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THE fifth estate: Dead in the Water
Argentina> Printer Version

Broadcast March 31, 2004

ARGENTINA:
A GRAND EXPERIMENT IN WATER PRIVATIZATION THAT FAILED

Half of the 9 million people living in the slums around Buenos Aires had no water connections.

Argentina has suffered through decades of military rule, dictatorships, corruption and a collapsed economy. When Carlos Menem was elected president in 1989 the country was relying heavily on advice and loans from the International Monetary Fund. With the IMF’s backing, Menem passed the “National Administrative Law,” a declaration of a state of emergency that gave him the power to privatize public utilities by decree. The blanket privatization of public assets was meant to be a cure for the country’s hyper-inflation, which at that time was close to 5000%.

Argentine economist Karina Forcinito: In 1985 the IMF was applying a lot of pressure on Argentina to privatize. It made privatization a condition for getting new loans. So the pressure was huge.

President Menem put a political ally and tabloid favourite in charge of the privatization of the state telephone and steel companies. Maria Julia Alsogaray was the daughter of the pro-market and army-supported former Minister of Economy, Alvar Alsogaray. She was known for her lavish lifestyle and high-level political connections. Alsogaray would go on to have a major role in the country’s water privatizations as well.

WATER PROBLEMS IN BUENOS AIRES
By 1991, Buenos Aires’ public water utility, Obras Sanitarias de la Nación (OSN), was rife with problems. Up to 50 per cent of the system’s water was lost through broken pipes, water shortages in the summer were frequent, and there were too few sewerage connections and inadequate treatment. Thirty per cent of people in the greater Buenos Aires area had no access to the water network.

Lydia Chavez gets her water from a pump located in the backyard.

One of them was Lydia Chavez, a mother of eight who lives in a poor area of Buenos Aires called La Matanza. Lydia and her family get their water from a pump in the backyard that is dangerously close to their sewage pit. Her children often visit the local hospital with stomach problems. She has been waiting for a water connection for 14 years.

READ ABOUT THE MILLENIUM DEVELOPMENT GOALS FOR WATER >

In 1991, the head of the public utility announced that the state could not undertake the billions of dollars of investments needed in order to avoid a collapse of the water and sewer networks. He said the public water company was a model for privatization.

After the utility was ear marked for sale, water rates started to climb. Double-digit increases throughout 1991 and a new sales tax significantly increased water bills. The World Bank funded and approved a team of private sector technical and financial consultants from the U.K., the birthplace of water privatization under Margaret Thatcher, to advise on the future of Buenos Aires’ water sector.

When former World Bank president Lewis Preston visited Argentina in 1992 he declared that Argentina’s “process of adjustment” was “an example for all of Latin America.” Throughout the nineties the World Bank and its lending arm, the IFC, loaned close to one billion dollars for three water and sewage projects in Argentina. The IFC even bought a 5 per cent stake in the private water concession, and became a part owner.

AGUAS ARGENTINAS WINS THE WATER CONCESSION
When Buenos Aires’ water utility was open for bidding, the lobbying heavyweights stepped in. French dignitaries visited Buenos Aires on behalf of a consortium led by France’s two powerful water companies, Vivendi and Suez. The consortium, called Aguas Argentinas, won the concession in May, 1993 after promising a 26.9 per cent reduction in water rates.

The concession was one of the largest water privatizations in the world. It included 9.3 million people and covered downtown Buenos Aires and 14 surrounding municipalities. A new public regulatory body, ETOSS (Ente Tripartito de Obras y Servicios Sanitarios) was created to oversee Aguas Argentinas. Its mission was to monitor the quality of service, represent customers and ensure the private company lived up to its contract.

Untreated sewage fills the streets after a rainfall because the collection system is outdated or non-existant.

After winning the contract, Aguas Argentinas did reduce rates by 26.9 per cent, mostly by reversing the increases of 1991. The new private water company also committed to a $1.4 billion investment in the system, and to connecting more than 4,200,000 people to water and 4,800,000 to sewage in 30 years.

The concession contract stated that rates were subject to change every five years. In the first five-year period rates were fixed, and in the second five-year period, rates could only go down. The company could only apply for a rate increase if costs for fuel, chemicals, electricity or labour went up.

WATER RATES START TO RISE
Only eight months after the contract was signed, Aguas Argentinas wanted permission from ETOSS for a rate increase. The company claimed operational losses of $23 million for “extra-contractual costs,” such as speeding up service in very poor neighborhoods.

ETOSS granted the rate increase in exchange for making certain investments, including getting water and sewage to “villas de emergencia” (shanty towns) sooner, as well as a plan to eliminate the use of well water, which was heavily contaminated with nitrates.

By 1996, however, Aguas Argentinas had invested $300 million less on expansion of services than promised, or approximately 45 per cent of the original contract. The company used bad debt, late payments, and a downturn in the Argentine economy to justify the difference. Despite this, the company’s profit margin remained above 20 per cent.

THE FRENCH CONNECTION
French companies had won several of the Argentine privatization contracts and relations between Argentina and France were close. In February 1996, Argentine president Carlos Menem visited French president Jacques Chirac in Paris, where he received an honorary degree from the Sorbonne. While in France, Menem and Argentina’s Minister of Economy, Domingo Cavallo, met with the president of Suez, Jérome Monod, who indicated he would like to renegotiate the entire water contract in return for speeding up the water and sewer connections in Argentina.

People in Argentina took to the streets to protest over privatization.

PROTESTING OVER WATER
I n Argentina, frustration with high water rates and new connection fees was beginning to materialize into street protests. A congressional commission found that Aguas Argentinas had “committed serious and grave breaches of contract” and ordered the company to suspend new connection charges for 800,000 new users in metro Buenos Aires. It also found that Aguas Argentinas was not meeting its goals for renovating water and sewage networks.

In February 1997, in a move to centralize power with the national government, President Menem passed Decree 149, which took the power to negotiate with the water companies away from the regulatory body, ETOSS, and gave it to Maria Julia Alsogaray, who by that time was Minister of Natural Resources and Sustainable Development.

After a visit to Buenos Aires by French President Jacques Chirac, Alsogaray agreed to review the water contract. She did so despite warnings from the public regulator, ETOSS, that Aguas Argentinas had only built about a third of the new pumping stations and underground mains it had promised to finish by 1997, and had only invested $9.4 million of a promised $48.9 million in sewage networks.

WATER RATES RISE BY 177%
In November 1997, Alsogaray’s ministry finalized a new contract with Aguas Argentinas. It gave the company new opportunities to raise rates, additional time to expand coverage, and cancellation of some investments originally agreed to. Subsequent contracts, including another one signed in 1999, allow for more increases in water rates and removed sanctions for not fulfilling investment and expansion promises.

Ignacio Chavez bathes his ten month old son who has been suffering from diarrhea and severe stomach pain because of the water. 20% of all children's deaths in Argentina are water related.

By 2002, water rates in Buenos Aires had increased 177 per cent since the start of the private concession. Meanwhile, the Argentine economy was in crisis. Several interim presidents took power then quickly resigned. Bank accounts were frozen and the peso was devalued by two-thirds. People who were once middle class became poor overnight.

In early 2002, the new Argentine president Eduardo Duhalde passed an “economic emergency law” which froze all utility rates. Arguing the rate freeze violated their contracts, some of Argentina’s privatized utilities, including Aguas Argentinas, took the government of Argentina to the International Centre for Settlement of Investment Disputes. The court is part of the World Bank group, whose investment arm, the IFC, still owns a 5 per cent stake in the concession.

The World Bank considers the private water concession in Buenos Aires a success and blames any lack of investment on the economic crisis.

The World Bank’s Director of Energy and Water, Jamal Saghir: The issue of Argentina in particular is a market economic-related issue, it’s not a water related issue. … If you look at prior to the Argentina crisis, 1.6 million people were connected, that’s a lot of people. (read an on-line interview with Jamal Saghir)

Economist Karina Forcinito believes that the privatization of water in Argentina was a failure.

Argentine economist Karina Forcinito disagrees: Let’s face the facts. The concession began in May, 1993 and until the beginning of 2002 had stable operating conditions. Completely stable. Stable prices, stable exchange rate, completely stable relations with the rest of the world. … In no way can you justify the non-compliance.

NEGOTIATING A NEW CONTRACT
In 2003, the IMF and World Bank sent a delegation to Buenos Aires to assist the government in renegotiating the private utility contracts. The IMF made structural reform, including increases in utility tariffs, a condition for any new loans to the country. When French Foreign Minister Francis Mer visited the new Argentine president Nestor Kirchner in 2003, he too insisted utility rates be raised. The French Minister said that the decline of the peso’s value has cost French companies 10 billion dollars in Argentina. But President Kirchner said he wouldn’t bow to pressure from any foreign government, including the French.

Argentina signed a new IMF agreement in September 2003 and promised to address the rate issue. The Argentine Congress said there will be no increases without newly negotiated contracts.

RE-EXAMING PRIVITIZATION
In 2003, Maria Julia Alsogaray, who by that time was reviled by the Argentine media as a symbol of the corrupt Menem government, was charged with several counts of misappropriating government funds and other corruption and embezzlement-related charges. She is being held by police until her trial begins in April 2004.

In November 2003, the Argentine government said it is re-examining all privatization contracts, including Aguas Argentinas.

Miguel Saiegh, head of ETOSS, the public regulator: Aguas Argentinas is in default right now. They’re paying very little of their debt. The World Bank, the International Development Bank, and the European Bank aren’t demanding that they pay. But the company is technically in default. Right now this contract is in deep crisis. We are debating whether to continue with the concession.

The water company is in default on $700 million worth of loans to international financial institutions. Millions of people in greater Buenos Aires are still waiting for water and sewage connections.

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the fifth estate: DEAD IN THE WATER
Broadcast on the fifth estate Wednesday, March 31 2004 on CBC-TV at 8PM

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