Private sector participation in water supply and sanitation can represent an impediment to achieving development objectives.1 This occurs when:

• Consumers are charged excessively in correspondence of deteriorating quality;
• Commercial considerations distort development priorities, such as service coverage to low-income urban areas;
• Profit guarantees offered by governments and local authorities to water multinationals reintroduce debt-like obligations;
• Multinationals' strategy subordinate investment in local water systems to cross-subsidizing speculations in other countries and sectors.

A. Water privatization conflicting with local objectives

Tucuman, Argentina: Excess Charges and Deteriorating Quality

In 1995, Aguas del Aconquija, a subsidiary to Générale des Eaux was granted a 30-year concession to supply the province of Tucuman. Although water tariffs doubled following the award, the company failed to deliver the promised investment programme, and the water supplied "turned brown". Following the refusal of the large majority of customers to pay water bills, the company rescinded the contract and the operations were retained under public control. Vivendi subsequently filed a $100 m suit against the government and an ICSID (International Centre for the Settlement of Investment Disputes) arbitration panel is currently examining the case. 2.

Buenos Aires, Argentina: no extensions without cross-subsidy

Aguas Argentinas, the privatised utility for water supply and sanitation in Greater Buenos Aires, was unable to collect connection charges for new extensions in poor areas, which meant the company faced a loss of USD 60 million. The company then applied cross-subsidy, by charging all clients an extra USD 2 to 4 every two months, to cover these 'social' connection costs. Consumers challenged the legality of these charges 3.

Zimbabwe: investors withdraw from water project

In December 1999 UK water company Biwater pulled out of a major water supply project in Zimbabwe, because the project could not deliver the rate of return now demanded by private investors. The company manager said: "Investors need to be convinced that they will get reasonable returns. The issues we consider include who the end users are and whether they are able to afford the water tariffs. From a social point of view, these kinds of projects are viable but unfortunately from a private sector point of view they are not" 4.

B. Guarantees as Debt Obligations

When it comes to infrastructure services such as water, using privatization as a means of financing investment may be more like debt than equity. The government may have to pay whether supplies are needed or not, and price may be fixed in dollars, thus removing exchange rate risk. Investors assume almost no risk in terms of price demand or exchange rate and host countries bear almost all of the risk. Unlike debt, such a transaction does not attract relief measures. In terms of finance this is unlikely to be the cheapest way of financing infrastructure 5.

Also, BOT agreements often oblige public authorities in developing countries to buy bulk quantities of water irrespective of future demand. When take-or-pay contracts are associated to BOTs, public funds guarantee multinationals' profits at the expenses of taxpayers/consumers.

• Vivendi and Marubeni have recently obtained multilateral finance for a water supply BOT in Chengdu, China which will provide water to the local municipality on a take-or-pay basis 6.

Similarly, some water concessions in transition countries include clauses which protect the company from trading losses at the expenses of taxpayers. For example, in Pecs and Szeged, Hungary and Plzen, Czech Republic, the concession contracts include clauses stating that if the tariffs are not sufficiently high to provide an operating profit, the council must make good the loss for the company 7.

C. Multinationals' Strategies and Local Priorities

The biggest water multinationals are also multi-utilities with interest in other sectors. Local development priorities can be frustrated when profits extracted from water concessions are invested elsewhere or in operations of other kind.

• Vivendi offers a clear example of a multi-utility group "milking the cow" of water worldwide to finance its other activities. In January 2000, Vivendi announced that the entire debt of the group, equal to Euro 16.5 billion, would be placed onto its water, energy, waste and transport operations - the 'environment' division' - while the Communications division will become virtually debt free. Based on the 1999 level of sales in the Environment division of Euros 22.2bn, the debt burden will amount to a surcharge of about 4% on the bills of every user of Vivendi's water, waste and transport in the world. 8

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Notes

1 On the need to effectively balance the interests of multinationals and the contracting authorities in order to avoid triggering political risks, see Wells, L. (1999) 'Private Foreign Investment in Infrastructure: managing Non-Commercial Risk' (Preliminary Draft). Paper for Private Infrastructure for Development: Confronting Political and Regulatory Risks - Conference, 8-10 September Rome, Italy: www.worldbank.org/html/fpd/risk/papers.htm.

2 Latin Trade Business & Industry: 5 Mar 1999.

3 Bugge, A. "Argentina agrees to revise water concession terms", Reuter News Service - Latin America: 21 Nov 1997. See also Lobina, E. & Hall, D. (2000) "Public Sector Alternatives to Water Supply and Sewerage Privatization: Case Studies", International Journal of Water Resources, 16(1), pp. 37-57.

4 Zimbabwe Independent 10/12/99.

5 Hall, D. & Bayliss, K. (2000) Privatisation of water and energy in Africa, 1999, PSIRU, February 2000.

6 CHENGDU Generale des Eaux-Marubeni Waterworks Company Limited, in ADB Private Sector Project Profiles : www.adb.org/Work/Projects/Profiles.

7 Hall, D. (1998) Restructuring and privatization in the public utilities - Europe, in De Luca, L. (Ed.) Labour and social dimensions of privatization and restructuring (public utilities: water, gas and electricity). Geneva: published for the International Labour Office, pp. 109-151.

8 Estimated financial results for 1999, Press Release, 28/01/00: www.vivendi.com.