H2 Uh Oh: Local Governments Employ Leaky Logic

INSIGHT magazine ^ | April 8, 2002 | Sheila R. Cherry

[Stand Watch Listen]

Multinational corporations that buy and sell water and water services are seeking public utilities in the industrialized world for what they hope will be guaranteed profits. In the United States, towns and cities are flirting with water privatization as a way to pass on the costs of upgrading their aging utility infrastructure. But water is unique. Unlike electricity, natural gas or telecommunications, everyone needs water to survive.

Nonetheless, local officials worldwide are negotiating deals in private with companies that view a government-guaranteed monopoly on water as the ultimate deal. In their zeal to embrace white knights, local water boards might do well to study a world of examples of what the future might be like if the monopoly on water and its infrastructure were turned over to rapacious multinational corporations accountable to no one and with the money and know-how to manipulate government whenever necessary.

Californians, always protective of water rights, already have their own "North/South" water battles afoot. Michael Mortensson, executive director of the California Groundwater Association, quotes Mark Twain's "Whiskey's for drinking, water's for fighting," which Mortensson says is "basically very true around the Golden State."

Officials in Mendocino County, Calif., are in the midst of a controversy that surfaced when a businessman with multinational backing proposed bypassing the usual pipeline and well-water delivery system in favor of one that begins by pumping Northern California coastal water into large plastic-bag reservoirs off the Pacific shore. The giant bags of freshwater then would be towed down to consumers in Southern California.

"This is a system that has been used in other parts of the world," according to Mortensson, whose trade association represents businesses that install wells and water systems. He admits to limited knowledge of the details, except that residents of Mendocino County tend to respond to the project by declaring: "This is my water being taken away for some other use." He explains that the population is in the south, but the water is in the north.

The World Bank knows about water controversies, too. It has been making loans to help developing countries provide potable water to their citizens for half a century. John Briscoe, a senior water adviser for the World Bank, takes Insight into the mysterious some say secretive process of how billions in American taxes are turned into water in thirsting developing nations. The experience of the international lending agency also sheds light on why multinational companies are so anxious to advance water privatization to the United States.

For the last 10 years, the World Bank has encouraged privatization of utility services such as water, electricity and telecommunications when granting development loans to countries seeking to build or upgrade public services. Because of the need for infrastructure such as pipes and dams, these are considered natural monopolies, Briscoe explains, and have tended to be publicly owned. "The interesting thing is that publicly owned monopolies are generally not regulated. They simply operate on some great act of faith. People say 'Oh, well, they must be doing something in the public good,' and therefore there is no regulation of public operators."

But, Briscoe charges, "We had many, many loans to poorly performing utilities owned by government, which regrettably are most of the utilities in the developing world." Nevertheless, the vulnerability of underserved citizens kept the funding coming.

So what have sales of water monopolies to multinational corporations produced? Citizens in Cochabamba, Bolivia, saw their government privatize the water supply to improve service. According to Sara Grusky, coordinator of the International Water Working Group of the Naderite organization Public Citizen, the 1999 agreement with the multinational Bechtel Corp. resulted in making a dire situation far worse and more costly.

Grusky explains that Bolivia's concession contract for water-utility maintenance with Bechtel subsidiary Aguas del Tunari included provisions that also allowed the company to claim rights to all water in Cochabamba including water drawn from wells and aquifers. Neither the local government nor individual citizens, according to Grusky, had any say in the agreement the company negotiated with authorities at the federal level.

Naturally enough, local residents became incensed when the price of water reached one-third of their monthly incomes. Finally, through street protests and blockades, the Bolivians pressured government officials to end the contract with Tunari. The Bolivian government acquiesced at last, but not before 17-year-old Victor Hugo Danza was gunned down protesting his right to take a bath or drink a glass of water at a price that was not extortionate.

Briscoe suggests that the corporations are being scapegoated. Cochabamba was run by a public utility for many years, he points out. "During that time, 40 percent of the people received no water service. So when the opponents of change start carping you have to first say, 'Oh, it was going well, was it? Forty percent of the people didn't get any service; that was okay?' Because that was what they had; that was how it was functioning" before the multinational company got the contract.

According to Briscoe, Cochabamba officials at first wanted the World Bank to finance a "completely uneconomic project" beginning with a large dam. And, he complained, "90 percent of that water would go to farmers who wouldn't pay anything and 10 percent would go to the city."

Grusky thinks she knows why the World Bank balked. She claims that it stands to lose when agreements such as the one in Cochabamba are not profitable to World Bank-approved corporations because, in addition to funding the nations buying services through development loans, it also funds the corporate-service providers. The corporations receive International Finance Corp. loans from the World Bank to underwrite their "investments" and multilateral "investment guarantees" to ensure their profits.

But Briscoe adds of the original Cochabamba proposal, "You do not have to be a financial wizard to know that if 10 percent of the people are paying 100 percent of the costs that, for those 10 percent, their rates are going to go up." That was where Bolivia's negotiations with World Bank officials broke down, Briscoe recounts. "These are sovereign countries. It is their choice to do what they want ? the World Bank is not global government." But the World Bank does not hand blank checks to whom-ever wants them, he adds.

Bolivian officials chose to proceed "on their own" by agreeing to give that single-bid contract directly to Bechtel's Tunari. So now, after the citizen unrest, the municipality is back to where it was before. Except that now it also is facing a $25 million international lawsuit by the Bechtel entity for breaking the contract with Tunari. Grusky warns that U.S. jurisdictions risk similar litigation once commerce commences with companies protected by international investment treaties.

Cato Institute senior analyst Daniel Griswold is more optimistic about water privatization, especially in industrialized countries. "Great Britain privatized its water system during the [Prime Minister Margaret] Thatcher years," he says, "and the trade-off seems to be you do get higher prices, certainly in the short run." But, he adds, in the medium and long term, the increased foreign investment in the government-guaranteed monopoly would result in a more reliable delivery of high-grade water to consumers.

So what happens when a government authority negotiates an agreement that the people reject, as in Cochabamba? "There is nothing to prevent the government [in developing nations] from indirectly subsidizing water [for the poor] the way we do with food stamps or Section Eight here," Griswold says. And, of course, all the better for the private monopolist.

For U.S. water consumers, according to Griswold, the more competition the better. "We [in the United States] have one of the most reliable, safest water systems in the world. The problems we've had have been in part because of government control and subsidies. You look at the massive overuse of water in the West, particularly for [agricultural] irrigation, and some of the environmental damage that has caused. That's not a market phenomenon, that's government control of water and selling it at a price that is far below the market price." The question is: What is the market price under a monopoly?

Asked whether making water available to farmers and ranchers at low prices isn't in the national interest, Griswold seems to say that the need is overrated. "Growing crops doesn't seem to be a problem in the U.S. If anything, we have a problem of overproduction," he says. "And what you have is government intervention in the water market. Selling water [to farmers] below market price is creating a supply of crops that is out of sync with supply and demand in the domestic market."

Maybe. But encouraging hugely rich foreign corporations to buy and sell private water monopolies tends to make those Americans concerned about U.S. sovereignty fidgety. However, Griswold assures that national sovereignty is not under assault by international law.

The trouble is, that is not entirely clear. As reported in Insight (see "In Search of the NAFTA Judges," Sept. 10, 2001), constitutional scholars are scarce when international agreements are negotiated, and even the thoughtful Griswold concedes that he has no idea how many constitutional lawyers work in international trade. "There are plenty of lawyers," he says, "but constitutional law and international law, well, there isn't that much of an overlap."

Sheila R. Cherry is a writer for Insight.

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