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Great Lakes Article:

Great Lakes Water Privatization: Monopolies on the Local Water Front

Posted 08/30/ 2002

For most Americans opening a tap to receive fresh, clean water is as basic as a flush toilet. But the nation's water and wastewater infrastructures are aging, creating an opportunity for multinational corporations that have recognized the profit potential for buying up cash-strapped municipal utilities.

Many cities, counties and townships are turning to giant conglomerates that promise to pick up the tab for renovating and/or operating outdated water utilities in exchange for a guaranteed profit under monopoly authority. These arrangements are called "build-own-transfer" or "build-own-operate" contracts.

When a local government cannot provide its citizens with safe, clean water, outside help is welcomed. But with large foreign-based multinational corporations increasingly acquiring U.S. utilities there is concern lest Americans find themselves as dependent on foreign ownership of water as they are on foreign oil. And critics of utility privatization charge that multinationals that win utility concessions sometimes transfer debt burdens from other subsidiaries to their utility divisions and then on to the utility customers.

Moreover, even the World Bank is singing the multinationals' tune. A World Bank white paper "Private Capital in Water and Sanitation" puts in writing the new emphasis of the World Bank and the International Monetary Fund (IMF) on utility privatization as a condition of badly needed financial assistance for developing countries. As critics long have noted that these entities tend to favor government rather than private solutions, it is surprising that the paper asserts:

"Private capital and initiative can help accomplish operational efficiency and investment objectives if two stringent requirements are met: (1) projects must generate revenues that cover operating costs and debt-service payments, and earn a competitive rate of return on equity, and (2) risks that are internal (for example, construction and operation) and external (for example, regulatory and foreign exchange) to a project must be identified and clearly allocated to the parties that are in the best position to mitigate them. With their own capital at risk, lenders and investors have strong financial incentives to ensure that a project is built on time and within budget, and is operationally efficient."

World finance favors the giant multinationals. And some of them seem to be into almost everything these days. It's hard to imagine that the same corporation that produces Oscar-quality dramas such as A Beautiful Mind and Erin Brockovich also bottles Seagrams beverages while collecting water bills and hauling sewer sludge. But France-based Vivendi Universal does, and it says of its water unit in its annual report for 2000: "Revenues generated outside France now represent almost 58 percent of total revenues, with 19 percent derived from the United States."

Vivendi and major diversified European utilities slowly have been acquiring private utilities in the United States and other industrialized nations. They are purchasing access to an established water market, effectively adding to holdings in developing nations acquired from their IMF/World Bank connections.

According to Vivendi's annual report, with operations in all major regions of the world, its environmental group provides integrated services that include water (Vivendi Water), waste management (Onyx), energy services (Dalkia) and transportation (Connex). All involve intimate relations with government regulators.

And they are doing it with approval from local governments and, in most cases, without the knowledge of residents. As one U.S. official admitted, if people today are mad about high cable-TV fees, then imagine what will happen (and in some parts of the world already has occurred) when water monopolies start turning the screws on the price of access to water.

But not all local-government officials are willing to turn their water utilities over to multinational monopolies. New Orleans City Council Chairman Jim Singleton is pushing a referendum to let voters decide whether to put water consumers in the same category as cable-TV subscribers. "It is time for our city's elected officials and leadership to stand up during this privatization process. We cannot let this flawed process and 'mad' rush to to privatization continue. Clean water is one of the largest assets that our city owns and we should not sit idly by while a few parties simply give one of our most basic resources away," he said in a statement.

Some may ask why this is so important. Consider Vivendi Universal which also has acquired such media footholds as Universal Studios, record company Polydor Inc. and a host of telecommunications subsidiaries is the majority shareholder of Vivendi Environment. Vivendi Water, a division of Vivendi Environment, claims to be the world's No.1 water-sector provider. "Vivendi Water delivers drinking water and manages wastewater collection and treatment facilities for over 110 million people worldwide through the outsourcing of municipal-utilities management," the company reports.

As such, the Vivendi Website explains, "Through USFilter, Vivendi Water is the United States leader in industrial outsourcing of process and wastewater treatment."

Vivendi Environment, the annual report says, "holds water, as well as waste management, energy and transportation operations." Its subsidiary Onyx is the third-largest waste-management company in the world, serving through monopoly contract more than 70 million people, and is the only worldwide operator with the capacity to deliver the full range of waste-management services.

Another subsidiary, Dalkia, is a leading European company in energy services, managing more than 250 district heating networks and supplying 40,000 industrial, commercial, residential and local authority customers with integrated energy-management services (industrial utilities and maintenance services), according to the company. Once more the business is contracted monopolies legalized through government.

In November 1999, BusinessWeek suggested that Vivendi itself was at risk of being an acquisition target. In its international edition, market analysts warned that the corporation's acquisition strategies were increasing its debt burden, to the point of prompting Standard & Poor's Corp. to downgrade its long-term credit rating.

But what's a little debt between multinational friends? Especially, say critics, when one is contracting for legalized monopolies. Another French energy, water and waste conglomerate, Suez Lyonnaise des Eaux, touts its mission as "delivering the essentials of life" to the 110 million consumers it provides with water-related services.

In August 2000, U.S. Water News Online reported that Suez "completed the acquisition of United Water Resources Inc., the second-largest private water-services company in the U.S., in an all-cash transaction valued at $1.02 billion. Following the acquisition by its largest shareholder, United Water Resources became a wholly owned subsidiary of Suez Lyonnaise des Eaux."

According to its annual report for 2000, Suez also won global water-management monopolies in Santiago, Chile; Manaus, Brazil; and Johannesburg, South Africa, during 2000, adding more than 14 million new "customers" to its service base. "With its 100th contract won in China during the past year, the Group has now secured a major role on this continent where it has built a full 10 percent of that area's total water-treatment capacity," it states.

The annual report gives a glimpse of how attractive the legalized monopoly of water management has become. "The municipal water market remained very active in 2000," the company reports. "Over 38 million people saw their water-management needs partially outsourced to a private company."

German utility giant RWE boasts on its Website: "Right now, we're your source of power-supply and energy-related services; in the near future, you can count on us for a full-service lineup for your four walls: gas, water, a power-outlet approach to the Internet, e-services in your home."

According to Hoover's, the business-profile publisher, RWE now is the parent company of Thames Water, the largest water company in the United Kingdom. It serves some 12 million people in London, the Thames Valley and Scotland, and is "the world's third-largest provider of water and wastewater services [after Vivendi Environment and Suez], serving about 31 million people in Europe, Asia, Australia, Africa and the Americas."

Moreover, according to the Financial Times, RWE has purchased American Water Works (AWW), the largest publicly traded U.S. water company, which RWE reportedly plans to merge with its Thames Water division. Added to the $4.6 billion purchase was AWW's $3 billion in debt.

World Bank analysts use Argentina and Malaysia as model examples of developing countries on the forefront in "privatizing" water-service monopolies. But inquiries to a well-connected source in Argentina raise questions about what is going on there. An Argentine executive of a waterworks and sanitation business tells Insight what happens to privatized services when a government faces financial problems, such as Argentina's recent governmental collapse.

"It is possible that many of the privatized services will find their way back to municipal or provincial hands, due to the fact that it is an area that needs large investments, and in this moment of [Argentina's financial] crisis it is hard to do that for two reasons: because the fees are fixed and the investments promised, in large part, are quoted in dollars, which have become expensive," the executive says.

"The financial-economic equation did not add up before the devaluation, and the services are about to collapse," the executive continues. "There are many cases in which people have stopped paying for their water and spend their money on food or other essential goods such as medicine. The [Argentine] Supreme Court has ruled that water service cannot be cut if the customer has not paid due to a need to cover other pressing needs."

The central government may have to pay off the companies as part of a liquidity bailout from IMF and the World Bank. But for some of Argentina's water customers, their collapsed government may be compounded by woes of their utilities, forcing the sale of still more monopolies to the multinationals.

"In Mendoza province the operation is done by the Azurix company, which is associated with Enron," our insider source notes. "Azurix paid an excessive price for the $438 million concession, as the second-highest bidder offered only $115 million. From the beginning there were problems, as the promised investments were not made and the services stipulated in the contract were not made available. There were a lot of customer complaints in many of the jurisdictions where their service was used."

And now the challenges and benefits of "privatized" water are coming to the United States. Alex Tsybine, an analyst with Public Citizen, complains that sale of utility monopolies to the multinationals often brings problems here as well, including high utility rates, poor service, closed-door contracts and, sometimes, governmental corruption.

Tsybine says Cadiz, a British agricultural company, has purchased land in the Mojave Desert in California and now is trying to offer the water from the underlying aquifer for sale to the Metro-politan Water District of Southern California (MWDSC). Serving Los Angeles, San Diego and Orange County, the MWDSC is the largest public water district in the United States, accor-ding to Public Citizen.

The aquifer underlies federal lands that the Department of the Interior is supposed to protect. Its depletion likely would threaten the Mojave National Preserve. At the same time, according to Tsybine, Cadiz Chief Executive Officer Keith Brackpool has become the leading water adviser and a confidant of California Democratic Gov. Gray Davis. Tsybine points out the nearly $200,000 in campaign contributions for Davis from Brackpool in both personal and company donations.

Public Citizen is not the only entity wary of cozy relationships between private companies seeking water monopolies and concessions and government officials who can sign contracts that are kept secret as proprietary corporate information. Some relationships have proved too cozy.

According to a Center for Responsive Politics (CRP) report called The Big Picture: The Money Behind the 2000 Elections, the French utility and communications conglomerate Vivendi Universal (Seagram & Sons) was among the top 100 contributors to federal candidates and political parties in the 2000 elections. Vivendi and its officers, employees and their families gave 60 percent of its $1.8 million to Democrats. Similarly, CRP also records that Vivendi was among the top 50 soft-money donors, with Democrat organizations receiving slightly more than half of the conglomerate's $1.17 million in donations.

But sometimes the private/public quid pro quo crosses the line from merely influential to illegal. According to a Department of Justice (DOJ) release, a subsidiary of Aqua Alliance, a Vivendi water-treatment company, admitted bribing a New Orleans Sewage and Water Board (S&WB;) member in return for favorable treatment, including a glowing endorsement for efficiency.

An Environmental Protection Agency (EPA) financial-advisory board in 1998 outlined the contract operations. In it, EPA officials pointed out that the New Orleans S&WB; was having difficulty meeting environmental restrictions, its operating costs were increasing, "and the plant's main-tenance program could not keep pace with the repair requirements for the aging East Bank facility."

As a result, the EPA report continued, "the S&WB; contracted with Professional Services Group (PSG) in 1991 to operate, maintain and manage the East Bank and West Bank Sewage Treatment Plants for a five-year term. PSG operations have saved the S&WB; an average of $1.1 million annually." As part of the "lessons learned," the government officials concluded that "the key to a successful privatization is having a well-defined contract with a reputable firm." Maybe so, maybe not.

According to a plea agreement Houston-based PSG entered into with DOJ three years later, from June 1993 through October 1996 company officials provided legal services and cash payments of more than $70,000 to the New Orleans official in charge of researching the privatization procurement process.

The company pleaded guilty to bribing the city official to influence and reward her for supporting its subsidiary's business interests with the Sewer and Water Committee, which she chaired. In exchange, the DOJ reported, the city official agreed to recommend "that the Board renew PSG's contract to operate New Orleans' water system for five years rather than the one year called for in the original contract, thereby potentially locking PSG into the lucrative New Orleans market."

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