 1989, one more face of privatization. Inthe meantime, Scotland kept its utilities public, while Wales moved to a not-for-profit model in 2000. The chapter analyzes how the performance of water and sewerutilities evolved over the past quarter century in the various countries that make upthe United Kingdom. France is the country that invented the water concession inthe nineteenth century. It is also the home of the two largest international watercompanies, Veolia and Suez. The models of service provision in France haveevolved considerably over time. The France chapter compares private and publicservice provision within France, shows how regulation has forced more competitionand transparency on French water companies, and describes the recent trend towardsremunicipalization in France. Germany has a strong tradition of publicly ownedand managed municipal multi-utilities, the Stadtwerke, that provide different localpublic services together. The Germany chapter shows how energy liberalizationhas led to the partial sale of some of these utilities to energy companies andhow some German municipal utilities embarked on risky Cross-Border-Leases. Italso describes how the city-state of Berlin partially privatized its water and sewerutility in an attempt to plug holes in its budget, and how citizen protests ultimatelyled to the buy-back of the utility, albeit at a substantial cost to taxpayers. TheEuropean Commission has been an active player in water supply and sanitationin the European Union. Through stricter environmental and health standards, it hasimproved service quality, while it has historically not interfered in how water andsanitation services are provided. The chapter on civil society in Europe and theEuropean Commission describes how this changed in 2013, when the Commission’sConcession Directive stirred a lot of controversy, first and foremost in Germany,where it was seen as a Trojan horse for water privatization. It shows what theDirective had in mind, and how a European Citizens’ Initiative and the Germanmedia defeated it in an effective, albeit somewhat misleading campaign.

I then move on to the United States, with its thousands of municipally ownedwater and sewer utilities. But there are also privately owned, run and financedutilities in the U.S., particularly in small towns, with a century-old tradition. Anattempt by foreign companies to bring private sector management to more andparticularly to larger U.S. cities failed around the turn of the twenty-first century.However, as the chapter shows, the private sector reinvented itself and is nowhelping municipalities such as New York City to become more efficient underperformance-based technical assistance contracts, showing that within the U.S.,there are many different forms of “water privatization”.

The journey ends with three examples illustrating how dysfunctional utilities inUganda, the Philippines and Cambodia were turned around, with or without the

Chapter Overview 13

help of the private sector. The Uganda chapter describes how the corporate cultureat the National Water and Sewer Company (NWSC), under pressure to be privatized,changed, giving more responsibility to its employees, and focusing more on itscustomers while expanding access, posting a profit and keeping it public. In Manila,the capital of The Philippines, two concessions for water supply and sewerage werebid out – one for each half of the city. The concessions in Manila are thriving underthe leadership of Filipino companies. The Philippines chapter describes how thetwo private companies expanded access and improved efficiency and service qualitywhile keeping tariffs affordable. Last but not least, the Phnom Penh Water SupplyAuthority (PPWSA) in Cambodia managed to turn itself around without bringing inthe private sector. It shows that a publicly owned and managed utility can changeits corporate culture, become more customer-focused and be very efficient. PPWSAshows that water can remain affordable in one of the poorest countries on earth whilefinancing investments through interest-bearing loans and posting a profit. However,in an unusual turn of events, the well-functioning public company has been partiallyprivatized through the stock exchange.

In the conclusion, the multiple forms of water “privatization” are reviewed. Theirdifferences and similarities, as well as their strengths and weaknesses, are analyzedcompared to the experience with purely publicly managed water utilities. This givesrise to a nuanced picture, different from the common black-and-white rhetoric aboutwater privatization. I hope that you will benefit from this analysis and will share itsconclusions.

Part ILatin America: Two Aborted

Privatizations and One That Endured

Chapter 2Bolivia: The Cochabamba Water Warand Its Aftermath

In the film “Quantum of Solace”, James Bond fights the villain Dominic Greene,who tries to get his hands on the water resources of Bolivia. The villain belongs toa shadowy criminal group called Quantum that supports a coup d’état by an exiledBolivian general. In exchange for its support, Quantum wants a seemingly barrenpiece of desert. As James Bond discovers, that piece of desert actually contains theaquifers that feed the country’s water supply. The true aim of Quantum is to makea ton of money from a monopoly on the vital liquid once their stooge is in power.Fortunately, James Bond foils the evil plot and leaves the villain Greene stranded inthe desert with only a can of engine oil.

The movie was inspired by a real incident: the “water war” in Cochabamba, thesecond largest city in Bolivia. For many, this water war was a fight of David againstGoliath, not too different from James Bond’s fight against the villains of Quantum.For them, the “water war” was a story of a grassroots movement that kicked a greedymultinational company out of an impoverished country. Along the same storyline,the Cochabamba water war is, to many, a symbol of neocolonial interference by theWorld Bank and the foolishness of water privatization.

The true story, however, is not quite that simple.

Before the Privatization

Cochabamba is a city of about one million people nestled in a valley of the Andesat more than 2,500 m above sea level. Historically, the city’s water supply dependedon small rivers captured in reservoirs close to the city. However, these water sourcessoon became insufficient for the growing city. Substantial investments had beenmade in Bolivia’s drinking water supply during the 1970s and 1980s with thesupport of the Inter-American Development Bank and the World Bank. They workedwith a cooperatively owned water company in Santa Cruz, a city in the Bolivianlowlands, as well as with public utilities in the capital La Paz and in Cochabamba.

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_2

17

18 2 Bolivia: The Cochabamba Water War and Its Aftermath

In Santa Cruz, service had improved parallel to these investments. The World Bank –often accused of blindly pushing privatization on any water company within itssights – never suggested bringing in the private sector there.

Cochabamba was different. Service did not improve despite major investmentsfunded by international donors: Water losses remained high, water was suppliedonly 4 h per day and water quality remained poor. This was a great source offrustration, including for the employees of the international development banks whosaw that the investments they financed were not well taken care of. Only about 60 %of the population was connected to the network. Everyone else had to rely on moreexpensive alternative water sources. This included water tankers that supplied waterat five to ten times the tariffs charged by the local utility, SEMAPA, and wells thatthose who could afford it drilled alongside those of the city and farmers. The cityalso drilled deep wells next to ones used by farmers to irrigate their fields. The watercrisis in Cochabamba, as it was called in Bolivia, was a double crisis: a crisis of lackof water resources, and a crisis of poor management of the local water utility.

Resolving the Cochabamba water crisis had long been on the agenda of thenational and local government. To solve the lack of water resources, various Boli-vian governments since the 1960s had promoted the construction of the MisicuniDam. Jim Shultz, a Cochabamba-based U.S. journalist who heads The DemocracyCenter, a research and advocacy organization, called the 300 million dollar project“shrouded in rumors of behind-closed-doors sweetheart deals”. A first phase ofthe project, a 20 km tunnel through a mountain range, had been started, but wasabandoned half-finished amid contractual disputes. The idea was ultimately to builda large dam, in fact, the largest in Bolivia. The dam was to produce hydropowerand store water from the rainy season in order to irrigate fields and provide ampledrinking water for the growing city. It was expected that the Misicuni Dam would,thus, resolve the lingering conflicts between farmers and the city.

But the second part of the water crisis, the poor management of the utility, alsohad to be tackled. The government was well aware that its performance laggedbehind the performance of other Bolivian utilities. As a first step to improve theutility’s performance, SEMAPA was to be transformed from a municipal departmentinto a public company. The World Bank went further and had included conditionsin its loans asking for the privatization of those Bolivian water utilities that didnot perform well. These included the utilities in La Paz and Cochabamba. Thegovernment at the time was in favor of privatization: It had privatized its railways,telephone system, national airlines, and hydrocarbon industry. The water supply forLa Paz had been entrusted to Suez under a concession in 1997 with encouraginginitial results.

Ambitious Targets, High Returns and High Risks

The Cochabamba concession was much smaller than the big concessions in BuenosAires and Southeast Asia awarded a few years earlier: Investment requirements

Before the Privatization 19

included only 85 million dollars over the first 5 years and an additional 129 millionover the remaining duration of the concession. But the performance targets wereambitious: 24-h water service, an objective that had remained elusive for decades,was to be achieved by the second year of the concession. Access was to be increasedto 90 % for water and 88 % for sewerage in only 4 years. The company would alsohave to serve the existing debt of the utility. On top of that, it was expected to paya concession fee to the municipality. To make the concession attractive, the contractguaranteed a 15 % annual return on investment. The low water tariffs were to beincreased to cover the profit, but also the cost of expanding the network and to paythe debt and fees to the municipality. In addition, tariffs were indexed to inflation.Financing was to come from the private companies’ equity, but also through localcurrency loans from Bolivian pension funds.

It would have been difficult to achieve these ambitious targets even in the bestof times. But in the climate prevailing at the time in Bolivia, it was challenging inthe extreme. Making a profit on top of fulfilling the contractual targets would havebeen close to a miracle. The concessions in Buenos Aires and Manila (see Chaps.4 and 13) were based on water tariff reductions at the start of the contract. TheCochabamba concession was based on an initial tariff increase. Anyone familiarwith the sensitivity of water pricing in developing countries should have known thatthe planned tariff increases were politically risky and therefore far from certain tohappen smoothly.

A First Failed Attempt: The World Bank and the GovernmentDisagree

Initially, in unison with the World Bank, the Bolivian government had wanted toprivatize the water supply of Cochabamba much earlier when the concession for LaPaz had been bid out in 1996. But the World Bank disagreed with many Bolivianpoliticians on a crucial point: It was against the Misicuni Dam. It said the project wastoo expensive and would take too long to build. Instead, the World Bank suggestedbringing water in from Lake Corani, arguing that this option would be faster andless expensive. A first version of the concession contract included a project for bulkwater supply from Lake Corani, just as the World Bank wanted it. But the mayorof Cochabamba, Manfred Reyes Villa, an influential member of the ruling coalitiongovernment, and others tried to prevent the concession from going forward, amidclaims that local and international construction interests connected with Misicuniwere involved. Unable to challenge the World Bank directly, Reyes used a legalruse: He challenged the legality of transforming the municipal water department ofCochabamba into a state corporation. The Supreme Court ruled in favor of the mayorand cancelled the first bid in May 1997. The World Bank had been outsmarted by alocal politician.

In late 1997, Hugo Banzer, a general and former military dictator, was electedPresident of Bolivia. Banzer had previously promised the citizens of Cochabamba

20 2 Bolivia: The Cochabamba Water War and Its Aftermath

that the Misicuni project would be completed. Soon after his election, constructionof the tunnel and a small diversion dam was restarted with funding from Italy andthe Andean Development Corporation, a regional development bank.

The government then prepared another bid for the concession, this time includingthe not-yet-awarded elements of the Misicuni project – a large dam to store waterfrom the rainy season, and a canal to the city. At that time, the World Bank saidit had withdrawn its support for the privatization. To what extent this was actuallythe case remains disputed. It did not announce its decision to the public. In a reportpublished in June 1999, it argued that “no subsidies should be given to amelioratethe increase in water tariffs in Cochabamba.” The World Bank thus opened itself upto charges that it had pushed for the privatization in the shape it took over the next2 years.

The Second Attempt: Enter Bechtel

The concession still did not look very attractive. In Buenos Aires and Manila, theIFC had supported the concessions. In Cochabamba, bidders knew that the WorldBank had withdrawn its support, so the project looked suspicious. The inclusion ofMisicuni made it necessary to increase tariffs much more than would already havebeen the case without the project. There was an attempt to increase water tariffsbefore the concession was awarded to soften the blow. But the tariff increase hadto be approved by the national regulatory agency and got delayed. The politicalsituation in the country amid a campaign to eradicate Coca planting was tense. Still,the government and its adviser, Banque Paribas, moved ahead with the tender.

Not a single bid was submitted for the concession. The usual bidders for largewater concessions, including Suez, which held the water concession for La Paz,shied away from the project. Apparently, they had decided that for them the“guaranteed” rate of return of 15 % was not worth much if they risked losing alltheir money at the beginning of the concession. The mixture of political tensionsand a flawed concession design was toxic.

The Cochabamba privatization could have ended here, before it had actuallystarted. But things turned out differently. Shortly after the deadline to submit bidshad expired, one unsolicited bid was submitted. It came from a newly formedconsortium called Aguas del Tunari. At the time, the public did not know who wasbehind the consortium. Jim Shultz in Cochabamba found out that it was led byInternational Water Limited, itself controlled by the US construction giant Bechtel.International Water Limited was the company that had won the concession for EastManila 3 years earlier.

But the full structure of the consortium was more complicated. The London-based company had a partnership with United Utilities International, a subsidiaryof the private water and power company United Utilities serving NorthwestEngland. Since Bechtel had no experience in running water systems, United Utilities

The Privatization 21

International did the work on the ground for it. Now, in preparation for winningmore water concessions worldwide, Bechtel set up a new outfit called InternationalWater Holding, registered in the Netherlands where it only had a letter box. TheHolding Company held all the shares in International Water Limited. This was donefor tax reasons and because the Netherlands had a bilateral investment treaty withBolivia – a fact that would become crucially important later on. To make mattersmore complicated, in November 1999, Edison, an Italian construction companyspecializing in the power sector, acquired a 50 % share in International WaterHolding right at the time the Cochabamba concession became effective. Aguasdel Tunari also included the Spanish energy company Abengoa and four Bolivianfirms – a cement manufacturer, an engineering company and two construction firms.One of these firms, ICE Agua y Energia S.A., was involved in the constructionof Misicuni. Aguas del Tunari was thus owned by seven power and constructioncompanies, three from abroad and four from Bolivia, none of which had experiencein the water sector. The water operations expertise was provided by UK-basedUnited Utilities.

The bid of Aguas del Tunari did not meet the conditions spelled out in thebidding documents. In particular, Aguas del Tunari said it suggested deferring theconstruction of Misicuni to focus on fixing leaks in the city instead. It also askedfor the legacy debt to remain with the municipality and for cancellation of themunicipality’s concession fees. These measures reduced costs and would thus haverequired a lower tariff increase. But changing the conditions at this stage would haveput the other bidders at a disadvantage. It was clearly unacceptable from a publicprocurement point of view. According to Bechtel, Aguas del Tunari was unable toget its way. The government stuck to its conditions, and the concession was awardedthe expensive way.

The Privatization

In September 1999, the national government signed the unusually long 40-yearconcession contract, and in November, Aguas del Tunari took over responsibilityfor the water supply in the city.

Increased Tariffs, Disputed Figures

A year earlier, SEMAPA had requested a tariff increase. The government took a yearto approve it so that the increase did not take effect until January 2000, 2 monthsafter the private company had taken over. Thus, the full brunt of the anger over tariffincreases was directed at the private company.

22 2 Bolivia: The Cochabamba Water War and Its Aftermath

The amount by which the tariffs were increased is a matter of debate. Aguasdel Tunari said average tariffs increased by 35 %, while the Cochabamba-basedDemocracy Center calculated that the average was 51 %. Given the utility’scomplicated tariff structure, with four different residential tariff categories, anindustrial and a commercial tariff, and several consumption blocks within eachcategory, calculating the exact increase is not easy. The increase was designed insuch a way that the poorest should not be affected. Claudia Vargas, a lawyer atthe Bolivian water regulator, and the researcher Andrew Nickson argued that thenew tariff was actually pro-poor, because the burden of increased tariffs fell on thewealthiest residential users as well as commercial and industrial users. Accordingto them, the water bill for a consumption of 12 m3 per month for the pooresthouseholds was 3 dollars per month compared to 8.64 dollars for those living inluxury apartments. They argue that the water tariffs in Cochabamba were only raisedto the level that already existed in La Paz and Santa Cruz.

But these complexities were not part of how the people of Cochabamba perceivedthe situation. Their perception was instead shaped by another event; an event thatsome say was unrelated to the privatizations, while in the eyes of others, it wasclosely connected.

Leasing the Rain?

On October 29, the Bolivian Parliament passed a new law – Law 2029, the WaterServices Law. The controversial law gave exclusive water supply rights to privatewater concession holders, including the power to take over community-based watersystems that local communities had built with their own funds. Moreover, peopleexpected that the private company would also charge for irrigation water, which hadbeen free.

The new law was, it seemed, designed to make the privatization deal sweeter forthe consortium. In Cochabamba, the law created the impression that the companywould own the water resources and charge for their use – or, as the New Yorkermagazine famously wrote, quoting a local peasant, that the company had “leasedthe rain”. It also angered tanker operators, who felt their business was threatened, aswell as farmers who feared losing control over their water resources and wealthierresidents who would have to pay more for water. In fact, protests first started, inNovember 1999, in the rural areas where farmers feared their water rights would bejeopardized.

If the water service law was designed to facilitate the concession, it achieved theexact opposite: It poisoned it. The law created uncertainty and fear – which wasstoked further by the privatization. It did not help that the deal was shrouded inmuch secrecy. Bechtel later said that it had pushed for an information campaign tobe carried out by the municipality, but no such campaign was conducted. Thus, anopportunity was missed to explain to the citizens what was part of the concession

The Privatization 23

and what was not. But the lack of such a campaign also allowed the mayor to hedgehis bets by not clearly and openly associating himself with the privatization.

All the residents of Cochabamba knew was that a foreign private company hadincreased tariffs for a basic necessity. They were made to believe this was doneto make large profits, not to cover the cost of bringing more water from Misicuni.Although this was not supported by facts, water bills were described as leaping from12 dollars per month to 30. Ironically, for some users, the bill increased because, inthe first 2 months of operations, Aguas del Tunari’s water supply increased, a factthat got completely lost in the fray.

What counts in the short-term in politics is not reality, but perception. When thetariff increase came into effect on the first day of the new millennium, a perfectstorm was about to be unleashed.

The “Water War”

In January, protests against the water services law spread from the rural areas tothe city, igniting a cycle of more vigorous protest and repression. The foreignengineers who had arrived just 3 months earlier in Cochabamba were unfamiliarwith Bolivia, and politically clueless. According to the New Yorker, GeoffreyThorpe, the company’s manager, “simply said that if people didn’t pay their waterbills their water would be turned off.” Anger mounted, and Oscar Olivera, thePresident of the Cochabamba Federation of Factory Workers, and Omar Fernandez,leader of the group of farmers, forged an alliance, the Coalition for the Defenseof Water and Life, or Coordinadora. Its aim was to repeal Law 2029 and to throwAguas del Tunari out of the city.

The workers and farmers were joined by students and street children in theirstreet protests. Subsequently, the government backed down and canceled the tariffincrease in February. Aguas del Tunari even provided refunds. But it was a caseof too little, too late. The demands of the protesters had not been met. Protestscontinued, and protest leaders were arrested. Oscar Olivera was released again andwent into hiding, while his house was searched four times. Mayor Reyes Villa,sensing the tide turning, was quick to distance himself from Aguas del Tunari.Protests spread to other cities and, in early April, the government declared martiallaw. When the police fired into the crowds and a protester was killed, the foreignstaff of Aguas del Tunari were told to flee the city.

In the meantime, newsletters sent out by the U.S. journalist Jim Shultz had spreadthe word of the revolt against a private water company around the world. Thiscontributed to mounting pressure through thousands of emails sent to Bechtel. Then,on April 10, the government signed an agreement with Oscar Olivera, promising tocancel the concession, to hand over the utility to the Coordinadora, to repeal thecontroversial Law 2029 and to release imprisoned protesters. To get a quorum torepeal Law 2029, the government even rented planes to fly legislators back to the

24 2 Bolivia: The Cochabamba Water War and Its Aftermath

capital. The government canceled the concession, the Coordinadora took control ofthe utility SEMAPA and the water was “in the hands of the people”.

After the Privatization

The “Heroes” of the “Water War”

In mid-April 2000, the World Bank and the IMF held their Annual Meetings inWashington, D.C. Protesters gathered in the city and invited Oscar Olivera tocome to speak to them. Come he did, addressing the crowd together with thefamous civil rights activist Ralph Nader. Maude Barlow, the Canadian activistagainst water privatization, announced to the crowd: “Our hero from Bolivia hasarrived!” followed by standing ovations. Cochabamba had become a “poster child”of the global struggle against capitalism, iconized in innumerable articles and films,including the PBS documentary “Leasing the Rain”.

The leaders of the revolt, Oscar Olivera and Omar Fernandez, became heroes inthe eyes of many. In the following months and years, they were sought-after speakersat venues discussing how to resist neo-liberalism and resource privatization. EvoMorales, who is said to have thrown stones at policemen during the protests, rose toprominence due to the events and eventually became President of Bolivia in 2005.

Unlike in the Bond movie, the villains in the real-life Cochabamba privatizationare not that easy to pinpoint. Only one thing is sure: If there was a real-life equivalentto Dominic Greene, the villain of “Quantum of Solace”, he would have beendisappointed to find out how little profit and how much trouble was to be had ina private water monopoly.

International Arbitration: Bechtel Claims Compensation, ThenWithdraws

In December 2001 the international shareholders of Aguas del Tunari, led byBechtel, claimed 25 million dollars of compensation from the government of Boliviafor the expropriation of their assets. The claim for arbitration was submitted to theInternational Center for the Settlement of Investment Disputes (ICSID), which ispart of the World Bank Group, on the basis of a bilateral investment treaty betweenBolivia and the Netherlands that protects Dutch investors in Bolivia. Now it becameclear that International Waters Holding, the Holding Company set up to invest inCochabamba that did not have a single Dutch shareholder, had been located inthe Netherlands in order to be able to sue the Bolivian government in case theprivatization ran into trouble. Critics of the privatization were incensed: How couldan international company whose turnover was larger than the entire economy of

After the Privatization 25

Table 2.1 Water tariff, water use and affordability in Cochabamba

Middle class Poor

Residential water tariff USD/m3 1.07 0.66Water use liter/capita/day 100 70Household size Persons 5 6Typical residential water bill USD/month 16.05 8.32Median net household income (estimate) USD/month 364 200Affordability % of income 4.4 % 4.2 %

Source: Author’s calculation based on data from SEMAPA and other sources

Bolivia ask an impoverished country to pay compensation? The case was politicallysensitive. ICSID agreed to take on the case, but did not take a decision over severalyears. Finally, in December 2005 Bechtel and the other international shareholdersdropped all their claims in exchange for a brief joint statement with the Boliviangovernment that exonerated Aguas del Tunari from any responsibility for the eventsduring the Water War.

Cochabamba Revisited: A Sad End

What happened to the water supply of Cochabamba after the private company waskicked out? The tunnel and canal from the Misicuni River were finally completedin 2005 and provided additional water. The construction of the dam was startedyears later with Italian funding – but the dam remained incomplete at the timeof writing. The amount of water available to the city remains insufficient, despitefunding provided by the Inter-American Development Bank from 2002 onwards.

The water supply remains intermittent, and half the people of Cochabambaremain without tap water, despite the canal from Misicuni. In 2006, tariffs had tobe increased substantially to cover the operating costs of the utility – this time therewas no protest in the streets. Average residential tariffs under public managementare now more than twice as high as under private management at the height of theCochabamba water war. Because of the need to pump water from far away, tariffsare higher than in La Paz, where water is supplied by gravity. Without taking intoaccount sewer tariffs, water bills are very high at more than 4 % of median income,exceeding the commonly used threshold of 3 %. As shown in Table 2.1, this is truefor both the middle class and the poor, although those living in poor neighborhoodsare charged lower water tariffs.

The new participatory model of SEMAPA did not achieve much. Only 5 % ofthe population participated in the election of the community representatives on theBoard of the utility. Moreover, because of irregularities in the voting, one electionhad to be suspended and the seat of the elected representative remained vacant.Perhaps more seriously, the number of employees at the utility sharply increased

26 2 Bolivia: The Cochabamba Water War and Its Aftermath

Table 2.2 Performance indicators for SEMAPA, Cochabamba

Access to piped water 45 %Employees/1,000 households served 4.5Non-revenue water (%) 50 %Water employees (estimated, excluding sanitation employees) 315Total water connections 67.490Households served 70.000Continuity of supply (hours/day) 15Collection efficiency 98 %

from 270 to 700, far in excess of the staff needed to run the company. Employmentagain became a source of patronage, including for veterans of the “Water War”.Performance remains poor, as shown in Table 2.2.

Conclusion

Looking back at what was achieved, protest leaders are sober. Oscar Oliveraadmitted, “We were not ready to build new alternatives.” A Cochabamba residentand activist during the unrest was even blunter: “Afterwards, what had we gained?We were still hungry and poor.” Jim Shultz, revisiting the subject on the occasionof its 10-year anniversary, wrote: “A decade after people shed blood in the streetsto retake their water, the company that manages it remains riddled with corruption,mismanagement, and inefficiency – a source of graft for the city’s mayor and theunion that represents the company’s workers.”

Chapter 3Cuba: Water Privatization in a Socialist Country

On January 17, 2000, just as the protests against privatization in Cochabamba werebeginning to flare up, seemingly a world apart and gently tucked away from mediaattention, the Socialist government of Cuba under Fidel Castro made a 25-yearcommitment to entrust the operation of the drinking water supply of its capitalHavana to a private water company. On April 1st, just days before the foreignemployees of the private water company in Cochabamba had to flee in the midstof riots, the private Spanish company Aguas de Barcelona, a subsidiary of theFrench water giant Suez, began operating the water supply of Havana. How didthis situation come about?

When the Soviet Union collapsed, the Cuban economy went through a deepcrisis known locally as the “Special Period”. Deprived of subsidized oil and gassupplies, as well as of a guaranteed market for its sugar exports, the economy tanked.Agricultural and industrial production dropped, public transport was severelyrestricted, there were widespread power outages, and food rationing was intensified.

Poor Service

During this time, the quality of the drinking water deteriorated. While 73 %of Cubans had access to piped water at their premises, due to power outages,poor maintenance and leakage in the network, the supply became increasinglyintermittent. Some municipalities in the Havana metropolitan area did not receiveany water for days, never knowing when it would be turned on again. When it came,some houses just received a few drops. Due to shortages of chlorine, water supplieswere not systematically disinfected. The residents were supposed to be suppliedby public tanker trucks, but their movements were hampered by the fuel shortages.When the trucks arrived, long lines formed. At the height of the crisis, 90,000 peoplein Havana depended on tanker trucks for their water supply.

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28 3 Cuba: Water Privatization in a Socialist Country

Enter the Tourists

To generate foreign exchange earnings, the government opened the country upto tourism during the 1990s. Tourism was initially restricted to enclave resorts,built with the help of private foreign investors. One of these investors was theSpanish firm Martinon, based in the Canary Islands, which helped to develop theresort Varadero. To build and operate the water supply system for the tourist resort,Martinon had teamed up with the private water company Canaragua, the Aguas deBarcelona subsidiary that ran the water supply on the Canary Islands.

Havana Goes Private

Impressed by the ability of the private sector to deliver, in 1997, the Cubangovernment quietly asked the two companies to help in modernizing the watersupply for the three worst-affected municipalities in the Havana metropolitan area.Just as at the Varadero resort, the private companies were not only asked to investin infrastructure, but also to operate it. The private companies were not paid by thewater users, but by the government, which saved precious foreign exchange becauseit was able to reduce the fuel costs needed for the fleet of tanker trucks once the pipedwater system worked properly.

Satisfied with the performance of the private company, the communist govern-ment went one step further. In February 1999, a Cuban delegation was invited toBarcelona where it signed a framework agreement that foresaw the creation of themixed company Aguas de la Habana, jointly owned by the Cuban state throughits National Institute for Water Resources along with Aguas de Barcelona and theMartinon Group. The company was formed on January 17, 2000, and on April 1, thenew mixed company began to operate. At the same time, the new company signeda 25-year contract, which was kept secret, to operate the water and sewer systemfor 8 of the 15 municipalities in Greater Havana, with the option to expand thegeographical scope of the contract at a later date.

Loans and Quasi-free Water

Some of the investments made by Aguas de la Habana were financed by softloans from the Spanish International Cooperation Agency, which increased itsengagement in Cuba as part of EU efforts to gradually open up the political andeconomic system of the country. The Spanish loan financed the first ever majorrehabilitation of the Albear aqueduct, built in the nineteenth century to supplyHavana.

Conclusion 29

Residential water supply in Cuba was free until 1997. At that time, the govern-ment introduced a residential water tariff of 4 Cuban pesos per month, equivalent to0.17 cents in US currency, one of the lowest water tariffs in the world, equivalent to3.4 cents per month for a consumption of 20 m3. Hotels and foreign embassiesare charged much higher tariffs, but for the majority of Aguas de la Habana’scustomers, water is quasi-free. Water privatization and quasi-free water only fittogether because the government pays for the costs of the water supply, includingthe fees of the private company. Socialism and private water thus go well togetherin Cuba.

Conclusion

As of 2004, Aguas de Barcelona had reported significant progress. 95 % of thecity’s residents that had to be supplied by tanker trucks before the private contractnow received tap water, according to the company. The continuity of supply hadincreased from 7 to 10 h per day. However, water distribution losses are stillestimated at 50 %, and more than 100,000 residents of Havana still suffer froman intermittent supply, a challenge beyond the reach of improved operations, andsomething that can only be solved by significant investment of capital.

Chapter 4Argentina: A Flagship Privatizationand Its Demise

With 12 million inhabitants on the shores of the Rio de la Plata, a huge and cheapsource of freshwater, the bustling metropolis of Buenos Aires was a great prizeto win for the world’s water companies. Argentina had just come out of a darkperiod, one of instability followed by a military dictatorship that had cost the livesof thousands of people and that ended after the disastrous war over the FalklandIslands, called the Malvinas by the Argentines. The country returned to democraticrule, but the economy did not recover. The new President, Raul Alfonsín, from theRadical Party, took over in 1983, after democratic elections. The new governmentinherited a high foreign debt, and inflation spiraled out of control, amid labordisputes and frequent strikes. At the height of the crisis, close to the end of the6-year presidential period, almost half the population lived in poverty. During theelections, the opposition candidate from the Peronist party, Carlos Menem, stylizedhimself as an advocate of the poor in the tradition of the party’s founders, formerPresident Juan Perón and his wife Eva. The two, later subjects of the hit Broadwaymusical and subsequent film adaptation, “Evita”, the latter starring Madonna as EvaPerón, had ruled Argentina in the 1950s and are revered as icons by their followers.Building on the enduring myth of the Peróns, Carlos Menem promised to stabilizethe economy and to fight poverty. When the government lost the 1989 elections, thesituation was so bad that the incumbent President Raúl Alfonsín asked to hand overpower to the new President Menem 6 months earlier than foreseen.

Once elected, Menem completely changed course and adopted neo-liberal poli-cies. To his credit, his administration succeeded in reducing inflation and recoveringthe economy. With the support of his coalition partner, the liberal-conservativeparty UCD under Álvaro Alsogaray, Menem – to the horror of the left wing of thePeronist party – privatized state-owned companies across the board, starting withtelecommunications, electricity and gas.

At the same time, the French and British water companies set out on a course ofglobal expansion. The timing was good for them: After the fall of the Berlin wall,privatization was en vogue. The French and British companies had few competitors,

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_4

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32 4 Argentina: A Flagship Privatization and Its Demise

because, in the other major industrial countries, the water sector remained largely inpublic hands, often under the responsibility of local governments.

The two largest privatized English water companies, Thames Water, the utilitythat supplies Greater London, and North West Water, the utility that supplies theManchester and Liverpool areas, were particularly eager to expand internationally.And the French water companies, having won the Buenos Aires concession, thelargest water concession in the world, hoped that this reference would be a steppingstone for winning more water concessions around the globe.

Before the Concession

But was Buenos Aires a city that was thirsting for privatization? The public companyin charge of water supply and sanitation in the metropolitan area, Obras Sanitarias dela Nación (OSN), was not a model of efficiency and customer attention. It providedan intermittent but accepted water supply to the city itself. But, starved of loans,inefficient and obliged by the government to charge low tariffs, it had failed toconnect most people in the suburbs. In particular, the poorest were left out. Theylived in what was euphemistically called “Villas”, slums built on occupied land thatlacked basic services. Sewerage was discharged without any treatment, making theRiachuelo and Matanza Rivers that cross the city among the most polluted riverson the continent and a major source for disease for the people living next to them.Sewage from latrines and septic tanks contaminated groundwater that was used as asource of drinking water.

Besides the disastrous sanitary conditions in the Villas, there were also watershortages in parts of the city during the summer, as well as frequent breaks andinterruptions. Water pressure was low, in some parts of the city water qualitywas poor, and sewers overflowed during rainstorms. Water losses in the old andcrumbling network stood at an estimated 45 %. Moreover, the utility collectedonly about 80 % of the money it billed. The company had about twice as manyemployees as it needed to carry out its functions. “Salaries were low, turnover ofskilled personnel high, and the entire workforce suffered from low productivity andlack of discipline”, according to a study that described OSN before privatization.

Since water availability was not a problem, the great majority of residential waterconnections were not metered. There was no incentive to save water. Per capitawater use for those fortunate enough to have a tap was 350 l per day – about thesame as in the United States.

The company needed two things: more capital for investments to improve theexisting assets and to expand the services to provide services to the entire populationand to treat sewage collected; and a change in corporate culture towards moreefficiency and customer orientation. The Menem administration expected to deliverboth by privatizing the company.

Before the Concession 33

Preparing the Political Ground

The government wanted to complete the privatization of utilities while publicopinion was favorable. In 1989, opinion polls had still shown that a clear majorityof Buenos Aires residents rejected water privatization. But the public opinion hadchanged over a period of only 2 years. Menem had succeeded in stabilizing theeconomy, and the sale of state-owned companies had been part of that concept.His administration’s economic policies seemed to be working. Furthermore, thegovernment had promised to expand water and sewer access to the suburban areas,as well as to reduce tariffs for those already connected. The privatization plans thusappealed to both the connected and the unconnected voters in Buenos Aires. In1991, opinion polls showed that more people were in favor of privatization thanagainst it. Then, in February 1992, an epidemic of cholera started in Argentina,which appeared initially in the northern provinces of Salta and Jujuy, becoming anadditional justification for water supply reform.

The administration was politically careful in how it designed the concession.It involved a broad selection of stakeholders, including a bicameral Congressionalcommittee that had supervised all privatizations, and an 11-member committeein charge of the privatization of OSN. The committee included representativesof various Ministries, the Municipality of Buenos Aires, and the Province ofBuenos Aires, where most residents still were not connected to the water andsewerage system. The privatization committee also included a representative ofOSN employees.

The government opted not to completely sell the company, as it had done withthe telecommunications and electricity sectors. In those sectors, the growth potentialand cost recovery rate was high, so that privatization generated revenues for thestate. The water sector was different, with lower growth potential and limited costrecovery. The government thus ruled against a complete Thatcher-style sale ofassets. Instead, it opted for a concession “à la française” which would bring inprivate capital without selling assets. All bidders had to commit to fulfilling theobligations set out in the concession contract, including specific targets to expandaccess and treat sewage collected. This implied a huge amount of investments inthe early years of the concession that where supposed to be recovered during lateryears. It was assumed that private companies would be more efficient than the publiccompany, and that these efficiency gains would be so large that they would morethan compensate for the private companies’ higher cost of borrowing compared tothe government. There was thus a strong expectation that tariffs after privatizationwould be lower than before. The bidding process provided incentives to make thishappen. The concession contract was to be awarded based on a single criterion: thewater tariff promised by the bidder, so that the company that provided the lowestwater tariff would win.

34 4 Argentina: A Flagship Privatization and Its Demise

Dressing Up the Bride

The government knew that the success of the privatization would be judged bythe size of the tariff reduction that the private company was able to offer, and thegovernment very much wanted the transaction to be a success. Thus it dressed thebride to make it more attractive for bidders, so that the water tariff reduction wouldbecome as sizeable as possible.

First, the government had quietly increased water tariffs in the years beforethe concession. In 1991 and 1992, tariffs were increased four times, to the pointthat they had been doubled outright. But inflation at the time was almost ashigh as the tariff increase, so it was not much noticed amid the general priceincrease. The government also approved a hefty infrastructure fee for all newlyconnected customers. This was supposed to provide a financial incentive for theprivate company to connect new customers, but it also obscured the true cost of theconcession: While the government publicly argued that water tariffs would go down,it knew that for new customers – who would number millions, if the concessionworked – the water bill would increase substantially.

Second, in a movement that was not related directly to the water privatization,the government pegged the Argentine Peso to the US dollar at a 1:1 exchangerate in April 1991. A Currency Board was to give credibility to the arrangement.This policy ended the period of hyperinflation in Argentina, gradually bringing theinflation rate down over a period of 2 years. This provided foreign companies andlenders the comfort to invest with hard currency in Argentine companies whoserevenues were in Pesos.

Third, the government had agreed not to transfer the old OSN debt to the newprivate company. This, of course, reduced the payment obligations of the privatecompany and allowed it to submit a lower bid than would have been possible had itbeen obliged to service the old debt.

And fourth, the government had substantially reduced OSN’s work force. 1,618employees participated in a voluntary retirement program that cost the governmentabout 33 million dollars, or about 20,000 dollars per worker. The administration hadovercome opposition by involving the unions in the transaction. After the endlessstrikes of the 1980s, the unions’ credibility was extremely low. A 1990 opinion pollshowed that only 8 % of the population approved of the policies of the unions. Thiswas far less than the 22 % approval rating for the military, despite their previousbrutal dictatorship. In 1990, the approval rating for entrepreneurs stood at 31 %,much higher than for the unions or the military. Starting from such a weak position,the union leaders first pumped up their rhetoric, vowing to fight to the last dropof blood against privatization. But when the government asked union leader JuanCarlos Lingeri to become a member of the privatization committee, he surprisinglyaccepted. He then negotiated a 10 % share for employees in the new company.Another union member, Carlos Ben, later on became a member of the company’sBoard, representing the unions. The unions thus supported the deal.

Before the Concession 35

Ambitious Targets

The government had set ambitious targets. Over the 30-year life of the concession,universal water coverage was to be instituted across the entire metropolitan area;access to sewerage was to be increased to 90 %; 93 % of wastewater was to betreated, up from almost no treatment; and water losses were to be reduced froman estimated 45 % to 25 %. These targets were broken down in 5-year periods.Approximately one million people would be connected every 5 years for the first15 years of the concession. The required investment was about 4 billion dollars.Investment during the first 5 years alone would amount to 1.2 billion. Moreover,high standards for water quality, continuity and pressure had to be reached.

Despite these ambitious targets, private companies rushed to Argentina to be partof the frenzy.

If Alan Greenspan had been in Argentina at the time, he might have said, intypical understatement, that there was “irrational exuberance” in the air. But wasthere? Or were private companies taking a deliberate risk, expecting they could“game” the process in their favor once they had won the contract?

How to Regulate a Private Water Company?

While the political ground for the privatization was prepared rapidly and astutely,its technical design was weak. For example, many considered a strong, competentautonomous regulatory agency essential for ensuring that the benefits of waterprivatization were shared between water users, taxpayers and the private company.

In Argentina, the government decided that a regulatory agency was needed.Since Buenos Aires was the first water privatization in the country, the governmentdecided to set up a regulatory agency that would regulate only the Buenos Airesconcession. But it was not clear whether the national, provincial or city governmentwould set up and oversee the regulatory agency. In the end, all three entitiesdecided jointly to form the new water regulatory agency, called Ente Tripartito deObras y Servicios Sanitarios (ETOSS). Each entity nominated two members to theBoard of the regulator. They would chair the agency on a rotational basis, witheach term lasting only 1 year. During its existence, the regulatory agency wouldhave to balance the political interests of the three levels of government whoserepresentatives were often at odds with each other. Trying to please three masters,all while remaining fair to the private company, was going to be a tough call. Theregulator became operational when the concession came into force. It was fundedthrough a regulatory fee imposed on all water users, a measure that was designed toprovide it with financial autonomy and thus a certain degree of independence frompolitical authorities. But despite this measure, the regulator remained weak. It hadno previous experience with regulation. Furthermore, it was perceived as not having

36 4 Argentina: A Flagship Privatization and Its Demise

staff with the same qualifications as utility regulators in other sectors in Argentina,such as the telecommunications or electricity regulator.

The Forgotten Poor

The needs of the poor were not explicitly addressed in the concession design.The existing tariff system, albeit complicated and confusing, seemed at first sightpro-poor. Residential tariffs were calculated based on five variables: location, areaof the plot, share of the plot area that was built up, type of construction, andage of the house. One household could pay a hundred times more than another,irrespective of its water consumption. Residents of new houses, even if poor, endedup paying relatively high tariffs. For those not yet connected, connection feesremained high and the infrastructure fee increased their water bill substantially, afact the implications of which were apparently not fully understood at the timethat the concession was designed. Furthermore, the concession kept a feature ofthe previous legal regime unchanged: The expansion of access to slums and so-called “villas” was excluded from the concession contract, which only obliged thecompany to provide access to “urbanized areas”.

The Fog of Bidding

Setting the right price to bid for a water concession is more an art than a science.In theory, bidders estimate the investment and operating costs to achieve thecontractual targets over the lifetime of the concession. They will also estimate thenumber of customers it could connect to the network over the same period. Theythen make assumptions as to how it will finance its investments, in particular, whichshare will be financed by loans at an assumed interest rate, which share can befinanced by the company’s revenues, and which share will have to be financed by thebidders’ own money. When the bidders set their own expected return for their funds,the financial model produces the water tariff that needs to be charged to achievethe expected rate of return. As the theory goes, some bidders are able to connectcustomers faster or at lower investment costs, or they can mobilize debt at lowerinterest rates. Because of their different degrees of ability in increasing efficiency,they will make higher or lower bids. So the most efficient company wins the bid,which will benefit the public.

So goes the theory. In practice, contracts can be renegotiated. A company thatassumes that the contract is sacrosanct will thus submit a higher bid than a companythat assumes it will be able to renegotiate the contract in its favor. In such a setting,it is not necessarily the most efficient company that wins, but the one that believesit is best able to argue their case with regulators (and influence politicians) after thecontract has been awarded.

Before the Concession 37

Convincing banks to provide loans for a deal that is not yet secured in anuntested market in a foreign country is hard. This is where the World Bank’s privatesector arm, the International Finance Corporation (IFC), came in, giving lendersthe comfort they needed. The IFC would put together a syndicated loan for thewinning consortium, leading the syndicate with a loan from its own resources andputting together a package of loans from other banks. The involvement of the IFCwas crucial, because otherwise, the water companies would not have been able tomobilize the debt they needed to finance the investments foreseen in the concessioncontract. It also allowed them to plug lower interest rates into their financial model,thus allowing them to bid lower than would have been possible without the IFC’sparticipation.

Another problem in setting the price for a bid for a water concession isthat it is next to impossible to estimate the costs of maintaining the assets ofa water company. Most of its assets are underground. The length, material andage of the pipes are thus difficult to determine. Well-run utilities have detailedand accurate asset registers. Not so OSN or the other 95 % of utilities in theworld. The available information in the concession contract concerning the stateof the existing infrastructure was so poor that the Argentinian government deniedtaking responsibility for it. A rough estimation was made by a consultant basedon experience in England, but the difficulty in estimating the cost to maintain andrenew the existing network still made it hard for bidders to place the “right” priceon their bid.

May the Lowest Offer Win

Despite these caveats, bidding went ahead. It was undertaken in three stages:prequalification, a review of technical proposals, and the opening of financialproposals for those who passed the previous two stages. The bid was to be awardedto the company that proposed the lowest tariff, with the expectation that the tariffwould be lower than the existing tariff. Interest in the concession was substantial.Almost all the large private water companies in the world at the time participated,despite the ambitious targets set out in the concession contract. Five consortia, eachconsisting of an international lead company associated with local partners, passedthe prequalification stage. But this number was soon reduced to three. The Spanish-led consortium’s technical proposal failed to qualify. More importantly, the Frenchconsortia led by Lyonnaise and Generale decided to make a joint bid. Although thisreduced competition, the government accepted the alliance of the two companies.The new joint consortium was called Aguas Argentinas. It was 50.4 %-ownedby foreign companies. Lyonnaise held the lion’s share (25.3 %), followed by theSpanish Aguas de Barcelona, which was itself controlled by Lyonnaise (12.6 %).Compagnie Générale des Eaux (8 %) and UK’s Anglian Water (4.5 %) held smallerstakes. 39.6 % of the ownership was by Argentine companies, including a 20.7 %stake by Sociedad Comercial del Plata, owned by the prominent businessman

38 4 Argentina: A Flagship Privatization and Its Demise

Santiago Soldati, and 10.8 % by Sergio Meller’s Meller Group. Both men wereclose political allies of President Carlos Menem. A share of 8.1 % was held by theArgentine Banco de Galicia. The remaining 10 % of shares were to be owned by theemployees of the company, as set out in the legal framework for the concession.

The financial proposals were opened on December 9, 1992. The French offereda considerable tariff reduction of 26.9 %. This bid was followed very closely by theoffer of a 26.1 % reduction from the group headed by Thames Water International.The third bid came from the British company North West Water; it offered a 10.1 %reduction. Jerome Monod, CEO of Lyonnaise des Eaux, and his partners celebrated.They had won the largest water concession in the world, and they expected it tobe only the beginning. The concession was not just a success for the winningconsortium. It was also hailed as a success for a development model that bet onliberalization, globalization and privatization: The private sector, so it was said, wasable to provide water at significantly lower tariffs than the public sector because ofits greater efficiency. In this atmosphere, the concession was signed and came intoforce in May 1993.

The First Half of the Concession Period

The early days of Aguas Argentinas were bright. After many years of neglect,investment finally picked up again. The trees growing in the water treatment tankswere removed. The number of households newly connected to the water and sewernetwork picked up. Customer service also improved: For example, the responsetime to complaints became much shorter with computerized customer records andthe establishment of a modern call centre. Aguas Argentinas also offered retirementto another 2,000 employees at a cost to the company of 50 million dollars. Theemployees gladly accepted the package.

Aguas Argentinas had arranged a first debt package together with their bid. Thecompany’s debt-to-equity ratio was 1.38 in 1993, a reasonable level that providedplenty of equity as a cushion for risks. But the initial funding was insufficient toachieve the investment targets spelled out in the concession contract. For that, newfinancing was needed. In this situation, the IFC came to the rescue. It played a keyrole in putting together a second financing package for the concession. As an anchorinvestor for a new company in an untested market, it mobilized 15 other internationalbanks to provide a syndicated loan to Aguas Argentinas. In addition to the debtfinancing, IFC acquired 5 % of Aguas Argentinas’ shares in November 1994. Thesyndicated loan totaled 172.5 million dollars. “Due to strong market interest the loansyndication far surpassed the original target”, the IFC wrote in a press release at thetime.

The concession, it seemed, was off to a good start.

The First Half of the Concession Period 39

Corruption Argentinian-Style: The Alsogaray Saga

Fortunately for Aguas Argentinas, or so it seemed, the company had found astrong ally in the federal government. María Julia Alsogaray the daughter of ÁlvaroAlsogaray, the man who had helped Menem become President, had become Ministerof Environment in November 1991, just before the concession was awarded. Sheremained in this position until the end of the Menem Presidency in 1999, and wasinstrumental in the privatization of the telecommunication and steel companies. Butthat good fortune would take on a more troubling note when she was later involvedin a number of corruption scandals related to these privatizations. She wouldeventually be convicted for corruption in a case unrelated to the water privatizationin Buenos Aires and became the only member of the Menem administration toactually serve time in prison on corruption charges. Alsogaray had a flamboyantlifestyle, providing ample fodder for the tabloid newspapers, with her love affairsand a high-profile divorce from her husband. She once posed for a magazine ata ski resort wearing nothing but a fur coat. For many, she was a symbol of thecorruption and greed during the Menem years. But at this earlier stage, she was stillin a position of considerable power, and it was she who would become the mainnegotiating counterpart with Aguas Argentinas.

The First Renegotiation: Higher Tariffs, More Investment

In 1994, the government asked the company to accelerate some investments, suchas the construction of the General Belgrano water treatment plant and a program todrill clean wells instead of wells contaminated with nitrate. The company acceptedthe request, but in return negotiated a 13.5 % tariff increase. Moreover, the waterand wastewater infrastructure connection fees were substantially increased by,respectively, 36 % and 48 % in 1994 as part of the first renegotiation. AguasArgentinas thus benefitted greatly from the renegotiation.

At the same time, the company further increased its debt. The loan agreementwith the IFC initially required that the debt-to-equity ratio remain below 1.9. AWorld Bank researcher, Manuel Abdala, had calculated as early as 1994 that AguasArgentinas could only be profitable at the level of debt prescribed in the contractif its investment targets were reduced or its tariffs increased. Indeed, the companytried to do both. On top of that, it took on more debt than was allowed in its originalloan agreement. In 1995, IFC and its partner banks provided a second syndicatedloan of 150 million dollars. In the same year, the company received a 70 milliondollar loan from the European Investment Bank (EIB) for a wastewater treatmentplant. The debt-to-equity ratio had reached 2.37 by 1996. Debt played a key role infinancing investments. Indeed, the actual leveraging was much higher: One analysis

40 4 Argentina: A Flagship Privatization and Its Demise

concludes that only 2.6 % of Aguas Argentina’s investments between May 1993 andDecember 2001 came from its own funds.

While the company became more leveraged, another problem arose. When theconcession was designed, it was apparently assumed that new water users wouldnot have any problem paying the infrastructure connection fee. This assumptionwas unrealistic, because the fee was often three times higher than the regular waterbill. And it proved to be false. Many customers refused to pay the infrastructure fee,which had been expected to be a major source of revenue for Aguas Argentinas.In April 1996, street protests erupted in the suburbs against the fee – thousands ofangry people blocked roads into the capital. Aguas Argentinas now badly wanted tochange the tariff system, and this required a renegotiation of the concession contract.

The Second Renegotiation: Cancelled Fines, Less Investment

In February 1997, Menem issued Decree 149 that authorized his Minister ofEnvironment, the by then infamous Maria Julia Alsogaray, to negotiate directly withthe company, bypassing the regulator ETOSS. One month later, French PresidentJacques Chirac visited Buenos Aires and had a discussion with government officialsconcerning the water privatization issue, which was close to the heart of his oldfriend and ally Jerome Monod, the CEO of what was by then called Suez, the majorstakeholder of Aguas Argentinas. Shortly afterwards, the renegotiation, conductedwithout the regulatory agency, was concluded. It allowed for spreading the costsof connecting new customers to all customers. This change was designed to berevenue-neutral. Furthermore, the renegotiation also cancelled fines imposed on thecompany by the regulator for not having met its targets, including the acceleratedinvestment targets for which the company had been rewarded with a tariff increase in1994. The company claimed to have exceeded its target for the expansion of wateraccess – 82 instead of 81 %. But this had been disputed by the regulator. Therewas no doubt that the company lagged behind on sewerage at 61 % compared to atarget of 64 %, and on wastewater treatment at 0 instead of 2 %. The renegotiatedcontract cut back investment and coverage targets for the fifth year, thus avoidingfurther penalties. More importantly, it opened the way for further renegotiations thatfavored Aguas Argentinas. For example, in mid-1998, the government had approveda significant rate increase, allowing Santiago Soldati, an ally of Carlos Menem, tosell his share at a hefty profit to Suez. Soldati had paid 50 million dollars in 1992.He was able to sell his shares 6 years later for 150 million dollars. His exit waswell-timed for him, since trouble lay ahead for Aguas Argentinas.

In June 1999, when the company was already in a difficult spot, the Inter-American Development Bank (IDB) arranged a 300 million dollar syndicated loan,further increasing the company’s debt-to-equity ratio.

In November 1999, during the last days of the Menem government, AguasArgentinas managed to sign a new contract. Shortly before its difficulties would

The Economic Crisis and the Second Half of the Concession Period 41

really begin, it succeeded in gaining significant advantages. It further reducedinvestment commitments, erased a few fines that the regulator had managed toimpose despite the earlier reduction in targets, and – crucially – pegged rateincreases to the exchange rate with the US dollar. Moreover, a former Menemadviser, Juan Carlos Cassagne, was made the President of Aguas Argentinas,securing him a key position before the Menem government was ousted in theelections.

The Economic Crisis and the Second Half of the ConcessionPeriod

Since 1999, the Argentine economy had spiraled down into an economic crisis ofever greater proportions. Unemployment was on the rise, salaries of governmentemployees were slashed, and an IMF program was initiated imposing austeritymeasures. In December 2001, the government defaulted on its external debt, andin January 2002, the fixed-parity exchange rate with the US dollar was abandoned.The Peso was allowed to float freely and quickly lost 70 % of its value.

At that time, Aguas Argentinas had 700 million dollars of foreign currency debtin its books. It now demanded that the Central Bank provide US dollars at the old1:1 exchange rate so that it could continue servicing its debt. The government wasobliged under the renegotiated concession contract to do so, but it refused. AguasArgentinas then asked for a 42 % tariff increase. When the increase was refused,the company froze its investments and defaulted on its loans. The perfect storm hadhappened.

After the economic crisis, the concession ground on for another 4 years amidcontractual disputes, but it was clear from then on that it was hanging by a thread.

Serving the Poor, At Last

To its credit, during the crisis, Aguas Argentinas stepped up its programs to increaseaccess in the poorest neighborhoods, in an effort to regain credibility. The issue ofaccess to the poorest had been ignored during the design of the concession andduring its first years. Only in 1999 was a community development unit created inthe company, which employed social workers and social scientists to find a way toprovide slum residents with better access. It worked on the basis of an analysis donetogether with the International Institute for Environment and Development – LatinAmerica, contracted by Aguas Argentinas. In 2001 a social tariff was introducedthat included subsidies to vulnerable families who were identified by neighborhoodassociations and local authorities under the control of the regulatory agency andAguas Argentinas. Between 2003 and 2005 alone, about 100,000 inhabitants of poor

42 4 Argentina: A Flagship Privatization and Its Demise

neighborhoods and slums are said to have been connected through a “participatorymanagement model” piloted by Aguas Argentinas.

More Renegotiations Fail to Save the Concession

But belatedly helping the poor would not be enough to save the concession contract.Suez also nominated a new French President to the company to replace its ArgentinePresident in December 2003. Suez sent Yves Thibault de Silguy, a former EuropeanCommissioner and politician who had been an advisor to Jacques Chirac whenhe was French Prime Minister, to renegotiate the concession. Initially, he waspartly successful. In May 2004, he convinced the government to commit to usingpublic funds for water investments and to suspend, once again, additional finesthat had been imposed on Aguas Argentinas. In exchange, tariffs would remainfrozen and Suez would suspend its arbitration claims at ICSID, the internationaltribunal in Washington. However, in October 2004, the negotiations took a new turn:Suez once again asked for tariff increases, more public funds and an exemptionfrom income tax. The Argentine government deemed the proposal unacceptable,and the relationship became more confrontational. In March 2006, the Argentinegovernment finally issued a decree that cancelled the concession and created a newpublic company to take over from Aguas Argentinas.

Impact Falls Short of Targets

The regulator ETOSS estimates that, during the period 1993–2002, the companyonly met 61 % of its contractual investment and expansion targets on the basis ofthe lower renegotiated investment commitments. As shown in Table 4.1, the targetsfor water supply and sewerage extensions did not even come close to being met,even during a period that was made up predominantly of the pre-crisis years.

Access to water and sanitation in urban areas in Argentina increased at a similarrate in other cities where water and sewer services were not privatized. Overall,access to piped water supply in urban areas in Argentina increased from 78 % to88 %, a ten percentage point increase compared to a nine percentage point increasein the Buenos Aires concession area.

Between May 1993 and January 2002, the mean residential tariff increased by88 %, while during the same period, the Consumer Price Index only increased by7.3 %. The private company made a profit of more than 20 % over net assets between1994 and 2001.

Table 4.1 Increase in access to water supply and sewerage – targets vs. actual

1993 Target (2002) Actual (2002)

Access to water 70 % 88 % 79 %Access to sewerage 58 % 74 % 63 %

After the Concession 43

When the government rescinded the concession in March 2006, it argued thatAguas Argentinas had not complied with its obligations concerning expansion andquality. According to the government, the supplied water had high levels of nitrate,pressure obligations were not kept and scheduled waterworks were not executed bythe concessionaire. While all this was true, the government generously overlookedthe fact that it had also failed to live up to its part of the contract, in particular, theobligation to raise tariffs in line with the devaluation of the Peso.

Between 1993 and 2000, Aguas Argentinas had invested around 200 milliondollars per year. It extended water access to 2.3 million people and sanitation accessto 1.4 million people across the entire duration of the concession. But it still failedto reach the stipulated access targets. It also failed to reach the target set down forwastewater treatment: Only the “Planta Norte” sewage treatment plant had beencompleted, serving an equivalent population of barely 270,000.

After the Concession

In 2006, Dr. Carlos Ben, the union representative who became a member of theboard of the private company Aguas Argentinas as an employee representative,became President of the new public water company Agua y Saneamientos Argenti-nos (AySA). A loyal follower of Presidents Nestor and Cristina Kirchner, he remainsat the helm of the company at the time of this writing. During the 8 years of publicmanagement, the government committed to showing that it invested more than theprivate company did. Fueled by public investment subsidies, investments pickedup again: During this time period, the first major wastewater treatment plant inBuenos Aires was completed at Berazategui, the Bicentenario Plant, pre-treatingthe wastewater of four million people. In Luján area, at a northern location, a newlarge water treatment plant was completed, and other existing plants were expanded.The company prides itself that, over 6 years, it has expanded access to water supplyto one million people and access to sanitation to about 700,000 people. Thus, about1.7 million people gained access to one type of service or the other over six years.Aguas Argentinas provided 3.7 million people with access over 12 years. On anannual average basis, access thus had increased at the same pace during the privateconcession and after it ended.

Return to Public Management: A Drain on the State Budget

After a 12-year tariff freeze, while costs increased with inflation averaging 10 %per year, sales revenues at AySA are now lower than personnel costs. The companyhas little debt, since all the debt remained on the books of the private companyAguas Argentinas. Although AySA is in the fortunate situation of paying almost nointerest, it incurs heavy losses. With sales revenues in 2012 equivalent to only 160million dollars and costs of more than 500 million dollars, the utility is a constant

44 4 Argentina: A Flagship Privatization and Its Demise

drain on the already strained national budget – a detail that is not publicized muchin Argentina. AySA has to rely completely on government subsidies to finance itsinvestments, and it still needs more subsidies to pay its recurrent costs, while theeconomy is again in tatters. In December 2011, the government finally faced realityand gradually began to increase water tariffs, although it remains to be seen if theincreases will be sufficient to make the utility financially viable again.

Legal Aftermath

In July 2010, the International Center for the Settlement of Investment Disputes(ICSID) of the World Bank Group ruled on a claim by Aguas Argentinas against theArgentine Republic. It concluded that the government had fulfilled its obligation toprovide “full security and protection” to the private investors, but had, at the sametime, not treated them in a “fair and equitable” manner. The Argentine governmentwas furious, because its claim that it was entitled to refuse contractually-agreed upontariff increases to defend the country and the human rights of its citizens duringan economic emergency had been denied by the arbitrators. The arbitrators haddecided to rule only on the liability of the government, while the damages wouldbe determined by an “independent expert”. The shareholders of Aguas Argentinasannounced that they would seek 1.2 billion dollars in damages, although theyprivately expected a lower outcome. The Argentine government refused to acceptthe claim, and announced its intention to seek annulment of the ruling. As of thiswriting, no compensation has been paid.

Conclusion

The evolution of water supply and sanitation in Greater Buenos Aires can be dividedin three distinct phases: From the time of the concession award until the economiccrisis (1993–1999), private financing was mobilized, efficiency improved and accessincreased. However, the poorest were left out, just as they had been left out underpublic management before the concession. And there were several renegotiationsthat benefitted the company, reducing its targets, cancelling fines imposed for nothaving met targets, and reducing the risks of the company. The crisis changedeverything at the beginning of the troubled phase of the concession (2000–2006):A new anti-privatization government was elected, and the government refused toallow the tariff increase based on a clause that had been included in the contract bythe previous government just before the crisis. As a result, the concession died aslow death after numerous failed attempts to rescue it. During this time, the privatecompany changed course in one important respect: It successfully reached out to thepoor, a policy that was continued after the renationalization in 2006. The publiclymanaged utility that followed in the footsteps of the private company had to beheavily subsidized, until the government agreed to allow what it had refused to dowhen the private company was still there: to increase water tariffs substantially.

Part IIThe Middle East: Reform Deadlock,

with an Exception

Chapter 5Egypt: Kafka on the Nile

While public water utilities perform very well in many rich countries, the same,unfortunately, cannot be said of most developing countries, where poorly function-ing water utilities are common. One of these is Egypt. After Cuba, the country hasone of the lowest water tariffs in the world: The monthly residential water billis less than 2 dollars per household. In Cairo, only half of the bills are actuallycollected. Revenues are far from adequate for covering the operating cost of utilities,let alone recovering investment costs. The government, while itself poor, stillsubsidizes water supply and sanitation to the tune of 2.5 billion dollars per year.This corresponds to 12 dollars per household per month, more than six times asmuch as water users pay.

Dismal Conditions

The woes of the water sector are not isolated from the general woes of the publicsector in Egypt. The civil service is overstaffed and employees are underpaid,leaving them unmotivated, and making it difficult to attract and retain competentpersonnel. Some have a second job to make ends meet and only show up at workfor a few hours a day. Egyptian water utilities have 98,500 employees, an estimatedtwo thirds of whom work on water supply, with the other third handling wastewater.This corresponds to more than four employees per 1,000 households, a relativelyhigh level by international standards. If a utility wants to request a tariff increase, ithas to follow an arcane procedure that involves numerous approval steps, includingfinal approval by the president of the republic and the national assembly! No wonderthat tariffs are only increased about once in a decade.

Not surprisingly, water bills are very affordable at about 0.2 % of the median nethousehold income, as shown in Table 5.1.

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_5

47

48 5 Egypt: Kafka on the Nile

Table 5.1 Residential water tariff, water use and affordability in Egypt (without sanitation)

Residential water tariff USD/m3 0.05Water use Liter/capita/day 200Household size Persons 5Typical residential water bill USD/month 1.50Median net household income (estimate) USD/month 607Affordability % of income 0.2 %

Source: Author’s calculation

Foreign donors have a strong presence in Egypt. For four decades, since AnwarSadat turned away from the Soviet Union, western governments have providedEgypt with generous aid. The World Bank, the European Union, Germany, Franceand the United States are among the major donors in the water sector. A WorldBank sector study in the late 1970s observed “dismal conditions”: fragmentation ofoperational responsibility, poor maintenance and operation, excessive water losses,inadequate investment level, shortage of skilled staff, and low tariffs and inadequatecost recovery. The donors were concerned about the lack of sustainability in theirinvestments. They wanted to avoid a repeat of the pattern of “Build, Neglect,Rebuild”, familiar from other aid-recipient countries, so they pushed for sectorreforms to make service provision more sustainable, in particular, higher watertariffs and autonomous, commercially-oriented public water utilities.

Investments have since picked up. This allowed expanding access to water supplyand sanitation, in both urban and rural areas. Drinking water production capacityincreased from 5.5 million cubic meters per day in 1982 to 21 million in 2004,corresponding to an increase from 130 to 275 l per capita per day. Actually, wateruse in Egypt is higher than in Europe, mainly because the extremely low tariffsprovide no incentive for conservation.

The problem of low investment levels had been resolved. But unfortunately, allof the other “dismal conditions” observed in the 1970s prevail today, despite manyefforts at sector reforms.

Decades of Tug of War over Reforms

Before 1981, a single entity, the General Organization for Potable Water (GOPW),was in charge of planning, investment and operation of drinking water systemsthroughout Egypt, with the exception of Cairo and Alexandria. Another entity, theGeneral Organization for Sewerage and Sanitary Drainage (GOSSD), was in chargeof planning and investment for sanitation. Coordination between investments inwater supply and sanitation was poor, so that water systems were often built withoutany consideration for sanitation.

Donors once again pushed for change. The government, entrenched in a traditionof central management and state domination of the economy, implemented the

Decades of Tug of War over Reforms 49

reforms in its own peculiar way. Concerning the separation between water supplyand sanitation, the government obliged. But it did so in a way that did not affect itscentralized decision-making process: It merged the two organizations for water sup-ply and sanitation, and created an even larger central entity with another Orwellianacronym, NOPWASD, which stands for National Organization for Potable Waterand Sanitary Drainage. However, operations would become decentralized to entitiesat the level of the 27 governorates. This partial decentralization created anotherproblem: Centralized investment planning and decentralized operation often clashedwith each other. Planning was often done without taking into account the operationalcapabilities and on-the-ground knowledge of those working on system operation.

There were also different views as to how the governorate-level entities in chargeof operation should be organized: donors pushed for full-fledged, legally separatewater companies with autonomy in decision-making for finance and personnel. Thewater companies were supposed to recover their costs fully through tariff revenues.The government preferred public economic authorities, which were essentiallydepartments of the governorate administration without autonomy. In the end, outof 27 governorates, water companies were established in only three, where donorsmade substantial investments and pushed hardest, all located in the Nile Delta: TheBeheira and Damietta water companies that were supported by the World Bank, andthe Kafr el-Sheikh water and wastewater company that was supported by Germandevelopment cooperation.

However, old habits die hard. Despite the adoption of a National Water PricingPolicy with the objective of reaching full cost recovery for water, tariffs wereeither increased insufficiently or not at all. Ten years after the creation of the firstthree water companies, an evaluation concluded that the companies were not asindependent or as decentralized as intended, and that they were not financiallyviable. Nine years after that, a government report stated that infrastructure continuedto fall into disrepair, while the entities in charge of water supply and sewerage ranlarge deficits that were only partly covered through subsidies. The report concludedthat there was a “duplication of administrative entities, low cost recovery ratios,and lack of qualified management and modern management systems”. Anothergovernment report a few years later observed that water and wastewater serviceproviders were overstaffed with poorly qualified and poorly paid employees, therewas no system to evaluate staff performance, billing and collection were poorand done manually, there was no system to respond to citizen complaints, and noprocedures for maintenance. To sum up, not much had changed. No turnaround ofpublic utilities was in sight, despite massive technical assistance and financing.

Privatization Stuck in the Mills of Bureaucracy

Faced with such a debacle, donors pushed for a second reform in the mid-1990s. Ata minimum, the second reform was to complete that which had not been achievedunder the first, namely the introduction of decentralized autonomous public watercompanies. But the Zeitgeist was different, and more was expected. The reforms

50 5 Egypt: Kafka on the Nile

also aimed at bringing the private sector into the game. However, the drive forreforms was little match for the mills of the Egyptian bureaucracy. First, studieswere commissioned. Based on the results of these studies, the Cabinet charged theMinistry of Housing in 1998 with the elaboration of two documents: a decree onthe reorganization of the water and wastewater sector, and a law on concessionsfor water and wastewater. Both were elaborated and approved in principle by theCabinet in 2000, which then sent them back to the Ministry of Housing. However,the water concession law, which was broader in its application and would have hadto go through Parliament, was never passed. So the reform “package” went aheadwithout any provision for private sector participation.

A Kafkaesque Turn

One may have hoped that the decree on the reorganization of the sector wouldat least create strong and autonomous utilities with full-fledged responsibility forinvestment and operation, covering all governorates of Egypt. Not so. Instead, in aKafkaesque turn, the decree in its original form was discarded in favor of two otherdecrees creating two new entities on top of the plethora of existing entities in thesector. They were the Holding Company for Water and Wastewater, created in 2004,and the Egyptian Water Regulatory Agency, created in 2006.

The new regulatory agency’s tasks include reviewing proposals for tariff adjust-ments, monitoring the application of technical standards, reviewing customercomplaints and performance monitoring. Most of these tasks overlap with those ofother agencies: the Holding Company also reviews proposals for tariff adjustmentsand the affiliate companies also review complaints. Thus, the new agency remains aweak entity in the complicated web of Egyptian government agencies dealing withwater and sanitation.

Through the decree on the reorganization of the water sector, the three waterand wastewater companies and the 20 plus public economic authorities in thegovernorates were transformed into “Affiliated Companies” of the Holding Com-pany. The Holding Company was responsible for technical assistance to its AffiliateCompanies, training their staff and the collection of performance data on them. Theimportant responsibility for investment remained in the hands of the old behemothNOPWASD. The problematic separation between decisions on investment andoperation was left untouched. European donors were unsatisfied with the reform.As a result, they decided to provide investment financing directly to the AffiliatedCompanies, bypassing NOPWASD at the risk of duplicating its functions. Otherdonors, such as the World Bank and, of course, the government with its own funds,continued to channel their funding through NOPWASD.

With the passing of the reforms, tariffs in Greater Cairo were increased by100 %. But given their low initial level and the erosion through inflation overthe previous years, they still remained among the lowest tariffs in the world at29 Egyptian piasters per cubic meter, equivalent to about 5 cents at the time. The

Decades of Tug of War over Reforms 51

Holding Company then initiated a number of useful activities: It replaced 800,000non-functioning water meters, created a central laboratory, procured computerizedcontrol systems and customer databases for its Affiliated Companies, and assistedthem in establishing customer hotlines. Despite all of this, the core weaknesses ofthe sector were not resolved.

Box 5.1. A Water Company Led by WomenAlexandria Water Company (AWC) has been led since 2002 by a woman,Nadia Abdou. Trained as an engineer, she has worked her way up throughthe ranks of the company, occupying different positions including being theelected employee representative at one time. She became chairperson at AWCwhen the preparatory work for the 2004 reforms, granting more autonomyto affiliated companies such as AWC, was underway. Technical assistancefrom the United States and Germany was provided to turn the ailing, loss-making utility around into a successful publicly managed utility. Nadia Abdouand her board of directors, which consisted almost entirely of women at thetime, seized this opportunity. The company upgraded its water laboratories,certifying them according to international standards. It increased compliancewith Egyptian drinking water standards from 90 % to almost a 100 %.

Since most of its tariffs are regulated and employees cannot be laid off,the company had only limited scope to increase cost recovery. That scope,however, was used deftly. Revenue collection was improved by grantingmore responsibility and incentives to front-line employees. For example, fieldinspectors, meter readers and collectors received bonuses for each illegalconnection they discovered and for exceeding monthly targets. Nadi Abdoualso recalls how she negotiated the (unregulated) water tariff with the localCoca Cola bottling plant. When she announced an increase from 0.80 to3.00 Egyptian Pounds (0.11–0.42 dollars), the company threatened to leaveAlexandria, but then gave in. Through these efforts, the company generatedrevenues equivalent to 150 % of its operating costs in 2004.

However, while AWC has kept up its technical achievements, its financialperformance deteriorated again. Today, the water regulatory agency ranksthe company only fifth among the affiliated companies in terms of financialperformance.

Arab Spring, Arab Fall

Egypt saw a lot of political upheaval in the beginning of the second decade of thiscentury: the demise of the Mubarak government in February 2011, the election ofthe Islamist President Morsi in June 2012, and his removal by the military 1 year

52 5 Egypt: Kafka on the Nile

later. None of this benefitted the water sector. The so-called “Arab Spring” hasdampened the enthusiasm of private investors for a long-term engagement in Egypt.The financial situation of the affiliated companies, already on a weak basis, furtherdeteriorated. The Morsi government granted salary increases to civil servants,including, despite all talk of autonomy, to those of the affiliated companies. Thesehigher costs were not fully compensated through higher government subsidies, sothat the companies have even less financial resources to maintain their infrastructurethan before. Furthermore, even fewer customers pay their bills. There was some talkabout the possibility of tariff increases, but nothing happened and, due to inflation,the real value of tariff revenues accruing to utilities further eroded.

Impact: Disappointing Results

While access to piped water supply and to sewerage increased over the past twodecades thanks to heavy government-financed investments, service quality in Egyptremains poor despite the reforms. In 2009, a study by the Ministry of Health hadshown that drinking water for half a million people in Asiut in Upper Egypt wasunfit for human consumption. The chlorination systems of wells failed for lack ofmaintenance and were shut down, resulting in the water provided to residents beinguntreated and contaminated with bacteria. Two years later, nothing had been done toaddress the problem. In 2007, in the village of Wardan in the Nile Delta, the waterbecame very dark. The authorities declared that they were not responsible. Instead,they claimed that residents were to blame themselves because some of them hadinstalled booster pumps to suck water from the network, in order to compensate forthe very low pressure provided by the utility. In slums, most residents do not haveaccess to piped water at all. They must buy water in canisters provided by tankersat the cost of two to three Egyptian pounds for 25 l, about 300 times more than thetariff for piped water.

When Catarina Albuquerque, the UN special rapporteur for the human rightto safe drinking water and sanitation, visited Egypt in 2009, she noted limitedtransparency and accountability concerning water and sanitation. She was toldthat complaints to the authorities remained unanswered. She noted that it was“exceedingly difficult to obtain information about the quality of ( : : : ) drinkingwater” and “there was confusion about where to send complaints”. The situationremained Kafkaesque. She concluded that “the overlapping responsibilities createa situation where no institution considers itself accountable for the problem inquestion”, adding that “the overall lack of transparency and access to informationin the water and sanitation sectors creates an atmosphere of suspicion, which ischaracterized by a lack of confidence in the quality of drinking water and overalldistrust of the government.”

Conclusion 53

Table 5.2 Performance of Egyptian water utilities in 2012/13

Staff/1,000 households served 6.5Non-revenue water (%) 32Degree of cost recovery (%) 62

The performance of Egyptian water utilities remains poor, as estimated by theregulatory agency and shown in Table 5.2 for the Egyptian fiscal year 2012/13. Thelevel of non-revenue water – leakage as well as stolen and under-registered water –is roughly estimated at 32 %, but could well be higher.

Conclusion

Egypt has largely eschewed the privatization wave of the 1990s. It mobilizedsubstantial public funding from its own government budget, including throughincreased general debt. It also received substantial grant and soft loan fundingfrom major donors, including the World Bank, despite its refusal to open up toprivatization, with the exception of one BOT contract for a wastewater treatmentplant. The government has been unable to turn around its public utilities despitelaudable efforts at technical modernization. Reforms have been incomplete andinsufficient. They have not addressed core problems of underpricing, overstaffingand poor management.

Egypt is not alone in this situation. For example, utilities in South Asia, wherewater tariffs are also among the lowest in the world, are caught in a similar apparentvicious circle of poor services and low cost recovery through tariffs. As in manyother developing and emerging countries, the prospects for further sector reformsare bleak, and so are the prospects for the sustainability of water and sanitationservices in Egypt.

Chapter 6Jordan: Private Plants, Public Utilities

Jordan is one of the most water-scarce countries in the world. Water tariffs arekept low for political reasons, and water utilities are subsidized through foreigngrants and in many other ways, such as direct payment of electricity bills forutilities by the state. One may not expect that “water privatization” would work insuch an environment. Yet three public-private partnerships have been undertakenin this country: A management contract for the capital Amman; the financingand construction of the country’s largest wastewater treatment plant, serving bothAmman and the neighboring city of Zarqa; and a large pipeline to supply the capitalarea with water.

The Amman Management Contract

In 1999, the Water Authority of Jordan signed a Management Contract with a JointVenture led by Suez Environnement. According to the contract, the Joint Venturewas responsible for operating and managing water and wastewater services in theGovernorate of Amman, while ownership of assets remained with the state. Theprivate company was paid a fixed fee from a World Bank loan and a variableperformance fee to be paid from a portion of the increase in net revenue that thecontract would generate. Water tariffs were not increased, and the contract wasstructured in such a way that it could be profitable despite the lack of cost recoveryin the water sector.

The contract was intended to improve certain performance indicators, as well asstrengthen management capability and develop the skills and knowledge of the staff.To this end, a small team of experienced expatriates and Jordanians worked with,and trained, around 1,250 local staff. After 7 years, the Joint Venture had compliedwith 12 out of 15 performance targets; certain overambitious target values had beenrevised and the contract had been extended for 2 years beyond its initial duration offive. In the end, non-revenue water was reduced from 54 % to 42 %, the duration of

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56 6 Jordan: Private Plants, Public Utilities

water supply per week was increased from 8 to 46 h, and access was expandedsubstantially without recruiting more staff, thus increasing labor productivity. Afunctioning modern computerized customer call center was established, the entirenetwork was mapped using a Geographical Information System (GIS), and ahydraulic computer model was developed and employees trained in its use. Whenthe contract ended in 2007, the newly created Jordan Water Company – proudlycalled Miyahuna, Arabic for “Our Water” – took over from the Joint Venture.Miyahuna benefitted greatly from the tools introduced by the private company andthe training provided, and was in much better shape than 7 years before when theprivate company was brought in.

Another management contract was awarded in 2011 to a Joint Venture led byVeolia for the northern part of the country, where performance indicators and skilllevels had remained low. But it failed to replicate the success of Amman. Themanagement contract was terminated after only a year and a half amid a lack ofpolitical will to support the management contractor, contractual disputes, and strikesfor higher salaries. What had worked well in Amman had not worked in NorthernJordan during a more difficult time that coincided with the outbreak of what wasthen called the “Arab Spring”.

The divergent experiences in Amman and Northern Jordan confirm that there isno one-size-fits-all approach. A successful model applied at one time in one placecan fail in the same country at a different time.

Build-Operate-Transfer (BOT) Contracts: Concessions forSingle New Plants

Another model for private sector participation introduced into Jordan was the“Build-Operate-Transfer” (BOT, pronounced Bee-Oh-Tee) contract. As explainedin the introduction, under a BOT contract, the private sector finances, builds andoperates a plant, and then hands it back to the public sector at no charge when thecontract expires after 20–30 years. Like management contracts, BOT contracts canwork even if water tariffs are low, because states, rather than cash-starved utilities,guarantee payments under such contracts.

The Samra Wastewater Treatment Plant: A Smart Mix of Publicand Private Funds

In the case of Jordan, a BOT contract for the 169 million dollar Samra wastewatertreatment plant was signed in 2002 between the Jordanian government and a privateconsortium. The consortium was selected through international competitive bidding.The funding was a blend of public and private sources, as shown in Table 6.1 below.

Build-Operate-Transfer (BOT) Contracts: Concessions for Single New Plants 57

Table 6.1 Funding of theBOT contract for the Samraplant

Funding source Amount (USD m)

Public funding Grant from USAID 78 92Jordanian government 14

Private funding Equity by sponsors 17 77Bank loans 60

Total 169 169

Almost half the investments were funded through a 78 million dollar grantprovided by the U.S. government. The Jordanian Social Security Corporation wasto take a small stake in the project company, called the Samra Plant Company, irre-spective of who might win the bid. The winning bidder was a consortium betweenthe U.S. construction services company Morganti and the French international wateroperator Suez. As is typical for a BOT project, they provided equity for a smallershare of the private financing portion (17 million dollars) and mobilized credits fromcommercial banks led by the local Arab Bank for the larger financing portion (60million). The government would pay 17 million per year to the consortium over aperiod of 22 years, totaling 374 million. This would pay for the operation of theplant and for the recovery of the 77 million in private financing with interest andprofit.

This allowed the government to mobilize investment without using its own scarceresources at that time. The arrangement had another advantage: It increased thelikelihood that large infrastructure projects would be completed on time. The Samraplant was completed in 52 months, within its schedule. Last but not least, thearrangement has ensured that the plant is properly operated and maintained usingadvanced technology, including biogas digestors and energy recovery, introducedinto the country for the first time. The plant has been well run and a contract for itsexpansion was awarded in 2012.

The Disi-Amman Conveyor: 10 Years in the Making

In parallel to the Samra project, the Jordanian government launched a second muchlarger BOT project for the construction of a large water conveyor, the 1.1 billiondollar Disi-Amman Conveyor. The contract was awarded in 2007 after more than10 years of preparatory studies and several false starts. Like the Samra plant, theBOT scheme involved a blend of public and private financing. But in this case, thegovernment did not benefit from a foreign grant. Instead, it had to borrow frominternational donors to mobilize its contribution. As usual for BOTs, the privatefinancing consisted of a mix of equity and debt. In the case of the Disi-AmmanConveyor, the debt financing did not come from private commercial banks. Instead,it came, presumably at better terms, from international financial institutions such as

58 6 Jordan: Private Plants, Public Utilities

Table 6.2 Funding of the BOT contract for the Disi-Amman conveyor

Funding source Amount (USD m)

Public funding Jordanian government grant 300 400Government stand-by facility 100

Private funding Equity by sponsors 200 675Bank loans 475

Total 1,075 1,075

Note: Funding from the Jordanian government was financed through loans from the EuropeanInvestment Bank and the French Development Agency

the U.S. Overseas Private Investment Corporation, its French counterpart Proparco,and the European Investment Bank. The equity was provided by the Turkishconstruction firm GAMA and its part-owner, General Electric Energy FinancialServices. The project was completed in 5 years with a 1-year delay. The fundingstructure is shown below (Table 6.2).

The completion of the Disi project in 2013 was a milestone for Jordan, alleviatingthe country’s severe water shortage at a time when it hosted more than a millionSyrian refugees. Compared to infrastructure projects awarded in a “classical”manner the private sector takes more risk in terms of timely project completionunder a BOT contract. In line with this incentive, the delay in project completion wasrelatively limited. However, the preparation of any BOT project is time-consuming.In the case of Disi the preparation took more than 10 years, much more than thetime saved through timely completion of the construction phase. Moreover, thegovernment faces substantial contractual claims from the project company and thepayments for the Disi project will be a burden on the state budget for many years tocome.

BOT Contracts: The Most Common and the Least Known Formof Water “Privatization”

BOT contracts are the most common form of “privatization” for single facilities –such as a desalination plant, a water treatment plant, a wastewater treatment plant, ora bulk water supply pipeline. However, they are much less well known by the publicthan utility privatizations, and they are certainly less well understood. They arealso politically less controversial. Perhaps not surprisingly, such contracts for singlefacilities are more common today than privatizations of entire water systems à laBuenos Aires or Manila. David Lloyd Owen, an author and consultant specializingin water and the private sector, estimated that 909 million people – about 20 % of theworld’s urban population – received water or sewer services from “private players”in 2011. More than half of this figure is actually for single facilities which supplyservices to publicly managed utilities under BOT contracts or similar arrangements.

Conclusion: Benefits and Risks for Governments and Taxpayers 59

Conclusion: Benefits and Risks for Governmentsand Taxpayers

BOTs provide tangible short-term benefits. Since design, construction and operationare in the hands of one private entity, it has strong incentive to optimize the lifecyclecosts of the investment. For example, in the case of the Samra plant, the privateconsortium designed it in such a way that most of the plant’s energy is generated bythe plant itself through biogas digestors and mini-hydropower plants at the intakeand outflow of the plant. This means higher investments at the beginning, but loweroperating costs over the lifetime of the project. Public entities, especially the weakentities found so often in poor countries, typically do not properly analyze andexploit such synergies. Another way the private company adds value is by exertingall efforts to make sure that a project is finished on schedule, because it otherwiseloses money. When a public entity contracts a private firm to build a plant, the delaysare paid by the taxpayer, and the public entity has few incentives, and frequently fewinstruments, to ensure timely completion.

The annual fees paid to the private companies are high, since they include theinterest rate on privately contracted debt and the profit margin of the operator. Asmentioned above, the fees are often higher than what public utilities, with their lowwater and sewer tariffs, can afford. Therefore, governments often support BOTsin different ways, including through guarantees from the Ministry of Finance forpayment of the fees. BOT contracts thus are a form of hidden debt. They constitutewhat is called a contingent liability for the government – it is the public utility,not the government, which is obliged to pay fees, so these liabilities often do notofficially show up as government debt. But when the public utility fails to paythe fees, the government has to bail it out: The contingent liability becomes a realliability for the government.

Thus, the benefits and risks of BOT projects outlined above have to be balancedcarefully against each other when deciding whether or not an infrastructure projectshould be carried out as a BOT.

Part IIIEurope and North America: Private

and Public Utilities Compared

Chapter 7The United Kingdom: A Natural ExperimentBetween Private and Public Management

The way the drinking water and sanitation sector was organized in the UK wasvery different between its four constituent parts in the 1980s. In England andWales ten public Regional Water Authorities were in charge of water supply inmost of England and sanitation in all of England, while a few private “wateronly” companies were in charge of water supply in some parts of England. InScotland, hundreds of municipalities were in charge of water supply and sanitation.In Northern Ireland, water was provided free of charge by a single public entity,just like in the Republic of Ireland, while costs were recovered through taxation.1

In 1989, the Thatcher government embarked on the most far-reaching privatizationof drinking water supply and sewer services in modern times. All publicly ownedwater and sewer utilities were to be privatized simultaneously in the entire UK.However, the efforts of the British government failed in Scotland and NorthernIreland.

The institutional diversity of the UK water sector thus provides the settingfor a natural experiment for testing the impact of privatization by comparing theperformance in England with the performance in other parts of the United Kingdom.Wales is a special case, where the water and sewer utility was privatized, but thentransformed to a not-for-profit company in 2000.

Before the Privatization

Ten years after Margaret Thatcher had been elected Prime Minister for the first timein 1979, she embarked on a major privatization program across all sectors, startingwith telecommunications and gas. One of the objectives of the privatization was to

1This chapter is limited to the comparison between the performance of the water sector in England,Scotland and Wales.

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64 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

create a “shareholder democracy”: Stocks in the privatized companies were sold atrelatively low prices to ordinary people who had never held stock before. Anotherobjective was to introduce competition, something that is technically much easierto do for telecommunications and energy than for water supply. Competition wasexpected to increase efficiency and service quality. The government also wanted toreduce what is called the public sector borrowing requirement, i.e., the public deficitincluding the deficits of publicly owned companies. Infrastructure investments wereto be financed by the private sector, not with taxpayer money. But the fiscal motivewas not really in the forefront, as Nigel Lawson, Chancelor of the Exchequer atthe time, noted in his memoirs: “The prime motives for privatisation were notExchequer gain, but an ideological belief in free markets and a wider distribution ofprivate ownership of property.”

In fact, the word “privatization”, which had hitherto been unknown, was inventedin the process. Since the Second World War, “nationalization” had been thebuzzword of economic policy in Britain and many other countries – so much so thatthe policies of the Thatcher government were first labelled “de-nationalization”,until the term “privatization” was first used in an editorial by John Elliott in theFinancial Times.

The “Sick Man of Europe” and Public Water

The first water companies created in Britain had been private companies. But mostof them were municipalized beginning in the 1870s, culminating with the creationof the Metropolitan Water Board that took control of all competing private watersystems in Greater London in 1902. Only in a few localities had private watercompanies been spared by the municipalization (companies that continue to providewater services up to the present day). Thus, by the 1980s, the bulk of water servicesand all sewer services in England and Wales were provided by ten state-ownedcorporations called the Regional Water Authorities, often working in partnershipwith municipalities. They had made some remarkable achievements, such as theconstruction of the Thames Barrier that protected London from flooding and thecleaning up of the River Thames so that the salmon returned to its waters. Butin many respects, the British water sector lagged behind. During the 1970s, theUnited Kingdom was often called the “sick man of Europe” because of its moribundeconomy. There was still only limited wastewater treatment, and coastal bathingwaters were polluted. Residential water connections were unmetered, and manywater and sewer pipes dated back to Victorian times. As in many other countries,old sewers were designed so that they overflowed into rivers during heavy rains. Butthe Regional Water Authorities were constrained by debt ceilings and, thus, investedless than they should have to maintain their infrastructure properly.

Before the Privatization 65

Pondering Alternatives for Reform

The alternative of keeping the Regional Water Authorities in public hands, providingthem with the same level of one-time financial support that the privatized companiesreceived and modernizing them, was not seriously considered by the conservativegovernment. There are several explanations for this. For one, at the time, regulationhad been ineffective in improving the Authorities’ performance. In 1988, the formerhead of the North West Water Authority and former Chairman of the NationalRiver Council, David Kinnersley, wrote a book entitled “Troubled Waters”, inwhich he criticized the “fantasy and rhetoric” and “administrative fudging” ofthe Environment Department, describing a “potent culture of government conceal-ment.” The EU had given its member countries 10 years to clean up their bathingwaters in a 1975 Directive. Britain lagged behind in implementing it. Accordingto Lord Crickhowell, the chairman of the National Rivers Authority, the permitsystem in place at the time for controlling pollution was designed “to avoid anembarrassing number of failures and an excessive number of prosecutions of publicorganizations.” Private companies could be better held accountable, it was believed,than public companies. But was full privatization the only alternative for achievingthis objective?

The German and Scandinavian model of commercially-oriented public compa-nies was apparently never considered. Utilities in these countries borrow withoutguarantees by the national government, and their borrowing could thus arguablyhave been excluded from the public sector borrowing requirement. But in the Britishcontext of the time – the creation of a shareholder society and ineffective regulationof public companies – such a model did not fit. The French model apparently wasbriefly considered. David Kinnersley, who advised Nicholas Ridley, the Secretary ofEnvironment at the time of the privatization, suggested adopting the French model ofpublic-private partnerships. This would have allowed the regulators to hold privatecompanies accountable while avoiding the payment of large dividends, since someof the investments would have been publicly financed. But the proposal was notfurther considered. The “Zeitgeist” was to privatize all utilities using the same modelof selling shares in the stock market. The water industry was to make one morecontribution to the “shareholder democracy” cherished by Margaret Thatcher.

Water privatization was planned for 1984, but due to public opposition, it wasdelayed until after the 1987 elections. According to opinion polls, 87 % of the votersopposed water privatization. Clearly, it was not a popular measure.

Regulation of Private Water Companies

Partly in response to these concerns, regulation was tightened. While privatization isoften associated with deregulation, in the water sector, it is quite common to increase

66 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

regulation in parallel to privatization in order to prevent the abuse of a naturalmonopoly. In the case of the English and Welsh water industry, the regulatory zealsignificantly increased. At the time of privatization, many performance indicatorswere simply unknown. For example, the level of leakage was never measured,and the monitoring of service quality was rudimentary. All this changed withprivatization.

Private water companies in England and Wales operate under licenses and areregulated by three regulatory entities: The Drinking Water Inspectorate, in charge ofregulating drinking water quality; the Environment Agency in charge of monitoringwater abstractions and wastewater discharges; and the Office of Water Services(Ofwat). The economic regulatory agency Ofwat was established in 1989 in parallelwith privatization. It approves tariffs, monitors service quality, and can impose fines.Maximum limits on tariffs are set for what became 5-year intervals in advance.Tariffs are calculated based on an estimate of operating costs taking into accountincreased efficiency, a similar estimate as to how much capital maintenance wouldbe required in the coming ‘asset management plan’ period, and a target rate of returnbased on the value of the utilities’ assets. Outperforming these estimates allows theprivate companies to make higher profits, though a proportion of any such gainswould be shared with customers at the subsequent price reviews. In addition, Ofwatestablished ‘Customer Service Committees’ (now Consumer Council for Water) ineach region to provide a mechanism for the voice of customers to be heard.

The Privatization

At privatization, the debt of the public water companies – a substantial 5 billionpounds (8 billion dollars in 1989 prices), 100 pounds per inhabitant – wascompletely taken over by the government. This measure was more generous thanany other water privatization – be it in Berlin, Buenos Aires, Manila or Jakarta. Theprivate water companies were free of debt when they took over the water and sewersystems.

A Green Dowry

Furthermore, the government even injected public money, a “green dowry” of 1.6billion pounds (2.5 billion dollars) into the new companies to capitalize them. Thecompanies were then sold at prices, which, according to David Hall from the tradeunion-affiliated Public Sector International Research Unit (PSIRU), were 22 %lower than the value of the companies. This generated a one-time income of 5.3billion pounds for the Treasury – less than the cost of the debt forgiveness and the“green dowry”.

The Privatization 67

“Shareholder Democracy”

The shares of the companies were not sold to strategic investors, but were floated onthe London Stock Exchange with shares heavily promoted and sold to individualsmall scale investors. The share prices quickly began to rise. The governmentretained one “golden share” in each company for 5 years. This allowed it to vetothe sale of the companies to foreign investors, in particular to the French watercompanies that dominated the international market. When that period elapsed, fourof the ten companies were sold, but not to the “usual suspects”. Rather, most ofthem were sold to power companies from the US, Germany and Scotland whowanted to diversify into the water sector, including the German power giant RWEthat bought Thames Water. While both Suez and Veolia had already invested insmaller, always private, ‘water only’ companies, only one English water and sewercompany, Northumbrian Water, was sold to a French international water company,Suez Environnement.

New Labor Turns Against the Private Companies

The election of a Labour government under Tony Blair in 1997 brought aboutsignificant changes for the water industry. While in opposition, Labour had calledthe water company bosses “fat cats”, and now the party was in a position to go afterthem. First, the new government imposed a windfall tax on the excessive profitsof all privatized utilities. Second, following several years of drought and criticismof massive water leakage, the government held a Water Summit. At the summit,Deputy Prime Minister John Prescott announced that the government would setleakage reduction targets over the next 5 years, backed up by hefty fines. Third,Parliament prohibited any disconnection of residential customers for non-paymentof water bills and prohibited flow-limiting devices through the Water Industry Act1999.2 Last but certainly not least, the regulator Ofwat, having taken note of theefficiency gains achieved by the private companies, ordered a tariff reduction. Itthus unintentionally triggered a process that led to the emergence of a completelydifferent model for service provisions for one of the water companies – Welsh Water.

Institutional Investors Take Over

The ownership structure of the industry began to change during the 2000s. Theprivate power companies from the U.S., Scotland and Germany that had rushed to

2The regulator Ofwat allowed the water companies to pass the resulting revenue losses on to payingcustomers. The balance sheets of water companies thus remain unaffected by this decision. The billis footed by paying customers, who face 2 % higher water bills.

68 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

buy English water companies only a few years earlier began to sell them. The buyerswere not utility companies, but institutional investors: A pension fund from Canada,a bank from Australia, and the Sovereign Wealth Funds of China and Abu Dhabi, aswell as funds based in Hong Kong and Malaysia. Some investors bought all stocksand simply delisted the companies they bought from the London Stock Exchange.

Over Their Head in Debt

In parallel, debt levels began to soar. The water companies were highly leveraged,their debt accounting for 72 % of their assets on average, with some companieshaving more than 90 % debt. The rating agencies started to downgrade them.Financial leveraging not only helped to increase the rate of return on equity, it alsocut corporate income tax: Payments on interest fully count as costs, and thus, profitsand taxes on profits are slashed by loading on more debt. This provides an incentiveto reduce equity, so that little equity capital is left as a cushion in times of crisis.

The Track Record of Regulation

As the regulator of the English water industry, Ofwat has built up an impressivearray of information on the industry, in order to compare the performance of theprivate companies and to monitor their service quality. In no other country can suchcomprehensive, publicly available, nationwide data on the performance of the waterindustry be found.

Before the creation of Ofwat, the traditional approach to the regulation of naturalmonopolies was to take the price at which a product was produced, add a fixedprofit rate, and set the price of the product accordingly. Water tariffs for privateutilities in the U.S. have been set on that basis, called “rate-of-return regulation”,since the nineteenth century. British economists now introduced a new variation ofeconomic regulation for utilities, called “price-cap regulation”: Prices are set fora given period – usually 5 years – based on an estimate of the needed capital andoperating costs and a rate of return, but an assumption is made concerning efficiencygains during this period. The tariffs thus are lower than they would have been underthe traditional “rate-of-return regulation”. If a company becomes more efficientduring the regulatory period than the target efficiency gain set by the regulator forthe entire industry, it can increase its profitability above the rate used by the regulatorin setting the tariffs. If the company fails to increase its efficiency, its profits will beaccordingly lower.

How did this model work in practice? During the first 5 years after privatization,companies exceeded the expectations of the regulator and pocketed huge profits.Then, the regulator tightened the screws in 2000 and profitability declined.

The Privatization 69

Amid complaints that the tariff cuts had been “excessive” and did not allowcompanies to make the necessary investments, new Ofwat Director Fletcher loos-ened the reins again during the subsequent 5-year review cycle beginning in 2005.Again, it allowed tariff increases above the rate of inflation, reportedly justifiedby the ongoing requirements for investment which continued at approximately 7billion dollars per year, a level considerably higher than assumed at the time ofprivatization. However, when in 2012 a past water company Managing Director,Jonson Cox, became Ofwat Director, against general expectations given his back-ground, he reversed course again, dramatically cutting the target profit margin.When, in December 2014, Ofwat published its final determination on price controlsfor 2015–2020, the regulator showed its teeth again: Average water and sewer priceswill have to come down by 5 % after inflation, while companies have to increasetheir investments to 44 billion pounds. Further improvements in service quality andleakage reductions have been mandated and companies will have to compensatecustomers if they fail to reach these targets. It thus seems that there was a kind of“yo-yo-regulation”, with the regulator alternately being too lax and then too strict.

Critics have thus accused Ofwat of having been too lenient with the privatewater companies most of the time – with the 1999 and 2014 price reviews beingexceptions. They also say Ofwat has been too wedded to the private serviceprovision model, as exemplified in its initial opposition to the delisting of GreenWales from the Stock Exchange, as described below. It has also been accused ofhaving missed important issues out of sight, such as increasing leakage levels in theearly 1990s and, more recently, the poor condition of sewers. The water companiessimply invested money where Ofwat or EU regulations put them under pressureto do so, such as wastewater treatment, drinking water quality and – after 1997 –leakage. Because Ofwat paid little attention to the condition of sewers for manyyears, water companies simply delayed the construction of new sewers until theybegan to collapse.

But despite such weaknesses, Ofwat has gained substantial experience and, thus,probably has at present much better information for monitoring the performance ofwater utilities than any other public authority around the world in charge of suchsupervision.

Private Water Calls for Government Help: The Thames TidewayTunnel

By far the largest single investment in the British water sector for many years tocome is the Thames Tideway Tunnel. The objective of the tunnel is to eliminatethe overflow of diluted sewage in the Thames River during heavy rainstorms. Theseoverflows are part of the design of any old sewer network: Until the early twentiethcentury, there were no separate sewers for storm water and sanitary sewage. Instead,both flowed through so-called combined sewers. These sewers overflowed during

70 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

heavy rainfall periods. When combined sewers were designed, and for a longtime afterwards, combined sewer overflows into rivers were deemed an acceptablenuisance. Not so today. Water utilities are under pressure from the EU to undertakeheavy investments to reduce or eliminate these overflows. After having neglectedsuch investments, Thames Water faced fines levied by the EU. In order to avoidthem, it proposed the Thames Tideway Tunnel. It would be a gigantic sewer underthe River Thames for storing the mix of rainwater and sewage, so that it can laterbe pumped to wastewater treatment plants whose capacity has to be increased. TheThames Tideway Tunnel would be 7.20 m in diameter and run at a depth between30 and 70 m.

When first proposed in 2005, the project was to cost 1.2 billion pounds. Now, thecost estimates have spiraled to more than 4 billion pounds before construction haseven begun. And as large infrastructure projects go, cost overruns are unfortunatelymore than common. Thames Water would not finance this project with its ownresources. Instead, it plans a Build-Operate-Own (BOO) Project. This means that aseparate private company – called, in this case, an “Infrastructure Provider” – will beset up. This company will mobilize equity capital and debt to build and operate theproject. The Infrastructure Provider will be procured through a competitive process.Thames Water would be its client, but not its owner. Thames Water would pay a fee,but it would pass all costs of the project on to ratepayers, which would increase waterrates by around 80 pounds per year for a period of 8–9 years, or more than 20 % –if there are no cost overruns. In theory, an Infrastructure Provider has incentive tocomplete a project on time and at cost, because any delays and cost increases willhurt its bottom line. However, the government often steps in and takes over somerisks to make the project more attractive to bidders who would submit lower bids.But this carries significant risks for the taxpayer. In the case of the Thames TidewayTunnel, Thames Water has effectively called on the state to help it in funding newinvestments. In response, the government “agreed to act as insurer of last resort,to provide short-term liquidity in the event of financial market disruption, and toinject additional equity – if required – to cover significant cost overruns.” Ian Byattis highly critical of the request for public funding to build the super-sewer. Whyshould the private owners of Thames Water not be required to pay for the investmentthemselves?

Byatt has gone further and criticized the entire project as unnecessary. He is beingjoined by the engineer Chris Binnie, a former Director of Atkins, one of the largestwater consulting firms in the world. The matter is delicate, because Chris Binniehad been the Chair of the Study Group that had initially recommended the TidewayScheme. He now says the cost explosion has made the project uneconomic and thatless costly alternatives should be implemented, such as greening roofs and creatinggreen spaces that allow the infiltration of rainwater in the ground, together knownas “sustainable drainage”. This can reduce the peak flows to the storm sewers sothat they overflow much less frequently. These measures would cost less, could beimplemented faster, and have other benefits, such as reducing urban heat islandsduring summers, which are expected to get hotter with climate change. But ThamesWater moves on with its plan, undeterred by criticism.

The Impact of Privatization in England 71

The Impact of Privatization in England

Unsurprisingly, the debate on the impact of water privatization splits observers intotwo camps. On the side of the supporters, Tony Ballance, former Chief Economist ofOfwat, now with Severn Trent, one of the largest private water and sewer companies,writes: “Service to customers has been improved, new drinking water standards havebeen met, tighter environmental standards have been achieved, and new investmentattracted”.

On the side of the opponents, Singapore-based Professor Asit Biswas, recipientof the Stockholm Water Prize, concluded his analysis of water privatization inEngland as follows: “England’s water consumers are being ripped off. High leakagerates and the privatization of the water supply have provoked a price explosion. Timeto bring the water supply back into public hands.”

So who is right? When trying to answer this question, one should not make thecommon mistake of comparing the situations before and after an event over a longperiod of time. Rather, one must assess other factors that influenced performanceover this period in an – albeit hypothetical – attempt to compare the situation afterprivatization with what it would have been had privatization not occurred.

In the case of the English water privatization, one has to ask: What would havehappened without privatization if the public authorities had obtained access to thesame debt relief, access to new debt, subsidies and tariff increases that the privatecompanies had? The trends observed in Scotland and continental Europe during thelast 25 years can help to answer these questions for each aspect of performanceindividually tariff increases, investments, service quality and drinking water quality,pollution, leakage, and the efficiency of service provision.

Higher Bills and Profits

In the 20 years after privatization, water and sewer tariffs in England and Walesincreased by 45 % after adjustment for inflation. In 2013, average water and sewerbills were 376 pounds per year, corresponding to 21 pounds (38 euro) per month.They had become among the highest in Europe, together with those in Germany.Table 7.1 shows the water tariff and bill without the sewer tariff in dollars, forpurposes of comparison with other countries. It shows that the water tariff aloneaccounts for only 0.7 % of median income and thus remains highly affordable.

But could these increases have been lower? On the one hand, as outlinedbelow, the private companies became more efficient in some respects, such as laborproductivity and operating costs, but not in others, such as level of leakage. On theother hand, the private companies paid out hefty dividends. In the 1990s, the pre-taxreturn on capital was well above 10 %, much higher than required to attract capitalto the sector. After the 2000 price review, the pre-tax return on capital in the waterindustry returned to a more reasonable level of 6–7 %.

72 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

Table 7.1 Water tariff, water use and affordability in the service area of Thames Water (withoutsanitation)

Residential water tariff USD/m3 2.00Water use Liter/capita/day 167Household size Persons 2.5Typical residential water bill USD/month 25Median net household income (estimate) USD/month 3,419Affordability % of income 0.7 %

Source: Author’s calculations based on annual report 2013 of Thames Water

Increased Investment

Investments almost doubled from 9.3 billion pounds in the 6 years before priva-tization to 17 billion in the 6 years after, one of the key objectives of government.Investments further increased and have reached more than 100 billion in the 25 yearssince privatization. The investment target set by the regulator for the period 2015–2020 is 44 billion pounds, a substantial increase compared to earlier periods.

Improved Quality of Service

Initially, service quality remained the same, but then it improved. In 2003, 14 yearsafter privatization, all indicators of service quality had improved (Table 7.2).

Reduced Pollution

The quality of water in rivers and canals improved, with the share of rivers whosequality was rated good or fair increasing from 84 % in 1990–1991 to 95 % in 2001.Many beaches in England were so polluted that it was considered a health riskto bathe in the sea. Through substantial investments in wastewater treatment, thecompliance with coastal bathing water standards increased from 66 % in 1988 to99 % in 2002. The rate of sewage treatment works compliance increased from 90 %to 99 % in 2001.

Loss of Employment and Increased Labor Productivity

Private water companies have become more efficient in terms of labor productivity,providing improved services with fewer employees. The workforce fell from 40,000to 31,400 between 1990 and 1999. There were no layoffs, but the reductionwas achieved by not filling new positions. The staff level corresponds to about

The Impact of Privatization in England 73

Table 7.2 Service quality after privatization

1989 (%) 2003 (%)

Water quality tests in compliance with standards 99.5 99.87Properties at risk of low pressure 1.26 0.06Unplanned interruptions over 12 h 0.42 0.05Written complaints answered with 10 working days 81.9 99.8Billing contacts answered in 5 working days 79.8 99.5

Source: Ofwat, water and regulation: facts and figures, November 2003

1 employee per 1,000 households served, a very efficient level in internationalcomparison. However, the loss of employment is also a downside of privatization.Since then, private water utilities have begun recruiting again. While figures are notstrictly comparable because today more services are provided than in 1989, e.g.,concerning wastewater treatment, it is still notable that total employment in the UKwater industry (including Scotland and Northern Ireland, which are not included inthe figures above) has risen again to 41,000 in 2013.

Leakage Goes First Up, Then Down

Water leakage in England, and especially in Greater London, is higher than inmany Central European cities. According to environmental journalist Fred Pearce,leakage in London remains higher than in Paris, New York or Singapore. It is alsosignificantly higher than in Germany, the Netherlands or Japan. Since the late 1990s,the regulator has tried to push water companies to bring leakage levels down. Thereare no reliable data on leakage levels in the pre-privatization era, since there wereno bulk meters or customer meters, which are necessary to monitor leakage levels.It is thus impossible to tell if leakage has declined since privatization or not.

Thames Water executives blame high levels of leakage on the old age of thenetwork, since 44 % of the mains are over 100 years old, with some being as muchas 150 years old. It appears that Thames allowed water leakage to increase untilthe company came under public criticism when a drought hit Southern England inthe mid-1990s and a hose pipe ban had to be enforced. This came at the same timethat the Labour government came to power, leading to the 1997 water summit andmandatory targets for leakage reduction over the next 5 years.

Still, leakage in Greater London increased from 662,000 m3 per day in 1999/2000to 946,000 in 2003/2004. Only afterwards did the company tackle the issueseriously, resulting in leakage levels declining to 894,000 in 2005/2006, still missingthe regulatory target. The company then beat the reduction targets for 8 years in arow, reporting that, in 2013/2014, leakage had been reduced to 644,000 m3 per day.While this is certainly a substantial achievement, it is also merely a return to a levelof leakage comparable to that 15 years earlier.

74 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

Box 7.1. Leakage in London and in England: An InternationalComparisonLeakage in the service area of Thames Water in Greater London is higherthan in Berlin, New York City and in Phnom Penh, as shown in Annex 2,no matter which indicator for leakage is used. Leakage is also about twice ashigh as in other English cities. One of the reasons is the geology of London,which is characterized by aggressive clay soil that corrodes the older castiron pipes, as well as by vertical movements that cause breaks. Still, thisdoes not explain why leakage levels in England are much higher than inGermany. One explanation lies in the approach for dealing with leakage.England follows the approach of an economic level of leakage: Leaks shouldonly be reduced until the cost of leakage reduction per unit of water is lowerthan the economic value of the water itself. Thus, if it is cheaper to expand awater treatment plant or to save water by other means than fixing leaks, theleaks are not fixed. Germany, however, follows a standards-based approach:Pipes are replaced if their conditions are determined as being below standardas part of an inventory, no matter what the costs of replacement are comparedto other costs.

Operating Costs Reduced

Operating costs in the water industry in England and Wales remained fairly constantafter adjusting for inflation in the 21 years between 1989 and 2010. Since the assetbase increased during that time, for example, through the construction of numerousnew wastewater treatment plants, this is an improvement. In 1989, the governmentexpected that operating costs would increase by about a third during the subsequent5-year period, but they increased by less than half as much. During the next 2-year period beginning in 1994, the companies for the first time submitted theirown projections of operating expenditures, projecting a significant increase. Theregulator, going through this exercise the first time, changed the projections andbased water tariffs on a projection of constant operating costs. The companies,however, beat that challenge and reduced operating costs to the level of 1989,partly by reducing the number of employees. Over the next two 5-year periods,the regulator set its tariffs based on a slight reduction of operating costs and thenallowed a moderate increase. The operating costs then were very similar to what theregulator had expected.

In summary, the private companies first exceeded the expectations of theauthorities in terms of their ability to reduce operating costs, and later on met thoseexpectations.

Welsh Water: A New Model Emerges 75

Welsh Water: A New Model Emerges

Like all other water companies in England and Wales, Welsh Water became a privatecompany traded on the London Stock Exchange during the water privatization underMargaret Thatcher in 1989.

Cowboy Capitalism

The owners of Welsh Water then pursued an aggressive strategy of expansioninto other businesses: They took on massive debt and used the proceeds to buycompanies that had little or nothing to do with the company’s core business. Newbusinesses included street cleaning, railways and even luxury hotels and a fish farm,all in the service of maximizing “shareholder value”. In 1996, the company boughtan electric company in South Wales and changed its name from Welsh Water toHyder, a multi-utility focused on energy. In the new company, water was reducedto a side business. To some extent, the acquisition made sense: Customer service,billing and collection could be combined for both services, so that the company wasable to cut costs. But the acquisition made less sense if one looked at how it wasfinanced. After the buying spree, the company was highly leveraged, with a hugedebt load and limited equity.

As mentioned above, Ian Byatt, the outgoing Ofwat Director General (1989–2000), ordered an average 12 % tariff reduction in late 1999 to be implemented inApril 2000. The decision sent stocks of water companies into free fall, with somestocks – including those of Hyder – losing 80 % of their value in 1 year. Regulatorshad an eye on the company because of its excessive debt, which was close toexceeding allowable levels. Hyder wanted to issue more shares, but investors werenot interested, forcing the company to sell its assets.

A Revolution from the Managers

Nigel Annett and Chris Jones, managers at Welsh Water, were unhappy with theCowboy Capitalism practiced by the company’s owners. In early 2000, Annett andJones left Welsh Water and created an unprecedented scheme: They founded thenot-for-profit company Green Wales with the sole objective of buying the wateractivities of the company that had employed them. Hyder’s water business wasvalued by Ofwat at 2 billion pounds at that time. How could a mere handful of menand women even dream of mobilizing such a sum for their project? Fortunately,Chris Jones was a finance expert who had worked at Her Majesty’s Treasury and

76 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

at an international economic consulting firm. Nigel Annett had been an investmentbanker before becoming a Director at Welsh Water.

The idea of Green Wales emerged at a propitious time. It was a year after theGovernment of Wales had been established within the United Kingdom, so Welshpoliticians were inclined to introduce policies that set Wales apart from England.Green Wales brought in an influential conservative politician, Lord Burns, whohad been Permanent Secretary at HM Treasury, the second-most powerful man inthe Ministry of Finance after the Minister. Lord Burns, although not from Wales,accepted the position of Chairman of Green Wales and became a powerful advocatein London for the plan hatched by Annett and Jones.

A Revenue-Making Not-for-Profit Company Built on EthicalPrinciples

The ethics of the new company were to be based on the Nolan Principles, developeda few years earlier by a government commission led by the judge Lord Nolan inresponse to a series of corruption scandals. The seven Nolan principles include:Selflessness, integrity, objectivity, accountability, openness, honesty, and leadership.There are countless principles of business ethics, all ripe with high-sounding ideals.Their true test is always in whether they are genuinely enacted. The foundingdirectors of Green Wales, it seems, were serious about breathing life into theseprinciples. But they were not bleeding hearts: They were keen to create a financiallysound company that would receive good grades from rating agencies in order toraise funds in the capital market at the lowest possible cost.

At the time, two companies, Nomura from Japan and the US power utility WPD,were locked in a fierce battle for a hostile take-over of Hyder. They bid up shareprices at the London Stock Exchange from the very low levels reached after theregulator had tightened the screws. The companies were not interested in Hyder’sheavily regulated side business of providing water in Wales. Their target was themore profitable electricity and gas business. And this opened up an opportunity forGreen Wales. The Americans were perfectly happy to sell Hyder’s water business toGreen Wales, provided they could pay the price. Green Wales, formally establishedin April 2000, wanted to raise funds in the capital market through the issuance ofa massive corporate bond with the help of Barclays Capital, an investment bankspecializing in bonds issued by public entities.

A First Transformation Attempt Foiled by the Regulator

While the bond issue was being prepared, an obstacle appeared. Ian Byatt, stillDirector General of Ofwat at the time, had to approve the transaction, but he didnot like the proposal. Ofwat was concerned that Welsh Water would become a“mutual” owned by its customers, devoid of equity capital, unable to raise debt

Welsh Water: A New Model Emerges 77

in the markets, and thus ultimately failing its customers. It was also concerned thatthe new model would be diametrically opposed to the equity-based system practicedin the English water industry. After Barclays Capital heard about these regulatoryconcerns, it withdrew its support for the takeover in May 2000. Green Wales thenapproached Hyder directly to buy its water business. But Hyder, confronted by theregulatory hurdles and seeing that Green Wales did not have the degree of financialmuscle it needed to build up, refused to sell.

It looked as if Green Wales had failed only months after it had embarked on itsambitious project to buy Welsh Water.

A Chance Event Creates a New Opportunity

WPD then bought Hyder in October 2000, after it had bid up the share price incompetition with Nomura to more than double the level it had been at its lowpoint. WPD proceeded quickly to sell all of Hyder’s side businesses. For the waterbusiness, the Americans signed an outsourcing contract with United Utilities, thewater and power company for Northwest England. But the deal fell flat because itinfringed on European procurement law. This chance event was what opened upanother opportunity for Green Wales and its plan to transform Welsh Water into anot-for-profit company. For that purpose, knowing that the Americans wanted to sellthe water business quickly, Green Wales offered a price below the regulatory assetvalue of the company.

But the water regulator still had to be convinced.

Support from the New Regulator

In early November 2000, Lord Burns, Chairman of Green Wales, sent a letterto the newly appointed Director-General of Ofwat (2000–2012), Philip Fletcher,addressing concerns that body had raised. Lord Burns emphasized that Green Waleswould not be a “mutual”, but a company that would strive for efficiency for thebenefit of its customers, increasing competition by outsourcing more activities thanhad been the case under Hyder. The company would continue to be regulated byOfwat and would report as if it was listed on the stock exchange. It would use itsprofits first to build up equity in order to be able to manage risks, and only thenwould provide rebates to its customers. The strategy ultimately proved successful.

Ofwat cleared the acquisition in January 2001, providing certain conditions weremet. These conditions, such as a public commitment to customer benefits andlimiting its activities to the single purpose of providing water and sewerage services,actually further reinforced what Green Wales stood for. It almost looked as if Ofwathad been so convinced that it had tried to outpace Green Wales in its efforts toachieve its own goals.

78 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

The last obstacle to overcome was the issuing of the bonds. Most bonds wereinsured by a U.S. bond insurance company, but none of the bonds carried agovernment guarantee. Most were rated AAA despite the absence of governmentguarantees and without any initial equity capital. The Green Wales bond issue inMay 2001 was extremely successful, being oversubscribed by 70 % and bringingin capital at low interest rates, which was a key objective of Green Wales. Interestpayments per year were 40–50 million pounds lower than for the bonds previouslyissued by Hyder under private ownership. The bond issue was believed to be thelargest ever non-government backed bond issue in pound sterling at the time, raising1.9 billion pounds to buy the company and to pay the advisers. Welsh Water wasacquired for 1.85 billion pounds, only one symbolic pound more than the total debtof the company.

The Green Wales and Welsh Water Model

What emerged in Wales is a model that combines British-style utility regulation witha not-for-profit model. This is a model that did not exist until that day and that isstill almost unknown in continental Europe.

Green Wales, the owner of Welsh Water, is a company that has no shareholders,but only members. Its 66 Members receive no dividends or other compensation.Most of its Members are chosen by an independent selection panel, separate fromthe Board, after public advertisement. The selection panel is chaired by a personindependent from the company. As of 2014, the panel is chaired by Glyn Mathias,a retired Welsh journalist. Any Welsh resident can apply for membership. Membersmust have diverse backgrounds in terms of gender, age and residence. Membershipis personal and Members are not appointed to represent any particular group orstakeholder interest. They include teachers, writers, a former Bishop, Professors,independent consultants, engineers, accountants, lawyers, human resources profes-sionals, employees of charities, a mayor, a retired union official and a dentist. Itis the Members who appoint the Board at the Annual General Meeting, and whocan, in principle, fire them. The Board of Green Wales then appoints the ChiefExecutive of Welsh Water. The bonuses of its Executives are not linked to quarterlyearnings or stock price increases, but to the achievement of service quality standards,the reduction of water bills and environmental improvements. The whole companystructure is designed to be transparent and to ensure that Welsh Water acts in theinterest of the general public. In order to ensure transparency for bondholders, WelshWater also continues to report as if it was listed on the London Stock Exchange.

Performance Improvements

During the 10 years after Welsh Water ceased to be a private for-profit company,it continued to outsource important activities, such as the operation of its assets,

The Scottish Turnaround 79

customer services and billing, to private companies. These happened to be theprivate water companies in England, including United Utilities and Severn Trent.It was thus closer to an asset holding company than a full-fledged utility. Only in2011–2012 did Green Wales end the outsourcing contracts with Veolia, Severn Trentand United Utilities. Green Wales now provides all these services in-house, havingbecome a full-fledged utility.

“Not-for-profit is no excuse for poor service. Indeed, we believe that our differentbusiness model must be a spur to excellent service and the best possible efficiency”,says the company’s 2013 annual report. During its first 10 years as a not-for-profit, the main focus of Green Wales was on reducing the cost of financing, whichaccounted for the lion’s share of its costs. By improving its credit rating, it reducedthe cost of its bond financing. Most Green Wales bonds are bought by UK-basedpension funds and life insurers. Furthermore, financial gearing was reduced to 63 %,down from 93 % in 2001, and leakage was reduced from 245,000 m3 per day in2001/2002 to 193,000 in 2010, a 21 % reduction.

Welsh Water and English Water Companies Compared

How did Welsh Water fare after it was turned into a not-for-profit company in 2001?Did it provide better value for money than the private companies in England?

Water and sewer bills in Wales remain higher than the average bill in England.But according to Ofwat, inflation-adjusted bills in Wales fell by 0.8 % per yearbetween 2000 and 2015, while inflation-adjusted bills in England increased by anaverage of 0.5 % during the same period. According to the company, almost 15 %of Welsh Water’s customers spend more than 5 % of their income on their water andsewerage bill, despite the fact that no dividends are paid and customers are grantedrebates. About 5 % of residential customers received some form of support from thecompany to pay their bills. Welsh Water says it believes that “this is more than anyother water company does” in terms of helping poor customers deal with high waterand sewer bills, probably referring to English water companies.

In 2012, Welsh Water became what is probably one of few utilities in the worldto receive more thank-you letters and emails than complaints. Ofwat’s independentresearch gave Green Wales a customer satisfaction score of 92 %, ranking it secondon the industry league table in terms of customer satisfaction. In addition, 83 % ofemployees say they are proud to work for Welsh Water.

The Scottish Turnaround

Unlike in England and Wales, water supply and sewerage was a local governmentresponsibility in Scotland in the 1980s. And the Scottish mayors, many of them fromthe then-opposition Labour Party, warded off privatization attempts when water was

80 7 The United Kingdom: A Natural Experiment Between Private and Public. . .

privatized in much of the rest of the country. Nevertheless, London made a secondattempt at privatization a few years later. In 1994, it succeeded in wrestling theresponsibility for water and sanitation from local governments as part of a broaderreform of those governments. Water and sanitation were now the responsibility ofthree regional public service providers, and the plan was to privatize them. However,this attempt was thoroughly defeated by Scottish voters in the Strathclyde waterreferendum of March 1994. Seventy percent of voters in the Strathclyde region,which includes about half the population of Scotland, participated. Ninety-sevenpercent voted against the privatization proposal.

Scotland is a useful case for comparison. Following the 1994 vote against waterprivatization, to the chagrin of the Scots, service quality remained below what it wasin England and Wales. But then the tables turned. In 1999, the Scottish governmentcreated an economic regulatory agency for the water sector that has similar tasksand methods as Ofwat in England and Wales: It approves tariff increases, monitorsservice quality and promotes competition. In 2002, it merged the three regionalentities to create Scottish Water, a publicly owned not-for-profit corporation. In2005, none other than Ian Byatt, the former English water regulator who, as headof Ofwat, had cut the profits of water companies in 1999 and was still up to a newchallenge after official retirement, became the Chairman of the regulatory agency,the Water Industry Commission for Scotland.

Initially, Scottish Water was – like almost all water utilities in the world – amonopolist providing water to all households and businesses in Scotland. However,the regulator radically changed this when competition for business customers wasintroduced in 2008. For businesses, Scottish Water now became the “bulk supplier”,while business customers could choose among 18 “retail suppliers” who chargeddifferent tariffs and provided a whole range of services beyond water supply. Inparticular, they offered water audits to identify potential measures to reduce waterand energy use. The idea behind this concept is that customers do not need waterper se, but that they do have needs, such as cleanliness, that should be served atthe lowest cost. Retail companies thus identify water and energy saving measures,implement them and charge a fee that includes both the cost of these additionalservices spread over a number of years and the residual water bill after the savings.Since the bill for the whole package is lower than the original water bill prior tothe savings, both the customer and the company benefit, and the customer canfocus on its core business. For example, a charity running Dumfries House, aneighteenth century country house in Southwestern Scotland, was reeling under itshigh water bill. A water company identified major underground leaks inside theproperty, repaired them, trained staff in how to prevent future leaks, and thus saved11,000 pounds sterling in annual water bills.

Customers can choose between twelve water companies. Many of these com-panies are subsidiaries of private English water companies, but many othersare Scottish companies that were created in anticipation of the introduction ofcompetition for retail business services. In 2011, England followed the Scottishmodel and introduced retail competition for business customers as well, albeitinitially limiting competition only to the largest customers.

Conclusion 81

Scottish Water is not allowed to borrow in the capital market or from banks tofinance its investment needs. Instead, it borrows from the government at an averageinterest rate of 5 % as of 2012. But the availability of these loans is subject topolitical decisions – borrowing in the market may enable Scottish Water to obtaincheaper financing for the exact amount needed and at the exact right time. So far,Scottish Water finances most investments through retained earnings. Its debt is lowat only about a quarter of its balance sheet.

The performance of the Scottish water industry has improved substantially overthe first 10 years following the creation of Scottish Water. Today, the companyprides itself that water and sewer bills in Scotland are about 15 % lower than theaverage in England, while service standards have improved and are on par with theirEnglish counterparts. The Scottish regulator has developed a performance index,based on which Scottish Water achieved an index value of 368, which is comparableto 380 achieved by the best performers in England. The level of investment was 92pounds per capita in 2012–13 compared to 74 pounds per capita in England andWales. Over a mere 7 year period (2005/2006 to 2012/2013), leakage was almosthalved, going from 1.1 million cubic meters per day to 575,000.

Scotland, where water and sewerage remained in public hands, thus has achievedthe same standards that have been achieved in England, albeit at lower costs withoutdividends paid to shareholders and without huge bonuses paid to their executives.

Conclusion

All over the UK, revenues from higher water tariffs have translated into higherinvestments and improvements in service quality. This chapter supports a centralassertion of this book which runs counter to the positions of both supporters andopponents of privatization: On balance, whether water utilities are privately ownedor not did not make much of a difference in the UK. What counts are a sustainablefinancing model, as well as modern, efficient and professional utilities. When thesewere absent – such as in England before 1989 and in Scotland during the 1990s,both under public ownership – water services suffered. Only once these conditionswere met – as was the case in England and Wales under private ownership after 1989and in Scotland under public ownership after c. 2002 – water services thrived.

A byproduct of the English water privatization was the creation of an economicregulatory agency for the water and sanitation sector, an innovation that wasemulated in Scotland for a publicly owned water sector. The two regulatory agencieshave become powerful tools for price regulation and for the benchmarking of utilityperformance. They provide a useful complement to the traditional public regulationof drinking water quality and the environment, adding an economic element toregulation that is absent in almost all continental European countries.

Chapter 8France: An Improved Partnership in theMotherland of Multinational Water Companies

The French water sector is organized in a way that is quite distinct from theorganization of the sector in most other European countries. Unlike in England,there is no full privatization of utilities through the sale of assets. However,in contrast with other European countries, with the exception of Spain, mostmunicipalities delegate the provision of water and sanitation services to privatecompanies. Two thirds of French citizens receive their water from just three privatecompanies – Veolia, Suez and the much smaller SAUR. They have signed a total of4,700 contracts with municipalities for drinking water alone. These companies arealso the most active players on the international water market, serving, directly orindirectly, 163 million people in about 40 countries in 2010, with Veolia and Suezbeing by far the largest players. In France, where the state dominates the economy,the strong presence of private companies in the water sector may seem counter-intuitive. It is explained largely by history, as will be shown below.

The delegation of water or sewer services is usually done through concession orlease contracts (“Affermage”). These contracts have a specific duration. When theyexpire, this opens up the possibility of bidding them out again, which may result ina change of operator. It also makes it possible to remunicipalize water and sewerservices at the end of the contract without paying contractual penalties. In all cases,municipalities retain the ownership of the infrastructure and, unlike in England, theyeven continue to finance a large share of the investments.

Fragmented Local Government

There are more than 36,000 municipalities in France, some of them with less than100 inhabitants. The water sector thus is highly fragmented. This fragmentationis somewhat mitigated by the fact that many municipalities are part of municipalassociations that can take many different forms (“Intercommunalité”). It is oftenthese associations, and not each individual municipality, that are in charge of

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84 8 France: An Improved Partnership in the Motherland of Multinational Water. . .

providing water supply and – to a lesser extent – sanitation, or contracting outthese services to the private sector. For example, in the metropolitan area of Paris(commonly referred to as Île-de-France), with its 12 million inhabitants, thereare – like a microcosm of the entire country – three different models of serviceprovision: First, a large municipal association regroups 144 municipalities withfour million inhabitants. This association has delegated the responsibility to providedrinking water and sanitation to Veolia under a lease contract. Second, there areseveral smaller municipal associations that mostly provide water and sewer servicesdirectly. And third, in the heart of the metropolitan area lies the municipality of Parisproper with its two million inhabitants. The municipality of Paris used to delegateits water and sewer services through two lease contracts to Veolia and Suez, but nowprovides these services directly under public management.

Despite the existence of municipal associations, the water sector in Franceremains highly fragmented. There are 14,200 public entities in France in charge ofwater supply, and 17,200 in charge of sanitation. This is higher than in Germany,with its 6,400 service providers; higher than in Belgium, with its two regionalwater companies in Flanders and Wallonia respectively, as well as about 70 otherwater utilities; much higher than in the Netherlands, with its ten regional watercompanies; and also much higher than in England, with its nine regional water andsewer companies, as well as a handful of water-only companies, and in Scotland andWales, each with its single water company.

Improved Governance, Step by Step

Unlike in Germany, the national government in France plays an active role inshaping the conditions under which municipalities and private companies providewater services. These interventions had a positive effect on the French watersector, which was characterized by a lack of transparency and cozy relationsbetween politicians and the executives of water companies. This has led, in somecases, to corrupt behavior, as in the case of Grenoble described further below.Various central state institutions have taken an active role in the water sector tocombat these excesses: The Loi Sapin (an act named for the Minister of Economyand Finance at the time, Michel Sapin) limited the financing of political partiesby private companies (such financing was completely banned 3 years later) andforced more competition on the water sector in 1993; the Loi Barnier in 1995(named for the Minister of Environment at the time, Michel Barnier, who laterbecame European Commissioner) for the first time required water utilities to submitcomprehensive data on their performance to their municipal owners. In 2003, areport by the National Audit Office (Cour des Comptes) criticized the lack ofcapacity of many municipalities to manage complex concession and lease contracts,in particular regarding unjustified increases in certain fees. It also concluded thatthe municipalities do not use the numerous legal instruments at their disposal to

The History of French Water Sector 85

better control the contracts they sign. In 2006, a new law created a National WaterAgency, ONEMA. The regulatory agency established for the first time a nationaldatabase to monitor the performance of water utilities in 2009, thus increasingthe transparency in the sector. However, the submission of data to the regulatoris voluntary, and ONEMA often struggles to obtain the data it needs to performits functions. A 2012 decree complements the legal framework by imposing higherwater abstraction charges on water utilities that have high leakage losses and do notaddress the problem. Moreover, the Oudin-Santini Law passed in 2005 allows watercompanies and water agencies to spend up to 1 % of their revenues for “internationalsolidarity”, i.e., for water supply and sanitation projects in developing countries.

Unlike its British counterparts, the French National Water Agency does not setwater tariffs. Its role is limited to the collection of data and to technical assistance.Despite the creation of ONEMA, the economic regulation of water and sanitationutilities in France is done predominantly by contract at the local level, with themunicipality being in charge of setting water tariffs and service standards throughthe concession and lease contracts it signs with private companies.

The History of French Water Sector

The Emergence of Private Water Companies in theMid-Nineteenth Century

The concession contract with a private company is a French invention from thenineteenth century. The first private water concession in the world was awardedin France in 1853. It was given to a company created by Count Henri Siméon,a conservative politician who had supported a coup that allowed Napoleon III tobecome Emperor of France. As a reward, the Emperor issued a decree that grantedSiméon’s Compagnie Générale des Eaux the exclusive right to supply the city ofLyon with drinking water for no less than 99 years.

The concession was quickly followed by a 50-year concession in Paris andconcessions in other French cities, as well as abroad. At the end of the nineteenthcentury, the Compagnie Générale provided water services in Venice, Naples,Lausanne and Constantinople. In 1880, the French Bank Crédit Lyonnais foundedthe second large French water company, Lyonnaise des Eaux. It won water contractsin France and abroad, including in the French Protectorate of Morocco. Theinternational expansion of French water companies in the late nineteenth centurywas closely linked to colonial expansion. The Suez Canal even gave its name to theFrench Suez Canal Company that built and operated it, and which also oversaw thedrinking water supply of the cities along it. More than a century later, Suez wouldmerge with Lyonnaise des Eaux to become the second largest water company in theworld, Suez Environnement.

86 8 France: An Improved Partnership in the Motherland of Multinational Water. . .

The private companies who held these concessions in nineteenth century Franceprovided untreated piped water to fire hydrants and public stand posts, as well as tothe premises of the rich. The companies had two types of revenue. First, they werepaid a fixed fee by the city for the public service they provided through fire hydrantsand distributing water at the public stand posts for free. This fee was supposed tocover their costs without profit. Second, rich households that had their own houseconnections paid fees to the companies. These latter revenues were the basis of thecompanies’ profit.

The Demise of Water Concessions in the Late NineteenthCentury

However, the system had many flaws. The tariffs for house connections were setin advance for the entire contract period, which was often 50 years or even more.Changes in the contracts were difficult, and if any additional obligations were added,the companies understandably wanted to be compensated for the additional costs.Under the first concession contracts, the companies had no incentive to providepiped water to the homes of the poor, because the poor were unable to pay the tariffsfor house connections set in the contracts. After a series of cholera epidemics inEurope in 1863–1875 and 1881–1896, and thanks to a better understanding of howcholera was transmitted, many municipalities wanted to change their concessioncontracts in two crucial respects: They wanted to expand house connections toeveryone, and they wanted to introduce water treatment. But the poor were not ableto pay for these costs, and the municipalities were reluctant to raise taxes. The modelof the early concessions thus was ill-suited to provide universal coverage to citieswith widespread poverty.

In the Paris suburbs, private companies had contracts with dozens of munici-palities. An emergent middle class in these municipalities resulted in more peoplethan expected asking for house connections, allowing the companies to make higherprofits than anticipated. This led to endless disputes. From the mid-1870s to theFirst World War, the French Supreme Administrative Court heard 78 cases betweenmunicipalities and private water concession holders. Amid complaints about poorwater quality and excessive profits, there was a general sense of dissatisfactionwith private water concessions. Some municipalities wanted to force companies totreat water, others requested lower tariffs or faster investments, and some wantedto terminate the concession contract before its term. In most cases, the SupremeAdministrative Court sided with the water companies. Frustrated, municipalitiesthus let the concession contracts elapse when they came to term, or ended themearly even if they had to pay high penalties.

The municipality of Lyon decided to terminate its 99-year concession contractahead of time in 1888. But, faced with stiff penalties, it only managed to terminate

The History of French Water Sector 87

it 12 years later after lengthy negotiations. Paris also gradually returned to publicmanagement after a 50-year concession by Compagnie Générale expired in 1910.

The local governments in the larger cities then stepped in, took control of thewater systems and finally did raise taxes to finance universal access to piped drinkingwater. The private water companies in France, deprived of new concession contracts,reinvented themselves and became primarily contractors for public water companiesfor the next two generations. Only in a few cities did private companies continue toprovide water services. At its low point in 1936, the share of private water operatorshad declined to 17 %.

When the era of colonialism drew to an end, it also meant the end of mostinternational French water concessions. After the downfall of the Ottoman Empire,the Turkish Republic rescinded the water concession for Istanbul; the Suez Canaland the private water companies in Egypt were nationalized in 1956; and a fewyears later, the Kingdom of Morocco ended the Casablanca concession. Only onecountry, the Ivory Coast, with its staunchly pro-French President Félix Houphouët-Boigny, bucked the trend: A private water contract was signed at independence in1960. This contract was a lease contract. This same model also allowed French watercompanies to stage a comeback in their home country.

The Post-war Comeback of the Private Sector

Unlike in England, where most water utilities remained publicly managed until1989, the private water companies in France made a surprising comeback in thefirst decades after the Second World War. This comeback was not driven by anynational policy for privatization. Quite to the contrary, the post-war governmentconsidered nationalizing the private water companies altogether. But the companiesmanaged to grow by taking advantage of opportunities in small towns. After theSecond World War, many small towns built drinking water systems for the firsttime, but had little experience in running them. They were overwhelmed by thenew responsibility and were glad to accept a helping hand. Beginning in the 1960s,municipalities also had to cope with more stringent environmental standards andmany started to build their first wastewater treatment plants. The private watercompanies successfully marketed their technical and managerial experience to helpmunicipalities cope with these challenges, often in parallel with the creation ofassociations of smaller municipalities. The growth was based on lease contracts.These contracts kept the responsibility for raising finance with the public sector.Even the traditional concession contracts were modified in such a way that a shareof tariff revenues (“part municipalité”) directly went to the municipal coffers, whereit was earmarked for water investments. A substantial share of water and sewerbills consisted of taxes levied by basin agencies, established in the country’s fivemajor river basins. These basin agencies levy taxes on raw water abstraction andwastewater discharge. They use their revenues to subsidize investments for water

88 8 France: An Improved Partnership in the Motherland of Multinational Water. . .

treatment and particularly for wastewater treatment. Created in 1965, the fundingfrom the basin agencies helped to expand wastewater treatment and improve thequality of French rivers. However, the subsidies were not financed by taxes or debt,but rather from water tariff revenues that were used as an incentive for utilitiesto invest in environmental clean-up. Altogether, only 15 % of water and sewerinvestments in France are financed by private companies, while 85 % are financedby municipalities with their share of the water bill, by basin agencies and by otherpublic entities.

All the while, the share of the private sector thus gradually increased to 32 %in 1954, 50 % in 1975, and 80 % in 2000. During that time, Compagnie Généraleexpanded into other sectors, such as electricity, public transport and solid wastemanagement, just as Lyonnaise had done right from the beginning.

Nationalization Averted

In 1981, the Socialist François Mitterrand became President. His government firstplanned to nationalize the big water companies, just as it had been after the war.However, the central government was loath to interfere with the autonomy ofmunicipalities, which held hundreds of contracts with the private companies. It wasalso reluctant to shoulder the cost of compensating the private companies. Thus, theprivate companies escaped nationalization a second time, and indeed, continued toexpand.

A Too Cozy Relationship with Politicians

The French model has been characterized by a cozy relationship between politi-cians and company executives. In addition, during the 1980s, cartels and suspectaccounting practices were widespread and often tolerated in the French water sector.This was combined with occasional bribes and generous contributions to politicalcampaigns. Because there were only two large water companies, there was littlecompetition. Company executives built a close network of connections with the twomajor political parties, the Conservatives and the Socialists. Water contracts wereoften awarded directly without any bidding. Contract durations were long, oftenspanning several decades. When the contracts did come to term, they were oftenrenewed without bidding.

Paris Privatization

The coziness between politics and private water companies is exemplified by theclose political alliance between two men: Jerome Monod, the CEO of Lyonnaise,

The History of French Water Sector 89

and Jacques Chirac. When the young Chirac was Prime Minister in the 1970s,Monod had been the head of his office. Monod then became the secretary general ofa new party established by Chirac, the RPR. When Chirac became mayor of Parisin 1977, Monod had moved on to Lyonnaise, where he quickly moved to the top,arranging generous donations to the RPR along the way. In 1984, Chirac arrangedfor the water supply of Paris to be privatized. Compagnie Générale already hada service contract for water billing and collection on behalf of the city. Chirac’sadministration could have launched a competitive bid for the entire city. But instead,it arranged a deal. It decided to separate the city into two areas divided by the SeineRiver: The left bank was awarded to the smaller of the two companies, Lyonnaisedes Eaux, under Monod, while the larger area on the right bank was awarded to thelarger Compagnie Générale. All this was done under a 25-year lease contract thatallowed for public financing of infrastructure. They allowed the private companiesto select contractors, so that construction contracts were passed on to subsidiariesof the two water companies. It was clearly a profitable deal – an arrangement that,according to some, led to overinvestment in infrastructure and, thus, provided goodquality services at relatively high costs.

A Rip-Off in Grenoble

Another such example was the concession contract for the city of Grenoble in theFrench Alps.

In 1987, Monod had lunch with Alain Carignon, then mayor of Grenoble.Carignon was also Minister of Environment under Chirac, who had been re-electedfor a second term as Prime Minister. During that lunch, it was decided that the cityof Grenoble would sign a concession contract for its water system with Lyonnaisedes Eaux. It later turned out that Lyonnaise gave 3 million dollars in bribes directlyto Carignon and, on top of that, provided illegal campaign contributions to his party,the RPR. Monod later denied any knowledge of these bribes. Carignon could freelyuse a luxury apartment in a posh Paris neighborhood and got free plane tickets,which he used in 121 cases. At a time when fat concession contracts had fallen outof fashion in France, in 1989, the Lyonnaise subsidiary COGESE was awarded a 25-year water concession without any bidding. A lone city councilor from an oppositionparty, the Association Démocratie Ecologie Solidarité (ADES), Raymond Avrillier,challenged the decision in administrative court, but his plaint was quickly dismissed.

COGESE then proceeded to get the bribes back from water customers throughincreased tariffs. The costs in its books were inflated through fraudulent accountingpractices to justify the increase before auditors. Tariffs were increased by a massive164 % in one go, followed by annual increases linked to a price index that evolvedfaster than inflation. Contracts were passed on to other subsidiaries of Lyonnaise,again without competitive bidding and at inflated prices. The concession contractalso included “entry fees” equivalent to 35 million dollars paid to the municipalityin yearly installments. While not strictly a corrupt practice, these fees amounted

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to a hidden tax; the municipality got its hand on cash that would be recoveredfrom citizens through higher water tariffs. At the same time, the municipality wassupposed to regulate the private company and keep its tariffs at reasonable levels. Itwas a blatant conflict of interest, and no one except Avrillier seemed to care muchabout it.

The case of Grenoble may have been extreme. Because of the lack of trans-parency of the French water sector, it is hard to tell to what extent the Grenoblecase was representative or exceptional. French water companies undoubtedly hadaccumulated substantial technical expertise and were doing a good job of modern-izing the water sector, introducing new technologies and especially helping smallermunicipalities to improve their management. But there was limited competition,limited transparency, poor accountability and insufficient regulation.

A New Law Chastises Private Water Companies

In 1992, Parliamentary elections in France brought the Socialists a majority. Asmentioned above, the new Socialist Finance Minister, Michel Sapin, initiated anambitious law to prevent corruption and promote transparency in public life. Thelaw, prepared by the Cartel Office and passed in January 1993, was broad: Itcovered the financing of political parties, real estate transactions, advertisement andpublic procurement, in particular for the “delegated management” of public servicessuch as water supply and sanitation. The law obliges local governments to awardwater supply and sanitation contracts competitively, and the contracts have to belimited in time. A simple extension of a contract is now only allowed in exceptionalcircumstances and for a short period. As a rule, contracts have to be bid out againafter they have expired.

The Loi Sapin was an important step in cleaning up the water business in France.It also made the French water sector less profitable and, thus, contributed towardspushing French water companies to expand overseas.

International Expansion

The international expansion of French water companies was not led by the marketleader, the Compagnie Générale, but by its smaller competitor, Lyonnaise des Eaux.1

At that time, Lyonnaise des Eaux was still relatively small, the 40th largest company

1Since the early 1990s, the two French water companies have changed their names several times.CGE changed its name first to Vivendi Environnement and then to Veolia Environnement, the nameit maintains to this day. In the meantime, Lyonnaise des Eaux merged with the multi-utility Suezand changed its name to Suez Environnement.

International Expansion 91

in France. Seeing little potential in expanding its home market, Jerome Monodengineered a profound reorientation of the quiet old company: It began to expandabroad by buying a stake in the Spanish water company Aguas de Barcelona in 1979,and by gaining a concession in the Portuguese territory of Macao in China in 1985.It also bought several “water only” companies in England in 1988, right beforethe Thatcher privatizations, thus increasing the number of its foreign customers(13 million) above the number of its French customers (10 million). But, as theFrench sociologist Dominique Lorrain points out in his research on the company, its“center of gravity” remained in France and its culture remained staunchly French. Itsemployees had little international experience, except in the former French colonies.

The international expansion of the company began in earnest in the 1990s when itmerged with another company, Dumez, and won a large number of foreign contractsin two waves. The first wave in 1993 included, in particular, the large concessionin Buenos Aires, as well as smaller contracts, such as one in Rostock, Germany,and a management contract for parts of Mexico City. The next wave, beginningin 1997, included concessions for one half each of Manila and Jakarta, as wellas concessions in Casablanca and Budapest. This was a massive challenge for thecompany, whose managers had previously only worked in medium-sized Frenchcities. The biggest contracts held by Lyonnaise in France were for one half of themunicipality of Paris minus its suburbs, numbering about one million inhabitants,and for Bordeaux including its suburbs, with 700,000 inhabitants. The first Frenchdirector of Aguas Argentinas, serving Greater Buenos Aires with its 10 millioninhabitants, had previously managed the water utility of Béziers, a town in SouthernFrance of only 70,000 inhabitants.

A factor that favored the French water companies during their internationalexpansion in the 1990s – the Compagnie Générale quickly followed in Lyonnaise’sfootsteps – was that the French model, with its many options of “delegated man-agement” over a defined period of time, was more palatable to most governmentsin developing countries than the English model of outright and permanent sale ofwater companies to the private sector. But for every opportunity, there is a challenge.As Dominique Lorrain explains, Lyonnaise tried to train a cadre of 50 internationalmanagers from various countries to make the company a truly multinational com-pany. However, these efforts apparently were not successful. The notion of having“supermanagers” who would easily move from one country to another simplyclashed with the reality of the water sector. While the understanding of foreignpolitics, laws and culture is essential in any industry, it is especially important inthe water sector, which is very local and depends heavily on government regulation.

Suez Environnement, as Lyonnaise is called today, had to learn this at a cost.Its concessions in Atlanta in the United States, Buenos Aires and Bolivia endedprematurely after massive disputes and heavy losses. In January 2003, the newCEO of Suez Environnement, Gerard Mestrallet, announced a major restructuring.The company sold some of its foreign concessions to local partners, such as inManila, and became very selective in pursuing new water contracts abroad. Theprofit margins for the water operations were about half as high as the profit marginsin the energy sector, the other major business area of Suez. Frustrated by its foreign

92 8 France: An Improved Partnership in the Motherland of Multinational Water. . .

adventures, Suez refocused more on the energy sector and effectively abandoned,or at least severely curtailed, its international expansion as an operator in the watersector, 10 years after it had won the first major concession abroad in Buenos Aires.

Remunicipalization

Grenoble Remunicipalizes After Corruption Was Exposed

Back in France, shortly after the Loi Sapin was passed in 1993, the funeral bells rangfor the corrupt deal that had brought about the Grenoble water concession and itsinflated water prices. The prosecution got wind of the deal, and in November 1995,two Lyonnaise executives, as well as Alain Carignon, the mayor of Grenoble andMinister of Environment from the Conservatives, were convicted of bribery. Theywere sentenced to prison terms ranging from 3 to 2 years and fines were leviedagainst them. Jerome Monod, the CEO of Lyonnaise who had initially denied anywrongdoing by the Lyonnaise subsidiary, lauded the court decision: “Justice hasbeen done”, he said, adding that the campaign finance practices were tolerated atthe time and that he had been “among the first ones” to ask that they should bechanged.

In June 1995, the opposition party ADES won the local elections in Grenoble.It wanted to remunicipalize the water services, but it could not because of heavycontractual fines. In a separate court case, ADES argued that the concessioncontract was illegal and that customers should be refunded for what they had beenovercharged. A first instance court turned down the case, but ADES pursued it upto the highest instance, the Conseil d’Etat. There it won. In October 1997, 8 yearsafter the first appeal by Raymond Avrillier, the concession contract was declaredillegal and the High Court ordered COGESE to pay a refund to the water users ofGrenoble. In 2001, the water service in Grenoble was remunicipalized, making itone of the first remunicipalizations of water services in modern Europe.

Paris Remunicipalizes

The remunicipalization in Grenoble was not a watershed for the French water sector.Although Danielle Mitterrand, widow of the first French Socialist President, andher NGO France Libertés pushed for the remunicipalization of water and sanitationservices, the French private sector remains strong in its home country. Today, thereare 4,700 public-private partnerships in France for drinking water alone, and about700 contracts are bid out again every year.

When the city of Paris remunicipalized its water and sewer services, some sawthe balance tipping against the private sector in France. However, the remunicipal-

Remunicipalization 93

Table 8.1 Water tariff, water use and affordability in Paris (without sanitation)

Residential water tariff USD/m3 2.51Water use Liter/capita/day 138Household size Persons 2.3Typical residential water bill USD/month 23.92Median net household income (estimate) USD/month 3,433Affordability % of income 0.7 %

Source: Author’s calculations based on the annual report 2013 of Eau der Paris

ization in Paris was more the result of political maneuvering highly specific to oneplace at one time. In fact, the private companies had done a good job in terms ofservice quality in Paris. Old lead pipes had been replaced to improve drinking waterquality, water losses had been reduced substantially from 24 % to only 4 % andthe internal systems had been modernized, for example, by installing remotely readwater meters. This had come at a price, with water tariffs more than doubling duringthe 25 years of the lease contracts. But given skyrocketing rents in Paris, the weightof the water bill in household expenditures still remained acceptable, as shown inTable 8.1, and water tariffs were not an issue that upset the public.

Unlike in Berlin, as we will see in the later chapter, there was no citizen group thatmobilized against the private companies. When the Socialist Bertrand Delanoë waselected mayor of Paris in 2001, he talked about remunicipalization, but did not endthe lease contracts prematurely, thus avoiding the fines associated with such a move.Only when preparing for his re-election campaign did he promise to remunicipalizethe water supply, a demand that had been pressed upon him by his political allies,the Greens and the Communists. Keen to become a national political figure, Delanoëwanted to be re-elected in the first round with no run-off, and to achieve this, heneeded the full support of his coalition partners. One of the few issues over which amayor has real control is, indeed, the water supply, and the lease contracts were toexpire in 2010, so that the remunicipalization could have been achieved at little cost.The election turned out as Delanoë expected, and after his re-election in 2008, AnneLe Strat from the Greens became deputy mayor. She immediately announced thatthe two concession contracts would not be renewed after they were due to expire in2010. The public utility Eau de Paris, which had been reduced to bulk water supply,took over the entire system again, and water tariffs were reduced by 8 %.

Eau de Paris: Underinvestment at the Expense of FutureGenerations?

Eau de Paris self-finances more than 80 % of its investments. Unlike most waterutilities, it does not incur any commercial debt in the form of bank loans or bonds.It does only incur limited debt through zero-interest loans from the Water Agency

94 8 France: An Improved Partnership in the Motherland of Multinational Water. . .

Seine-Normandie, from which it also receives investment subsidies. The company isquite profitable, with a surplus of 63 million euros in 2013, while total sales revenuewas 170 million euros. The surplus is entirely reinvested, and – in contrast withGerman water utilities – no profits are paid out to the municipality. But there is acatch: Investments are low, at 20 euros per inhabitant per year, standing at only athird of the French average. Only 0.2 % of the network is renewed every year, whichis equivalent to a renewal of the entire network after 500 years if the same slowrhythm is maintained – a problem that affects many French water and sanitationutilities, but appears to be particularly acute in Paris. Sooner or later, Eau de Parismay be forced to incur commercial debt to maintain its assets.

The level of leakage is about half the recommended maximum threshold of 15 %of produced water fixed in French law (décret nı2012-97). Leakage seems low inpercentage terms, at less than 8 %, and lower than the 20 % average for France. Butthis indicator is flawed. The leakage expressed as a percentage is low because theParisian water network is relatively short, since downtown Paris is densely settledwith multi-floor buildings. It is more appropriate to measure leakage per length ofdistribution network. Using this indicator, a completely different picture emerges.With almost 20 m3/km of network per day, leakage in Paris is much higher than theaverage in France of 3.6 m3, and higher than in almost all other utilities covered inthis book, including the National Water and Sewer Company in Uganda, as shown inAnnex 2. The only exception is London, which has the highest leakage in Englandand leakage that is only slightly higher than in Paris.

Remunicipalization in Other French Cities

The water and sewer system in most of Île-de-France was not remunicipalized andremained under private management. Prices were reduced when the concessionswere bid out anew in 2010. Nevertheless, the Paris remunicipalization sent a signalto other French cities. During the subsequent years, 40 French cities and townsdecided to remunicipalize, including Rouen in 2011 and Brest in 2012. In Bordeaux,a public campaign led to audits of the accounts of the private water company, as aresult of which the municipality was paid back 300 million euros. The municipalitythen decided to end the contract with Suez Environnement in 2019, 3 years earlierthan was designated in the contract, even if it had to pay penalties of 50–70 millioneuros for the early termination. Other cities managed to negotiate substantial tariffreductions as a condition of continuing private contracts, such as Toulouse, whichgot a 25 % tariff reduction.

However, this swat of remunicipalization should be seen in the context of the 700contracts that are bid out every year and the 4,700 public-private partnerships thatcontinue to exist in France for drinking water alone. Despite the remunicipalizationin Paris and in a few other cities, the private sector maintains a strong position as anoperator in the French water sector.

Conclusion 95

Marseille: More Competition Instead of Remunicipalization

In the metropolitan area of Marseille, the expiry of the water and sewer contracts in2013 ignited a political debate. The two big French water companies had createda joint venture, the Société des Eaux de Marseille (SEM), whose contract hadbeen renewed and amended 60 times since it had first been attributed in 1942.Under pressure from the government, the companies decided to end the JointVenture, which was increasingly perceived as what it was – an arrangement toavoid competition. As their first line of defense, the companies split up the booty:Veolia took the drinking water system, while Suez was attributed the sewer system.Surprisingly, this arrangement subsisted for two decades after the passing of the LoiSapin, which was supposed to increase competition in the water sector. Only whenthe latest in the series of contracts expired did the water companies have to acceptthat they would need to compete if they wanted to keep their contracts.

Indeed, the Greens and the Communists in the councils of the 16 municipalities inthe region asked for a remunicipalization following the example of Paris. However,the Socialists, as the largest party, and their allies from the Conservatives decided tocontinue with the model of private service provision, based on their narrow majority.

The bidding was done in four lots, one covering drinking water and threecovering sanitation in different parts of the metropolitan area, each for a durationof 15 years and with a combined value of 3.2 billion euros. In the end, Veolia wonthe water lot and two sanitation lots, but only after offering a 20 % reduction inwater prices. The sanitation lot covering Marseille city was won by its competitorSuez, with the sanitation tariffs for all contracts remaining unchanged. 60 millioneuros will be invested to upgrade the city’s wastewater treatment plant to improvebathing water quality after periods of heavy rainfall, in line with EU regulations.

Less than a year after the contracts were awarded, auditors from the regionalgovernments investigated the transaction. The regional prefect had asked them tofind out if the metropolitan government could not have extracted lower tariffs, ashorter contract duration, or more investments. There were also allegations of aconflict of interest, because one of the local councilors had also worked for LoicChausson, the President of the Veolia subsidiary serving Marseille and President ofthe World Water Council, whose seat is in Marseille. At the time of this writing,no result of the investigations is available. Whatever the merits of the accusations,the episode clearly shows that the scrutiny to which water contracts in France aresubjected is more intense today than it was in the past.

Conclusion

It is sometimes assumed that privately managed water companies are more expen-sive than publicly managed water companies. Evidence from France shows that thetariffs set by private providers are indeed 12 % higher than the tariffs set by public

96 8 France: An Improved Partnership in the Motherland of Multinational Water. . .

providers. But this conclusion has to be seen in context, since the conditions facedby private and public companies in France are not the same. For example, publiccompanies do not have to pay for the acquisition of public land. Also, they are notsubject to corporate income tax or property tax. In addition, according to a studyby the research institute INRA, the municipalities with the most difficult conditionstend to delegate service provision to the private sector. It thus seems that in terms oftariffs, there is no clear difference between water services provided by publicly andprivately managed companies in France.

Another question is to what extent the governance of the French water sector hasimproved. According to a study carried out for the Ministry of Environment in 2006competition increased following the passing of the Loi Sapin in 1993. The averageduration of concession and lease contracts decreased to 11 years, the average pricepaid to private operators declined by 9 %, and the average number of bids by privateoperators for a given contract increased from 2.6 to 4.5. The creation of a nationalregulatory agency of the water sector in 2006 has improved the monitoring of utilityperformance, although the powers entrusted to the agency remain far weaker thanthose that the British regulatory agency Ofwat enjoys. While substantial challengesremain, one can still conclude that the governance of public-private partnerships inthe French water sector today is better than it was 25 years ago.

Chapter 9Germany: Healthy Municipal Utilities, but witha Quirk

In Germany, more than 6,000 municipally-owned water utilities produce high-quality water that can be drunk from the tap. Leakage accounts for, on average,only 6 % of water production, among the lowest in the world, in large part becausethe network is regularly renewed. The pipe network is in such good shape that,unlike in countries with a hotter climate and worse infrastructure, there is no riskof recontamination between the treatment plant and the tap. Utilities in manyother countries chlorinate drinking water to prevent such recontamination in thedistribution network. Germany is one of a few countries in the world that providessafe drinking water without the need for chlorination, and customers appreciate thebetter taste of the water. According to a survey, 91 % of water customers are satisfiedor very satisfied with the service they receive from their local water utility. A highlevel of service quality and technical excellence are hallmarks of the German watersector, which is well regulated in terms of drinking water quality and pollution.

But the sector also has its weak spots. Economically, it is largely self-regulated,with almost no role for the federal government, no British-style regulatory agency,and only very light economic regulation of water utilities by the 16 states. In thisenvironment, a strange thing occurred: Around the turn of the millennium, manyGerman cities actually sold their water and sewer infrastructure to U.S. investorsto allow them to save on taxes, while providing up-front cash to the cities, asdescribed further below. The risks of these deals were often not well understood,resulting in some cases of losses to utilities. Perhaps another weak spot is thatGerman water tariffs per unit of water are among the highest in the world, leadingto allegations that German utilities gold-plate their infrastructure. But despite thesehigh tariffs, monthly water bills remain affordable, largely because residential waterconsumption is one of the lowest among wealthy countries: At 121 l (32 gal) percapita per day, it is much lower than that of New York City, with 319 l (84 gal), andLondon, with 167 l (45 gal).

Per capita tap water use in Germany has declined by 16 % over the past 20 yearsfrom its already low previous level. The reduction was caused by more water-efficient appliances, the increased use of rainwater for lawn watering, and increased

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_9

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environmental awareness. This has actually caused some problems: Sewers are notflushed sufficiently any more, sometimes resulting in a foul smell. Some utilitieshave even appealed to their customers to use more water: Nathalie Leroy, ManagingDirector of Hamburg Wasser, called saving water “nonsense”. “We have too muchwater”, she said, leading to an increase in the groundwater level. Groundwater isalready high in Hamburg, so that the foundations of houses are damaged. And,counterintuitively, saving water does not even help in reducing costs: 80 % of autility’s costs are independent of water consumption. The reduced water use forcesutilities to increase their tariffs per unit of water, so that water and sewer bills inGermany have barely declined in inflation-adjusted terms despite the lower waterconsumption.

Tariffs and Affordability

By law, tariffs have to cover costs, and assets are regularly maintained. Infrastructurewas initially partially financed through subsidies, but today, the renewal of assets isfinanced to a large extent through retained earnings and – to a lesser extent – bybank loans. Debt typically accounts for less than half the balance sheet of Germanutilities, making them financially healthy with a big cushion of equity.

Water bills are affordable to the great majority of Germans. Two thirds of watercustomers say that they do not even know how high their water bill is, mostlybecause they are tenants of multi-apartment buildings and, thus, never receive awater bill. For a household of two, the average water and sewer bill – or the shareof the water and sewer bill allocated to the household – is 34 euros per month. At abit more than 1 % of income, this is quite affordable to the average household. Thepoorest receive welfare payments to cope with water bills, along with support fortheir rental payments.

After reunification, massive subsidies were provided to East Germany to buildup its infrastructure. Wastewater treatment plants were often oversized in theexpectation that industrial estates would attract major commercial customers. Thesehopes were not fulfilled. The population has declined by more than 10 % over thelast two and a half decades from 17 to 15 million, leaving municipalities with heavyexpenditures for maintenance and debt service. As a result of overinvestment andpopulation decline, water and sewer tariffs in East Germany are much higher thanin West Germany. For example, in the state of Brandenburg, a monthly water andsewer bill is 45 euros on average, compared to only 26 euros in Bavaria.

Cross-Border-Leases: Selling German Sewers to HelpAmericans Save Taxes

A not-so-bright spot in the German water sector are so-called cross-border-leases,a financing scheme designed by American lawyers and German bankers with theobjective of saving taxes. Largely without the knowledge of the respective American

Cross-Border-Leases: Selling German Sewers to Help Americans Save Taxes 99

and German publics, this form of financing spread among municipal utilities inGermany, Austria and Switzerland in the mid-1990s. Under a Cross-Border-Lease,a German city effectively sells its assets to a Trust based in the U.S. or in a taxhaven such as Bermuda, and then leases the same infrastructure back for the next30 years. The services continue to be provided by a publicly owned and publiclymanaged utility whose tariffs remain unchanged. According to the promoters of thisarrangement, consumers would not be affected.

The beneficiaries are American companies and wealthy Americans who savetaxes, then the lawyers, advisers and bankers who arrange and finance the deals,and lastly the German municipalities who receive up-front payments for the saleof their assets. In the short run, all three win. These contracts are typically morethan a thousand pages long. In all likelihood, many city treasurers and councilorswho became involved in these deals did not fully understand the implications ofthe contracts, which were never even fully translated into German. City councilmembers only received a summary in German prepared by the advisers who hadcome up with the deal. The contracts were secret and, thus, not subject to scrutinyby the media, concerned citizens, or NGOs. Litigation was to be carried out at courtsin New York.

About 180 German cities and towns signed such cross-border-leases between1995 and 2003, covering more than 30 billion euros of assets from water andsanitation to tramways and waste incineration plants. Certain cities, such asLeipzig, signed seven such contracts, covering every imaginable type of city-ownedinfrastructure one after the other, even including schools in the end. Many mayorsand city treasurers were more than willing to accept the deals. They travelled to NewYork City where pictures show them standing proudly in the posh offices of WallStreet law firms.

A typical cross-border lease used 85 % of debt financing and 15 % of equityfinancing. Of an amount of 100 million dollars used to buy infrastructure assetsin Germany, 85 million would be lent by banks. Equity investors from the UnitedStates provided only 15 million dollars, but they were able to claim depreciation forthe entire investment of 100 million dollars over a period of 30 years in order toreduce their income tax bill in the U.S.

The municipalities kept about 4 million, and the advisers took about 6 millionin fees, both paid up front. 75 million dollars were immediately transferred backto two separate bank accounts, one of which was with the same bank that providedthe funds. The bank then invested the funds and paid the lease fees for the cityover a period of 30 years. 15 million dollars, the amount provided in equity, wereimmediately deposited with a third bank that also invested the funds for 30 years.These funds were supposed to allow the city to buy back its infrastructure after30 years. The entire deal was a financial illusion created to save taxes for U.S.investors. Many German city treasurers and bankers had no qualms about thisscheme: If the U.S. government wanted to allow its citizens to save taxes in thisway and German municipalities and utilities could get a piece of the cake, why notgo along with it?

100 9 Germany: Healthy Municipal Utilities, but with a Quirk

The first time that the German public became aware of what might be brewingwas through a radio feature by the investigative journalist Werner Rügemer inDecember 2001. He hit a sore spot. Some listeners called and complained: Theythought the feature had been a piece of satire, and were angered by the possibilitythat the utterly realistic way in which it had been presented might cause listeners tobelieve that it was true! Alas, it was true. During the following weeks, city councilmembers and citizens flooded the radio station with requests for a transcript of thefeature. This triggered more media attention. In the picturesque Frankish town ofKulmbach, where a cross-border-lease for the towns’ sewers had been approved byall parties on the town council, citizens began to mobilize against the decision. InNovember 2002, a referendum stopped the deal – 88 % voted against it. While thetransaction was relatively small, it had a symbolic effect: Both investors and citycouncilors now treaded more carefully.

In any case, the death bells had rung for cross-border-leases. Senator ChuckGrassley, an Iowa Republican and chairman of the U.S. Senate Finance Committee,made a strong push for legislation to completely ban any new cross-border-leases.It passed Congress in 2004. A year later, the U.S. government also abolished thetax benefits associated with all cross-border-leases, including those already signed,although legal battles in court dragged on for years.

The U.S. investors got away with their tax savings accumulated over more thana decade. However, the municipalities had incurred a form of hidden debt: Fundingwas mobilized once at the beginning of the deal, but the infrastructure had to bebought back after 30 years. Suddenly, municipalities and utilities became entangledin the web of global finance with risks they did not fully understand. During thefinancial crisis of 2008, AIG – the American insurance company that was involvedin most of the deals and that had invested the funds in risky assets – was badly hitand its credit rating deteriorated massively. Some municipalities shifted the assetsinto safer U.S. treasuries and kept the arrangement going, but others, such as theLandeswasserversorgung, a large association of municipalities in the Southwesternstate of Baden-Württemberg, negotiated an end to their contract. It lost 10 millioneuros in the process.

However, it must be noted that even during the financial crisis, the magnitude ofthe losses remained limited compared to the overall size of the German water andsanitation sector, with its annual revenues of 13 billion euros in 2009. While theexact losses are not known, there was no hike in water or sewer bills as a resultof cross-border-leases, and many Germans were not even aware that such dealsoccurred.

Is the German Water Business Profitable to Its MunicipalOwners?

In German cities, there is a tradition of cross-subsidies from “profitable” municipalservices to public transport and public swimming pools to keep bus and metrofares, as well as entrance fees to pools, low. The most profitable municipal services,

Performance Benchmarking 101

and thus the major source of cross-subsidies, are electricity and gas distribution,although energy sector reforms have reduced their profitability. Water and sewerageare usually presented by utility executives and city officials as simply recovering thecosts of service provision, not a source of profits and cross-subsidies. However, thereality is often more complex. Water utilities pay concession fees to municipalitiesand groundwater abstraction fees to the Länder, and they transfer profits to theirmunicipal owners. Depending on their legal status, some utilities also pay corporatetaxes. For example, Berlinwasser, the largest German utility, has been a reliablesource of financing for the city-state of Berlin, as shown in Chap. 10. The sameis true for Hamburg Wasser, for which all payments to the city-state of Hamburgadded up to more than one third of the utility’s water sales of 228 million euros in2012. In the case of multi-utilities selling energy and water together, it is impossiblefor an outsider to identify which share of the utility’s profits has been generatedby its water business. Many multi-utilities, such as Frankfurt’s energy and waterutility Mainova, are highly profitable, with a pre-tax profit of more than 20 % ofequity.

Competition in Water Supply?

The late 1990s were a time when competition, having brought about lower pricesin telecommunications, was introduced into the energy sector in Germany, justlike in many other countries. In this context, the water and sanitation sector wasperceived as less dynamic, inefficient and lagging behind. In 2000, a study for theFederal Ministry for Economic Affairs by the late Professor Hans-Jürgen Evers,an economist from the Technical University in Berlin, recommended introducingcompetition between neighboring water utilities to reduce these inefficiencies. TheGerman water utilities, their influential associations and the Federal EnvironmentalOffice shot back in unison: They alleged that the proposal would undermine drinkingwater quality and cause damage to the environment. This triggered a discussion inthe German Parliament, the Bundestag, about the modernization of the water sector.It was one of the very few cases when the federal government got involved moreactively in water, treading on territory that is under the exclusive responsibility oflocal governments under the supervision of the German states, the Länder.

Performance Benchmarking

The Bundestag declared itself opposed to competition in water supply, but sug-gested alternative measures to improve the efficiency of the water and sanitationsector. In particular, it recommended performance benchmarking, an idea that hadbeen applied to 14 utilities in Germany as part of a pilot project. Against thisbackground, the German Länder and the professional and trade associations of the

102 9 Germany: Healthy Municipal Utilities, but with a Quirk

water sector began to promote voluntary and confidential performance and processbenchmarking among utilities: A utility opens its doors and its books to specializedconsultants who analyze their processes and performance in detail, benchmarkingit against good practice in the sector, and recommending improvements. Today,benchmarking has become a common feature of the German water sector and,according to industry associations, is highly successful. For example, many utilitiesfound that their energy costs per cubic meter of water were far higher than average,and subsequently made investments to improve the energy efficiency of theiroperations. Others found out that they had more employees than utilities of the samesize. They optimized their internal procedures and gradually reduced their level ofemployment by not rehiring employees every time someone left the company. Otherutilities optimized their practices for carrying out construction work. One smallutility realized that their traditional practice of digging open trenches to replacehouse connections was far more expensive than the trenchless pipe replacementused by more modern utilities. This technique consists of two pits dug at the endsof the pipe section that needs replacement. A winch then pulls a cable by one ofits ends with a bursting head attached to the other end through the old pipe. Thedevice bursts the old pipe into pieces and pulls the new pipe behind it at the sametime, all underground so that no open trench has to be dug in the street or thesidewalks.

Voluntary benchmarking thus has allowed German water utilities to become moreefficient without competition, privatization or the creation of a national regulatoryagency. Whether these improvements were passed on to customers in the form oflower water tariffs remains unclear in the absence of available data.

The Regulators Push Water Prices Down

Tariff regulation is far less developed in Germany than, for example, in the UnitedKingdom. There is no national regulator, such as Ofwat in England and Wales, theScottish water regulator or the National Water Observatory in France. Most Germanwater utilities are not subject to price regulation that even remotely resembles thescrutiny to which utilities in England, Wales and Scotland are subjected.

German water utilities set their water tariffs based on state laws that require themto fully recover their costs. However, until recently, no one had pushed them toreduce their costs and pass the benefits on to their customers. As mentioned above,given that multi-utilities that provide water and energy do not publish the costs ofwater supply separately, it is impossible for outsiders to assess the rate of returnearned on their water business. What is clear is that the overall profits of the multi-utilities were very comfortable for many years.

These comfortable times began to change when, in 2006, the Ministry ofEconomy in the state of Hesse decided to look more closely at the level of water

Utilities Fight Back in Their Own Way 103

tariffs. In its role as the regulator for water prices, which it had never played before,the Ministry commissioned a tariff study. The study found that water tariffs in somecities in Hesse, including the state’s largest city Frankfurt, were much higher thanin other German cities. For the first time in German history, a State Ministry usedits authority to order municipal utilities to lower their water prices. The Frankfurtutility, Mainova, was ordered to reduce its water tariffs by 37 %. Infuriated, Mainovaand other concerned utilities challenged the findings in court. They argued that thestudy had compared apples with oranges. But they did not back up their argumentwith the required evidence. For example, the town of Wetzlar said its water wasexpensive because its geography was hilly. However, in the town of Montabaur,which is far hillier, water tariffs are 30 % lower. The water utility in Montabaurhad found creative ways to reduce the need for pumping by building a ring pipelinearound the city, and it reduced the costs of repairs by keeping an accurate digitalinventory of all its assets. In the end, the Court supported the position of theMinistry. After some further legal wrangling about the amount of the reduction,Mainova finally settled out of court and agreed, in 2012, to reduce its water tariffsby 25 % for the next 2 years. After the expiry of the deal, the utility plans to increasetariffs again. At the time of writing the tariff has not been increased although the 2-year period had expired. After state elections in 2012, the new Minister of Economyin the state of Hesse transferred the head of department in the Ministry who hadpushed for the tariffs to be reduced. The Ministry apparently did not stand any morein the way of increasing tariffs again, but now the mayor of Frankfurt objected toa tariff increase. If the tariff increase comes, it is expected that the city may lowerthe concession fee that Mainova pays to the city to use its infrastructure in order toreduce the impact of the increase.

Utilities Fight Back in Their Own Way

Beyond this specific case, the method used by state regulators to decide whethertariffs are too high has been criticized. They look at the costs and decide whichones are beyond the control of utilities, such as the quality of raw water, thedensity of settlements, or the difference in altitude between the water source andthe city. If they find that after taking into account these differences, tariffs are aboveaverage in some cities, they order tariffs to be reduced. Regulators are not obligedto verify whether utilities can still cover their costs after the price reductions. Thisapproach triggered complaints by some utilities that the action of the regulatorswas in contradiction with the legal requirement for full cost recovery. Some utilitieshave gone beyond complaints: They have used a legal trick to escape the recentefforts at price regulation. They transformed themselves from private law companiesback to public law companies, which are not subject to price regulation by the stategovernments according to German law.

104 9 Germany: Healthy Municipal Utilities, but with a Quirk

Conclusion

In sum, the German water sector is characterized by publicly owned and managedlocal utilities with a high level of service quality, cost recovery and efficiency, whilethere is very little economic regulation at the state or federal level. This model issimilar to the water sectors in Austria, Switzerland, the Netherlands, Scandinaviaand Japan. As the experience with cross-border-leases has shown, the model has itsflaws. But overall, it has served the German people quite well.

Chapter 10Berlin: Privatized to Fill State Coffers,Remunicipalized at the State’s Expense

While most of the German water and sanitation sector is in the hands of publiclyowned and managed utilities, as previously detailed, there was one high-profilewater privatization in Germany: its capital city Berlin. This privatization was notdesigned as a French-style concession or lease contract with a predeterminedduration. Neither was it an English-style complete sale of assets to a privateinvestor. Instead, it was a partial privatization that was intended to bring moneyinto the coffers of the city-state of Berlin while at the same time making the utilitymore modern and efficient. The privatization lasted from 1999 to 2013. It wascriticized as being unconstitutional, shrouded in secrecy, and guaranteeing risk-free profits to private investors while pushing up water tariffs. After a successfulreferendum calling for the privatization contract to be made public, a changein the city government, and an intervention by the Cartel Office, water tariffswere reduced and the city-state bought all shares back from the private investors,effectively remunicipalizing the water and sewerage utility known as the BerlinerWasserbetriebe (BWB). How did this privatization come about?

Before the Privatization

When the Berlin wall came down, the water and sewerage utilities from the Easternand Western halves of the city were merged, forming the largest water and sewerageutility in Germany. During the 1990s, massive investments were undertaken tomodernize the water and wastewater network and plants in East Berlin, where waterhad been virtually free. Tariffs were adjusted to the levels in the West, and weresubsequently further increased by a substantial amount to finance the investmentsneeded to modernize the waterworks for the whole city, East Berlin in particular.Between 1992 and 1999, tariffs increased by 150 %. This was not met with anycomplaints.

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_10

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106 10 Berlin: Privatized to Fill State Coffers, Remunicipalized at the State’s Expense

The civil service and public enterprises in Berlin were overstaffed. In 1991,the city-state had 3.4 million inhabitants and almost 344,500 direct employees. Itthus had more than 100 public employees per 1,000 inhabitants, two thirds morethan the German average of 61. This number was reduced to about 189,000 in2009, bringing it to a level similar to the average. At public enterprises such as thegas company Gasag, employees were offered generous severance payments called“golden handshakes”.

Fiscal Motives

The city-state was loaded with heavy debt and had to deal with the reduction ofsubsidies that the federal government had provided to West Berlin as long as thewall had been up. The city government, the Senate, had to tighten the purse. TheSenate decided to privatize its utilities, not primarily out of a desire to improveefficiency and service quality, but more to plug the holes in the city-state’s budget.In the early 1990s, a coalition government including Christian Democrats and SocialDemocrats sold minority shares in the electric and gas utilities, Bewag and Gasag,to private investors. In 1994, BWB was legally transformed from a public entity thathad to seek the city-state’s approval on debt financing and all personnel decisions toone that had more autonomy. The new structure was explicitly designed to facilitatesubsequent partial or total privatization, either through sale to a strategic investor orthe stock exchange.

The transformation also allowed BWB to expand internationally and into othersectors unrelated to water, far outside its core mandate of supplying water andsewer services to the residents of Berlin. As part of this controversial strategy,BWB had tried, with limited success, to diversify into telecommunications andsolid waste management through the establishment of subsidiaries. It also tried towin international water and sanitation contracts. One of the few successful foreignendeavors of BWB was when it won a contract for the Budapest wastewater worksin 1997. To win the contract, BWB had entered into a Joint Venture with Vivendi,the former Compagnie Générale des Eaux.

After elections in 1995, the Senate pushed its privatization program one stepfurther: Bewag and Gasag were to be fully privatized, and BWB was to be privatizedas well. RWE, an energy giant based in North-Rhine Westphalia, was interested inbuying BWB. RWE had bought a stake in Gasag in 1994, and it was also keento enter the global water market. Owning part of the water utility that served theGerman capital was seen by RWE as an important stepping stone for their globalwater strategy. Since RWE had no experience in the water sector, it teamed up withVivendi to buy BWB.

Before the Privatization 107

Privatization Design: Institutional Acrobatics

The Berlin privatization did not follow a clear Master Plan carried out from point Ato point Z. Instead, the privatization concept had to be adjusted several times to takeinto account political opposition and legal objections. The result was a complicatedexercise in institutional acrobatics.

The consultant hired by the Berlin Senate initially suggested a full privatizationof Berlinwasser, along the same lines as Bewag and Gasag, but this was not feasible.In Germany, sewer services are free of value added tax, but only if they are providedby a public law entity. If BWB had been transformed into a private law entity, anecessary step before a sale, sewer tariffs would have increased because they wouldhave become taxable, and the city-state would have been obliged by law to take overany employees who did not wish to work for the new company, a situation it waskeen to avoid.

Legally, BWB would remain a public entity fully owned by the city-state. But thiswas not the end of the privatization. The consultants were tasked with finding outhow a fully publicly owned company could still be sold to raise revenues for the cityand be fully under private management. The consultant came up with a solution: Anew entity was created, the Berlinwasser Holding Company. The Holding Companywas to be a mixed company, 49.9 % privately owned and 50.1 % publicly owned.The majority public ownership of the Holding Company was to assuage oppositionfrom unions, while in reality, the private shareholders would be allowed to run thecompany. A separate contract brought the BWB management under the control ofthe Holding Company. The private owners thus could manage BWB, although itremained an entirely public entity. The Holding Company would also fully own thesubsidiaries that had been created to win contracts in other sectors and cities. Thisstructure would place these business lines in legally separate companies under theroof of the Holding Company.

Furthermore, a clause in the contract provided incentives to increase the effi-ciency of the company: For whatever efficiency improvements were achieved, theowners would have been allowed to keep the profits resulting from them for 3 years.After that, tariffs were to be reduced in line with the reduced costs. Tariffs were tobe set based on a rate of return 2 % above 10-year government bonds. The contractsthat fixed all this were to remain confidential. When this clause later became public,it was highly controversial. After all, the Senate guaranteed a rate of return to aprivate company. And it had an incentive to do so, because it wanted to make the saleattractive enough to generate maximum revenues to the city state. If such concernswere voiced internally at that time, they were not heeded. In July 1998, the Senateadopted the new structure consisting of the mixed public-private Holding Companyand its public subsidiary BWB, with 49.9 % of the shares in the Holding Companyto be sold to a strategic investor.

108 10 Berlin: Privatized to Fill State Coffers, Remunicipalized at the State’s Expense

However, there was one more catch. The transaction could not be undertakenwithin the existing legal framework. Therefore, the Senate asked a law firm to drafta “Partial Privatization Bill”. The firm, “Finkelnburg & Clemm”, was co-ownedby Professor Klaus Finkelnburg, the President of the Constitutional Court of theCity-State. The same law firm also advised RWE and its partner Vivendi on thetransaction – a clear conflict of interest. The Berliner Wassertisch says that RWE,Vivendi and their advisers were closely in touch with the advisers who prepared theprivatization all throughout 1998, thus providing them an unfair advantage.

The Partial Privatization Bill was voted into law by the State Parliament in May1999, when the selection of the private company was about to be completed. Thestated objectives of the privatization were to make the utility more efficient withoutfiring employees, to undertake a prescribed amount of investments to maintain orincrease service quality, to maintain constant tariffs for the first 4 years, and toimprove customer service. But another important objective was not stated in thelaw: Generating maximum one-time revenues for the city-state of Berlin throughthe sale of the company.

Selection of the Company

The Berlin Senate had always had an eye on RWE and Vivendi as potential buyersof Berlinwasser. Allianz Finance, a subsidiary of the largest German insurancecompany, was also brought into the consortium as a financial investor with aminority stake.

In early 1999, an international call for bids was launched with the assistanceof the investment bank Merrill Lynch. Three consortia were prequalified, led byVivendi-RWE, Suez and the infamous Enron from the U.S., which went bankrupt2 years later after a major scandal that involved hiding billions of dollars in debtfrom failed deals and projects from its shareholders and lenders. Eurawasser, theGerman subsidiary of Suez, had teamed up with two almost problematic partners:the Berliner Bankgesellschaft, a bank owned by the city-state which would itselfbe engulfed in a major scandal 2 years later, and Mannesmann Arcor, a mechanicalengineering and telecommunications firm with no experience in water which wouldbe bought by Vodafone and broken up only a year later. The Suez-led consortiumsubmitted a higher sales price than the consortium led by Vivendi. But it was notselected, because Vivendi and RWE were considered to have offered the “mostadvantageous bid” and because Suez offered a different privatization model. In June1999, the contract was awarded to the consortium of RWE, Vivendi and Allianz.

More Acrobatics

However, there was one last obstacle to overcome. The opposition in the StateParliament, consisting of the Greens and the leftist party PDS, petitioned the

Private Management and Rising Opposition 109

State Constitutional Court to review the legality of the partial privatization law. InOctober, the Constitutional Court – headed by Finkelnburg, the man whose own lawfirm had prepared the law – ruled that the law was legal. However, it required somechanges. It struck down the efficiency clause and did not allow profits to be set at 2 %above the yield of government bonds. To allow the contract to remain as profitableas it had been before, some more acrobatics was necessary. The contractual packagewas modified to include a loan from the Holding Company to BWB. Under thisunusual structure, the remuneration on the loan was contractually defined as “profit”accruing solely to the private owners. It was set as equal to the interest on 10-yeargovernment bonds plus two percentage points – the same level at which profits hadbeen set in the original version of the contract. In return, all profits of the HoldingCompany would accrue to the city-state alone. The result was that the private ownerswere guaranteed a fixed rate of return, while the city-state would receive the profitsthat fluctuated from year to year. This unique legal structure made the public sectorbear most of the commercial risk, while the private sector bore almost none. Thelawyers had done a final piece of acrobatics to save the deal.

After the changes were quickly made, the contract was signed in November. Thesales price was 1.69 billion euros. The city-state was happy, Vivendi and RWE hadwon the coveted prize, and the public protest was subdued.

Private Management and Rising Opposition

After the 2002 elections for the Berlin State Parliament, the coalition betweenChristian Democrats and Social Democrats ended. Instead, the leftist PDS formed acoalition government with the Social Democrats. Harald Wolf, a leftist and staunchcritic of the privatization, took over the Economy Ministry. In that function, he alsobecame the Chairman of the Berlinwasser Supervisory Board. The tables had turned,and one could have expected that Berlinwasser would have been remunicipalized atthat time. But, surprisingly, the structure of the company was left untouched.

In 2004, the contractual grace period for tariff increases expired. The Berlingovernment played a conflicting double role at that moment: It was the majorityowner of Berlinwasser, but it was also in charge of protecting the water customersin its function as a regulator, approving requests for tariff increases. The governmentdecided in favor of its ownership role: In 2004, it approved a 15 % tariff increase,followed by another 5 % increase the following year.

The Citizens Rise Up

The tariff increases, coupled with the lack of transparency about the privatizationcontract, pushed an initially small group of citizens into action. In 2006, about 30activists formed the “Berliner Wassertisch” (Berlin Water Table). This group led by

110 10 Berlin: Privatized to Fill State Coffers, Remunicipalized at the State’s Expense

Thomas Rudek asked for the privatization contracts to be made public and for theprivatization to be reverted. Unlike the politicians, the Water Table was adamantabout getting water back into public hands.

The Wassertisch launched a citizens’ petition to undertake a referendum request-ing the publication of the privatization contracts. In Berlin, a referendum requiresthree steps. First, 20,000 signatures have to be collected to request a citizen’sinitiative. If successful, within 4 months, 7 % of voters must sign the initiative.Only after that step is a referendum held. At the beginning, the initiative “OurWater” was small and not yet well known. It initially failed to reach the requiredminimum signatures. When it reached the quorum in a second attempt in February2008, the city-state’s government tried to declare the initiative null and void. Thegovernment argued that contracts could not be made public retroactively. But theBerlin Constitutional Court, from which Finkelnburg had since retired, ruled that ithad to be accepted, even if it was unclear if the publication was legal or not. TheWassertisch, emboldened by its success, moved ahead. In October 2010, 280,000signatures were handed over to the Senate, far more than the required minimum. Afew days later, a newspaper published the contract, and a few days after that, thegovernment also published it.

Still, the Wassertisch pushed for the referendum itself. It argued that not allparts of the contract were published, and that contracts and decisions that werenot published should be void by law. The Referendum took place in February2011. Ninety-eight percent voted yes. 678,000 participated, far more than therequired minimum. While the contracts had already been published, there was nowsubstantial public pressure to reduce water tariffs and remunicipalize Berlinwasser.

The Cartel Office Joins the Fray

Bowing under that pressure, Harald Wolf asked the Federal Cartel Office to reviewwhether the water prices in Berlin were abusive. This was quite a strange move. TheChairman of the Supervisory Board of a company wanted to lower the company’sprices, but was unable to do so by himself. He thus asked the Cartel Office to reviewthe prices against the will of the management of the company. In late 2011, theCartel Office took up the case. It compared the tariffs with those of other large citiesin Germany and ruled that they were too high and had to be lowered. In June 2012,the Cartel Office ordered water tariffs to be reduced by 17 % until 2015. Watertariffs were thus reduced in steps, beginning with a first step in 2013 and followedby a second in 2014.

Remunicipalization

After 2 years of negotiations, in 2011, the city-state bought back the shares fromRWE for 618 million euros. Veolia – as Vivendi was called by then after a change inits name – initially refused to sell its shares. But when tariffs were reduced, Veolia,

The Impact of Privatization 111

which was going through a corporate overhaul, budged. In September 2013, thecity-state also bought shares of Veolia for 590 million euros – Berlinwasser wasback fully under municipal ownership and management.

The Impact of Privatization

What was the impact of the 14 years of private management of Berlinwasser interms of tariffs, employment, efficiency and service quality? And what was its fiscalimpact? Did the city-state actually benefit from the privatization? And did corporategovernance improve?

Tariffs Increase, but Mostly Before Privatization

The Wassertisch argues that tariffs increased more under private management thanunder public management. As shown in Fig. 10.1, this assertion is wrong. Watertariffs in West Berlin had been below the West German average when the wall camedown. They then more than doubled between 1991 and 1997 under public ownershipand management from the equivalent of 0.78 euros to 1.76 euros, exceeding theGerman average in 1997, 2 years before privatization. From then on, tariffs remainedfrozen at 1.76 euros until 2003, as stipulated in the privatization contract that frozetariffs for the first 5 years of the contract. Then, they increased by 23 % to 2.16euros up through 2006. This increase was much lower than the doubling of tariffsduring the 1990s. Beginning in January 2007, tariffs were gradually reduced by6 % until 2013 when the remunicipalization process was completed. Overall, tariffsincreased by 89 % between 1992 and 2013, from 1.07 euros to 2.03 euros. Duringthe same period, the average water tariff of utilities who were members of theindustry association BDEW increased by 65 %, from 1.18 to 1.95 euros. Inflationduring this period was 44% – water tariffs thus increased faster than inflation, aphenomenon that is partly due to reduced water consumption. As shown in Chap.9, the reduction of per capita water use partially compensates the effect of highertariffs on water bills, so that the inflation-adjusted water bills of German householdshave remained largely stable.

A typical water bill for an average household of 1.7 members at the “water tariffpeak” in Berlin in 2006 was 11.25 euros (14.63 dollars) per month, as shown inTable 10.1. With a median household income of 1,582 euros (2,057 dollars), atypical water bill amounted to 0.7 % of median household income. At much lessthan the international rule of thumb of 3 % for the affordability of water bills, watertariffs in Berlin remain affordable.

112 10 Berlin: Privatized to Fill State Coffers, Remunicipalized at the State’s Expense

0.0

50.0

100.0

150.0

200.0

250.0

1991

1992

1993

1994

1995

1996

1997

1998

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Water tariff Germany Water tariff Berlin Inflation

Fig. 10.1 Water tariffs in Berlin and Germany 1992–2013

Table 10.1 Water tariff, water bill and median household income in Berlin (without sanitation)

Residential water tariff (house connections) USD/m3 2.81Water use Liter/capita/day 115Household size Persons 1.7Typical residential water bill USD/month 14.63Median net household income (estimate) USD/month 2,057Affordability % of income 0.7 %

Source: Author’s calculations based on annual report of Berliner Wasserbetriebe 2012

Who Gained More: The State or the Investors?

Tomas Rudek from the Berliner Wassertisch says that, between 1999 and 2007,the city-state got 423.5 million euros of the Berlinwasser profits, while the privatepartners got the lion’s share with 949.9 million euros. The higher share receivedby the private owners is apparently confirmed by a study commissioned by SarahWagenknecht, a leftist member of the European Parliament, which showed that,between 1999 and 2003, the city-state received only 133 million euros, while theprivate owners received 366 million euros. In a study commissioned by Veolia andRWE, the consulting firm WIK used a different approach: it also included revenuesfrom corporate income taxes, a groundwater abstraction fee and a wastewaterdischarge fee in its figures, all of which the state levies on the water utility. Thus,the total amount the public sector received between 1999 and 2008 was 1.44 billioneuros, compared to 692 million euros received by the private owners. The city-state of Berlin thus actually received more than twice as much from the privatizedcompany than the private owners received.

The Impact of Privatization 113

The price the city-state paid to buy the utility back was lower than expected: 29 %lower than what the city-state had received when it sold BWB 14 years earlier. Atfirst sight, it seems that Berlin made a good deal. But actually it did not: Comparingthe two prices amounts to comparing apples and oranges. A few years earlier, thecapital of BWB had been reduced. The city-state had already channeled funds awayfrom the company, so what it bought back was less than what it had sold previously.The buy-back thus was not beneficial to the city-state’s finances. Berlin wanted tofinance the buy-back partly by using the profits of Berlinwasser, but those dwindledbecause of tariff reductions in 2013 and 2014. Almost all of the buy-back must thusbe financed through credits that will cost 60 million euros in interest and principalper year over a 30-year period. This increases the already staggering debt load ofBerlin, which had increased from 38 billion euros in 2000 to 62 billion euros in2013, making Berlin the second most indebted of the 16 German states.

Higher Productivity, Conflicting Figures on Operating Costs

Critics also argue that 2,000 jobs were “lost” because of privatization. However,as pointed out above, all public entities in Berlin were heavily overstaffed in theearly 1990s. Steps to reduce overstaffing at other state-owned enterprises weremore drastic. At BWB, the number of employees was reduced from 6,200 to5,000 in 10 years through normal fluctuation and regular retirement. There is alsodisagreement about whether the company became more efficient or not. Accordingto the Wassertisch, operating costs increased from 253 million in 1996 to 303million in 2006. The consulting firm WIK, however, says they decreased from 330million in 1999 to 240 million in 2007. These second figures seem more plausible,since the downward trend corresponds to the reduction in employees during thesame period.

Table 10.2 shows that BWB’s performance indicators in terms of labor produc-tivity and leakage are good and excellent, respectively, compared to good practice.

Transparency and Management Improved

Moreover, the private management refocused the company on its core business ofproviding water and sewer services. Against the wishes of the politicians in the

Table 10.2 Performanceindicators for Berlinwasser

BWB Good practice

Return on equity 8 % n.a.Employees/1,000 households served 1.2 <2Leakage (m3/km of network/day) 2.8 <10Leakage/water produced) 4 % <20 %

114 10 Berlin: Privatized to Fill State Coffers, Remunicipalized at the State’s Expense

city-state, it spun off the subsidiaries engaged in solid waste management andtelecommunications, areas in which the company was not competent. This wasperhaps one of the most lasting achievements of the privatization. It is a decisionpoliticians could easily have made, but failed to do so.

But this was not the only improvement in corporate governance. The WIK studyalso notes that Berlinwasser was, at least as of 2008, more transparent than otherGerman water companies concerning its costs. Most other German water utilitiespublish much less data on their costs and are quite non-transparent. According toWIK, Berlinwasser is a model to emulate for other German water utilities in termsof transparency. Furthermore, WIK says that industry experts – consultants andacademics – claim that investments at Berlinwasser are more efficient than thoseat other German utilities, and assert that the asset management practice should bea model for the industry. The consulting firm notes that this is well known amongindustry experts in Germany, but that it does not register with the public. A tellingtribute to the achievements of the management of the Berliner Wasserbetriebe isthat the CEO who had been brought in by the private owners was retained even afterthe remunicipalization – indeed, the entire management team around the CEO JörgSimon remained in place when the privatization was reverted.

Conclusion

Far from being a disaster, the privatization of Berlinwasser made the companymore efficient and ultimately more transparent. Tariff increases were only slightlyabove the German average. If the city-state had been genuinely concerned about theaffordability of water, it could have reduced the groundwater abstraction fee whichit levies and which is among the highest compared to other German states. Or itcould have taken a more drastic step and switched to a not-for-profit model for itsutilities, as was done in Wales (see Chap. 7). But the Berlin government preferredto give in to public pressure to remunicipalize Berlinwasser and to agree to populartariff reductions ordered by the Cartel Office. It thus effectively reduced the futureprofits it will receive from the remunicipalized utility, and will have to incur furtherdebt to finance the repurchase. The remunicipalization of Berlinwasser may havebeen a victory of citizen democracy over politicians and corporations. But in fiscalterms, it was a case of making short-term political and financial gains at the expenseof future generations who will have to pay back the mounting debt of the city-statethe remunicipalization has caused.

Chapter 11Civil Society and the EU Concession Directive:David Beats Goliath, Using a Few Tricks

In September 2013, more than 1.8 million signatures were submitted to EUgovernments under the first successful European Citizens’ Initiative. Under theslogan “Right2Water”, its promoters accused the European Commission of tryingto force water privatization through the backdoor. The anger had been provokedby a “Concession Directive” prepared under the auspices of EU CompetitionCommissioner Michel Barnier. Barnier had pushed the Directive, despite theEuropean Parliament having declared in 2010 that it was not necessary. What wasBarnier up to? Being a conservative politician from France, Barnier certainly fit theprofile of the “usual suspect” when it came to the promotion of water privatization –after all, the French water companies had been the keenest players in global waterprivatization.

What Is the Concession Directive and Why Was ItIntroduced?

Actually private water companies already were a fact of life in most EU countrieswhen the new Concession Directive was proposed. All water companies in Englandare private, about 75 % in France and almost half in Spain. The capitals of Bulgaria,the Czech Republic, Estonia, Hungary and Romania are supplied by private watercompanies. The Berlin water privatization preceded the Concession Directive, andshares of the two largest water companies in Greece have been traded on the stockexchange for many years. Private water companies also operate in smaller citiesPoland and Portugal. In Ireland and the Netherlands utilities are publicly managed,but private companies operate treatment plants. In fact, the Concession Directivecovers all kinds of public services, including public transport, toll roads, ports,energy and solid waste management. The Commission proposed the Directive,because the national laws for the award of concessions were quite different fromone another, and some countries had awarded concessions without any specific legal

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116 11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .

framework for concessions. Awarding concession contracts on the basis of publicprocurement law that is used to procure goods and works is not optimal, becauseof the long duration of concessions that often require changes. The Directive wouldclarify when changes to the contracts are allowed, and when they were so importantthat a new award procedure would be needed – an important issue given the longhistory of controversial renegotiations of concession contracts.

Opposition from Germany

But not everybody was convinced. The German Association of Energy and WaterBDEW, a trade association, had argued in February 2012 that the Directive wasnot necessary. It said that its analysis had shown that the legal framework forthe award of concessions in Germany was sufficient. The German associationof municipal utilities VKU and the Upper House of the German Parliament, theBundesrat, also declared their opposition to the Directive, saying that it infringed onthe constitutionally guaranteed autonomy of German municipalities. Nevertheless,Philip Roesler, the liberal Federal German Minister of Economy at the time,supported the Directive in Brussels.

The European Citizens’ Initiative Right2Water

The authors of the European Citizens’ Initiative Right2Water, a committee con-sisting of representatives of European civil service trade unions, argued from adifferent angle, focusing only on the inclusion of drinking water supply in theDirective which, according to them, was driven by a desire to “liberalize the EUwater market”. The authors of the initiative had deftly combined the oppositionto liberalization of the water market with other demands that enjoyed widespreadpublic support. The citizens’ initiative first asked that the human right to waterand sanitation be realized for all citizens of the EU. It ended by urging the EUto increase efforts to achieve universal access to water and sanitation globally. Thedemand to stop liberalization of the EU water market was tucked in between thetwo other sentences. While not stating it explicitly, the authors of the initiativeimplied that the human right to water could only be achieved if water utilities werein public hands, and that that right would be violated if water supply was privatized.This interpretation is not shared by United Nations Special Representative on theHuman Right to Water Catarina Albuquerque. She says that states do have anobligation to fulfill the human right to water and sanitation, but that the decision asto whether they will reach this objective through direct public provision or throughthe delegation of water and sewer services to private companies must be left to them.But these nuances were lost in the fray. The promoters of the initiative were againstwater privatization.

A TV Documentary Stirs Up Public Sentiment 117

Despite being deftly worded, the citizens’ initiative made little headway at first.It was signed by few people and the general public did not take notice of it. This waseven the case in Germany, where the Directive would have had the largest impact onthe water sector. Many other European countries would not have even been affected.On the one hand, all water services in England were already privatized, with theprivate sector also dominating in France and Spain. On the other hand, in someEuropean countries, the sector is resolutely under public authority, as is the casein Scandinavia or Scotland, with the Netherlands having gone so far as to pass alaw in 2004 forbidding any private sector participation in water supply (but not insanitation). The frontier for private companies did not lay in these countries, butin those with a hybrid structure, such as Germany or Austria. In some Germancities and towns, both water and electricity are provided by the Stadtwerke, inwhich electric companies often own minority shares. Those municipalities wouldapparently have been forced to bid out the concessions for water supply andelectricity. This was also to be the case if a municipality received services fromthe public utility of a neighboring municipality, something that is not uncommon inGerman towns. Nevertheless, the issue – marred by complex legal subtleties – stilldid not attract much attention from the wider public.

A TV Documentary Stirs Up Public Sentiment

This only changed when, in December 2012, the German TV magazine Monitoraired a documentary on the Commission’s plans. It called the directive the “projectof the century”, with the aim “to privatize water supply all over Europe”. A publicgood would become “an object of speculation” and companies “would make billionsof Euros”. Multinational companies had fought, said the documentary, for yearsto get the Directive passed. It showed angry citizens in Pacos de Ferreira, a smalltown in Portugal that had privatized its water system. The protesters said that priceshad increased by more than 400 % and that they were not even allowed to drinkwater from public fountains any more. What the documentary did not say was that,prior to the award of a 35-year concession for water and sewerage to the Spanishcompany AGS in 2004, water tariffs in Pacos de Ferreira had been much lowerthan the Portuguese average. The infrastructure had been neglected and was in badshape when it was handed over to the private company. In order to renovate theinfrastructure, water tariffs would have had to go up under public management aswell. In 2011, the average water bill was 17 euros per month, the second-highestlevel in Portugal. While still clearly below the 5 % threshold for affordability, thiswas still a heavy burden on the towns’ citizens, who went out every month to voicetheir discontent. It certainly made an impression on TV.

The documentary went on to show an EU paper naming Portuguese and Greekwater companies that were slated for privatization. The EU concession directive,the documentary continued, would be the “big breakthrough” for privatizing waterin the entire EU. The magazine then quoted a paper by the University of Barcelona

118 11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .

allegedly showing that water quality had deteriorated with privatization – actually,the study had only theorized that private companies had an incentive to do so,without citing a single example of deteriorated water quality. The magazine thenemphasized the paper’s finding that there was no evidence that private waterprovision was cheaper than public provision – something, it should be noted, thatthe authors of the paper had actually found. The reporters went on saying thatprivate companies neglected investments, that pollutants entered the drinking waternetwork, and that companies added “chlorine or similar substances” to compensatefor their lack of care for the network. None of this was actually written in the paperby the University of Barcelona.

A Public Relations Disaster for the European Commission

The journalists then interviewed Barnier, caught seemingly unprepared standingbehind a desk in his Brussels office. He first denied that the directive would forceany municipality to privatize its water supply – an assertion on his part that wasnot true. Then, he backtracked when the journalist confronted him with a list ofmembers of a steering committee that, according to the magazine, advised the EUon its water policy. The documentary only listed the committee members who camefrom large corporations, almost a dozen names, some of whom were representativesof big water companies, including a representative of Suez Environnement. Barnier,enervated, first said the steering group only dealt with water quality. When read thenames of the private companies, he claimed that he had not personally participatedin the selection of the group’s members. He then conceded, after a furtive look at thelist, that the composition of the group should have been “more balanced”. Little didit matter that half of the group’s members were representatives of local and nationalgovernments, other public institutions and academia, or that a representative of theWorldwide Fund for Nature was on the committee. Little did it also matter thatthe steering group was set up to advise on the European Innovation Partnership forWater, not on the concession directive, nor on water quality. Barnier looked like afool who had been caught lying. It was the beginning of a public relations disasterfor the Commissioner.

Before the documentary aired, the Citizens’ Initiative had made little headway.But from then on, the number of signatures multiplied in Germany. Monitor andBarnier had given a huge boost to the initiative, the former intentionally, the latterunintentionally.

A Powerful Mixture of Fear and Brussels-Bashing

The Commission still denied the accusations that it was forcing privatizationthrough the backdoor, saying that the directive was designed to promote competitionfor all public services and that it did not oblige local authorities to privatize theirwater supply.

A Modified Directive Is Passed 119

In March 2013, the TV magazine Monitor reported on the topic again. It showedan employee of the Stadtwerke Karlsruhe standing next to a water treatment plant.The man said that the time-tested structure of the German water industry had to bepreserved, and that water should be taken out of the Directive. According to him,the Stadtwerke Karlsruhe would have been forced to bid out water services becausethey had a private minority shareholder, the power company EnBW. The magazinealso showed how the German Christian Democrats had expressed themselves at theirparty congress against the EU Directive. Chancellor Angela Merkel was presentedin the magazine as continuing to support the Directive in Brussels, all while keepingvery quiet about it at home. It now looked like the issue could become a publicrelations problem for the Chancellor.

The Monitor report and the Citizens’ Initiative had touched a nerve among theGerman public. They rode on a more general sentiment that politicians in Brusselsand Berlin were out of touch with the real life of citizens and that lobbyistsdetermined policies behind closed doors. And they also rode on the fear thatprivatization would reduce water quality and force prices up. It was a powerfulmixture.

In the end, two thirds of the more than 1.8 million signatures to the Initiativecame from Germany. The required legal minimum of 0.1 % of the population wasreached in 13 countries, including in Italy, Spain and Greece. In France and the UK,the two countries in the EU in which private water companies had the strongestpresence, the initiative generated little traction and the required minimum numberof signatures was not reached.

Water Is Taken Out of the Concession Directive

The Commission had softened the proposal somewhat, but the protests did notsubside. It was a case of too little, too late. Christian Ude, the popular mayor ofMunich and President of the German Association of Cities, publicly criticized theDirective in April 2013. Shortly afterwards, Chancellor Merkel finally weighed inagainst the inclusion of water in the Directive at a congress of German mayors.Barnier then backpedaled and took water entirely out of the Directive in June 2013.David had won against Goliath.

A Modified Directive Is Passed

In January 2014 the European Parliament, which had denied the need for theDirective 4 years earlier, passed a modified version of the Directive. It praisedthe Directive because it “ensures best value for money by introducing new awardcriteria that place more emphasis on environmental considerations, social aspectsand innovation“, and because it provided greater opportunities for small and medium

120 11 Civil Society and the EU Concession Directive: David Beats Goliath, Using. . .

enterprises. Drinking water supply remained excluded from the Directive. However,concessions that are awarded only for wastewater collection and treatment fall underthe Directive, as do concessions whose main subject is electricity distribution ifthey also cover drinking water supply. The Commission repeated that the Directivedoes not aim to privatize any service, but just aimed at promoting fair competitiononce a public authority had decided to enter into a public-private partnership. It alsoannounced it would look again into the exclusion of water from the Directive within3 years and report on it to the European Parliament and Council. The last word inthis chapter in the history of European water supply may thus not have been spoken.

Conclusion

The controversy around water and the EU Concession Directive illustrates wellthe fears, but also the misunderstandings, associated with water privatization. TheDirective was designed to improve competition for concessions, if and once a publicentity had decided to enter into a public-private partnership for its water supply.Parts of civil society mobilized effectively against the inclusion of water in theDirective, arguing it was a Trojan horse to force the liberalization of the EU watermarket through the back door. In a situation where it was hard for all stakeholdersto grasp the precise impact of the Directive, the interpretation of the opponents ofthe inclusion of water in the Directive prevailed in the eyes of many people. TheEU Commission finally backed down under pressure, first modifying the Directiveto take into account concerns about forced privatization and then, when pressurepersisted, taking water completely out of the Directive.

Chapter 12The United States: Public Water in a CapitalistCountry

In the United States, water supply and sanitation are a responsibility of localgovernments. As a consequence, the water sector is highly fragmented: Thereare 54,000 public water systems nationwide, of which more than 90 % servelocalities with less than 10,000 inhabitants. Altogether, public water systems serve242 million Americans, with the remainder of the population having their ownwater supply. Most public water systems in the United States are owned by localgovernments, and all water utilities in large U.S. cities are publicly owned. But inthe U.S., a public water system can also be owned by a cooperative or a privatecompany. 35 million Americans, almost 15 % of those served by public watersystems, receive their water from privately owned utilities, known in the U.S.as investor-owned utilities. These utilities operate almost half of all public watersystems in the country, predominantly in towns.

Private water companies in the U.S. operate in two market segments. Thefirst segment, called the “regulated activities”, covers the investor-owned utilitiesmentioned above. It is referred to as the “regulated market” because water tariffsfor investor-owned utilities, which are natural monopolies, are overseen by stateregulators. The second segment, called the “unregulated activities”, covers servicesprovided to publicly owned utilities for which the utility sub-contracts the privatecompany to provide specific services, such as the design, construction and operationof a wastewater treatment plant or performance-based technical assistance. In thismarket segment, the private companies do not directly bill water users, and the pricespaid for their services are determined – at least in many cases – by the market.Of course, this market segment is subject to the same health and environmentalregulation as any other water supply and sanitation activity in the United States –the term “unregulated” only refers to the fact that the prices for the services arenot regulated by the state. Unregulated activities cover all kinds of public-privatepartnerships, including concession and lease contracts, some of which can havecontract durations of up to 50 years.

The largest private water companies in the United States, American Water andUnited Water, serve both the regulated and unregulated market segments. Taking

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122 12 The United States: Public Water in a Capitalist Country

their unregulated activities into consideration, private water companies in the UnitedStates serve more than 60 million people. In 2013, American Water, the larger ofthe two, operated in 30 U.S. states, as well as in Canada. Its customers live inover 1,600 communities with 10,000 inhabitants on average. Although listed onthe New York Stock Exchange, it is not really a large company by U.S. standards,with annual revenues of 2.9 billion dollars. The second-largest-company, Suez-owned United Water, had revenues of 764 million dollars and operated in 20 U.S.states. American Water and United Water grew through mergers and acquisitions,especially when tighter environmental regulations forced small rural investor-ownedutilities to modernize and invest more during the 1970s.

Infrastructure Backlog

A major problem for water and sanitation in the United States is the infrastructurebacklog. Many water mains in the U.S. were built in the early twentieth centuryand have exceeded their lifetime. Every year, only 4,000–5,000 miles out of anestimated one million miles of water mains are replaced. At this pace, it would take200–250 years to replace all water mains in the United States.

The American Society of Civil Engineers (ASCE) has repeatedly rung the alarmbells, but to little avail. In its Infrastructure Report Card, the ASCE has consistentlyassigned a “D grade” to water and sanitation infrastructure in the United States.According to the ASCE, investment levels must double to keep pace with the needto replace infrastructure and maintain service quality. However, the limited fundsavailable for investment are not spent on rehabilitating infrastructure. They are spenton upgrading water treatment facilities to meet more stringent drinking water qualitystandards. Since these upgrades are required by law, they leave city officials noroom to maneuver. Many municipalities are reluctant to raise water tariffs, and inthe absence of federal investment grants, fewer funds are available to maintain thewater and sewerage infrastructure.

Reluctance to Increase Tariffs

Water tariffs in the U.S. are affordable, amounting on average to 1.1 % of householdincome. In most U.S. states, there are no constraints on water tariffs for publiclyowned utilities. Local governments can set the tariffs of their utilities as they seefit without the need to gain approval from state regulators. Despite this, most localgovernments are reluctant to increase tariffs, in an effort not to please voters. Thisis a main reason why funds available for investment are insufficient. The situation issomewhat different for some larger utilities who tap into the bond market to financetheir investments. Financial covenants included in the bonds, as well as the scrutinyfrom credit rating agencies, often force them to increase tariffs.

The Water Privatization Wave Hits the United States 123

Unlike public water companies, private water companies are regulated concern-ing their tariffs. This is done through Public Utilities Commissions (PUCs) at thestate level which regulate the prices of all local private monopolies, from electricityand gas distribution through local telephone services and private water supply.Unlike in England, PUCs do not regulate through incentive-based price caps, but bysetting an allowed fixed profit margin on top of the company’s cost and making surethat this margin is respected. At first sight this type of regulation protects customers,because profits are capped. At second sight, there is no incentive to reduce costs,so that excessive costs can be passed on to consumers. However, it seems that inpractice, the average regulated water tariffs charged by private companies in theU.S. are not higher than the average unregulated water tariffs charged by publicservice providers.

Friends and Foes of Federal Financing

In the United States, the federal government provides some subsidies for capitalexpenditure, but these are subject to controversy. Republicans generally disapproveof federal meddling in state and local affairs, and water supply is a local affair.Republicans also loathe subsidies. Democrats are not as distrustful of federalinterventions if such interventions support broader objectives such as environmentalprotection. This tension is visible in the history of federal financial support for waterutilities. Federal subsidies were first introduced with the Water Pollution ControlAct of 1948 and were expanded substantially through the Clean Water Act of1972, which foresaw massive grants for local utilities to build wastewater treatmentplants. Republicans in Congress tried to trim down and eliminate these subsidies in1987 through the Water Quality Act, which established State Revolving Funds, thusintroducing loans to local utilities instead of the grants provided previously. StateRevolving Funds issue tax-exempt municipal bonds in the capital market backedup by federal funds. Publicly owned water utilities can thus obtain loans at lowerinterest rates than private companies. For smaller systems, there has been significantgrant funding of capital expenditure. But by far, most public drinking water andsanitation investments in the U.S. are financed by state and local governments:Congressional appropriations of 1.4 billion dollars per year account for only about5 % of annual investments of about 30 billion, which are mostly financed by utilityrevenues and commercial loans and bonds.

The Water Privatization Wave Hits the United States

The United States did not escape the global wave of water privatization wave inthe 1990s. Some cities thought that involving the private sector would not just helptheir utilities become better, but that, by handing over responsibility for financingand operating their water infrastructure, it would also allow them to save money.

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Enter the Foreign Companies

This push for privatization was not spearheaded by U.S. companies, but by the twolarge French water companies, Veolia and Suez, as well as the German energygiant RWE, which was trying to diversify into the water sector. A 1997 changein the U.S. tax code facilitated water privatization. It made bonds used by privatecompanies to finance their investments tax-exempt in the same way that municipalbonds are tax-exempt. The only condition was that the companies did not ownthe infrastructure. The change did not apply to existing investor-owned utilities,but it opened a window for public-private partnerships in which assets remainpublicly owned despite the private sector providing services and financing. Foreigncompanies took notice and entered the U.S. water market. Suez Environnementbought United Water, and Veolia Environnement set up its own subsidiary, VeoliaUnited States. In 2001, RWE, which had bought the British water company ThamesWater, also bought American Water. The U.S. subsidiaries of the French watercompanies and American Water now tried to win French-style concession contractsto run the entire water systems of large cities.

United Water managed to get hold of what seemed like the juiciest bit by winninga 20-year contract in 1998 to operate the water system of the city of Atlantathrough a very low bid. It was the largest water privatization in U.S. history, andthe rhetoric matched it. United Water promised to cut Atlanta’s water costs in half,although the infrastructure had been neglected for years and was in a deplorablestate. “Atlanta for us will be a reference worldwide,” Suez’s CEO Gérard Mestralletsaid at the time, “a kind of showcase.” Two years later, the U.S. Conference ofMayors bestowed Atlanta and United Water with its Outstanding AchievementAward, remarking that the deal “exemplifies the type of corporate citizenship thatmakes cities stronger and healthier.” But the showcase declared by the CEO of Suezunraveled quickly. The city terminated the deal in 2002, less than 4 years afterit had been signed. A Federal Court had ordered massive investments to complywith environmental standards that had not been foreseen in the original contract. Inaddition, there were many complaints about quality-of-service and mismanagement.Water often had to be boiled due to insufficient water pressure, and it ran a rustybrown color.

In 2004, Suez-owned United Water and Veolia competed to run the water andwastewater system of New Orleans. But the city rejected both offers amid citizenprotests arguing that Veolia’s previous operation of the city’s wastewater system“was marred by numerous environmental violations, mechanical failures, and lackof regard for the maintenance and long-term needs of the system.”

Privatization Fatigue

In 2002, RWE-owned American Water bought the water system of the small townof Felton in the San Francisco Bay Area through its subsidiary Cal-Am. Felton had

The Water Privatization Wave Hits the United States 125

always had a privately run water system and this had not caused any trouble untilCitizen Utilities, the small company that ran the system, was acquired by Cal-Am.Cal-Am immediately announced a 74 % tariff increase over 3 years. Although theregulator, the California Public Utilities Commission, reduced the rate increase to44 %, residents were still furious. They formed “Friends of Locally Owned Water”(FLOW), and fought the takeover amid deteriorating service and poor management.In 2005, the citizens of Felton voted to borrow 11 million dollars to repurchase theutility, despite substantial efforts by American Water to defeat the vote. AmericanWater refused to sell, saying the system was worth 25 million. Years of legalwrangling followed. Only days before a court would have set the price, the companygave in and sold the water system for 10.5 million.

After these failures, the attempts to take over entire water and wastewater systemswere dead. In 2008, RWE sold its shares in American Water on the New York StockExchange at a loss, after having reduced billions in shareholder value. The privateU.S. water companies focused on the markets where they were strongest: providingtechnical expertise and, if needed, financing for the construction and operation ofadvanced treatment plants.

Private Equity Firms to the Rescue?

To fill the gap in infrastructure funding, United Water has teamed up with a WallStreet private equity firm. This “new” idea is, in fact, another variation of theconcession contract: A private company receives a 40-year concession for a city’swater and sewer system, and commits itself to invest and modernize the city’sinfrastructure.

In 2012, United Water and the private equity firm Kohlberg Kravis Robertssigned a concession for the water and sewer system of Bayonne, New Jersey, acity with 62,000 inhabitants. The city and its small municipal utility with just 33employees were reeling under heavy debt. The utility’s revenues declined after theclosure of a large U.S. Army base in 1999 and after a deal to develop the area ofthe former base into housing fell flat. The big plus for the municipality was that theprivate joint venture took over more than half of the city’s debt, a total of 130 milliondollars. After the deal, the credit rating of the city was upgraded from “negative”to “stable”. However, everything comes at a price, and private equity firms are nocharities.

According to Bertrand Camus, CEO of United Water, “our commitment tofunding improvements in the water and wastewater system is critical to keepingrates stable”. The common definition of the term “stable” is “unchanged”. ButUnited Water obviously has a different understanding of the term: The rate scheduleincluded in the agreement foresees an immediate 8.5 % rate increase (the firstrate increase since 2006), followed by annual increases beginning in 2016 thatare reportedly between 2.5 % and 4.5 %. Whatever undisclosed efficiency gainsthe private Joint Venture will introduce, the improved efficiency clearly does not

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compensate for the costs of the additional investments and the profits. It remains tobe seen how much water and sewer tariffs in Bayonne will actually increase overthe next decade and beyond.

Despite the tariff increases, the concession agreement was lauded by the ClintonGlobal Initiative at its 2012 Annual Meeting as a “featured innovation”, and inthe same year, it also received an award at the American Water Summit, an eventorganized by Global Water Intelligence, an organization that provides market intelli-gence to private investors. This turn of events is consistent with the slightly awkwardpractice in which these entities hand out awards for public-private partnerships at thetime a contract is signed, rather than rewarding actual performance.

Private Companies Serving Public Utilities

Today, private water companies in the U.S. mostly thrive in niches. In their tradi-tional “regulated” market, they own mostly small water utilities. But in their new“unregulated” market, they provide specific services for publicly owned utilities.In this market segment, more than 1,300 municipalities and counties in 43 statescontract with private companies to provide selected water or wastewater services,often for wastewater treatment plants.

New York City

An example where they serve an entire public utility to improve its efficiency isNew York City. In order to understand how the private sector became involved, it isuseful to look back at the history of water in the city.

44 Years to Build a Tunnel

The tunnel that supplies Manhattan with drinking water is buried deeper below thesurface than the Empire State Building extends above it. It is 4 m wide and wasbuilt when the United States joined the First World War. The water flows from theCatskill and Delaware reservoirs in Upstate New York by gravity and then risesthrough large shafts to the surface without any need for pumping. The system is anengineering marvel. But it has a catch: For almost a century, there was no backupwater supply system for New York City. The giant underground gates controllingthe flow in the tunnel had not been closed for decades. They are so degraded thatengineers fear the gates would not open again once closed, shutting off the city’swater supply. In the meantime, the old tunnel loses huge amounts of water throughleaks. The only way to inspect and repair the tunnel was to drill a parallel tunnelinto the bedrock below the city at a cost of 6 billion dollars. The construction of

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the new tunnel was begun when Richard Nixon was President of the United States.It was opened by Mayor Michael Bloomberg in October 2013, finally allowing forinspection of the old tunnel.

The fact that it took 44 years to build the giant replacement tunnel in two phasesand three sections is not really due to the technical difficulties of the project, whichthe engineers could have completed much faster. The reason it took so long wasthat city officials were reluctant to come up with the financing, postponing the giantproject several times. Being underground, the project was not visible. It also didnot provide any new amenities, but “simply” secured an existing service. Like manyother, often smaller water infrastructure projects, it was not well-known to the publicand offered little tangible benefit to politicians running for re-election.

Keeping the Money from the Hands of the Politicians

New York City actually had to take some unusual steps to raise the funds needed forthe replacement tunnel. When the first phase of the tunnel was built in the 1970s, thecity was in a deep crisis and on the brink of bankruptcy. In order to raise the funds tomaintain and improve the city’s water and sewer infrastructure, the city’s legislaturepassed the Water Finance Authority Act of 1984. It stripped the city of the right toissue and collect water bills, and gave this right exclusively to the newly establishedAuthority. The Authority in turn raised bonds in the capital market. Its revenueswere to be used, by law, first to serve the Authority’s debt. This arrangement ensureda good credit rating, enabling the Authority to raise debt at lower interest rates thanthe bankrupt city government. Only once these financing costs were covered was theAuthority allowed to transfer funds to the city to pay for salaries and other operatingcosts of the water system. In parallel, under a 40-year agreement, the Authorityleased assets from the city. The arrangement alleviated the financing troubles of thewater system and was a major step forward. But it did not solve the city’s waterwoes completely.

The Federal Government Orders More Investments

The city also had other troubles related to water and money: In the 1990s, federalregulators imposed an environmental program aimed at improving drinking waterquality in the oldest of the three systems supplying water to the city. During theAugust 2003 power blackout, untreated sewage was discharged into the East Riverwhen emergency generators failed to operate. After this incident, the environmentalprogram imposed by federal regulators was extended to wastewater treatment,pushing costs up further. In the wake of a multi-billion dollar investment program,water tariffs in New York doubled between 2003 and 2011. The average monthlywater and sewer bill of a single family soared above 75 dollars. Many New Yorkersare tenants and never see a water bill. Compared to sky-high rents – of which

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Table 12.1 Water tariffs,water use and affordability inNew York City

Residential water tariff USD/m3 1.66Water use Liter/capita/day 319Average household size Persons 2.6Typical residential water bill USD/month 41.29Median net household income USD/month 4,659Affordability % of income 0.9 %

Source: Author’s calculations based on figures from theNYC Department of Environmental Protection

the water bills are one small element – such an amount pales. Water tariffs areaffordable, as shown in Table 12.1. Still, there were complaints that water tariffswere getting out of hand.

Instead of further delaying investments or simply passing all additional coststo its customers, the city’s Department of Environmental Protection (DEP) nowbegan to look at how it could reduce its operating costs. In 2010, the DEP setitself the aspiration of becoming “the safest, most effective, cost-efficient, andtransparent water utility in the nation”. It determined 100 specific goals to berealized across all business areas. It initiated an “operational excellence” programto make operations more cost-effective through energy savings, better inventorymanagement and streamlining workflows. In 2011, in order to achieve this objective,DEP hired the private water company Veolia Water Americas, a subsidiary of theFrench water giant Veolia, and the management consulting firm McKinsey. Initially,they helped to identify savings. In this process, the employees are closely involvedin identifying better ways to conduct operations, while drawing on the globalexperience of Veolia. Apparently, the collaboration worked well. In 2012, VeoliaWater North America won what it called a “performance-based technical assistancecontract” to implement the changes that were identified. This is expected to lead to100–200 million dollars in annual savings out of the 1.2 billion that the DEP spendsannually on operations and maintenance, thus keeping future tariff increases as lowas possible. The remuneration of Veolia is partly based on whether the cost savingsare achieved. In 2013, savings reached 15 million through activities as diverse as therenegotiations of supply contracts, the reduction of fluoride dosage, re-alignment ofstaff duties, automatic reading of meters, and consolidation of the vehicle fleet.

This public-private partnership seems to work well. Far from taking over utilityoperations, Veolia helps a public water utility to become more efficient and providebetter service for its customers.

DC Water: A Public Utility Turnaround

In the late 1980s and early 1990s, the water and sewer system of the U.S. capitalhad been in shambles. The system was operated by a municipal department that wasprone to the many woes of the city administration at the time. The drinking water

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standards were violated and the District did not have enough funds to make thenecessary investments. Unlike in any other U.S. city, the decision as to what to do totackle the problem could not be made by the City Council alone, but had to be madetogether with the U.S. Congress because of the District’s special status as an entitythat is not a U.S. state. There was talk of privatization at the time, but ultimatelythe District and Congress chose a different route: in 1996, Congress passed a lawto create an autonomous utility under a Board with representatives from D.C. andneighboring jurisdictions. The utility was authorized to set its water and sewer tariffsbased on the principle of full cost recovery and a 10-year financial forecast. Mostof the investments were to be financed by issuing bonds, while a smaller portionof the funding was to come from federal grants and directly from tariff revenues.Rates were increased immediately by almost 50 %, and on that basis, an investment-grade credit rating was secured from rating agencies for the utility’s first bond issue.A professional General Manager, Jerry Johnson, was competitively recruited. Heheaded the utility for the next 12 years and managed its turnaround, securing its firstcredit rating and initiating a multi-billion dollar investment program. This was onlypossible through regular tariff increases, which were not met with protests. Between2004 and 2012, the Board approved tariff increases between 4.5 % and 12.5 %every single year, well above the rate of inflation. The average monthly residentialwater and sewer bill more doubled from 34 dollars in 2004 to 69 dollars in 2013for a consumption of 18.8 cubic meters. This corresponded to 1.36 % of medianhousehold income, still slightly below the U.S. average of 1.57 %. The credit ratingof the utility improved in 2003 from lower medium to high investment grade, whereit remains as of this writing. This enabled the utility to raise debt at long maturitiesand low interest rates. In 2014, it raised 350 million dollars with a 4.81 % greenbond with an unprecedented maturity of 100 years.

The funds were not only used to replace assets, but also to improve servicequality. For example, the technology of the Blue Plains wastewater treatment plant,one of the largest in the world, was upgraded to remove nutrients to protect thenearby Chesapeake Bay and to produce energy from sludge. The sewer network wasalso upgraded to reduce incidents of raw sewage mixed with rainwater overflowingduring rainstorms into the Potomac River, the Anacostia River and Rock Creek, apark in the middle of the District. The utility has also replaced all its water meterswith remotely read meters. This allows customers to review and compare their dailywater use on the Internet and to receive email or SMS alerts in case of unusuallyhigh water consumption so that leaks inside homes can be detected quickly even ifno one is at home. In terms of social responsibility, the utility has a program thathelps needy customers to pay their water bills, called Serving People by LendingA Supporting Hand (SPLASH). It is funded by voluntary contributions that watercustomers are asked to make as part of their water bills, and is implemented by theSalvation Army.

But there was also a major crisis that the utility managed poorly. In 2003,the Washington Post reported on excessive lead levels in drinking water, after achange in water treatment processes caused lead from service lines to dissolve.The utility had tried to suppress a critical report by an expert and had even fired

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its own water quality manager after she had asked her superiors to take actionon the issue. A hastily written report by the Centers for Disease Control andPrevention (CDC) minimized the risks from lead in drinking water, but was latershown to be “scientifically indefensible” by Congressional investigators. The utilityembarked on a massive program to replace old service lines. More importantly, thewater treatment process was adjusted by adding a substance, orthophosphate, whichreduced the corrosion of the pipes and the lead levels in drinking water. Throughthese measures, lead levels declined again, but the reputation of the utility had beenseriously damaged.

In 2009, a new General Manager, George Hawkins, was brought in. Under histenure, investments were further accelerated. He also engaged more with customers,rebranded the utility as DC Water and encouraged innovation, including thosechampioned by employees and even customers. The utility won numerous awards.One way it engages with its customers is the annual “taste test challenge”. Duringthe contest volunteers taste two water samples, one being tap water and the otherbottled water, and decide which one tastes better. The majority of participantspreferred the taste of tap water or could not tell the difference between the tap andbottled water.

DC Water has completely changed compared to a generation ago, when itsservice was among the worst in the United States. Today, DC Water is one ofthe leading utilities in the United States in terms of its innovation, environmentalperformance, customer orientation and finance. This is another example of how theright policies and the right institutional framework, as they were set in place in 1996,together with professional leadership, can turn around a struggling water serviceprovider without the need to resort to privatization.

Conclusion

There is a backlog of investment in the U.S. water and sanitation sector. In the period2001–2006, the most recent period for which data are available, funding for capitalinvestments came from three roughly equally important sources: One third fromcurrent revenues, one third from private sector borrowing, and one third from othermainly public sources including State Revolving Funds. Private sector borrowingwas mainly in the form of municipal bonds issued by larger utilities. Funding fromprivate investors in the form of equity was almost negligible at only 2.4 % of capitalinvestments.

If investment is to go up, how should the additional investment be financed? Thefederal government is unlikely to come to the rescue, since the appropriations for theState Revolving Funds have declined for years. The federal government is heavilyindebted as a result of the 2008–09 financial crisis, reaching a level correspondingto 100 % of Gross Domestic Product (GDP) in 2013. State and local governmentsare far less indebted at an average of 7 % and 11 % of GDP respectively in 2013.

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But state governments are loath to assist local governments in an area that is theirresponsibility, and some local governments are far more indebted than others.

Private water companies have a long history in the United States, operatingmostly in small towns. As a result of a 1997 change in the tax code, private watercompanies had an incentive to expand into larger cities using the concession model.However, a high profile concession in Atlanta failed, and several smaller citiesfiercely opposed water privatization, so that the U.S. water sector continues to bedominated by publicly owned and managed utilities. Recently, there has been acomeback of water concessions in some heavily indebted municipalities, such asin Bayonne, New Jersey, as described above. More importantly, perhaps, some largeU.S. water utilities have ramped up investments and become more modern. Oneexample is the New York City Department of Environmental Protection (DEP) thathas teamed up with the private water company Veolia to increase its operationalefficiency. Another example is DC Water, a public turnaround success story financedthrough bonds that has gradually unfolded over the past two decades. While thepaths chosen to modernize utilities in the U.S. are quite different from each other,they have one thing in common: water tariffs went up, which is inevitable if theinfrastructure backlog is to be overcome without additional government grants.

Part IVAsia and Africa: Three Successful Utility

Turnarounds, Public and Private

Chapter 13The Philippines: A Delayed PrivatizationSuccess Story in Manila

In 1993, the same year the Buenos Aires concession was signed, President FidelRamos of the Philippines spoke of a “water crisis” in the capital city of Manila, anannouncement that came as a surprise to many of the city’s residents, who were notaware of any such crisis. While the utility was in poor shape, people had becomeused to its mediocre performance, and it had not been an issue of public concernuntil the President brought it to the forefront.

Before the Privatization

In his speeches, President Ramos highlighted the fact that more than half the waterin the network was lost and service quality was poor. The President instructed hisMinister of Public Works, Gregorio Vigilar, to bring a “Water Crisis Act” throughCongress. The Act was passed and gave extraordinary powers to the government,including the possibility of sending civil servants into early retirement and awardingBuenos Aires-style private concessions.

President Ramos was a keen supporter of privatization. He had previously pushedthrough the privatization of the electricity sector, which had earned him praisebecause a power crisis had been resolved by investments in new private powerplants. Now, he wanted to repeat the success in Manila for the water supply.

The government’s approach was prudent. As Mark Dumol, a former civil servant,describes in his diary, the government initially received several unsolicited bids.But unlike in Indonesia, where the government had accepted unsolicited bids forthe water supply of the capital Jakarta, the Filipino government refused to acceptthem. Instead, it insisted on an open bidding process in which the winner would beselected, just as in Buenos Aires, based on the lowest water tariff offered.

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Making the Concession Attractive

In theory, this approach should have lowered water prices. In practice, the govern-ment increased water tariffs before privatization by 38 %, above the inflation rate,which was 8 % per year at the time. It chose an opportune time for the move: Theincrease was announced during the visit of the Mexican singer Thalia who wastremendously popular in the Philippines. As predicted, almost nobody noticed theincrease and there were no protests.

Professional advisers provide advice on almost every large water privatization.Usually, consulting firms offer counsel on financial, legal and technical matters.In the case of Manila, the key financial advice for the transaction came not fromconsulting firms, but from the World Bank’s IFC. While leaving open the option oflending to the private companies at a later date, the IFC, thus, played a different rolethan it had in Buenos Aires, where it had not been involved in selecting the privatecompany.

Before bidding started, the government made a second move – beyond the tariffincrease – to make the concession more attractive. The public water utility, theMetropolitan Waterworks and Sewerage System (MWSS), had been one of themost overstaffed utilities in Asia, with four times the number of employees perconnection than the water utility of Singapore. Using the upcoming privatizationas a justification, the government reduced the number of staff significantly throughmeasures negotiated with the labor unions. This would not have been possible undernormal conditions: The Water Crisis Act exempted the management and employeesof the company from the usual civil service rules. It also allowed for mobilizingconsiderable government funding to compensate staff who would lose their jobs. Assuch, it was essential that the government seek the support of the unions for theirplan. It even took them to Buenos Aires so that they could talk to the unions there.In the end, the union approved the plan. Employees were offered a generous earlyretirement deal, which 30 % of all employees accepted. The substantial reduction inoverstaffing enabled bidders to offer lower water tariffs to customers.

The government had taken and implemented two difficult decisions beforeprivatization: tariffs had been increased and the overstaffing of the utility had beenreduced. The concessions were now attractive and the bidders could come.

Splitting the Service Area in Two Halves

The government also made another unusual decision: It decided to split the city intotwo service areas, following the example of Paris. The two concessions could not beawarded to the same company, meaning that the performance of the two concessionholders could be compared. Another motive was that, should one of the companiesgo bankrupt, the other company could be asked to take over the entire city. The staff,assets and debts of the existing public company was split in two, in a cumbersomeprocess with controversial merits.

Before the Privatization 137

The companies were expected to invest 7 billion dollars over the 25-year lifetimeof the concessions. Who would finance these investments? The companies wereexpected to come up with only limited capital of their own. Most capital was to beprovided through loans, including low-interest loans in foreign currency.

The two halves of the city were not equally attractive. And there was dis-agreement as to which one was more beautiful. The IFC argued that investmentrequirements would be higher in the Eastern zone and that bidders would, thus,offer higher prices for this less attractive zone. The government did not want tohave widely different tariffs in the same city. Therefore, the expected higher costswere counterbalanced by loading 80 % of the 880 million dollar legacy debt on theseemingly more attractive Western zone – a decision that would have consequences.

The Bidding War

Companies had to be joint ventures between an experienced international watercompany and a Filipino company. Four joint ventures were prequalified, led byfour international companies: The two French water giants were competing witheach other this time. The two other competitors were Anglian Water from the UK,and a newly formed company baptized International Water. International Waterconsisted of the construction giant Bechtel from the US and the water companyUnited Utilities from the UK. United Utilities was the successor of North WestWater, after that water company had been merged with a power utility. The localpartners of the four international firms were four big construction companies ownedby influential families: the Ayala Corporation, Benpres Holding owned by the Lopezfamily, Aboitiz Equity Ventures and the Metro Pacific Corporation.

Each of these joint ventures was allowed to place two bids, one for eachconcession area. The bid for East Manila was to be opened first; the winningcompany would not be eligible for West Manila. Bids were opened in public inthe presence of the media, with the figures from each bid projected on a screen.The lowest bidder for the East zone was Manila Water, consisting of the AyalaCorporation and International Water. It offered tariffs that were one fourth theamount of the previous tariffs! The participants were in awe. The tariff was so lowthat the bidder was asked if his bid had been serious or if the company had made amistake.

The lowest bid for the West zone, after excluding the bid by Manila Water, wassubmitted by Maynilad, consisting of Lyonnaise des Eaux and Benpres Holding. Itwas twice as high as the bid for the East zone, but still 55 % below the previoustariff level and lower than the tariffs prior to the increase during the timely visit ofthe singer Thalia.

Bidders fell over themselves, doing so despite the massive investments required.The bidders had to reach universal access after only 10 years. They did not receiveany subsidies, and they had to pay off the legacy debt. Ayala had apparently beendesperate to win the contract in the East Zone, which included the business heart of

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Manila, because it was interested in the construction works that would come withthe concession. Its international partners, Bechtel and United Utilities, had theirown reasons to bid low. Bechtel, as a newcomer to the water concession market,was apparently ready to take greater risks to get a foothold in the international watermarket. And United Utilities still reeled from its defeat in Buenos Aires, where it hadbeen outbid by Lyonnaise. In the financial model that accompanied its bid, ManilaWater made extremely optimistic assumptions: It expected to be able to reduce non-revenue water very quickly, and its cost of capital was only 5.2 %. Manila Waterexpected to raise loans at low interest rates, and it expected that most investmentswould be financed by loans or tariff revenues, and not by its own capital. These werebold assumptions.

Was it “irrational exuberance” or did the bidders assume right from the beginningthat they could renegotiate the concessions later on to gain more favorable condi-tions? In early 1997, the winning bidders did not wonder too much about thesequestions, but instead celebrated their victory.

Private Management: A Tale of Two Concessions

Shortly after the concession contracts were signed, a first risk materialized – onethat apparently few had expected: the East Asian crisis erupted, sending the Filipinopeso into a free fall, halving its value. Remarkably, IFC, the international financialadvisor, had not accounted for any foreign exchange variations in the contracts, andthe private companies, in their rush to gain contracts, had foolishly not challengedthis omission. The two private water companies had to cut down on investments. Theconcessions were off to a bad start, but the two companies dealt with the situationdifferently. Maynilad in West Manila failed, while Manila Water in the East wassuccessful. What explains these differences?

Maynilad had placed a much higher bid than Manila Water. Also, it workedin the Western zone, which the IFC had expected to be more attractive in termsof returns and costs. Therefore, the Western zone had been allocated 80 % of theforeign currency legacy debt. With the devaluation of the peso, these costs soaredin local currency. Maynilad cut down on investments, as its French and Filipinoowners refused to inject more equity. Banks were not willing to lend during thecrisis to a company that did not put its own money where its mouth was. Moreover,the local personnel that Benpres had sent to manage the company had no experiencein the water sector, and soon, a rift occurred between them and the old employees.Maynilad eventually managed to make some investments and expand access, but theachievements remained far short of the targets. After many years during which thecompany struggled, it declared bankruptcy. In 2006, it was sold to a consortium thatincluded Metro Pacific Investments Corporation, one of the Filipino partners whowere among the losers of the 1997 tender.

Manila Water, the concession holder in East Manila, was more successful.To some extent, it had been lucky. Its half of the metropolitan area turned out

Impact: Increased Access, Improved Efficiency and Customer Satisfaction 139

to be economically more attractive than expected, and it had to shoulder only20 % of the legacy debt. But the company was also smarter. It borrowed smallamounts in local currency to finance investments quickly, gaining the trust oflocal banks during the crisis, which allowed it gradually to borrow more. It alsoempowered its employees to seek the best ways to cut water losses, which wereextremely high. Under an approach called “territory management”, the evaluationand compensation of employees was linked to their performance. Each of the 400territory managers within Manila Water was responsible for about 8,000 customers.A territory manager is accountable for clearly defined outputs: amount of water sold,amount of water billed, bill collections, customer service and non-revenue water.Territory managers are expected to regularly “walk the line” and to communicatewith community leaders. A hotline having been established, territory managersare also expected to monitor complaints closely and determine whether or not theyhave been resolved.

Impact: Increased Access, Improved Efficiency and CustomerSatisfaction

The approach worked well. Manila Water more than doubled the population served,going from 3 million in 1997 to 6.1 million. It increased the share of customerswith continuous water supply from 26 % to more than 98 %. It also reduced waterlosses and theft from 63 to 16 % in 2009, and then to 11 % in 2013. The percentageof people judging Manila Water’s performance as “very good” increased from 28to 93 %, according to surveys conducted by the University of the Philippines.The success was largely attributable to the Filipino partner, the Ayala Corporation.International Water – the Bechtel & United Utilities subsidiary that later took overthe water supply in Cochabamba – sold its stake to Ayala after a few years with littleapparent impact from the international partners (Table 13.1).

In West Manila, the oldest part of the city with the oldest pipe network,results were eventually turning positive, especially concerning access. Accordingto Maynilad, access expanded from 58 % in 1997 to 84 % in 2002. The share of

Table 13.1 Performance of Manila Water before and after privatization

1997 2013

Access 49 % 94 %Population served Million 3.0 6.1Customer satisfaction 28 % 93 %Continuity of supply 26 % 98 %Labor productivity Staff/1,000 connections 9.8 1.4Non-revenue water 63 % 11 %

Source: Manila Water annual report 2013

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customers that enjoys 24-h water supply increased from 32 % in 2007 to 71 % inearly 2011. But non-revenue water actually increased from 64 % in 1997 to 69 % in2002, compared to a target of 30 %. By 2011, it had been reduced to 47 %, a levelthat is still unacceptably high.

Tariffs Go Down and Up, but Remain Affordable

Tariffs in Manila had initially gone down substantially as part of the bidding for theconcessions, helping politicians to score points with the public. But the low tariffswere short-lived. The Board of MWSS, which continued to own the infrastructureafter the privatization, approves tariff adjustments on the basis of the concessioncontracts. In addition to the indexing of tariffs to inflation, in 2002, regulatorsallowed a tripling of water tariffs, raising them well above the pre-privatizationlevel. It was only this tariff increase that allowed the massive investments to take off,in turn creating the improvements in access and service quality over the followingyears.

Nevertheless, tariffs remain affordable. The average tariff for all customer groupsin East Manila is 32 pesos/m3 (71 cents/m3), less than half the water tariff inSingapore. The residential tariff is less than half as much at 32 cents/m3. Aresidential bill in East Manila for a consumption of 30 cubic meters per month,including all charges and taxes, is 395 pesos (9.60 dollars), about 2 % of medianhousehold income. Tariff revenues cover the full cost of water distribution, includingasset replacement, interest on debt, and profit – an unusual achievement in anydeveloping country (Table 13.2).

Did the Winning Companies Submit “Dive Bids”?

It remains a matter of debate as to whether some companies deliberately submittedlow “dive bids” in the expectation of renegotiating the terms later on. The bid byManila Water was clearly based on unrealistic assumptions: Its financial modelassumed an unrealistic increase in water demand, a rapid reduction in water lossesand very low financing costs. Manila Water took a big risk in order to win. It

Table 13.2 Residentialwater tariffs, water use andaffordability in East Manila

Residential water tariff USD/m3 0.32Water use Liter/capita/day 200Household size Persons 5Typical residential water bill USD/month 9.60Median net HH income (estimate) USD/month 509Affordability % of income 1.9 %

Source: Calculation based on Manila Water annual report 2013

Conclusion 141

either completely overestimated its capacity to achieve rapid improvements, or itwas confident that it would be able to change the contract after it had won – orperhaps it was driven by a combination of both. The other bidders submitted muchhigher bids, but even these proved to be too optimistic.

Box 13.1: Working with Communities in the Slums of ManilaProviding access to water for all is a moral imperative and an obligation interms of fulfilling the human right to water. However, in practice, this is aconsiderable challenge in slums where residents typically live on illegallyoccupied land so that utilities are not allowed to provide residents with houseconnections. Furthermore, utilities are concerned that the low per capita waterconsumption in slums means that revenues are below costs, that the poor maynot pay their bills, or that they will steal water. In Manila, this dilemma wasresolved through cross-subsidies from commercial as well as high-volumeresidential users, and through an innovative partnership between the privatewater utilities and community groups.

An example is the slum Happyland, where social workers from the NGO“Streams of Knowledge” helped the community to organize itself throughelected leaders. The community leaders had the trust of the community andof the social workers. The NGO then approached the utility and asked it toprovide water not to every shack, but to faucets at the entrance of every alley.Residents would then distribute the water with hose pipes and pay dues to theircommunity coordinators. These would pay the NGO, which in turn would paythe utility bill. The NGO would also pay the community coordinator a modestsalary for her or his services. Fees were set at such a level that there wouldend up being a small surplus that could be used to finance small works thatbenefit the community. The arrangement worked well. Residents paid theirwater fees, water theft remained limited. Most importantly, monthly waterexpenditures of the poor were cut to a fourth of their previous level whenthey had to pay exorbitant prices to water vendors, while service improvedgreatly. The key element that had been missing before to solve the puzzle ofwater supply in slums was provided by the NGO: Trust. The public-privatepartnership of the Manila concessions was thus extended to become a public-private-community partnership that served and included the poor.

Conclusion

None of the two concessions in Manila achieved their original targets within thespecified time frame. After the Asian financial crisis the original targets provedto be unrealistic and had to be adjusted. Improvements came much slower than

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anticipated, but come they did. Today, the East Manila concession is regarded aslikely the most successful private water concession in the developing world. TheWest Manila concession, contrastingly, was regarded as a failure for many years.After Suez sold its share in the concession, however, performance picked up, andtoday, significant improvements have been made in both halves of the city.

The success of the Manila water concessions was facilitated by the preparatorywork done by the government, which increased tariffs and reduced the number ofstaff before privatization. It was also facilitated by the regulator which allowedtariffs to go up within reasonable limits, whilst maintaining challenging investmentand efficiency targets. Then it was the companies who made the success a reality.It was their focus on customer service and productivity that allowed to keep tariffsaffordable while using revenues to replace assets and expand service at no cost tothe taxpayer.

Chapter 14Uganda: A Public Utility Turnaround, Triggeredby Pressure to Privatize

The turnaround of NWSC, the National Water and Sewerage Corporation ofUganda, is a textbook case of how a failing water utility was transformed into aperforming company. Over a period of 5 years, from 1998 to 2003, costs wereslashed, efficiency was increased, hierarchies were made flatter, service qualityimproved, and a loss-making company in one of the poorest countries in the worldmoved into the profit zone without even increasing its tariffs. This was achievedto a large extent through the efforts of a visionary leader, William Muhairwe, whoapplied modern business management techniques to shake up a sclerotic governmentagency.

Or so goes the story that has been told time and again at water conferences aroundthe world. The actual story of the turnaround of NWSC is more nuanced.

Before the Turnaround

NWSC, which in the 1990s had a service area comprising the capital city ofKampala and about ten other cities and towns in Uganda, is usually described ashaving been in total disarray in the mid-1990s. Indeed, many things were wrong atthe company.

The Heritage of Idi Amin and Milton Obote

The entire country had been devastated by two tragic episodes in its history: thedictatorship of Idi Amin during the 1970s and a Civil War in the southern parts ofthe country, known as the Ugandan Bush War, during the first half of the 1980s,during the Presidency of Milton Obote. After rebels captured the capital and made

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their leader, Yoweri Museveni, President of the country in 1986, peace and somesense of national unity were restored.

Not surprisingly, public enterprises in Uganda were in terrible shape, both interms of their physical assets and their managerial approaches. As Muhairwe hastold it, “to cope with mounting economic hardships, employees resorted to all sortsof coping mechanisms, including moonlighting and petty trade ( : : : ) in order tosurvive. The virtues of punctuality, integrity, hard work and commitment ( : : : )were abandoned. Coming late and absenteeism, dishonesty and corruption, abuse ofoffice, malingering, intrigue, rumour mongering and double dealing set in.” At onetime during the regime of Idi Amin, the military governor in the town of Jinja wastold that customers were not paying their bills. Immediately, he ordered his soldiersto storm the homes of residents to collect the bills at gunpoint. With this kind ofunsolicited help, it is no wonder that the NWSC, just like the entire Ugandan state,had a terrible reputation. This was the utility that Hilary Onek inherited when hebecame Managing Director of NWSC in 1982.

National Water and Sewer Company (NWSC) in the 1990s: ABasket Case?

Against all odds, Onek aimed at making NWSC a leading water utility in Africa, andhe brought major improvements to the utility. After Museveni became President in1986, donors flocked back to Uganda, providing substantial funding for investmentand training. Brand new water treatment plants were built, in particular for Kampala,drawing water from nearby Lake Victoria. Old and deficient waterworks wereredesigned and rebuilt, such as in the town of Mbale next to the Kenyan border. Theinternal systems of the company were modernized, introducing for the first time adigital geographical information system (GIS) to map the company’s customers.Many middle level managers received postgraduate degrees with scholarshipsfinanced by donors. Consultants introduced area business plans with the aim ofproviding more autonomy to mid-level managers. Furthermore, NWSC became atruly national utility, expanding from the country’s three largest cities, Kampala,Entebbe and Jinja, to serve a total of ten cities and towns.

But there were still major deficiencies in the organization in 1998. The utility hadfailed to keep pace with urban growth in its efforts to extend access. In Kampala,there was an imbalance between greatly enhanced water treatment capacity andwater connections, which lagged behind. The Corporation billed only half thewater it produced, and of the amount billed, it collected only 60 %. It had fartoo many staff for a company of its size. Staff costs accounted for 64 % of thetotal operating cost. Its debt was too high, since the government on-lent the loansit had contracted from international financial institutions to NWSC. And despitethe efforts to decentralize decision-making, the senior management did not reallyempower mid-level managers, maintaining the highly centralized decision-makingso characteristic of many utilities in developing countries. As Muhairwe would

The Turnaround 145

write, under Onek, the company had made much progress, but it had focused onthe physical “hardware” and had neglected to transform its management approach,the “software” of the water business.

The legal framework had become more conducive for improved performancewhen NWSC had been reorganized under a new Statute in 1995. The new Statutegave the Corporation more operational autonomy and the mandate to recover itscosts through revenues. Its Board composition was changed from one dominatedby government officials to a Board that included many professionals. Furthermore,the government had approved a tariff increase in 1994, including an indexing ofwater tariffs to inflation, so that a monthly residential water bill averaged about 5dollars, a high level for a country as poor as Uganda. The NWSC water tariff was 64cents per cubic meter, compared to 40 in Cochabamba, Bolivia, 20 in Phnom Penh,Cambodia, and only 5 in Cairo, Egypt.

NWSC thus may have been in poor shape in 1997, but it was far from being abasket case. It was in average shape compared to other water utilities in developingcountries, and it was in better shape than utilities in Egypt at the time or the utility ofPhnom Penh in Cambodia before it started its turnaround. The key events precedingthe turnaround, during the turnaround (1999-c. 2006) and in the years following itare summarized in Table 14.1.

The World Bank Pushes for Privatization

In this situation, the World Bank pushed for public sector reform, including theprivatization of state-owned enterprises in all sectors. NWSC was not financiallyattractive enough to be completely sold or to be bid out as a concession contract,as had been the case in Buenos Aires or Manila. This is why the government andthe World Bank opted for a different approach. Private sector participation wouldonly be introduced in Kampala, accounting for about two thirds of the customers,and it would be limited to specific activities where the utility had weaknesses:metering, billing and collection. In November 1997, NWSC, still under the helmof Engineer Onek, signed a 3-year management contract with H.P. Gauff Ingenieurefrom Germany for these services in Kampala.

The Turnaround

In late 1998, the government appointed Dr. William Muhairwe as the new ManagingDirector of NWSC. Holding a doctoral degree in business administration, he hadpreviously worked at the Uganda Investment Authority, quickly ascending withinthat organization. At NWSC, the new Managing Director immediately initiated a100-days program, aiming to adjust operational and financial inefficiencies, basedon the views and aspirations of his managers. His aim quickly became to show that

146 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

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The Turnaround 147

NWSC could improve its performance without private sector participation, or inother words, that there was a viable public sector alternative to privatization.

Making Customers Pay Their Bills

On William Muhairwe’s first day at his new job, he was locked out of his office bythe tax authorities, who had sealed the company’s doors because of unpaid valueadded taxes. Reeling under its debt and saddled with high costs, the company hadalso not paid its electric bills, and the electric company threatened to cut off thepower to the treatment plants and pumps. Muhairwe met with the Secretary of theTreasury and pointed out that government customers were not paying their waterbills to NWSC either. This paved the way for an arrangement under which thegovernment allocated sufficient budget to public agencies such as hospitals andschools to pay their water bills, and the respective arrears were ultimately settled.

This arrangement made it much easier for NWSC to increase its collectionefficiency during this period. But the company also managed to increase thecollections from residential customers. In Kampala, this was done with the helpof the management contractor Gauff. Collection efficiency increased from 60 % to96 % during Muhairwe’s first 100 days as Managing Director, and to the pride ofNWSC, the achievements in the areas under their direct management fully matchedor even surpassed those of the private company in Kampala.

Cutting the Number of Employees by Half

In the late 1990s, all public companies in Uganda were under pressure to becomemore efficient as part of World Bank-sponsored reforms of the public sector. The“shadow of privatization” brought constant pressure to the utility, pushing it tomodernize its management approaches to prove that the public utility could performbetter than private companies.

To address the excessive staffing at NWSC, the government offered severancepayments to employees who were willing to leave the civil service. These werefinanced by the proceeds of the privatization of state-owned companies, such asthe telecommunications company. Under different circumstances, a state-ownedenterprise would not have been able to lay off staff. But with the support of thegovernment, NWSC was able to reduce the number of its employees by half, fromalmost 1,800 in 1999 to less than 900 4 years later. Part of this reduction wasachieved by contracting out certain activities, such as vehicle repair and securityservices. Salaries for remaining employees were increased significantly, but evenafter these increases, labor costs were lower than before due to the staff reductions.This had a significant positive impact on the company’s finances. The number ofstaff per 1,000 connections decreased from 35 in 1998 to 9 6 years later, a result of

148 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

both the reduction in the number of employees and the increase in the number ofwater connections.

Staff morale was, of course, affected by the uncertainty induced by the voluntarydeparture program. Many employees wondered if they would still be working at thecompany the following year. Remarkably, staff morale actually improved despitethis uncertainty.

Changing the Corporate Culture and Focusing on Customers

Despite all the achievements of NWSC prior to 1998, according to Muhairwe, thegreatest obstacle to turning around the company was the work culture and mindset ofits employees at all levels. More than 10 years after the end of the tragic period underIdi Amin and Milton Obote, many employees still displayed the same behavioras described above. As he recalls, “coming late, shabbiness, drunkenness, rumourmongering and gossiping, ethnic-based cliques, godfathering, insubordination andabsenteeism ( : : : ) were the order of the day”. In order to break this work culture,Muhairwe and his management team identified eight targets to be achieved by theend of the 100 days program, such as the reduction of response time to leaks andbursts and the bill collection ratio. Managers of each geographical area and theirstaff were asked to set themselves monthly targets. The areas competed againsteach other to see who could best achieve the targets. At the end of each month,a ceremony, complete with music, dancing and bull roasting, was held to celebratethe achievements of the best area. This indeed motivated the employees and changedthe spirit throughout the company.

The 100 days program was followed by a concerted effort to improve customerservice, an area where NWSC had been weak. This included regular customersurveys, from which weaknesses would be identified, as well as measures to remedythose weaknesses. Furthermore, help desks and service centers, previously unknownin the company, were created. The same principles of empowering employees,celebrating success and devolving authority to local managers were successfullyapplied during this and subsequent phases of the Turnaround of NWSC.

Box 14.1: Customer Satisfaction Surveys in UgandaThe widespread customer satisfaction surveys have proven to be one of themost effective features of NWSC’s Turnaround. They cover questions such aswater reliability, water pressure, water quality, timely and accurate water bills,responsiveness in resolving complaints, responsiveness in carrying out newconnections, customer care, and the convenience of the bill payment process.The outcomes of these surveys are mixed. In the 2009–2010 survey, somecustomers complained about low water pressure, muddy water during the

(continued)

The Turnaround 149

wet season, supply interruptions during the dry season, low water pressure,slow implementation of new connections, erratic bills, disconnection despitehaving paid their water bills, and the rudeness of field staff. But the overallresult has still been positive. Expectations of water customers in Uganda,accustomed to years of neglect, are lower than expectations of water usersin rich countries. For example, customers appreciate that water cuts wereannounced over the radio. Customers also appreciate the ambience in localoffices, that phone calls are made to remind them of payment, and thatthey can settle arrears through payment plans in exceptional cases. Overallcustomer care, water quality and pressure all receive very good ratings. Acustomer satisfaction index shows that 85 % of customers are satisfied.

Performance Contracts Between the Government and NWSC

In 2000, Parliament passed the NWSC Act, which introduced 3-year-performancecontracts between NWSC and the Government. NWSC was the first companyin Uganda to be given the privilege of benefitting from such a contract. Theperformance contracts were inspired by the management contracts made withprivate companies, such as the one in effect at the time with Gauff for water supplyin Kampala. While new for Uganda, they were not a new idea in Africa: ManyFrancophone countries use such performance contracts (contrats-plan) to set andmonitor targets for public enterprises. What was new was how the performancecontract was translated with the company. Continuing the spirit of competitionbetween areas that had been introduced during the 100 days program, NWSC usedArea Performance Contracts between the Head Office and the assorted areas tobreak down the objectives from the performance contract for each individual area.

In order to encourage management to achieve the targets, an incentive elementof 25 % of the annual basic salary of the Directors was introduced, depending onthe fulfillment of the contract. Each year, the Board decides what kind of bonusesmanagement will receive. Crucially, employees also receive incentive paymentsif their areas achieve the performance targets set out in the internal contracts.Just as in Manila, the company gave more autonomy to regional managers whowere held accountable through internal performance contracts, introduced in 2000and subsequently refined. Hierarchies were flattened and staff was given moreopportunities to be involved in what was called the “stretch out programme”.

150 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

Creating a New Corporate Culture

A key element of the managerial changes introduced by Muhairwe was to makehierarchies flatter and to grant more decision-making power to area managerswithin the company. This was first done through so-called “Area PerformanceContracts”, and then through “Internally Delegated Area Management Contracts”(IDAMCs). The concept behind the contracts was the same and was inspired bythe existing arrangement in the Ugandan water sector. As mentioned above, thegovernment signed triannual performance contracts with NWSC. The company, inturn, had signed a management contract with a private company for one of its largestservice areas, the capital Kampala. This contract foresaw bonuses for increasedperformance, while giving the management contractor autonomy in its decisions asto how to reach the targets. Why not emulate the spirit of these contracts to shape therelations between other areas within the company, many of them located in remoteareas of the country, and the company headquarters? The simple idea was to rewardsuccess, both in monetary terms and by publicly celebrating achievements, but alsoto hold managers accountable for failure. Both ideas were apparently new to thepublic sector in Uganda. The corporate culture of the company had been one ofextreme centralization, in which top managers in Kampala made trivial decisionsabout the purchase of spare parts or the repair of a vehicle. This was now about tochange.

The first Area Performance Contracts were signed in 2000, in parallel withthe First Performance Contract with the government, and the first IDAMCs weresigned in 2003, mirroring the duration of the Second Performance Contract with thegovernment. Following the advice of Richard Franceys, a British specialist on waterutility management in developing countries, the initial very legalistic draft contractswere simplified and written in a clear, practicable way that was easily understand-able for area managers. The contracts initially met with some resistance, because –as a last resort – Area Managers faced penalties for consistent underachievement,including the possibility of demotion and even dismissal. Targets were negotiatedbetween headquarters and area managers. Managers and employees would receiveindividual bonuses for the achievement of performance targets, initially equivalentto 25 % of their basic salary. Crucially, the Uganda Public Employees’ Union(UPEU) was involved in designing the contracts, and its endorsement was importantin gaining employee buy-in for the reforms. To attenuate fears of abuse, an outsidearbitrator was named to make a final decision in the case of disputes betweenAreas and Headquarters about whether the targets had been achieved or not. Thefirst Area Performance Contracts were signed in two pilot areas, Kasese and FortPortal, both under the same manager, an enthusiastic supporter of the new idea.Furthermore, the German development cooperation supported investments in thesetwo areas and assisted in the preparation of Business Plans for them. To the surpriseof Muhairwe, the initial reservations were quickly overcome. Only 2 months afterthe first contracts had been signed, all other areas except Kampala, which was still

The Turnaround 151

under the private management contract with Ondeo, had prepared their businessplans and were ready to sign their contracts.

Initially, the autonomy was limited. For example, area managers were allowed tohire low-level staff, but the hiring of higher-level staff still required approval fromheadquarters. Similarly, small purchases were decided locally while bulk purchasesof pipes and chemicals continued to be done by headquarters to secure lowerprices. Still, the newly gained autonomy increased employee motivation. Resultswere evaluated in workshops held on a quarterly basis in the respective areas, sothat lessons could be quickly distilled and shared. Area managers and employeesexerted substantial efforts to map all customers and assets, expand access, repairbroken meters, identify and repair leaks, and make sure bills were paid on time.Crucially, they were given the means to achieve these objectives through workingcapital advances from headquarters. At the end of the contract period in 2003, notonly had most areas improved their performance for all indicators, but for someimportant indicators, such as non-revenue water and bill collection efficiency, theimprovements achieved by the internal Area Performance Contracts under publicmanagement had been far greater than the achievements under the managementcontract with the private company Ondeo in Kampala during the same time.

An Alternative to Privatization

The management and employees of NWSC were rightly proud of their achieve-ments. Looking back at these achievements in comparison with the two privatemanagement contracts in Kampala with Gauff and Ondeo, Muhairwe concluded:“The performance of both management contracts demonstrated that internationalprivate sector participation was not the best way to go. The process of recruitingan international operator ( : : : ) was too slow and too bureaucratic for our internalprocess momentum ( : : : ). While the management contracts were expensive tooperate, the results were not impressive. ( : : : ) The fat salaries of expatriate staffwere not reflected in improved performance and, in many areas, the servicesregistered marked deterioration. The international contractors were not familiar withthe local environment. And it took them a long time to learn the ropes (some nevercared to do so) to cope with the local situation ( : : : ) The dual allegiance of theworkers to the corporation and to the private operator was bound to be a source oftension and friction that blurred the lines of responsibility and accountability ( : : : )NWSC had built a critical mass of professional managers and engineers who werecapable of operating water and sewerage services as businesslike ventures withoutdirection or supervision from the headquarters.”

While the first internal performance contracts over a period of 2 years hadbrought some achievements, they had not yet sufficiently changed the corporateculture. There was still too much of a “boss element”, complacency and bureaucracy,at least for Muhairwe’s taste. When he visited Harvard in 2002 to attend aWorld Bank-sponsored workshop on infrastructure privatization, he was thoroughly

152 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

Table 14.2 First performance contract (2000–2003): targets and achievements

Base value (2000) Target value (2003) Actual (2003)

Non-revenue water (%) 43 35 39Staff productivity(staff/1000 connections)

18 10 11

Proportion of inactiveaccounts (%)

26 15 21

Collection ratio (%) 89 92 95Metering efficiency (%) 85 97 95Operating surplus(million Ugandan shillingsper month)

250 1090 670

Source: William Muhairwe: making public enterprises work, 2009

disappointed by the event, which he found “neither impressive nor instructive asfar as the challenges facing NWSC were concerned”. Instead, he wandered intoa bookshop and bought a book by Robert Slater on the famous General Electricmanager Jack Welch. In this book, Welch argues that the traditional control-typemanagement stifles employee motivation and initiative. He advocated abolishingthe “boss element”, to be replaced with flat hierarchies, direct communication andparticipation by employees. The book struck a chord with Muhairwe, who decidedto “become a Jack Welch disciple in Uganda”. He convinced the Board and SeniorManagers of NWSC to introduce Jack Welch’s “stretching” concept to the company.In particular, he asked one of his trusted area managers whether he would implementthe concept in his area by asking his employees to make suggestions as to howto improve performance beyond the targets in the performance contracts. Aftersome hesitation, the manager accepted and convinced first his middle managers,and then his employees. Subsequently, ideas were generated in a workshop. The3-day workshop was held in a Spartan environment attended by senior managersfrom headquarters and employees alike, without ties and where everybody calledeach other by their first names, something unheard of previously. After the firstworkshop, other areas were quickly asked to set out their own visions and targets insimilar workshops.

The performance contracts include six performance indicators, as shown below.In the first performance contract, all indicator values improved, but only one outof six targets was reached. The targets for the reduction of non-revenue water andinactive accounts, as well as those for the increase of metering efficiency and theoperating surplus, were not reached (Table 14.2).

In the meantime, the management contract with the private company Gauffhad been renegotiated by Muhairwe, strengthening the rights of NWSC. Whenthe contract expired in June 2001, there was disagreement as to its impact. Gauffclaimed success, while NWSC said it had failed. The contract was not renewed,but the government – still under pressure from donors to introduce private sectorparticipation in the water sector – decided to bid out another management contractfor Kampala. The second management contract started in February 2002. It was

The Turnaround 153

Table 14.3 Second performance contract (2003–2006): targets and achievements

Indicators Base value (2003) Target value (2006) Actual (2006)

Non-revenue water (%) 39 36 30Staff productivity(staff/1000 connections)

11 8 7

Proportion of inactiveaccounts (%)

21 12 13

Collection ratio (%) 95 103 90Metering efficiency (%) 95 96 99Operating surplus (millionUgandan shilling permonth)

670 1119 1168

Source: Author’s compilation from Ministry of Water and Environment and GTZ: “Reform of theUrban water and sanitation sub-sector”, 2010

signed with the French company OSUL (Ondeo Services Uganda Limited), asubsidiary of Suez, and ran for 2 years. The internal performance contract forKampala, as well as for other cities, was inspired by and based on the twomanagement contracts.

Indeed, NWSC employees are proud because the improvements achieved in areasoutside of Kampala without any private sector participation were greater than theimprovements achieved in Kampala under the management contracts.

In the second performance contract, the actual values from the end of the previouscontract were used as the baseline. All indicator values once again improved, butthis time, five of the six indicators were either surpassed or came close to beingachieved. Only the ambitious collection ratio target of more than 100 % was missed(Table 14.3).

Increasing the Customer Base

The number of connections more than tripled from 51,000 in 1998 to more than181,000 in 2006. This increased the revenue base of the company, spreading the costof its existing water treatment infrastructure and its labor costs to a larger customerbase. Donor financing helped in achieving this increase, but there are two otherfactors as well. First, connection fees were drastically reduced. In 1999, they stood at400,000 shillings (274 dollars), so that some households could not afford to connectto the network even if pipes had been laid in their street. The connection fee wasnow reduced to only 25,000 shillings (17 dollars), and the paperwork for processingconnection requests was simplified.

154 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

Reaping the Rewards

As a result of all the above changes, the financial performance of the companyimproved substantially. Notably, this was achieved without any tariff increase.There were only inflation adjustments and a 10 % increase to compensate theutility for a reduction in connection fees. It was a major achievement in a difficultenvironment, and it did not go unnoticed. The company was showered with awards,including being named “Employer of the Year 2003 for Ethics and Corporate SocialResponsibility” in a survey audited by the international consulting firm Ernst &Young. It also received a Golden Award for Management Excellence in June 2004and was named Employer of the Year 2004 for “Productivity and PerformanceManagement”.

Muhairwe presented the success story of turning around NWSC at numerousinternational venues, beginning with the World Bank Water Week in Washington,DC, in 2003. In the subsequent years, the eloquent speaker continued to be invitedregularly to both African and international conferences, becoming a celebrity in theworld of international water. In 2006, emboldened by the company’s success and thepraise it had received, Muhairwe went beyond his predecessor’s vision and vowedto make NWSC “one of the leading water utilities in the world”.

After the Turnaround

Management Fads Galore

But there was, perhaps, also a downside to the successful approaches introducedby Muhairwe. With his boundless energy, he kept introducing new managementconcepts. Every time Muhairwe travelled abroad, as he himself writes, he madeit a habit to visit the management sections of book stores. Inevitably, he founda new book that inspired him, and every time, he made it an obligation for hismanagers to read the book, to talk about it, to implement its lessons and to maketheir own subordinates do the same. After the “Stretching Program” inspired byJack Welch in 2002, the “One Minute Manager” by Kenneth Blanchard and SpencerJohnson was introduced in 2003. Then came the Checkers program, a tool toimprove performance monitoring by using unannounced and undisclosed visitsby employees and customers, inspired by the experience of a German car rentalcompany managed by a friend of Muhairwe in 2005. In 2008, “Raving Water Fans”was introduced, aimed at improving customer service and based on the “RavingFans!” concept by Kenneth Blanchard and Sheldon Bowles that emphasizes “the3Ds”: Decide what you want, Discover what the customer wants and Deliver plus1 % of what the customer expects. When the Managing Director introduced one ofthese new concepts, all senior managers were asked to make a presentation abouttheir understanding of the concept to their staff. Copies of the books were distributed

After the Turnaround 155

to all employees, who were required to take tests to see whether they had understoodthe concept.

Perhaps not surprisingly, staff began to suffer from change management fatigue.Employees were sick and tired of reading books and taking tests. The ManagingDirector rushed into one change management program after the other, without itbeing clear to employees what the additional benefits were. While the corporateculture and motivation had clearly improved, things were still far from perfect.

Stagnating Performance

After its spectacular turnaround in the first years of the new millennium, NWSCwas unable to further improve its performance in line with the targets set bythe government. The third performance contract for 2006–2009, which includeda different set of indicators than the previous contracts, called, among other targets,for an increase of the return on capital employed from 1.7 % to 3.2 % and a reductionof non-revenue water from 33 % to 31 %. But instead of improving, the return oncapital employed declined to 0.7 %, and non-revenue water increased instead ofdeclining. In Kampala, non-revenue water stagnated at 39 %, an unacceptably highlevel. The share of bills collected had declined again to 92 %, while the number ofemployees increased substantially, eroding the efficiency gains made in the previousyears.

At the time that NWSC’s performance was deteriorating – the period between2006 and 2009 – Muhairwe wrote a book called “Making Public Enterprises Work”in which he described how he had turned the company around.

The fourth performance contract for 2009–12 called for an increase of the returnon capital employed from 2.7 % to 5 % and a reduction of non-revenue water to31 %. As of 2013, the results were quite mixed. The return on capital employedwas 1.5 %, and the target was readjusted to just 2 %. Despite some improvementsin Kampala, non-revenue water stagnated at 35 %. The ratio of staff to 1,000employees also stagnated at 6, compared to a target of 5. And the collectionefficiency stood at 92 %, far below the target level, mainly because governmentcustomers failed to pay their water bills.

The Government Provides Debt Relief

As per its statute, NWSC must operate on a commercial basis. For many years,the government thus on-lent international loans it had received to the company.However, the company was increasingly unable to service this debt. Muhairweargued at a meeting in Paris in December 2006 that full cost recovery in developingcountries was a “myth”, and that tariffs would have to go up beyond the ability of

156 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

Ugandans to pay in order to reach full cost recovery. He then asked the Ugandangovernment to forgive the loans it had on-lent to the company.

In February 2008, the government agreed to the proposal and converted the 153.5billion shillings of debt (90 million dollars) into equity. This was presented as a wayto make the company more commercially-oriented, because NWSC planned at thattime to borrow from the local capital market. A cleaned-up balance sheet wouldfacilitate that endeavor. Indeed, a week after the debt forgiveness, NWSC announcedthat it intended to borrow 30 billion Ugandan shillings (18 million dollars) on thebond market. NWSC expected to be able to borrow in local currency at lowerinterest rates and for longer maturities compared to borrowing from commercialbanks. The World Bank assisted in structuring the bond issue. But amid strongcurrency fluctuations and the global financial crisis, conditions for the bond issuewere not good. In 2010, the Ugandan Ministry of Finance stopped the bond issuefrom going ahead, citing the need to first use conventional concessional financingsources. Although foreign loans were denominated in hard currency, their overallconditions – longer maturity and lower interests – were considered better than localbond financing. But these loans would be borrowed by the government and – asopposed to the previous practice – would not be on-lent to NWSC.

Doubts on the Accuracy of Figures

There were also doubts as to whether the figures documenting the achievements ofNWSC were accurate, given the lack of an independent regulatory agency in thewater sector to verify them. While the company’s financial statements were auditedby the Auditor General, there was no audit of technical indicators. As shown in Box14.2, there are a number of “dry zones” in Kampala. These areas were counted asnew connections, despite the fact that they never actually received any water.

Box 14.2: Dry Zones – No Water in Jinja KaloliWhen Sunday was a young girl, her family built a house in Jinja Kaloli, ahilly area in the Wakisu District outside of Kampala that was rapidly beingbuilt up. Since there was no piped water in the area, the family had to buywater in jerrycans. This imposed a heavy burden on the budget of the poorfamily, especially during the dry season, when prices for water skyrocketed. Ayear after the house was built in 2003, National Water announced that the areawould be connected to the water network. Sunday’s family paid a connectionfee and the area was connected to the network. However, the taps in the higher-lying areas of the neighborhood remained dry. Ten years later, Jinja Kalolistill hadn’t received water, although its inhabitants were counted as havingreceived access to drinking water in NWSC’s statistics.

After the Turnaround 157

Muhairwe’s Exit

In November 2011, the Board of NWSC let Muhairwe’s contract expire after13 years of periodic renewals. The termination came amid controversies about hispersonal wealth and the lack of improvement in the performance of the companyover the previous 5 years.

According to the company’s annual report, his salary was 378 million Ugandanshillings in 2011, about 160,000 dollars. This was about ten times the averagesalary of an NWSC employee. The Board hat authorized a substantial increaseback in 2006. At that time, Muhairwe had been mid-way through his second5-year term (2003–2008). The initial spectacular improvements had petered outinto more lackluster performance. Muhairwe apparently then told the Board thathe was considering accepting an offer as the Managing Director of the NationalSocial Security Fund, a job that allegedly was better paid than his current job.Muhairwe succeeded in negotiating a substantial increase in his remuneration andother benefits as the condition for his stay, together with an extension of his contractby 3 years until November 2011.

But there were also other questions. Muhairwe, who says he grew up in poverty,and his wife, who works as a contractor, own substantial real estate. One oftheir properties is the building that houses the Japanese Embassy. In 2007, theUgandan newspaper “New Vision” had included him in a list of the wealthiestpeople in Uganda. Where did their wealth come from? Muhairwe was also accusedof allegedly having written his book using company resources, and of excessiveinternational traveling. Furthermore, the charity Muhairwe Education Trust Ltd, towhich Muhairwe donated the proceeds of his book sales, was housed in the officesof NWSC.

In January 2013, Muhairwe became executive director of the Water LeadersGroup, a group launched by the British magazine Global Water Intelligence thathelps water leaders “share their ideas and experience : : : to make the world better”.In April 2014, NWSC received the Water Leaders Award at the Global WaterSummit in Paris from the hands of Liberian President and Nobel Peace LaureateEllen Johnson Sirleaf. It was recognized “for its innovations and efforts that haveresulted in significant increase in service coverage and supply reliability”, as notedin a press release by NWSC.

After Muhairwe

Back in Uganda, it took the Board of NWSC two years to select a new ManagingDirector. The position was advertised, but the selection had to be canceled afterconcerns raised by the Inspector General of Government (IGG) Irene Mulyagonjaamid suspicions that the process had been tainted by “gross irregularities”. Theprocess was then repeated, and Dr. Silver Mugisha, who had been in charge ofInstitutional Development and External Service under Muhairwe for many years,

158 14 Uganda: A Public Utility Turnaround, Triggered by Pressure to Privatize

Table 14.4 Performance ofNWSC before and after theturnaround

Indicator 1997–1998 2012–2013

Number of connections 51,000 317,000Share of bills collected 60 % 96 %Non-revenue water 51 % 33 %Staff per 1000 connections 35 6Operating profit (USh bn) 1.5 40

Sources: Jammal and Jones (2006), water and environ-ment sector performance report 2013

was appointed Managing Director in September 2013. The salary of the newMD was slashed to 229 million Ugandan shillings, 40 % less than Muhairwe’sremuneration.

The new Managing Director prepared a Strategic Plan to achieve NWSC’s vision,set out in 2006, to become one of the leading utilities in the world.

As of 2014, a bill was being prepared to be passed by Parliament to establish anautonomous regulatory agency, Uganda Water and Sewerage Regulatory Authority.It was expected that it would monitor the achievement of performance indicatorsmore closely, providing an independent assessment similar to Ofwat’s mandate inEngland and Wales.

Impact

Compared with the situation in 1997–1998, the performance of NWSC has signif-icantly improved, as shown in Table 14.4. However, most of these improvements,such as in labor productivity (staff per 1000 connections) and collection efficiency(shares of bills collected), were achieved during the first five years, followed byslower improvements over the following years that remained below the targets setby the government in its performance contracts with the utility. The sixfold increasein access during 15 years, which coincidentally made it to a large extent possible toachieve the improvements in labor productivity, is particularly impressive.

Are Water Bills Still Affordable?

As mentioned earlier, water tariffs in Uganda are high compared to other developingcountries. A typical residential water bill for a household with a house connection isabout 5 dollars per month, which amounts to more than 4 % of the median householdincome, as shown in Table 14.5. Water tariffs charged at stand posts with pre-paidmeters in slums are about a third lower and consumption is lower, so that monthlywater expenditures are rather in the range of 2 dollars per month for slum residents,which is still high compared to their meagre income.

Conclusion 159

Table 14.5 Residential water tariff, water use and affordability for NWSC customers in 2012(without sanitation)

Residential water tariff (house connections) USD/m3 0.76Water use Liter/capita/day 44Household size Persons 5Typical residential water bill USD/month 5.05Median net household income (estimate) USD/month 116Affordability % of income 4.3 %

Source: Calculated based on NWSC annual report

Conclusion

Despite the shortcomings mentioned above, NWSC’s turnaround and performancein one of the poorest countries in the world are impressive. NWSC performs farbetter than most water utilities in Sub-Saharan Africa, South Asia and even those inthe much wealthier Egypt. It is clearly in the same league as the best water utilities inAfrica which are found in Morocco, Tunisia, Burkina Faso, Senegal, Côte d’Ivoireand South Africa, including both publicly and privately run utilities.

What makes the NWSC case special is that it has achieved a turnaround whilemost of the utilities in the countries mentioned above have operated at high levelsof performance for many decades. Klaas Schwartz, a Dutch expert in urban watergovernance in developing countries, points out that the turnaround of NWSC wasfavored by many factors including a highly trained professional staff, a stronginstitutional culture, a high level of support for investment and technical assistanceby international donors, and strong support from the government. A study bythe Boston Institute for Developing Economies for the World Bank concludesthat the improvements were not due to private sector participation under the twomanagement contracts in Kampala, but to the overall reforms at NWSC that wereundertaken simultaneously. Muhairwe had succeeded by taking the approaches anyinternational private operator would have used to reform a utility and implementingthem at a fraction of what it would have cost to pay an international privateoperator for the same duration and for the entire service area of the company.More importantly, perhaps, working for the public sector and being a Ugandan,he had the knowledge, credibility and persuasion to win over the employees and hisBoard members that no foreign managing director would have been able to muster.Muhairwe himself credits the “Stretch Out” program inspired by Jack Welch forwhat he calls the “mental revolution” in NWSC. According to him, attitudes andwork methods changed profoundly: “Gone was the distance that had previouslykept the managers apart from their subordinates ( : : : ) In less than a year, stretch-outtransformed the Corporation’s organizational behavior beyond imagination, to theastonishment of other public utilities and the satisfaction of our customers.” Theprofound change in the utility’s management style and corporate culture indeed is arare feat in a developing country.

Chapter 15Cambodia: A Public Utility Turnaround, Endingwith Privatization

Ek Sonn Chan had a gun pointed to his head. As manager of the water utility, hehad dared to ask an army officer to pay the water bill for the army barracks, or elsethe supply would be cut off. In the face of the less than optimal response, Chanretreated. But the next day he came back with a handful of journalists and cut offthe water. The Army, under pressure from the public, gave in and paid its water bill.

Before the Turnaround

This scene took place at the beginning of what is probably the most remarkableturnaround of a public water utility in a developing country. Cambodia had beenheavily bombed during the Vietnam War, which had been followed by the terriblereign of the Khmer Rouge, who had killed a fourth of the country’s populationthrough murder and starvation. The cities were all evacuated in an effort to turnthe country into a peasant society. After the fall of the Khmer Rouge, the countryremained politically isolated under Vietnamese occupation, desperately poor andcut off from outside help, because the United Nations still recognized the exiledKhmer Rouge as the legitimate government of the country. This ended only afterpeace negotiations and free elections in 1993, which opened Cambodia to Westerntourism, trade and foreign aid.

At that time, Phnom Penh’s water supply was a shambles. Eighty percent of thepopulation did not have access to piped water supply. Those who had a tap in theirhome or yard received water for only a few hours per day, and what they receivedwas undrinkable. Pressure was so low that, for the few buildings that had more thanone floor, the water did not reach the first floor. Eighty percent of the water producedwas not even billed due to illegal connections and leaks. Half of those who receivedbills did not bother to pay them. Workers were underpaid and demoralized. Somewere corrupt and helped customers get illegal connections and avoid paying bills.The utility was effectively bankrupt.

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162 15 Cambodia: A Public Utility Turnaround, Ending with Privatization

The Turnaround

All this started to change when Ek Sonn Chan took over the company in 1993. Notonly did he confront customers who had not paid their bills, such as the army officerwho threatened to kill him, he also identified illegal connections, slapped heavyfines on the offenders and regularized the connections. He also fired corrupt staff.

Ek Sonn Chan had the support of the political authorities, all the way up to thestrong man Hun Sen, for this approach. Without that support, he would not havebeen able to make the sweeping changes he made. It also helped that late 1993 wasa good time to undertake reforms: Elections had been held earlier that year, so it waspossible to push through unpopular but necessary changes. Foreign donors came tothe country, so that substantial grant funding for public investments was available.Ek Sonn Chan seized his chance.

Laying the Foundations of Success by Gaining Trust

After having cleaned the corruption out of the house, he worked to gain the trust ofthe remaining staff. Promotions were based on merit, and a fair system of incentivepayments was introduced. Over the years, this created a culture of loyalty and prideamong employees.

The General Manager then worked to gain the trust of the customers. Havinghonest employees was an essential precondition for becoming credible with thepublic. Fighting against illegal connections was another part of it. As soon aspeople realized that the utility staff and its management were honest, they startedto report illegal connections and make other complaints. The utility staff followedup on complaints – something that people were not used to. A proper system forregistering complaints and following up on them was an essential, inexpensive stepin improving the internal work culture of the utility as well as its relationship withcustomers.

Ek Sonn Chan had thus improved the internal work culture of the water utility – acrucial point that would help the utility to make and maintain substantial efficiencygains in the following years, and which would allow for the next important step:making heavy investments in expanding infrastructure.

The billing and collection system was also changed completely. Previously,bills were issued by utility staff going door to door. The same staff also collectedbills. Accounting was manual and faulty. Now, payment was only accepted atthe offices of the utility that processed payments, using a computer system. Themodernization in terms of technology was accompanied, crucially, by changes inthe way employees were managed. Water meter readers were carefully monitored.Their performance was assessed and they received bonuses or penalties, dependingon whether they reached or failed to reach pre-set targets. The system achieved ahigh accuracy of meter reading.

The Turnaround 163

Creation of an Autonomous Utility

Still, substantial problems remained. For one thing, salaries continued to be low.Tariff revenues went to the municipality’s account, so any additional revenuescollected were not available to provide higher salaries to employees or to accomplishother tasks, like buying spare parts. Despite the increased motivation, it was difficultto retain qualified staff within the existing institutional set-up, where water serviceswere provided by a department of the municipality. The utility was not even allowedto recruit its own staff. This had to be done through the municipality, whichhad its own criteria for selecting employees that were not necessarily based onqualifications.

Donors thus insisted that an autonomous public utility should be created with itsown legal status and separate finances. This was achieved in 1996, 3 years afterEk Sonn Chan took over, when the government issued a decree that separatedthe Phnom Penh Water Supply Authority (PPWSA) from the municipality. Thenewly created utility was supervised by a Board consisting of representatives ofMinistries – after all, Phnom Penh was the capital of the country – a memberrepresenting the municipality, an independent director and a staff representative.

Increasing Tariffs, Especially for High-Volume Users

A year later, the water tariff was increased and the tariff structure was modified.Previously, tariffs were linear, meaning that the tariff was the same per unit ofwater consumed, and actual consumption was estimated based on the number ofpeople living in a house, since there were no meters. Now that all connectionswere metered, the utility introduced an increasing-block tariff. The lowest blockof the residential tariff was 20 % higher than the old tariff, but the second blockwas 148 % higher, and higher blocks were even more expensive. The tariff increasehad to be approved by the line Minister in charge, as well as by the Prime Minister.The additional revenues allowed the General Manager to increase the salaries ofhis employees and to ensure that needed repairs would be undertaken to maintaingood service quality. If PPWSA had remained a department of the municipality, therevenues could have been siphoned off for other expenses and would not have beenreserved for water supply.

Expanding the Network the Right Way

When Ek Sonn Chan took over, a Master Plan to expand the water network had beencompleted with assistance from France and Japan. The Master Plan, covering theperiod 1993–2010, was an excellent blueprint. Nevertheless, Ek Sonn Chan actuallyheld back on the expansion of the water network until PPWSA was reformed and

164 15 Cambodia: A Public Utility Turnaround, Ending with Privatization

strengthened. Only then was the system expanded, block by block, following therational layout of the Master Plan. This is in contrast to the way water systems arebuilt in many other developing countries, where pipes are often added haphazardlyin one area or another, making it difficult to provide water on a continuous basisand under constant pressure to all customers. In Phnom Penh, donors funded a newwater treatment plant and pipes were laid to substantially expand the customer base,while all new connections were metered. The number of customers increased tenfoldbetween 1993 and 2010, so that the network was newer than in most other cities.Beginning in 2003, clearly delineated hydraulic zones were established, separatedby bulk meters. Within these hydraulic zones, water losses can be easily identified,also making it easier to repair leaks quickly. But it takes trained and motivated staffto keep losses at low levels. At PPWSA, employees were not only trained, but teamsin charge of an area received a bonus if they reached their loss reduction targets.

Impact: Spectacular Results

Ek Sonn Chan remained at the helm of the Phnom Penh water utility for nearly twodecades, making sure that the principles and work ethic he had introduced to thecompany remained in place. The results have been impressive: The customer basemultiplied by nine, reaching over 90 % of residents. Service quality improved, goingfrom an intermittent to a continuous supply of safe drinking water at good pressure.Nearly all bills are being collected and non-revenue water has been reduced to theremarkably low level of 6 %. The director says he drinks the tap water withoutboiling. He has challenged his customers: “If you get stomachache after drinkingthe tap water, I will pay you compensation”. One should perhaps know, in regard tothis challenge, that it is not customary for Cambodians to drink untreated tap wateranyway, meaning that Ek Sonn Chan was not taking so great a risk when he made hisbet. Still, no one turned up at his office asking for compensation. The achievementsof PPWSA are summarized in Table 15.1.

Water losses are now only 6 %. 99.9 % of customers pay their bills on time.New employees were only hired when needed to replace staff that retired or left the

Table 15.1 Performance ofPPWSA before and after theturnaround

Indicator 1993 2012

Number of connections 27,000 234,000Share of population with access 20 % 92 %Share of bills collected 48 % 100 %Non-revenue water 72 % 6 %Continuity of supply (hours/day) 10 24Staff per 1,000 connections 20 3Revenues/operating costs 66 % 270 %

Sources: Michel Vermersch (2010) and PPWSA annualreport 2012

Impact: Spectacular Results 165

company, and recruitments were done based strictly on qualifications. The utilitywent from being bankrupt to making a profit. It now has motivated, well-paid staffwho earn ten times more than before the turnaround of the utility. The company’simage, according to Ek Sonn Chan, is excellent, a rare feat for a water utility in apoor country.

Box 15.1: Finding Out Who Is Truly in Need of Subsidized WaterA key challenge for utilities in poor countries is how to reach slum dwellerswho are not legally allowed to have their own water connections, becausethey do not own the land they live on. PPWSA has tried various approaches toreach slum dwellers, some more successful than others. At the beginning,the utility tried to sell water in bulk to “community representatives” whowould then sell water to slum residents in their neighborhood. Many ofthe community representatives turned out to be corrupt: They sold water attariffs that were much higher than those agreed upon, pocketing the profits.After several years of experimentation, the utility helped to gradually set upa different system: With outside help, community groups were elected thatwere representative of slum residents, while a unit was set up in the utilitythat was dedicated to working only with the community groups. Usually,utility employees have technical and commercial skills, but are not trained incommunity development. The new unit, staffed with social workers, filled thisgap. At the same time, slum residents gradually received land titles, makingthem eligible to receive water connections.

One of the tasks of the community groups was to decide who were thepoorest in each community. Those who were considered to be the poorestslum residents were allowed to pay their connection fees in installments,the number of installments being determined by the degree of poverty. Noone, even the poorest, was completely exempt from the connection fees.Many slum residents who were not classified as the being among the pooresthad to pay the full connection fee up-front, despite their still undeniablyconsiderable hardships. Keeping the utility financially healthy was consideredthe prime objective, and in order not to jeopardize that objective, only a fewexceptions were made. Mechanisms were set up to ensure that communitygroups worked in a transparent way, so that they could be held accountablefor their work. For example, the lists of those eligible for reduced connectionfees were made public, both inside the communities and on the website of theutility.

Thanks to the efficiency improvements achieved by PPWSA, the utility isprofitable while still offering low residential water tariffs that are affordable to itscustomers at an average of 1.8 % of household income, as shown in Table 15.2.

166 15 Cambodia: A Public Utility Turnaround, Ending with Privatization

Table 15.2 Water tariffs, water use and affordability in Phnom Penh

Residential water tariff USD/m3 0.18Water use Liter/capita/day 120Household size Persons 5Typical residential water bill USD/month 3.24Median net household income (estimate) USD/month 181Affordability % of income 1.8 %

Source: Author’s calculations based on PPWSA annual report 2012

After the Turnaround

Interestingly, the Phnom Penh success story was not widely known, even inprofessional circles, before the early 2000s. At that time, the accepted wisdom wasthat there had not been any turnaround of a public utility in developing countries.Supporters of public management, such as the trade-union affiliated think tankPSIRU, claimed that such successful turnarounds had occurred, but the examplesthey quoted, such as Hyderabad in India or Tegucigalpa in Honduras, turned out tobe less than ideal. The Phnom Penh turnaround, although quite advanced, remainedunnoticed by the world.

From Obscurity to Fame

That changed in 2004 when PPWSA received the Asian Development BankWater Prize for “dramatically overhauling Phnom Penh’s water supply system anddemonstrating leadership and innovation in project financing and governance”. Thiswas followed by a firework of awards, such as the Ramon Magsaysay Award forGovernment Service in 2006 and the Stockholm Industry Water Award from theStockholm International Water Institute in 2010.

Privatization Through the Stock Exchange

In April 2012, the government partly privatized PPWSA, although it was recognizedas one of the best publicly owned water utilities in the developing world. This wasdone without any external pressure from the World Bank or the IMF. Only 2 monthslater, Ek Sonn Chan was replaced by the manager of a private company that hadpreviously managed the water supply of the coastal tourist city of Sihanoukville. EkSonn Chan declined to comment about his removal when asked by the press. Shortlyafterwards, he became Under-Secretary in charge of water. He thus was in charge ofsupervising not only PPWSA, but the entire water sector in Cambodia.

Conclusion 167

One reason for the privatization was the mobilization of capital for the growingcompany, making it more independent from donor loans. However, this objectivecould also have been achieved by issuing local currency bonds, as other financiallysolid utilities regularly do. The debt-to-equity ratio of 0.56 at the end of 2011was very favorable. The company could have easily taken on more debt withoutincurring high risks. Still, the government opted to issue shares. The share issuebrought 77 million riels (19 million dollars) of cash inflow, which was partly usedfor investments and partly to bolster the company’s reserves.

This was not done by seeking a strategic investor, but by bringing PPWSA to theCambodian stock exchange. Since the balance sheet of PPWSA was healthy and theCambodian stock market bullish, the stock offering was oversubscribed. Fourteenpercent of the company’s equity is now held by a large array of shareholders, whilethe government maintains an 85 % majority, with 1 % of the shares owned byemployees. Private shareholders are represented by one of seven Board members.That Board member is a non-executive director with limited rights. The governmentdoes not require dividends to be paid on its shares (Class A), although it receives asmall share of profits every year. In 2012, the company made a profit of 34 billionCambodian riels (8.5 million dollars) which was fully distributed to the private“ordinary” shareholders. This amounted to a huge 44 % return on investment forthe shareholders.

The company’s employees also received dividends for their 1 % of the company’sshares, amounting to an average of about 800 dollars per employee. This isequivalent to more than 10 % of salaries and benefits. Dividends take up a significantshare of revenues, yielding a 44 % return on equity. Nevertheless, the company hasaccumulated reserves of 55 billion riels (13.8 million dollars), to which 23 billionriels (8 million dollars) were added in 2012 alone.

If bonds had been issued instead of shares, with a much lower yield than theyield on equity, there would have been more flexibility to provide higher salaries toemployees, to provide discounts on water tariffs to the poorest, or to invest in themuch needed sewerage upgrade. The challenge for PPWSA now is how to sustain itssuccess in a more difficult environment: it has to pay dividends to its shareholders,interest on its loans and maintain an aging network, all without the assistance ofthe exceptional leader who managed its turnaround. Ek Sonn Chan now supervisesthe drinking water supply for all of Cambodia from his position in the government,facing the challenge of replicating his success outside the capital, so far with onlylimited success, suggesting that the conditions that led to PPWSA’s triumph are noteasily replicable even within the same country.

Conclusion

Institutional reform in the form of the creation of a utility that is legally separatefrom the municipality, the absence of legacy debt, foreign aid, leadership and achange in corporate culture were all instrumental in achieving the turnaround of

168 15 Cambodia: A Public Utility Turnaround, Ending with Privatization

PPWSA. Without foreign aid, Phnom Penh could not have improved its water supplythe way it did. Almost all investments were paid for through foreign grants, andlater through loans. Foreign donors also helped to push for the creation of the rightinstitutional framework: the creation of an autonomous utility. Beyond that, foreignexperts from France and Australia provided substantial practical advice and trainingon a wide range of topics ranging from hydraulics to customer service. BecausePPWSA had no legacy debt and initially received grants to expand the network, itinitially had no interest payments to make and could keep tariffs low while devote itsscarce resources to maintaining its infrastructure in good working order. However,the most important success factor is not a “hard” financial or legal arrangement,but a “soft” one. Good governance, integrity, transparency and accountability arebuzzwords of the international donor community. Too often they remain a mantra,abstract concepts instead of reality. But, beyond the rhetoric, Ek Sonn Chan and thePPWSA have shown what it means to put these words into action, and how actionsrooted in values can turn around an entire utility. The difference between PhnomPenh and many other cities in developing countries was that the Cambodians putforeign aid to the best possible use. When rain falls on rocky ground, it quicklydissipates. But when it falls on fertile and well-tended land, the harvest is plentiful.

Chapter 16Utility Turnarounds Compared: TheImportance of Corporate Culture and Financing

How do the three successful turnarounds of water utilities in developing andemerging countries compared in the preceding chapters – PPWSA in Cambodia,NWSC in Uganda and Manila Water in the Philippines – compare with eachother? What are some common traits and what are important differences in thecircumstances the utilities faced, and in how the turnarounds were achieved?

Differences in Circumstances

Manila Water operates in a middle-income country with a per capita income of 2,600dollars per year. It has the largest service area of the three utilities, although it onlyserves one half of the huge metropolitan area of Manila. Because of its size andconcentration in one locality it benefits from economies of scale, coupled with theability to recruit talent in a large metropolitan area. It provides sewerage services,which in developing countries tend to be less profitable than drinking water supplybecause of low sewer tariffs. But because of the very limited sewerage coverage thisdoes not have a major impact on its finances. Because the Philippines is an emergingcountry and because Manila Water is a private company, the company does nothave access to grant financing or soft loans by international donors. It achieved itsturnaround using only commercial financing. Manila receives its raw water from theAngat-Ipo-La Mesa water system, a surface water system. The companies have totreat the water in their own treatment plants.

Uganda is the poorest of the three countries with a per capita income of onlyabout 500 dollars per year. Its per capita water consumption is much lower than inManila or Phnom Penh. NWSC also has the most extensive responsibilities, serving66 cities and towns in 2014. NWSC is also in charge of sewerage. To what extentthese responsibilities are a burden on NWSC is difficult to tell in the absence of more

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170 16 Utility Turnarounds Compared: The Importance of Corporate Culture. . .

analysis. Branches of NWSC in small towns in Uganda are apparently less profitablethan the capital branch, but non-revenue water in small towns is much lower thanin the capital. Given low coverage with sewerage and relatively high sewer tariffsin Uganda, the financial burden of sewerage on the utility seems limited. Thesettlement pattern in Uganda is less dense than in Manila or Phnom Penh, increasingthe costs of water distribution. The water network is not rationally laid out, makingit hard to reduce leakage. Government institutions in Uganda often fail to paytheir bills, something that is not the case in Phnom Penh or Manila. This makesit harder for NWSC to increase cost recovery from revenues. However, NWSCbenefits from soft loans from international donors that are passed on as grants fromthe government to NWSC. The largest cities served by NWSC receive their rawwater from nearby Lake Victoria. The water undergoes extensive treatment.

Cambodia has a per capita income of about 900 dollars. PPWSA is only in chargeof drinking water supply in the capital. Cambodia benefitted from substantial foreignaid to finance investments and to provide technical assistance. In Phnom Penh, theentire water system was rebuilt from scratch following a rational layout, making iteasier to subsequently identify and eliminate leakage. Phnom Penh receives its rawwater from the nearby Mekong River. The water undergoes extensive treatment.

It is difficult to compare the circumstances of the three utilities in the absenceof more data on the cost of water treatment, the cost of sewerage, and the relativeprofitability of small towns compared to the capital in the case of Uganda. However,based on the limited available information, it seems that NWSC faces the mostchallenging conditions of the three utilities, while Manila Water probably operatesin the most “favorable” circumstances.

Performance Compared

Access and service quality increased in all three cases, although NWSC lags behindin terms of access as shown in Table 16.1. All three utilities became financiallyviable. One contributing factor is the large increase in their customer base, making itpossible to spread fixed costs for water treatment and labor to a larger customer base.The performance of all three utilities is equally good in terms of service quality andcustomer satisfaction, albeit no survey data on customer satisfaction are availablefor Phnom Penh.

Table 16.1 Access andservice quality of ManilaWater, PPWSA and NWSCcompared

Manila Water PPWSA NWSC

Access to water 94 % 92 % 70 %.Customer satisfaction 93 % n.a. 85 %Continuity of supply 98 % 100 % n.a.

Source: Utility reports and national statistics

Performance Compared 171

Similarities in Changes of Corporate Culture

All three utilities achieved a change in corporate culture, giving more autonomy tolocal managers, penalizing misbehavior and corruption, while providing incentivesto good performers.

Manila Water empowered its employees to seek the best ways to cut water lossesunder a “territory management” approach, linking the evaluation and compensationof employees to their performance. Territory managers are expected to communicatewith community leaders, to monitor complaints closely and determine whether ornot they have been resolved. NWSC gave more autonomy to its area managersthrough internal management contracts. It made hierarchies flatter and improvedcommunications, following the example set out by the General Electric managerJack Welch. It provided both group and individual incentives in monetary termsand through ceremonies, complete with music, dancing and bull roasting. It evenwent so far as to control performance through undisclosed visits. At PPWSA, theperformance of meter readers was assessed. They received bonuses or penalties,depending on whether they reached or failed to reach pre-set targets. The systemachieved a high accuracy of meter reading. A proper system for registering com-plaints and following up on them was established. The utility was also successful inworking with poor local communities in slums.

Both the leaders involved in the turnarounds and observers say that the changesin corporate culture were either the key element or an important element in theturnarounds. The type of change is similar and simple: delegating responsibility tolower levels, while penalizing wrongdoing and rewarding performance.

Differences in the Sequence of Reforms

All three turnarounds took a long time – around a decade. The three paths to achievethe turnarounds were quite different in terms of ownership, tariff increases andfinancing. Manila Water was a private utility turnaround, financed first by equitycapital, then gradually more and more by commercial loans. Tariffs were firstreduced. They were only increased 5 years after the concession award, triggeringthe achievements after considerable delay. Loans could not have been accessedwithout private capital, tariff increases and the efficiency gains achieved duringprivatization.

NWSC was a public utility turnaround spurred by the threat of privatization,financed by loans from foreign development agencies. Tariff increases and institu-tional reforms had been completed before the turnaround. NWSC started by borrow-ing loans and then wanted to move on to corporate bonds. It abandoned this moveafter the financial crisis. The government forgave its debt, so that its investments arenow financed through subsidies, which may not be sustainable in the long run.

172 16 Utility Turnarounds Compared: The Importance of Corporate Culture. . .

PPWSA was a public utility turnaround financed first by grants and then by loansfrom foreign development agencies. Institutional reforms were only implemented3 years after the beginning of the turnaround. Tariff increases only took place inyear four. Only after the turnaround was completed, the utility tapped into equityfunding through the stock exchange. The efficiency gains were achieved underpublic ownership, allowing the utility to accumulate capital from tariff revenues.Bringing in private capital was not a prerequisite for taking on loans, becausePPWSA was creditworthy before its privatization.

Efficiency Improvements

Manila Water and PPWSA are more efficient than NWSC in terms of laborproductivity and non-revenue water. Manila Water and PPWSA provide theirservices with only 1.4 and 3 employees per 1,000 water connections respectively,less than half as many as NWSC has on its payroll.1 PPWSA’s non-revenue waterexpressed – as it should be – in cubic meters per kilometer of network length,amounts to 9.5 cubic meters per day compared to 15.5 in Uganda, as shown inTable 16.2.

This difference in efficiency has important implications for the financial situationof the utilities, both in terms of the tariffs they charge and their fiscal impact.

Salary Levels

Average salaries and benefits of a utility employee at NWSC are a third higher (861dollars per month) than at PPWSA (620 dollars per month), although Uganda has amuch lower per capita income than Cambodia. As shown in Table 16.3, salaries andbenefits at NWSC are quite attractive in the Ugandan context, compared to what thetwo Asian utilities pay their employees.

Table 16.2 Efficiency of Manila Water, PPWSA and NWSC compared

Manila Water PPWSA NWSC

Labor productivity Staff/1,000 connections 1.4 3.0 6.0Non-revenue water Cubic meter/km/day n.a. 9.5 15.5Non-revenue water % of water produced 11 % 7 % 33 %

Source: Author’s calculation from utility reports

1Since sewerage is only available to 8 % of NWSC customers, the responsibility for seweragealone cannot fully explain this discrepancy.

Performance Compared 173

Table 16.3 Salaries and benefits of utilities compared to income levels

Uganda Cambodia Philippines

GDP/capita/year 596 926 2,611Household size 5 5 5GDP/household/year 2,980 4,630 13,055GDP/household/month 248 386 1,088Average utility salary and benefits/month 861 620 1,441Ratio salary and benefits to GDP perhousehold

3.5 1.6 1.3

Source: Author’s calculation from national statistics and utility reports

Table 16.4 Cost and profit comparison between Manila Water, NWSC and PPWSA (USD perconnection, 2012)

Manila Water PPWSA NWSC

Depreciation 60 32 26Salaries and benefits 24 22 62Power 21 23 29Other non-salary operating costs 42 26 68Interest payments 43 7 0Total costs 190 110 185Profit 191 24 23

Source: Author’s calculations based on NWSC, PPWSA and Manila Water annual reports

The spread of salaries in fairly egalitarian Cambodia is about one to five betweenthe lowest and the highest salary, compared to a spread of one to 35 in more market-oriented Uganda. The lowest-paid workers in PPWSA thus are paid somewhat morethan in Uganda, while the mid-level and high-level employees receive much less inCambodia.

Overall Costs

The most striking difference between the three cases is perhaps their financingstructure. NWSC does not pay dividends to its owner, the state, and it does nothave to pay interest or principal on its loans any more. Manila Water and PPWSApay substantial dividends to their owners, as well as interest, and have to pay backtheir debt.

Table 16.4 compares costs and profits at the three utilities per water connectionin US dollars, in order to make the figures comparable. Depreciation is highest inthe case of Manila Water, perhaps as a result of the higher cost of construction in amiddle-income country compared to least developed countries. Salaries and benefitsare almost three times higher at NWSC, due to its lower labor productivity and itsrelatively high salaries, as analyzed above. Striking is the high level of non-salary

174 16 Utility Turnarounds Compared: The Importance of Corporate Culture. . .

operating costs at NWSC. A closer look at the income statements of NWSC andPPWSA shows that the difference is caused by expenses for transport, premises andadministration, which are relatively high at NWSC. Although NWSC does not payany interest, its total costs are still higher than the costs of the two other utilities asa result of its remaining inefficiencies.

All three utilities show a profit. NWSC retains its profits, while the two otherutilities pay a share of their profits out in the form of dividends to their shareholders.In the case of Manila Water, profits are substantial, almost equivalent to the totalcosts of service provision. In 2013, two thirds of these profits were retained and onethird was paid out as dividends.

Fiscal Impact

Manila Water and PPWSA both operate without subsidies. Instead, they paycorporate taxes on their profits. Their fiscal impact thus is positive. NWSC, however,is indirectly subsidized since the government decided to forgive its debt in 2008 andto pass foreign loans incurred by the government on to the utility in the form ofgrants. The fiscal impact of NWSC thus is negative, as the government has to payinterest and principal on its loans while receiving no payments from the utility.

Affordability

Like most utilities in developing and emerging countries, all three utilities chargemuch higher tariffs to commercial and industrial customers. Through these revenuesresidential water tariffs can be kept relatively low, a phenomenon called a cross-subsidy. As shown in Table 16.5, the typical monthly residential water bill in Manilais almost 10 dollars, much higher than in Uganda and Phnom Penh, where it is 5 and3 dollars respectively. However, because the Philippines is a middle-income country,water bills are affordable at 1.9 % of income, while they are unaffordable in Ugandaat 4.4 % of income.

Table 16.5 Affordability of water bills compared

PhnomPenh

ManilaWater

Kampala

Residential water tariff USD/m3 0.18 0.32 0.76Residential water use Liter/capita/day 120 200 44Household size Persons 5 5 5Water bill USD/month 3.24 9.60 5.02Median net household income USD/month 181 509 116Affordability of water bill % of income 1.8 % 1.9 % 4.3 %

Source: Author’s calculation

Conclusion 175

Conclusion

PPWSA, NWSC and Manila Water have shown that utilities in poor countries canprovide good and almost universal services. All three utilities show profits in theirbooks. They became so by expanding, focusing on efficiency, customer service andchanging their corporate culture, delegating more responsibilities to lower levelsof the company while combating corruption. PPWSA was very successful in itsefforts to increase efficiency. It showed that even in one of the poorest countries inthe world, a water utility can charge affordable tariffs, pay interest on its loans andgenerate a substantial profit – an achievement that has not been replicated in anyother least-developed country so far.

The circumstances in the three cases are different. Uganda probably faced themost difficult circumstances. But it could have achieved more in terms of efficiency.Manila had perhaps the most favorable circumstances. PPWSA’s achievementsgiven its circumstances seem to be the most impressive of the three.

Part VConclusions

Chapter 17Conclusion: It Is Not About Public or Private

This book has analyzed water utilities from 12 countries that seem to have little incommon: they range from the richest to the poorest, from those with a low level ofcorruption and functioning states to those where corruption, nepotism and cronyismare rampant and states are weak. It covers very different cultures from South EastAsia, East Africa, the Middle East, South America, North America and Europe.Under all these different circumstances, it has shown that utilities can fail or canperform in achieving the human right to water, no matter whether they are publiclyor privately managed.

The hypothesis that privatization, on average, does not make a big difference issupported by statistical analyses of larger samples of water privatizations. A 2005analysis by the World Bank reviewed six empirical studies on the impact of privatemanagement on the efficiency of water utilities in Africa, Asia, Argentina andBrazil. It concluded that “there is no statistically significant difference between theefficiency performance of public and private operators in this sector.” In the UnitedStates, a study published in 2005 found that, as far as household water expendituresare concerned, “whether water systems are owned by private firms or governmentsmay, on average, simply not matter much.” A study by three economists publishedin 2009 showed that in Argentina, Bolivia and Brazil, access to water supply andsanitation increased to the same extent for utilities under both private and publicmanagement. The study concludes that “private sector participation, per se, may nothave been responsible for those improvements”.

What Has Changed over the Last 25 Years?

This book has compared changes in the organization and performance of water andsewer utilities over a period of 25 years (1989–2014). Some of these changes are sorecent that the jury is still out on their impact, such as the public-private partnershipin New York City. In other countries, changes have remained superficial: in Egypt,

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9_17

179

180 17 Conclusion: It Is Not About Public or Private

reforms without privatization have been halfhearted and have failed to significantlyimprove the performance of publicly managed utilities. In Germany, there were fewchanges simply because utilities perform and are no drain on state budgets. Somechanges, such as the privatization in Cochabamba, were so short-lived that utilitiesquickly returned more or less to their previous level of performance.

In most cases presented in this book, there were substantial organizationalchanges that were sustained over a long period. Many of them started with aprivatization, including those where private service provision continues until today(England, Manila, Marseille, Havana) and those where water supply was remu-nicipalized (Berlin, Buenos Aires, Paris) or was organized under a new non-profitmodel of service provision (Wales). A few of the cases with sustained organizationalchanges started with a public utility turnaround. They include privatization attemptsthat spurred the successful turnaround of a publicly managed utility (Uganda,Scotland), the successful public turnaround of a utility that ended with a partialprivatization (Phnom Penh), and a public turnaround without privatization attempt(Washington, DC).

The Impact of Privatization and Remunicipalization

To assess the impact of privatization, remunicipalization and the turnaround ofpublic utilities, I asked six questions throughout the book:

• Did access to tap water and sewerage increase or decrease, in particular for thepoor?

• Did service quality deteriorate or improve?• Did tariffs increase or decrease, and are they still affordable?• Did the efficiency of service provision increase or decrease, as measured by water

losses, labor productivity and operating costs?• Did subsidies and taxes increase or decrease, and by how much?• Did corporate governance, the corporate culture of the utility and management

styles deteriorate or improve?

In all cases from developing and emerging countries, access to water supplyincreased substantially, Access to sewerage also increased, albeit more slowly. Itremains a matter of debate as to whether access increased more quickly under pri-vate or public management. In no developing or emerging country has privatizationreduced access to water as the result of utilities cutting off the water supply of thepoor who are unable to pay their bills. In England water cut-offs for non-paymentwere banned by law in 1999. This widespread fear associated with privatizationultimately proved to be unfounded. In most cases tariffs remained within the limitsof affordability, as measured by the rule that water expenditures should not exceedthree percent of income. Among the cases covered in this book, there are onlytwo exceptions, none of which is a privatization: in Uganda and Bolivia, the tariffscharged by the publicly owned and managed water utilities exceed the threshold ofaffordability.

The Impact of Privatization and Remunicipalization 181

Service quality increased in almost all cases.1 In none of the cases describedin this book did drinking water quality deteriorate. Thus, one of the other mostcommon fears associated with privatization also failed to materialize. One of thereasons is that the quality of water provided by private companies continues to bepublicly regulated. More importantly, private companies actually are under morescrutiny than public companies, precisely because the public and governmentsmistrust them. They simply have more at stake: while public utilities in manydeveloping countries provide tap water that is not fit for drinking without sufferingany sanctions, private companies are at risk of losing their concession. They thushave a stronger incentive to provide quality services than poorly regulated publiclymanaged utilities. If private water companies want to increase their profits, fiddlingaround with water quality would be the riskiest way for them to achieve thisobjective.

In all cases covered in this book, water and sewer tariffs went up in the longrun. Decreases were short-lived during the first years of the concessions in Manilaand Buenos Aires. After a few years, tariffs had increased again above their initiallevel. Remunicipalizations were sometimes accompanied by tariff reductions, suchas in Berlin. But in Buenos Aires and Cochabamba, tariffs had to be substantiallyincreased a few years after remunicipalization. Tariffs also increased during thepublic utility turnarounds in Uganda, Phnom Penh and Washington, DC. A largeshare of the increased tariff revenues was used to finance higher investments. Butanother share was used to generate profits, both in the case of private companies andin the case of some publicly owned companies that are required to pay dividends totheir municipal shareholders. Private companies usually pay higher interest rates onloans compared to a public corporation whose debt is guaranteed by the state. Forexample, loans from the World Bank’s private sector arm IFC and from commercialbanks, both of which were used in Buenos Aires and Manila, are more expensivethan loans to the public sector from the World Bank itself.

The efficiency of water utilities improved in almost all cases covered, albeit to adifferent extent. Where efficiency increases were highest, utilities were better ableto deliver improvements while keeping tariffs affordable. In Manila and PhnomPenh, water losses were reduced substantially and labor productivity improveddramatically. Increased efficiency was an important element of their turnaround.In Uganda and Buenos Aires, the improvements in efficiency were more limited. InBerlin and England, labor productivity improved, but water losses did not changemuch from the very low level in Berlin and the much higher level in England.DEP in New York City has shown how efficiency can be improved through reducedoperating costs. Generally, the often higher capital costs of private service provisionmust be outweighed by efficiency gains and improved service quality compared towhat a publicly managed utility would have achieved. While privately managed

1The exceptions are Berlin and Paris, where service quality was already good before reforms wereinitiated and where insufficient data are available to the public to assess any long-term changes inservice quality that may have occurred.

182 17 Conclusion: It Is Not About Public or Private

water utilities often have increased efficiency and service quality, there is noevidence that these improvements systematically outweigh higher capital costs.

The fiscal impact of utility reforms varied over time. Often, it was positive duringthe early years, but turned negative when reforms were rolled back. In Berlin andBuenos Aires, the positive fiscal impact during the first years turned negative afterremunicipalization. In Uganda, the fiscal impact was also initially positive, but thenturned negative when the state decided to forgive all debt of the national utility.In some cases, there was no change in the fiscal impact of utilities. In Paris, thefiscal impact remained neutral after remunicipalization. In Egypt, the water sectorremained a massive drain on the state budget. Only in those cases in which reformswere sustained over the long run was there a positive fiscal impact. This was mainlybecause investments that would otherwise have to be financed through taxes werenow financed by private utilities, which in turn often charged higher water tariffs.This is the case in the privatizations in England and in Manila, as well as for thepublic turnaround in Cambodia.

In many cases covered in this book, there was a significant improvement in thecorporate culture of the utilities. These changes were driven both by committedleaders and by legal reforms. In Uganda, Phnom Penh and Manila, employees weregiven more freedom to make choices, received rewards for achievements, and wereheld accountable for failures, in a clear break from the past, as described in thepreceding chapters. Overall, the utilities became more professional. In France, aculture of cronyism was gradually pushed back by a fairer and more transparentsystem. Changes in the overall legal framework for the entire water sector, such asthe Loi Sapin, a more active role by the Audit Office, and the establishment of a kindof regulatory agency, gradually improved corporate governance in the French watersector over two decades. However, when the corporate culture remained largelyunchanged, such as in Egypt, there was also no improvement in service quality.

Not a single one of the privatizations analyzed in this book has fully achieved allits stated objectives. Some privatizations have never materialized despite substantialefforts to prepare them, and some have been terminated much earlier than planned.Those privatizations or public utility turnarounds that have brought improvementsin terms of access, service quality, corporate governance, efficiency and lowerimpact on the state budget have done so only when governments have maintainedthe initial policies over a long period, usually more than a decade. In all thesecases, improvements have come at the expense of higher water tariffs. Whetherthe improvements were caused by privatization, or by other factors, remains amatter of debate. The results of remunicipalization have also been disappointing inBolivia and Argentina, controversial as in the case of Berlin, and leaving a potentialfinancing gap as in the case of Paris. As mentioned at the beginning of the book,assessing the various impacts of water privatization, remunicipalization or otherutility reform requires a judgment call. For example, are higher tariffs justified bybetter service quality, increased access, or a lower impact on the state budget? Thisand other questions about trade-offs are for the reader to decide, and each case willhave to be judged on its own merits.

Conclusion 183

Conclusion

When I speak to audiences from developing and emerging countries, I like toask which of three factors most impedes the achievement of the human right towater in their own country: lack of money; water scarcity; or poor governance.The result is always the same. While financing is clearly important, it is notprimarily a lack of money – be it from foreign aid or national budgets – that mosthampers the development of the water sector. Neither is it primarily constrained byenvironmental factors such as climate change, droughts, pollution or the depletionof water resources, although these factors are important. The key constraint toachieving the human right to water in developing countries is the combination ofinadequate institutional frameworks, poor management and the often resulting weakhuman resources that are called “poor governance”.

A utility needs professional, honest, well-paid and motivated staff. It needscompetent management. It needs an institutional environment that promotes trans-parency and accountability, an environment that rewards performance and penalizesmisbehavior, in short, a corporate culture that induces good behavior. It needsmoney, and lots of it. Part of it must come from its revenues, which should be basedon tariffs that at least recover the costs of recurrent service provision. Some of it maycome from subsidies funded by domestic general taxation or from foreign grants, tothe extent that they are available. In many cases, they must come from repayableloans or bonds. A good utility must be fairly efficient, without overly excessivestaffing, water losses, water stealing and unpaid bills. And if there is significantpoverty in its service area, it needs a mechanism that protects the poor from beingburdened with unaffordable bills, while compensating the revenue losses throughcross-subsidies or reliable government subsidies. In order to achieve all this, it needspolitical support. It may need political backing to cut off rich and influential cus-tomers who steal water, or to make public entities pay their water bills. It may needone-time funding to make severance payments to redundant staff. And it may needpoliticians that are courageous enough to approve a tariff increase when needed.

The conditions necessary for a water utility to perform are more prevalent in afunctioning country. Indeed, there is a strong correlation between the performanceof a water utility and the per capita income of the country where it is located.Nevertheless, this book showed turnaround stories from emerging countries andeven from the poorest developing countries. The private company Manila Water andthe publicly managed utilities NWSC in Uganda and PPWSA in Phnom Penh showwhat can be achieved if all the factors mentioned above come together. It shows thateven a utility in the poorest country can perform well.

Independently of whether water supply is provided by a public or a private entity,there are five observations that are common to all cases in this book. They areperhaps so obvious that I hesitate to repeat them, but here they are:

1. There are numerous local, national and international players in the water sector.None of them dominates and has the power to dictate changes.

184 17 Conclusion: It Is Not About Public or Private

2. No single privatization, turnaround or remunicipalization has happened asplanned. Unforeseen events abound and have had a significant impact onoutcomes.

3. Someone always pays for water and sewer services. If water users do not paythrough tariffs, taxpayers pay for them today or, when states get into more debt,in the future.

4. You get what you pay for. If neither water users nor states pay for water, accessto tap water and sewers remains low and service quality poor.

5. Leadership, good management, professionalism and honesty can make a hugedifference in any country or city, whether rich or poor, if changes in behaviorspread to an entire utility over time, changing its corporate culture.

Turning a water and sewer utility around is not an easy task. It has costs, entailsrisks and takes time. There is no one way to achieve a turnaround: it can work withor without bringing the private sector on board. The worst thing that could happen toa water and sewer utility that fails to deliver services to the people, however, is nota sin of commission, but a sin of omission: it is to leave a utility in the trap of poorperformance in which so many in developing and emerging countries, unfortunately,are caught.

Annex 1: Management Modes, Subsidies, WaterUse, Bills, and Affordability in Selected Cities

Cairo London Paris Berlin

NewYorkCity

PhnomPenh

ManilaWater Kampala Cochabamba

Currentmanagement

Public Private Public Public Mixed Mixed Private Public Public

Managementin 2000

Public Private Private Private Public Public Private Mixed Private

Subsidies Capitalandoperation

No No No No No No Capital No

Residentialwater tariff

USD/m3 0.05 2.00 2.51 2.37 1.66 0.18 0.32 0.76 1.07

Residentialwater use

Liter/capita/day

250 167 138 121 319 120 200 44 100

Householdsize

Persons 5 2.5 2.3 1.7 2.6 5 5 5 5

Water bill USD/month

1.88 25.00 23.92 14.63 41.29 3.24 9.60 5.02 16.05

Median nethouseholdincome

USD/month

607 3,419 3,433 2,057 4,659 181 509 116 364

Affordabilityof water bill

% ofincome

0.3 % 0.7 % 0.7 % 0.7 % 0.9 % 1.8 % 1.9 % 4.3 % 4.4 %

Source: Author’s calculations based on utility data and national statistics

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9

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Annex 2: Nonrevenue Water in Selected CitiesAccording to Different Indicators

BerlinPhnomPenh

NewYorkCity

Uganda(NWSC)

Paris(Eau deParis)

London(ThamesWater)

Water production (million m3/day) 0.55 0.28 3.8 0.22 0.52 2.6Nonrevenue water (million m3/day) 0.02 0.02 0.14 0.07 0.04 0.64Nonrevenue water (%) 4 % 7 % 4 % 33 % 7 % 25 %Water network length (km) 7,900 2,000 10,500 4,704 2,000 31,100Population served (million) 3.4 1.7 8.3 2.5 3.0 9.0Total water use (million m3/day) 0.53 0.27 3.66 0.15 0.48 1.96Total water use (liter/capita/day) 155 156 441 59 160 218Network length (m/inhabitant) 2.3 1.2 1.3 1.9 0.7 3.5Nonrevenue water (m3/km ofnetwork/day)

2.5 9.5 13.3 15.5 19.5 20.6

Source: Author’s calculations based on utility dataNonrevenue water (NRW) is a technical term that includes leakage (technically called “real losses”)as well as meter under-registration and water theft (technically called “apparent losses”). In thecities and countries listed here, except for Uganda and perhaps Phnom Penh, NRW is almost thesame as leakage. The table shows that expressing nonrevenue water as a share of water produced,as it is often done, is misleading. For example, New York City seems to have very low lossesof 4 % only. Actually, water use in New York City is more than twice as high as in other citieslisted. Therefore, expressed in the more appropriate format of cubic meter/km of network/day,leakage in New York City is rather average at more than 13 m3/km/day. Uganda appears to havemuch higher water losses at 33 %, but these have to be seen in the context of very low waterconsumption. At 15.5 m3/km/day, nonrevenue water in Ugandan cities is only slightly higher thanin New York City. Leakage excluding water theft and under-registration may well be lower. Thedensity of settlements also plays a role: In relatively densely settled inner Paris, the service area ofEau de Paris, the network length per inhabitant is less than a third than in Berlin and only a fifth ofGreater London, where the service area includes suburbs. In percentage terms, Paris has a level ofnonrevenue water that is very low at 7 %, but it actually has a higher level of leakage than Ugandancities (19.5 compared to 15.5 m3/km/day)Note that the figures for total water consumption per capita shown in this table are higher thanthe figures for residential water consumption per capita shown in Annex 1 for the purposeof calculating the affordability of residential water bills, because total water consumption alsoincludes water consumption by offices and small commerce

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9

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Annex 3: Overview of Privatizations, PublicTurnarounds, and Remunicipalizationsin This Book

Chapter Country City Type of PPP/reform Duration

2 Bolivia Cochabamba Concession 2000La Paz Concession 1997–2007

3 Cuba Havana Mixed enterprise Since 20004 Argentina Buenos Aires Concession 1993–2006

Remunicipalization Since 20066 Jordan Samra/Disi BOTs Since 2004/2009

Amman Management contract 1999–20067 England Countrywide Divestiture Since 19897 Wales Countrywide Not for profit Since 20017 Scotland Countrywide Public turnaround Since c. 20028 France Grenoble Concession 1989–2001

Remunicipalization Since 2001Paris Lease 1983–2008

Remunicipalization Since 2008Marseille Concession renewal 2013

9 Germany Countrywide Cross-border leases Since 1995–200410 Berlin Berlin Partial privatization 1999–201312 United States Atlanta Concession 1998–2002

Felton Divestiture 2002–2005Remunicipalization Since 2005

New York City Performance-based contract Since 2012Washington, DC Public turnaround Since 1994

13 Philippines Manila Concessions Since 199714 Uganda Countrywide Public turnaround Since 1999

Management contracts 1998–200415 Cambodia Phnom Penh Public turnaround Since 1993

Partial privatization 2012

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Annex 4: Chronology of Key Events Coveredin the Book

1989 Water privatization in England and Wales and creation of Ofwat as the economicregulatory agency for the water sectorWater concession in Grenoble awardedNewly elected Menem government in Argentina announces privatizations

1993 Concession in Buenos Aires awardedLoi Sapin passed in FranceEk Sonn Chan becomes General Manager of Phnom Penh water utility PPWSA

1994 First renegotiation of the Buenos Aires concessionWater Crisis Act passed in the Philippines, paving the way for water privatization inManila

1995 First cross-border lease between the United States and GermanyBribery convictions related to the concession in Grenoble

1996 Water and sewer utility separate from the District of Columbia created in Washington, DCPPWSA created as a utility separate from the Phnom Penh municipality

1997 Concessions in Manila awardedConcession in La Paz, Bolivia, awardedSecond renegotiation of the Buenos Aires concessionFrench water companies and the German company RWE enter liberalized US watermarketWater Summit held in England to address high leakage during drought

1998 Concession in Atlanta awarded1999 Muhairwe becomes General Manager of NWSC in Uganda

Partial privatization of BerlinwasserManagement contract in Amman, Jordan, awardedEnglish regulator orders price reduction; water cutoffs for nonpayment prohibited

2000 Cochabamba Water War in BoliviaCuban Government creates a mixed public-private water company for HavanaStudy in Germany recommending water market liberalization is rejectedWelsh Water created as a not-for-profit companyEconomic crisis in Argentina

(continued)

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9

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192 Annex 4: Chronology of Key Events Covered in the Book

(continued)

2001 Remunicipalization in GrenobleForeign institutional investors begin to buy English water companies

2002 Atlanta concession cancelledScottish Water created as a state-owned companyRate rebasing in Manila leads to a substantial tariff increaseFirst BOT contract in water and sanitation in Jordan signed for the Samra wastewatertreatment plant

2004 Legislation in the United States ends cross-border leasesHolding Company for Water and Sewerage created in Egypt as key element of sectorreformsEnglish regulator relaxes price control

2005 West Manila concessionaire goes bankruptIn Felton, California, citizens buy back their water utility

2006 Remunicipalization in Buenos AiresWater Table created in Berlin to overturn water privatizationBeginning of regulatory action on water tariffs in some German statesManagement contract in Amman expires, making place to a publicly owned company

2007 Second BOT contract awarded in Jordan for Disi-Amman water conveyor2008 Remunicipalization in Paris

RWE exits US water market2009 National database to monitor the performance of water utilities established in France2010 Referendum “Our Water” in Berlin

European Parliament declares that EU Concession Directive is not necessaryInternational arbitration tribunal holds Argentina liable in Buenos Aires concessioncase

2011 Muhairwe leaves NWSC in UgandaPartial remunicipalization in Berlin

2012 European Citizens’ Initiative Right2WaterPartial Privatization of PPWSA in Phnom Penh; Exit of Ek Sonn ChanPerformance-based contract awarded in New York City

2013 Full remunicipalization in BerlinEuropean Parliament adopts EU Concession DirectiveNew water and sewer concessions awarded in Marseille, reducing water tariffs

2014 Ofwat, the water regulator in England, orders tariff reductions over the next 5 yearsThe state-owned utility or Buenos Aires announces massive tariff increases

Annex 5: Glossary of Technical Terms

Arbitration A procedure to settle commercial disputes in a binding way withoutresorting to the judicial system, with the aim to ensure a high degree ofcompetence and a relatively speedy outcome. A specific form of arbitrationrelevant for water privatization is between states and investors, which is typicallycarried out by the International Center for the Settlement of Investment Disputes(ICSID) of the World Bank Group.

Bond (Finance) A financial instrument issued by a national government (govern-ment bond), a local government (municipal bond), or a company (corporatebond) that mobilizes financial resources for a certain period until the bondmatures, during which interest is paid. Bonds are typically bought by institutionalinvestors.

Build-Operate-Transfer (BOT) Contract A concession contract for the financ-ing, construction, and operation of a new plant under which no revenue iscollected directly from subscribers.

Collection Efficiency A measure of the efficiency in the collection of bills, definedas bills collected divided by bills issued. Ideally, collection efficiency is 100 %.

Concession (Infrastructure) A contract between a public entity that owns theinfrastructure and a company to provide a public service, under which thecompany operates and finances infrastructure and collects revenue.

Cross-Border Lease A contract between a private trust in one country that buysinfrastructure in another country and a public entity that leases back and operatesthe infrastructure without any infrastructure financing with the purpose to reducethe taxes levied on the private “investors.”

Debt-Equity Ratio The ratio between the debt and the equity of a company.Depreciation (Accounting) The allocation of the cost of assets to periods in which

the assets are used. For example, if a pump station costs 1 million dollars and isused over 10 years, the depreciation shown in the annual income statement ascost will be one hundred thousand dollars per year.

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194 Annex 5: Glossary of Technical Terms

Divestiture The permanent full or partial sale of assets from the state to the privatesector, either through the stock exchange or through the sale to a strategicinvestor.

Economic Regulation (Infrastructure) The regulation of prices, costs, and ser-vice quality of an infrastructure service, either through setting a price cap or afixed rate of return on assets.

Equity (Equity Capital) Funds provided by the owners of a company, as opposedto debt, with the sum of equity and debt equal to the company’s capital.

Financial Leveraging The process of increasing the profit of a company byincreasing the debt-equity ratio as long as the return on capital invested is higherthan the cost of debt service. It increases the risk of losses in case the return oncapital drops below the cost of debt service.

Financial Statements The financial reports produced by a company on an annualbasis, including its balance sheet and its income statement.

Geographical Information System (Utilities) A computer database that showsall the physical assets of a utility, in particular the pipe network and houseconnections, on a map.

Holding Company A Company created for the purpose of owning other compa-nies.

Increasing-Block Tariff A form of water tariff under which the price per unit ofwater increases with the quantity consumed, usually within specified blocks ofwater consumption.

Indexing (Tariffs) The automatic adjustment of tariffs to a price index, such as theconsumer price index or the wholesale price index (inflation indexing).

Institutional Investors Investors that are not individuals but funds such as pensionfunds, insurance companies, private equity funds or sovereign wealth funds.

Lease (Infrastructure) A contract between a public entity that owns and financesinfrastructure and a company to provide a public service, under which thecompany operates, but does not finance infrastructure and collects revenues.

Management Contract (Infrastructure) A contract between a public entity thatowns and finances infrastructure and a private company to provide a publicservice, under which the private company only operates the infrastructure.

Median Income A statistical expression for average income, as distinct from thearithmetic mean. The arithmetic mean is obtained by dividing total income bypopulation, and it is often incorrectly termed “average income.” The medianincome is the income obtained at the midpoint when separating a population intwo halves from the lowest to the highest income. The median income is typicallylower than the arithmetic mean income, because of the very high incomes at thetop end.

Nonrevenue Water Water produced for which no revenue is billed. It consistsof leakage (real losses), water theft, and under-registration by water meters(apparent losses), as well as water provided free of charge for certain uses suchas firefighting (authorized unbilled consumption).

Annex 5: Glossary of Technical Terms 195

Performance-Based Contract A contract where the management of infrastructureremains with a publicly owned utility, while specific services are provided bya private company against a remuneration that is at least partly based on theperformance improvements achieved.

Performance Contract A contract between a government and a public enterprisethat specifies the rights and obligations of both parties, including the achievementof performance targets.

Private Equity Firm A firm that manages funds of wealthy investors and investsit for them by directly buying shares in companies that are not traded on a stockexchange.

Privatization In the broad sense of the word used in this book, any form of public-private partnership. In the narrow sense of the word, the sale of public enterprisesto the private sector (divestiture).

Public-Private Partnership (PPP) Any contract between a public entity and acompany under which the company provides infrastructure-related services fora fixed duration. The services can be very different depending on the type ofcontract, such as a concession, a lease, a cross-border lease, a managementcontract, or a performance-based contract.

Public Service A service provided by a government, or by a company on behalf ofa government, for all regardless of income.

Public Utility A public or private entity that provides a public service such as watersupply or sewerage.

Regulation (Infrastructure) Any form of public control exerted on a public orprivate infrastructure provider, concerning its environmental impact, its healthimpact, its service quality, or its economic activities.

Regulatory Agency A public entity that enjoys a degree of autonomy from thegovernment, in order to avoid political interference, and that is entrusted by lawwith the regulation of a specific activity.

Tariff (Utilities) The price charged by a utility for its product. In the USA and theUK, the term “water rate” is more common, while in Ireland the term “watercharge” is used. In international comparisons, the terms “water tariff” and “waterprice” are more common. The various terms are used interchangeably. This bookuses the term “water tariff.”

Annex 6: Sources

1. Introduction

Figures on global access to water supply are taken from the Joint MonitoringProgramme for Drinking Water Supply and Sanitation of UNICEF and the WorldHealth Organization (WHO). The figures on the number of people served by “privateplayers” worldwide are from David Lloyd Owen, published in the Pinsent Mason’sWater Yearbook 2011–2012.

2. Bolivia

The account of the “Water War” is based on “the Cochabamba Water Revoltand Its Aftermath” by Jim Shultz, the Director of the Democracy Center inCochabamba, published in “Dignity and Defiance, Stories from Bolivia’s Challengeto Globalization”“in 2009, and the article “Leasing The Rain” by the journalistWilliam Finnegan published in The New Yorker on April 8, 2002. Both are criticalof the privatization. An article by the researcher Andrew Nickson and by ClaudiaVargas who worked as a legal analyst at the Bolivian water regulator during thepreparation of the Cochabamba concession provides a different perspective in “TheLimitations of Water Regulation: The Failure of the Cochabamba Concession inBolivia,” published in 2002 in the Bulletin of Latin American Research, Volume 21,Number 1. The World Bank’s version of the events is described in a paper entitled“Bolivia Water Management: A Tale of Three Cities” by the Bank’s OperationsEvaluation Department (OED Number 222) published in 2002. International waterconsultant David Bonnardeaux analyzes the privatization from a perspective that issympathetic to the World Bank’s position in the article “The Cochabamba WaterWar: An Anti-Privatisation Poster Child?” published in 2009. The perspective ofBechtel is summarized in “Cochabamba and the Aguas del Tunari Consortium”

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198 Annex 6: Sources

published in December 2005. Information on the development of SEMAPA afterthe “Water War” was collected from the Bolivian press, the websites of SEMAPA,the Misicuni Company, and the Inter-American Development Bank.

3. Cuba

The Cuba case is based on various media reports, including a report by PatriciaGrogg for the news agency IPS in 2003 entitled “Cuba: Más agua potable en LaHabana por inversión extranjera” and a 2010 article by Iván García in the Spanishnewspaper “El Mundo” entitled “La Habana y sus aguas perdidas.” It also drawson a 2004 presentation by Fernando Rayón and Martín Xavier Segura Ayala fromAguas de Barcelona entitled “La Gestión Privada Del Agua en Espana y AméricaLatina: El Caso de Agbar,” as well as the official websites of Aguas de La Habanaand the Grupo Martinon.

4. Argentina

The story of the Buenos Aires concession has been described from different angles.The Peruvian economics professor Lorena Alcázar, the consultant Manuel Abdala,and the World Bank researcher Mary Shirley wrote a comprehensive analysis ofthe preparation, award, and precrisis implementation of the concession in “TheBuenos Aires Water Concession” published as Policy Research Working Paper 2311by the World Bank in 2000. How the concession first neglected and then beganto focus on the needs of the poor is described by Marie-Helene Zerah, ClarissaBrocklehurst, and Kathleen Graham-Harrison in “The Buenos Aires Concession:The Private Sector Serving the Poor” by the World Bank’s Water and SanitationProgram in 2001. A critical description of the concession has been written bythe International Consortium of Investigative Journalists under the title “Cashingin on Buenos Aires’ Privatization,” in: “The Water Barons: How a few powerfulcompanies are privatizing your water” published in 2003. Another comprehensiveand critical analysis, as well as a description of the remunicipalization of the BuenosAires water system, was written by the Argentine researcher Daniel Azpiazu andJosé Esteban Castro, a sociology professor from the University of Newcastle whospecialized on water and institutions, in “Aguas Públicas: Buenos Aires in MuddledWaters” published the by Transnational Institute in 2012 in “Remunicipalisation:Putting Water Back into Public Hands.” The July 2010 decision by the InternationalCentre for Settlement of Investment Disputes on the case of Aguas Argentinasagainst the Argentine republic (ICSID Case No. ARB/03/19) also provides a veryreadable and impartial account of the concession from the conditions preceding

Annex 6: Sources 199

it until its termination. Besides these main sources, I have also drawn on theanalysis by Miguel Solanes, an economist and institutional expert from the UnitedNations specialized in water issues, in 2006 under the title “Efficiency, Equity,and Liberalisation of Water Services in Buenos Aires, Argentina” published by theOECD in “Liberalisation and Universal Access to Basic Services,” as well as ananalysis from Professor Martin Bosman, a regulatory specialist at the University ofSouth Florida, entitled “A Review of Privatization of Water and Sanitation: Systems:The Case of Greater Buenos Aires” in 2006 and the article “Failures in water reform:Lessons from the Buenos Aires concession” by Ariel A. Casarin, José A. Delfinoand María Delfino in “Utilities Policy 15 (2007).”

5. Egypt

The early history of failed water sector reforms in Egypt has been compiled fromvarious sources, including a 1991 Basic Contract Completion Report of BoyleEngineering Corporation and National Education Corporation for the “Water andWastewater Institutional Support Project (WWISP),” a 1995 World Bank ProjectCompletion Report on the “Beheira Provincial Potable Water Supply Project” anda report by Adel Sharabas, NOPWASD, Chief of Central Department of LowerEgypt Projects, written around 2000 and entitled “Water and wastewater sectorreform: the Egyptian experience.” More recent reform efforts through the creationof the Holding Company and the regulatory agency are described by Edouard Perardfrom the OECD Development Centre in the Working Paper No. 265 (2008) entitled“Private Sector Participation and Regulatory Reform in Water Supply: The SouthernMediterranean Experience”; by Ahmed Badr of the Delegation of the EuropeanUnion to Egypt in an undated presentation “Water Sector Reform in Egypt”; andby a presentation of the Holding Company for Water and Wastewater at the 5thConference of the Forum of the Water Directors of the Euro-Mediterranean andSoutheastern European Countries, Athens, Greece, July 21–22, 2008.

The situation of water supply in Egypt is summarized in a 2007 report bythe Egyptian National Water Research Center “Actualizing the Right to Water:An Egyptian Perspective for an Action Plan” by Shaden Abdel-Gawad and bythe Human Rights Council “Report of the independent expert on the issue ofhuman rights obligations related to access to safe drinking water and sanitation,Catarina de Albuquerque Addendum Mission to Egypt” of July 5, 2010. The figureson subsidies in Egypt are from USAID’s “Cost Recovery and Pricing ModelsPolicy Paper” produced under the Water Policy and Regulatory Reform Projectin 2012. Performance indicators are taken from the 2012–2013 Annual Reportof the Egyptian Water Regulatory Authority. The box on Alexandria is based onan interview with Nadia Abdou with Jeremy Josephs of WaterWorld in 2012, apresentation by Nadia Abdou on AWC at the 4th World Water Forum in 2012,and a 2005 report by USAID/ARD entitled “Case Studies Of Bankable Water AndSewerage Utilities.”

200 Annex 6: Sources

6. Jordan

The analysis of the management contract in Amman is based on the WorldBank’s Implementation Completion Report for the Amman Water and SanitationManagement Project of 2007 and on conversations with senior staff at the WaterAuthority of Jordan and the Amman water company Miyahuna. The description ofthe Disi Water Conveyance Project is based on the Wikipedia article of the samename, to which I made major contributions, and the sources quoted in the article.The description of the BOT in Samra is based on a press release by Suez-Morgantidated August 23, 2008 and conversations with senior staff at the Water Authority ofJordan and the Jordanian Ministry of Water and Irrigation.

7. The United Kingdom

The history of water privatization in England was compiled from various papers.The paper “Water Privatisation in England and Wales” by Peter Martin fromthe consulting firm Black and Veatch written around 2012 gives a good briefoverview. It is complemented by the analysis of numerous reports by the waterregulator Ofwat. Two poignant pro-privatization perspectives are found in “Waterand Wastewater Privatization in England and Wales: An Advocate’s Perspective”by Elizabeth Brubaker, Executive Director of the Canadian NGO EnvironmentProbe, and in the article “Private Passions” published in The Economist of July17, 2003. Critical analyses of the English water privatization include “UK Waterprivatisation – a briefing,” published in February 2001 by Emanuele Lobina andDavid Hall from the Public Services International Research Unit (PSIRU) at theUniversity of Greenwich; “Sale of the century: the privatisation scam” by JamesMeek of The Guardian of August 22, 2014; “Former regulator attacks water firmsover windfall profits and high prices” by Simon Bowers of The Guardian on July 17,2013; “The Boiling Point” published by Asit Biswas, published in The European ofSeptember 25, 2013; and “The water industry is burying a leaking pipes scandal”by Fred Pearce in The Guardian of May 8, 2012. The story of the Tideway projectis based to a large extent on the article “Tideway project runs up against reality”published in the July 2014 issue of Global Water Intelligence.

The story of the transformation of Green Wales from the private company Hyderto the not-for-profit entity today is briefly recounted by the water finance consultantDavid Lloyd Owen in “The Sound of Thirst, Why urban water for all is essential,achievable and affordable,” 2012, pp. 402–404. It is also covered by Robin de laMotte, a research fellow at the Public Services International Research Unit, BusinessSchool, University of Greenwich in the Cardiff case study, 2005, which is part ofthe Water Time research project supported by the European Commission. Importantdetails about the transformation have been taken from the published letters by LordNolan to the Director General of Ofwat on November 3, 2000 and March 7, 2001,

Annex 6: Sources 201

available on the website of Green Wales. The subsequent evolution of Green Walesis based on its Annual Reports and on an article in the Pinsent Masons WaterYearbook 2009–2010 “Glas Cymru (Dwr Cymru Welsh Water).”

8. France

The early history of the French water sector is based largely on two publicationsby the French researcher Christelle Pezon from the IRC International Water andSanitation Centre in The Hague. They are “Why did the Compagnie Générale desEaux not die with the concession contract in the early twentieth century? The endof concession contract to supply drinking water and the persistence of private watercompanies in the water sector in France,” 2009, and “Le PPP pour développer lesservices d’eau potable: quelques leçons de l’expérience française pour les PED,”written with L. Breuil and published in Aymeric Blanc and Sarah Botton (Editors):“Services d’eau et secteur privé dans les pays en développement. Perceptionscroisées et dynamique des réflexions,” Agence Francaise de Developpement, 2011.

It is complemented by information from the website of Veolia Water on itshistory and, in the case of the Paris privatization under Chirac, by the researcherMartin Pigeon who works for the NGO “Corporate Europe Observatory” in “Uneeau publique pour Paris: Symbolism and Success in the Heartland of Private Water,”published in 2011 in “Remunicipalisation: Putting Water Back into Public Hands,”a book by the Municipal Services Project. The Grenoble case study is recounted inDavid Hall and Emanuele Lobina: “Private to Public: International lessons of waterremunicipalisation in Grenoble, France,” Public Services International ResearchUnit (PSIRU), 2001, as well as in “Water and Power: The French Connection” inthe book “The Water Barons” published in 2003 by the International Consortium ofInvestigative Journalists. The history and internal culture of Lyonnaise des Eaux areanalyzed by the sociologist Dominique Lorrain, formerly at the Centre Nationalde Recherches Scientifiques (CNRS), in “The local-global firm: Lyonnaise desEaux, 1980–2004,” Sociologie du Travail, 2007. Basic figures on the French watersector are taken from the publication “Public water supply and sanitation servicesin France. Economic, social and environmental data,” published in 2012 by theAssociation of French private water companies FP2E and the consulting firm BIPE.

The story of remunicipalization in France is recounted by David Hall in“Re-municipalising municipal services in Europe” (May 2012) and on the Remu-nicipalization tracker at remunicipalisation.org. The political context of the remu-nicipalization in Paris is described by Dominique Lorrain in “L’eau à Paris, lessimulacres du politique” (2014). The Marseille case is based on press articles,including “La chambre régionale des comptes pointe des irrégularités dans lesmarchés de l’eau à Marseille” in Libération of April 28, 2014, and the blog “Veoliaremporte les élections municipales à Marseille” by Marc Laimé of October 9, 2013.The figures on the impact of the Loi Sapin are from a study by the Ministry ofEnvironment carried out by the consulting firm TNS Sofres in 2006, quoted in a

202 Annex 6: Sources

presentation by Alain Tiret from the Fédération Professionnelle des Entreprises del’Eau in 2008. The report of the French Audit Office was published in 2003 by theCour des Comptes under the title “La gestion des services publics de l’eau et del’assainissement.”

9. Germany

This chapter is based on an analysis of the Annual Reports of Mainova, the multi-utility serving Frankfurt, and on reports in the newspaper Frankfurter AllgemeineZeitung about efforts to regulate water tariffs by the German Länder. The section oncross-border leasing is based mainly on the 2005 book “Cross Border Leasing” byWerner Rügemer and on the article in the magazine Die Zeit, “Für dumm verkauft,”of April 2, 2009. Figures on the overall German water sector are from the booklet“Profile of the German Water Industry 2011” published by the German Energyand Water Association BDEW. The comparison of water prices in Montabaur andWetzlar is based on a report by the TV magazine ZDFzoom on May 8, 2013.

10. Berlin

The privatization of Berlinwasser until 2008 is analyzed by Mark Oelmann and hiscollaborators from the consultancy WIK in the detailed technical study “Zehn JahreWasserpartner Berlin – Eine Bilanz der öffentlich-privaten Partnerschaft zwischendem Land Berlin, RWE Aqua und Veolia Wasser” (2009). An earlier study commis-sioned by the European parliamentary group of the leftist party “Die Linke” fromthe political scientist Alexis Passadakis, himself from the advocacy group Attac,made a critical assessment of privatization in “Die Berliner Wasserbetriebe: VonKommerzialisierung und Teilprivatisierung zu einem öffentlich-demokratischenWasserunternehmen” (2006). Two other critical assessments are by Thomas Rudekin “Privatisierung der Wasserversorgung in Deutschland, Folgen & Konsequen-zen – exemplarisch dargestellt am Beispiel der Teilprivatisierung der BerlinerWasserbetriebe (BWB)” (ca. 2009) and Rainer Heinrich in “Rückabwicklungder Teilprivatisierung aufgrund der Ungültigkeit der Verträge” (2011), both fromthe Berliner Wassertisch, a body that opposed water privatization. The estimatesof costs and benefits of remunicipalizing Berlinwasser are taken from a studyentitled “Kosten und Nutzen der Rekommunalisierung der Berliner Wasserbetriebe”(2009) by Joachim Schwalbach, a professor of economics specialized in corporategovernance, published together with his collaborators Anja Schwerk and DanielSmuda for the Berlin Chamber of Industry and Commerce.

The evolution of Berlin water tariffs from 2006 to 2013 is taken from the websiteof Berlinwasser. The story of the referendum and the eventual remunicipalizationof Berlinwasser is taken from the Wikipedia article “Volksentscheid über die Offen-

Annex 6: Sources 203

legung der Teilprivatisierungsverträge bei den Berliner Wasserbetrieben” and thesources quoted there and from articles in the Berlin newspaper “Der Tagesspiegel.”

11. Civil Society and the EU Concession Directive

This chapter is based on various sources including information from the Websitewww.Right2Water.eu, media reports from tagesschau.de, and a press release by theGerman Water and Energy Association BDEW “Gestaltungsfreiheit erhalten” ofFebruary 7, 2012. The reports by the TV magazine “Monitor” of December 13,2012 and March 14, 2013 were accessed on the website of the German TV stationARD. Water tariffs in Portugal are from a report by the Portuguese water regulatoryagency ERSAR quoted in the Portuguese newspaper Expresso of September 26,2012. The study by the University of Barcelona is by Germà Bel, Xavier Fageda,and Mildred E. Warner and is entitled “Is Private Production of Public ServicesCheaper Than Public Production? A Meta-Regression Analysis of Solid Wasteand Water Services.” It was published in 2010 in the Journal of Policy Analysisand Management, Vol. 29, No. 3, pp. 553–577. The list of members of steeringgroup of the European Innovation Partnership for Water was retrieved from theEU commission’s website on August 14, 2014. The document “Directive of theEuropean Parliament and of the Council on the award of Concession Contracts –Frequently Asked Questions,” posted as a press release dated January 15, 2014,on the website of the European Union, was helpful in analyzing the content of theDirective.

12. The United States

The story of the New York City water tunnels is taken from the article “UnearthingManhattan’s new water source” by Daniel Geiger in Crain’s of July 21, 2013, thearticle “After Decades, a Water Tunnel Can Now Serve All of Manhattan” in theNew York Times by Matt Flegenheimer of October 16, 2013 and other sources. TheNYC PPP experience is based on reports in the business magazine Global WaterIntelligence, a blog by Tom Robbins entitled “Water, Water, Everywhere in MayoralRace” in the Village Voice of September 1, 2009 and on official reports by NewYork City, such as “DEP Launches Program To Improve Services, Lower Costs andMaintain Status as Nation’s Best Water Utility for Future Generations,” November7, 2011. NYC water tariffs are taken from New York City Water Board’s “Rates andRegulations” as well as New York City DEP: “FY 2014 Water Rate Proposal to theNew York City Water Board,” April 5, 2013.

The Atlanta case is described in “Faulty Pipes: Why Public Funding notPrivatizations is the Answer for U.S. water systems,” published by Food andWater Watch in 2006. The Felton case is described in the article “How Felton,

204 Annex 6: Sources

Calif., Achieved Water Independence,” published by Tara Lohan in YES! Magazine,May 27, 2010. The Atlanta and Felton privatizations are also described in PublicCitizen: “Waves of regret” (2005) and in Craig Anthony (Tony) Arnold: “WaterPrivatization Trends in the United States: Human Rights, National Security, andPublic Stewardship,” William and Mary Environmental Law and Policy Review 785(2009), which also describes the impact of the change of the 1997 tax regime onwater privatization in the USA. The massive losses sustained by RWE through itsUS adventure are analyzed by Frank Hofmann in “RWE – The Takeover and Resaleof American Water” (2012).

The turnaround of DC Water is based on the analysis of the utility’s 2013 AnnualReport, including the historical figures in the report’s statistical section; conversa-tions with Alex McPhail, a former member of the utility’s Board; the well-writtenand well-documented Wikipedia article “Lead contamination in Washington, DCdrinking water”; and my own experience as a resident of Washington, DC, from1997 to 2009.

The information on financing of water infrastructure from various sources istaken from the 2006 Community Water System Survey of the US EnvironmentalProtection Agency. The deteriorating state of infrastructure in the USA is docu-mented in the 2013 Water and Wastewater Report Cards of the American Society ofCivil Engineers (ASCE).

13. The Philippines

The prelude to the privatization is recounted by Mark Dumol, a senior civil servantwho was in charge of the privatization, in “The Manila Water Concession. A KeyGovernment Officials Diary of the World’s Largest Water Privatization” publishedby the World Bank in 2000. Critiques of the privatization and its impact include RoelLanding, a former Manila correspondent of the Financial Times, in “Loaves, fishesand dirty dishes” published in “The Water Barons – how a few powerful companiesare privatizing our water” by the Center for Public Integrity published in 2003; JudeEsguerra, former Head of the Economics Research Department at the Institute forPopular Democracy, in “New Rules, New Roles: Does PSP Benefit the Poor? TheCorporate Muddle of Manila’s Water Concessions” also published by WaterAidin 2003; and a publication by the Freedom from Debt Coalition of March 2009entitled “Recalibrating the Meter.” An excellent detailed analysis of the comparativeperformance of the two concessions has been written by Xun Wu and NepomucenoA. Malaluan in “A Tale of Two Concessionaires: A Natural Experiment of WaterPrivatisation in Metro Manila,” published in 2008 in Urban Studies 45 (1): 207–229.The improvements of access to water in the slums of Manila have been describedby Petr Matous in “The making and unmaking of community-based water suppliesin Manila,” published in Development in Practice, Volume 23, Issue 2, 2013, pp.217–231, and a presentation by Elsa Mejia in “Small-Scale Water Providers: Thebusiness of filling the gap for water provision” at the 2009 World Water Week

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in Stockholm. The analysis of the more recent developments is based mainly oninformation from the websites of Manila Water and Maynilad, including theirAnnual Reports, as well as the article “Regulation and corporate innovation: Thecase of Manila Water” by Perry Rivera published in “Transforming the World ofWater,” a publication summarizing the presentations at the Global Water Summit2010 in Paris.

14. Uganda

The situation before the turnaround of NWSC and the turnaround itself until2006 is described in many publications, including in “Struggling State-OwnedEnterprises: NWSC’s Turnaround in Uganda” (November 2006), written jointly bySilver Mugisha, the company’s long-time chief economist and current CEO, andProfessor Sanford Berg from the University of Florida, and in William Muhairwe’sbook “Making Public Enterprises Work: From Despair to Promise” published in2009. It was also reviewed by the development economists Yahya Jammal andLeroy Jones from the Boston Institute for Developing Economies (BIDE) in “Impactof privatization in Africa: Uganda Water” (October 2006); by Klaas Schwartz, anAssociate Professor of Urban Water Governance at the UNSECO-IHE Institute forWater Education in The Hague in “The New Public Management: The future forreforms in the African water supply and sanitation sector?”, published in 2008 inUtilities Policy 16 (1): 49–58; as well as in a series of Case Studies of BankableWater and Sewerage Utilities by the consulting firm ARD Inc. for USAID in 2005.

Much less has been written about the performance of NWSC after 2006. I havecompiled it from primary sources including NWSC Annual Reports; the NWSCCorporate Plan 2009–2012 (including the review of its actual performance underthe previous plan); the Government’s Water and Environment Sector PerformanceReport 2013; the African Ministers’ Council on Water’s Country Status Overview:“Water Supply and Sanitation in Uganda: Turning Finance into Services for2015 and Beyond” published in 2011; the 2010 report by Momentum Capital inAssociation with AF Mpanga Advocates “Reform of the Urban Water and SanitationSub-sector – Consultancy Services for the Review of the Performance Contractswith Water and Sewerage Authorities and the Development of the Next GenerationPerformance Contracts” for the Ministry of Water and Environment and DeutscheGesellschaft für Technische Zusammenarbeit (GTZ); and the Jan–March 2014 issueof the NWSC Newsletter “Water Herald.” The critical reports on Muhairwe aretaken from the Ugandan press, in particular the article “Behind the scenes atMuhairwe’s exit” in “The Independent” of November 22, 2011, “Germany holdsbillions to NWSC amid inquiry” from the “Daily Monitor” on June 6, 2013, and“Who Are the Richest People in Uganda?” in the “Sunday Vision” of April 9, 2007.

The chapter also benefited greatly from comments received by Richard Franceys,Senior Lecturer Environmental Science and Technology Department at the Univer-sity of Cranfield, and from Marine Colon, a researcher in public management at the

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Social, Economics, and Management Sciences Department of AgroParisTech whohas done primary, yet unpublished research about the turnaround of NWSC.

15. Cambodia

The account of the Phnom Penh Turnaround is based on an article by Ek SonnChan, former General Manager of PPWSA, with Michel Vermersch and PatrickVaughan, who worked as consultants for the consulting firm Safege in PhnomPenh, in the article “Water supply in Phnom Penh: from devastation to sectorleadership” published in Water Utility Management International in September2012; a conversation with Michel Vermersch; an article by Asit Biswas and CeciliaTortajada from the Third World Water Center in Mexico-City entitled “WaterSupply of Phnom Penh: An Example of Good Governance” published in theInternational Journal of Water Resources Development in June 2010; as well asa publication by Binayak Das, Ek Sonn Chan, Chea Visoth, Ganesh Pangare, andRobin Simpson “Sharing the Reform Process. Learning from the Phnom Penh WaterSupply Authority (PPWSA)” published by the International Union for Conservationof Nature and Natural Resources (IUCN) in 2010. Useful comments were receivedfrom Marine Colon, a researcher in public management at the Social, Economics,and Management Sciences Department of AgroParisTech who has done primaryresearch about the turnaround of PPWSA. Further data and information have beencollected from the websites of PPWSA, the Asian Development Bank, the WorldBank, and the French Development Agency.

16. Conclusion

The 2005 study on the efficiency of publicly and privately managed utilities is byAntonio Estache, Sergio Perelman, and Lourdes Trujillo and is entitled “World BankInfrastructure Performance and Reform in Developing and Transition Economies:Evidence from a Survey of Productivity Measures,” published as World Bank PolicyResearch Working Paper 3514 in February 2005. The 2009 study on the impact ofprivatization on access to drinking water and sewerage is by George Clarke, KatrinaKosec, and Scott Wallsten, entitled “Has private participation in water and sewerageimproved coverage? Empirical evidence from Latin America,” published in theJournal of International Development. The 2005 study on household expendituresfor water in public and private systems in the USA is by Scott Wallsten and KatrinaKosec, entitled “Public or Private Drinking Water? The Effects of Ownershipand Benchmark Competition on U.S. Water System Regulatory Compliance andHousehold Water Expenditures,” published as a Brookings Institution WorkingPaper.

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Technical Note on the Water Bill Affordability CalculationsVarious chapters contain tables that show the share of water bills in the medianhousehold income (affordability). In these calculations, water bills are estimatedbased on the average residential water consumption in the respective city and theresidential water tariff in place at the time of writing. The median household incomeestimates are based, to the extent possible, on official statistical data about themedian household income in the respective cities. If such data are not available,the median household income has been calculated based on the per capita grossdomestic product and the average household size in the respective country makingvarious adjustments, such as an estimate of the share of net household incomein GDP (55–65 %), a factor to take into account higher incomes in capital citiescompared to the national average (if applicable), and an estimate of the ratio betweenmedian and average income (usually 0.6), since the median income is systematicallybelow the average income.

Index

AAbdou, 51Abengoa, 21Aboitiz, 137Abu Dhabi, 68Affiliated Companies, 50–52Affordability, 25, 140, 158Affordable, 97, 98, 122, 128AGS, 117Aguas Argentinas, 37–44Aguas de Barcelona, 27–29, 37, 91Aguas de la Habana, 28, 29Agua y Saneamientos Argentinos (AySA), 43AIG, 100Albuquerque, Catarina, 52, 116Alexandria, 48, 51Alfonsín, Raul, 31Allianz, 108Alsogaray, 39, 40American Society of Civil Engineers, 122American Water, 121, 124, 125Amin, Idi, 143, 144, 148Amman, 55–58Andean Development Corporation, 20Anglian Water, 37, 137Annett, Nigel, 75Arbitration, 24Area Performance Contracts, 149–151Argentina, 179Asian Development Bank, 166Asiut, 52Asset holding company, 79Atlanta, 124Audit Office (France), 84Auditor General (Uganda), 156

Australia, 68, 168Austria, 99, 104, 117Avrillier, Raymond, 89, 92Awards, 153Ayala, 137, 139

BBallance, Tony, 71Banco de Galicia, 38Banque Paribas, 20Banzer, Hugo, 19Barclays Capital, 76, 77Barlow, Maude, 24Barnier, Michel, 84, 115, 118, 119Basin agencies, 87Bavaria, 98Bayonne, 125, 126BDEW, 116Bechtel, 20–23, 137–139Belgium, 84Ben, Carlos, 34, 43Benpres, 137, 138Berliner Bankgesellschaft, 108Berliner Wasserbetriebe, 114Berliner Wassertisch, 108, 109, 112Berlinwasser Holding Company, 107Bidding, 33, 37, 135–138, 140Binnie, Chris, 70Biswas, Asit, 71Blair, Tony, 67Blanchard, Kenneth, 154Bloomberg, Michael, 127Blue Plains wastewater treatment plant, 129Bolivia, 179

© Springer International Publishing Switzerland 2015M. Schiffler, Water, Politics and Money, DOI 10.1007/978-3-319-16691-9

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210 Index

Bond(s), 76, 78, 79, 122, 129, 155Bonus, 164Bonuses, 149, 150, 162, 171Bordeaux, 91, 94Boston Institute for Developing

Economies, 159Bottled water, 2, 130Bowles, Sheldon, 154Brandenburg, 98Brazil, 179Bribery, 92Budapest, 91, 106Build-Operate-Own (BOO) project, 70Build-Operate-Transfer (BOT), 5, 56Bulgaria, 115Bundesrat, 116Bundestag, 101Burns, Lord, 77Business plans, 150Byatt, Ian, 70, 75, 76, 80

CCairo, 47, 48, 50Cal-Am, 125California, 125Camus, Bertrand, 125Canada, 68, 122Carignon, Alain, 92Cartel Office, 105, 110, 114Casablanca, 87, 91Cassagne, Juan Carlos, 41Castro, Fidel, 27Centers for Disease Control and

Prevention, 130Chan, Ek Sonn, 161–168Chausson, Loic, 95Chesapeake Bay, 129China, 68, 91Chirac, Jacques, 40, 42, 89Chlorination, 52, 97Chlorine, 118Cholera, 33Clean Water Act, 123Clinton Global Initiative, 126Coca Cola, 51Collection efficiency, 147, 151, 155Communists, 93, 95Community development, 165Community groups, 165Compagnie Générale, 85, 87–91Compagnie Générale des Eaux, 37, 106Competition, 64, 77, 80, 101, 102

Complaints, 162Concession, 5, 8, 11, 12, 18–23,

32–43, 83–87, 89, 91–93, 96, 121,124–126, 136

Directive, 115fee, 103

Congress, 100, 123Connection fees, 153, 165Conservatives, 88, 92, 95Constitutional Court (Berlin), 108–110Consumer Council for Water (England), 66Contingent liability, 59Contracting out, 147Corporate culture, 150, 151, 154, 159Corrupt, 161, 162, 165Cost recovery, 48, 49, 53, 155Court, 89, 92, 99, 100, 103, 125Cox, Jonson, 69Credit rating, 100, 122, 125, 127, 129Crickhowell, Lord, 65Cross-border-leases, 98–100, 104Cross-subsidies, 100Customer service, 148, 154Customer surveys, 97, 139, 148Czech Republic, 115

DDC Water, 128–130Decentralization, 49–50, 144Delanoë, Bertrand, 93Democrats, 123DEP (Department of Environmental

Protection), 128, 131, 181De Silguy, Thibault, 42Disi, 57, 58Drinking Water Inspectorate (England), 66Drinking water quality, 181Dry zones, 156Dumfries House, 80Dumol, Mark, 135

EEast Asian crisis, 138Eau de Paris, 84–87, 89, 91–95Economic crisis, 41, 43Edison, 21Efficiency, 162Egyptian Water Regulatory Agency, 50Employees, 32–34, 38EnBW, 119England, 63, 64, 71, 73–77, 79–81

Index 211

Enron, 108Entebbe, 144Ente Tripartito de Obras y Servicios Sanitarios

(ETOSS), 35, 40, 42Environment Agency (England), 66Ernst & Young, 153Estonia, 115ETOSS. See Ente Tripartito de Obras y

Servicios Sanitarios (ETOSS)Eurawasser, 108European Citizens’ Initiative, 115European Commission, 12, 115European Innovation Partnership for

Water, 118European Investment Bank, 58European Parliament, 112, 115, 119Evers, Hans-Jürgen, 101

FFederal Environmental Office, 101Felton, 124Fernandez, Omar, 23, 24Financial crisis, 155Finkelnburg, Klaus, 108–110Flat hierarchies, 151Fletcher, Philip, 77Foreign aid, 8, 161, 168, 170Fort Portal, 150France, 48, 163, 168France Libertés, 92Franceys, Richard, 150Frankfurt, 101, 103French Development Agency, 58

GGAMA, 58Gauff, H.P., 145, 147, 149, 151General Electric, 58, 151German Association of Cities, 119Germany, 48, 51Global Water Intelligence, 126, 157Global Water Summit, 157Golden handshakes, 106Golden share, 67Grant financing, 8Grassley, Chuck, 100Green dowry, 66Greens, 93, 95, 108Green Wales, 63, 64, 69, 71, 74–79Grenoble, 84, 89, 90, 92Groundwater abstraction fee, 112, 114

HHall, David, 66Hamburg Wasser, 98, 101Harvard, 151Hawkins, George, 130Hesse, 102Holding Company, 50, 51Hong Kong, 68Human right to water and sanitation, 44, 52,

116, 141, 179, 183Hungary, 115Hyder, 75–78Hydraulic zones, 164

IICSID. See International Center for the

Settlement of Investment Disputes(ICSID)

IFC. See International Finance Corporation(IFC)

Ile-de France, 84Illegal connections, 161, 162Incentive payments, 162Inflation, 19, 31, 34, 43, 69, 71, 74, 79, 153INRA (French Research Institute), 96Inspector General of Government

(Uganda), 157Inter-American Development Bank, 17, 25Internally Delegated Area Management

Contracts, 149International Center for the Settlement of

Investment Disputes (ICSID), 24, 44International Finance Corporation (IFC), 9, 11,

37–39, 136–138, 181International Institute for Environment and

Development, 39–41International Monetary Fund (IMF), 2, 11, 41International Water Limited, 20, 21,

137, 139Investor-owned utilities, 121, 122, 124Ireland, 115Ivory Coast, 87

JJakarta, 91Japan, 104, 163Jinja, 144Johnson, Ellen, 157Johnson, Jerry, 129Johnson, Spencer, 154Jones, Chris, 75

212 Index

KKampala, 143–145, 147, 149–152, 155, 156Karlsruhe, 119Kasese, 150Kinnersley, David, 65Kohlberg Kravis Roberts, 125Kulmbach, 100

LLabor productivity, 72–73, 113Landeswasserversorgung, 100La Paz, 17–20, 22, 25Lawson, Nigel, 64Lead, 93, 128, 129Leakage, 66, 67, 69, 71, 73, 74, 79, 81, 85,

94, 113Lease, 5, 6, 83–85, 87, 89, 93, 96Leroy, Nathalie, 98Le Strat, Anne, 93Lingeri, 34Local capital market, 156Lord Burns, 76Lorrain, Dominique, 91Lyon, 85, 86Lyonnaise, 85, 88–92Lyonnaise des Eaux, 89, 90, 137

MMainova, 101, 103Malaysia, 68Management contract, 55, 56, 145, 150–152Manhattan, 126Manila Water, 137–140Mannesmann Arcor, 108Marseille, 95Martinon, 28Master Plan, 163Mathias, Glyn, 78Maynilad, 137–139Mbale, 144McKinsey, 128Meller, Sergio, 38Menem, Carlos, 31–33, 38–40Merkel, Angela, 119Merrill Lynch, 108Mestrallet, Gérard, 91, 124Meter readers, 162Metro Pacific Corporation, 137Metropolitan Water Board, 64Misicuni Dam, 18Mitterrand, Danielle, 92

Mitterrand, François, 88Miyahuna, 56Monitor (German TV Magazine), 117–119Monod, J., 38, 40, 88, 91, 92Montabaur, 103Morales, Evo, 24Morocco, 85, 87Morsi, 51Motivation, 21, 47, 148, 151–152, 159, 163Mubarak, 51Mugisha, Silver, 157Muhairwe, William, 143–145, 147–152,

154–157, 159Municipal associations, 83, 84Municipal bonds, 123, 124Municipalization, 64Museveni, Yoweri, 144

NNader, Ralph, 24Napoleon III, 85National Water and Sewer Company (NWSC),

143–159, 169Natural monopoly(ies), 66, 121Netherlands, 21, 24, 84, 104, 117New Jersey, 125New York City, 126–128Nitrate, 39, 43Nolan Principles, 76Non-governmental organizations (NGOs), 8Non-revenue water, 53, 55, 138–140, 151, 152,

155, 164, 172Northern Ireland, 63, 73North West Water, 32, 38

OObote, Milton, 143, 148Obras Sanitarias de la Nación (OSN), 32–34,

37Official development assistance, 8Ofwat, 66–69, 71, 75–77, 79, 80Olivera, Oscar, 23, 24, 26Ondeo, 150–152Onek, Hilary, 144, 145ONEMA (French water regulator), 85Opinion polls, 33Orthophosphate, 130Oudin-Santini Law, 85Overseas Private Investment Corporation, 58Overstaffing, 106, 113, 136Owen, David Lloyd, 58

Index 213

PPacos de Ferreira, 117Pension funds, 19, 68Performance-based technical assistance,

121, 128Performance benchmarking, 101Performance contract, 149, 150, 152,

154, 155Performance indicators, 152, 157Performance monitoring, 154Peronist, 31Phnom Penh Water Supply Authority

(PPWSA), 163–169, 173Poland, 115Portugal, 117Poverty, 165PPWSA. See Phnom Penh Water Supply

Authority (PPWSA)Prescott, John, 67Private equity firm, 125Proparco, 58Public Sector International Research Unit

(PSIRU), 66, 166Public Utilities Commissions (United

States), 123

QQuality of drinking water. See Water quality

RRamon Magsaysay Award, 166Ramos, 135Referendum, 105, 110Regional Water Authorities, 63–65Regulatory agency, 35, 40, 41, 50, 66, 80, 81,

85, 97, 102, 157Remunicipalization, 12, 92–95Republicans, 123Republic of Ireland, 63Return on capital, 155Return on investment, 167Reyes Villa, Manfred, 19Ridley, Nicholas, 65Roesler, Philip, 116Romania, 115Rostock, 91Rudek, Thomas, 110Rügemer, Werner, 100RWE, 67, 106, 108–110, 112,

124, 125

SSalvation Army, 129Samra, 56, 57, 59Sapin, Michel, 84, 90SAUR, 83Scandinavia, 104Schwartz, Klaas, 159Scotland, 63, 67, 71, 73, 79–81Self-financing, 8SEMAPA, 18, 21, 24–26Sen, Hun, 162Severance payments, 106, 147, 183Severn Trent, 71, 79Sewerage, 167, 172Shareholder democracy, 64, 65Shultz, Jim, 18, 20, 26Siméon, Henri, 85Simon, Jörg, 114Slater, Robert, 151Slums, 32, 36, 42, 165Socialists, 88, 90, 95Soldati, Santiago, 38, 40Spanish International Cooperation

Agency, 28Stadtwerke, 117, 119Staff morale, 148State Revolving Funds, 123Stock exchange, 67–69, 75, 76, 78, 122,

125, 167Stockholm Industry Water Award, 166Stockholm Water Prize, 71Stock market, 5Strategic investor, 106Strathclyde water referendum, 80Subsidies, 7, 49, 52, 88, 94, 106, 123Suez Environnement, 6, 18, 20, 27, 55, 67,

83–85, 87, 90, 91, 94, 95, 118, 122,124, 141, 152

Surveys, 139, 148Switzerland, 99, 104

TTariff structure, 163Tax(es), 42, 67, 68, 71, 90, 96–99, 101,

123, 124Tax haven, 99Technical assistance, 170Technical assistance contracts, 5, 12Thalia, 136, 137Thames Tideway Tunnel, 69–70Thames Water, 32, 38, 67, 70, 73, 124

214 Index

Thatcher, Margaret, 63–65, 75Toulouse, 94Transparency, 84, 90, 109, 114Trenchless pipe replacement, 102Turnarounds, 143, 145, 154, 158, 161,

165–167, 169

UUde, 119Union(s), 34, 43, 136, 150United Nations, 2United States, 48, 179United Utilities, 20, 137–139United Water, 121, 124, 125University of Barcelona, 117

VValue added tax, 107Veolia Environnement, 6, 56, 67, 79, 83, 84,

90, 95, 124, 128Vigilar, Gregorio, 135Vivendi, 106, 108–110VKU (German utility

association), 116

WWagenknecht, S., 112Wales, 79, 81Wastewater, 35, 39, 40, 43, 47, 49, 50, 53,

55–58, 64, 66, 69, 70, 72–74, 87, 88, 95,98, 105, 106, 112, 120, 121, 123–127,129, 192, 199, 200, 204

Water Agency Seine-Normandie, 93–94WaterAid, 8Water Industry Commission for Scotland, 80Water Leaders Group, 157Water.org, 8Water quality, 1, 32, 35, 52, 86, 93, 95, 101,

122, 127, 130, 148Water Quality Act, 123Welch, Jack, 151Wetzlar, 103WIK (German Consulting Firm), 112–114Wolf, Harald, 109, 110Work culture, 148World Bank, 2, 4, 8, 9, 11, 17–20, 24, 48–50,

53, 55, 145, 147, 151, 153, 155,159, 179

World Water Council, 95Worldwide Fund for Nature, 118WPD (US Power Utility), 76, 77