1 Introduction
For the last decade the supporters of privatisation of water have been able to rely on active multinational companies seeking to expand by obtaining water concessions in developing countries. This was supposed to create a virtuous circle of capital investment by the companies, giving them greater incentives to efficiency, removing the risks from governments, and attracting further investment from others.
The last three years, however, has seen a remarkable change of policy by the multinationals, which undermines those assumptions. Led by Suez, previously the most aggressive, the companies are now withdrawing from investment. At the same time, the risks of actually losing capital are becoming apparent: either through guarantees being called in, or through companies actually extracting more money than they invest.
This report examines these trends and draws some conclusions.
2 Suez in retreat
In January 2003 the multinational group Suez took a series of decisions on restructuring its debt, its divisional structure, and its future strategy. The effect is that the company is retreating from water operations in developing countries, including a 1/3 reduction in its current investment (Some of data pertaining to exit and closure is shown in appendix A). These decisions take place against a background of financial and political reversals on Suez’ water business across the world, including in the USA. They also imply that Suez is prepared to withdraw from many of its existing concessions. The other major French water multinationals Vivendi and SAUR have already indicated their reservations about investing in water in developing countries.
Suez’ retreat poses a major problem for the financial strategies of the World Bank, the Camdessus panel on water financing, and the EU Water Initiative, all of which lay central emphasis on raising finance through extending private sector involvement.
2.1 The Suez decisions
On 9 January 2003, Suez announced a five point ‘action plan’ for 2003-2004. [1]
· Reduction of debt, mainly by selling existing assets
· Cost reduction
· New investments to be financed from cash flow, so new annual investments fall from €8bn to €4bn
· Reorganisation, including merging water and waste management into a public sector division and a private sector division
· Reducing its exposure in developing countries by one third.
All of these decisions mean that Suez will not only stop expanding in water concessions in developing countries, it will actually reduce its existing investment and activities.
2.1.1 Selling assets
Suez will continue to sell assets in ‘non-core’ sectors like construction, but also will sell some international business which is not generating sufficient profits now or is thought to be subject to risk. The remaining assets will be in ‘activities which offer a better risk/return ratio and enhanced cash generation’.
The risks involved in developing country projects have no doubt been re-appraised in view of events in Argentina and the Philippines. Developing country business will be seen as riskier. Since long-term water concessions are not short-term generators of cash, it is prudent to assume that Suez’ existing water operations in developing countries are among those most likely to be sold by Suez.
2.1.2 Cost reductions
According to Suez the company already had plans to cut costs by €500m in 2003 and a further €100m in 2004. The group now intends to cut deeper in both these years. One source of these cost reductions will be the merger of the headquarters’ operations of Suez, Tractebel and SGB into a single headquarters with one office in Paris and one in Brussels.
2.1.3 Investments restricted to cash-flow
The company is adopting more restrictive investment criteria. One change will be in risk assessment, where the company says it will favour “currency risk-exempt financing”. This is certainly in response to the crises in Argentina and in Manila (see below) where the company suffered from exposure to currency risk.
The target of being ‘exempt’ from currency risk implies that very few developing country projects will be selected for investment. The Aguas Argentinas concession enjoyed a theoretical protection from currency risk through the ‘dollarisation’ of prices, but that has proved to be unenforceable. It is hard to think of a form of guarantee that will satisfy the requirement of ‘exemption’ from currency risk. It should be noted that currency risk cannot be simply abolished – Suez is saying that someone else must carry that risk for them, otherwise, it will not make investments.
Another change in Suez’ corporate strategy is to adopt criteria which favour “the quickest free cash flow generating projects and contracts”. This will exclude long-term water concessions, which have a typical profile of rising profits in later years of the concession, and so this too means that Suez is less likely to enter such concessions.
Finally, projects will be expected to finance all their investments out of their own cash-flow. In future profits will not be redeployed across the group, and investments will not be made unless backed by profits from the project itself. This implies potential conflict with water concession contracts, many of which include absolute requirements for investment targets to be met, regardless of local profitability.
It also implies that Suez’ pricing policies will attempt full cost recovery, including the cost of investments – a policy which is widely recognized as unrealistic and unachievable in poor communities in developing countries. [2] And it implies that Suez will continue to ‘ring-fence’ concessions by raising money through project finance, which is secured on the revenue streams of the project alone – not corporate finance based on the company’s assets. This increases the cost of finance.
2.1.4 Focus on Europe and North America, not developing countries
The final part of the strategy is a simple statement that the group will ‘concentrate’ on the ‘soundest’ markets of Europe and North America. For developing countries the strategy is no new investment, and reducing existing investments by one third by 2005: “SUEZ exposure to emerging countries, as measured by capital employed, is expected to be reduced by close to one third”.
This is a major policy reversal by the company which has led the globalisation of private water operations, declaring that the mission to bring water to the poor is one that the company itself was committed to. It creates a difficulty for the World Bank and other IFIs whose strategies for the water sector depend on enticing the multinationals to increase their investment. and participation. Instead, they are now faced with a two-year period in which the leading company is abruptly reducing its investment.
2.2 The background
2.2.1 Argentina – the losses continue
The greatest single factor influencing Suez must be the collapse of the Argentine economy, and with it the economic viability of the numerous privatised water concessions held by Suez and its subsidiaries. In 2002 Suez wrote off $500m because of Argentina, and the crisis effectively cost Suez over 8% of its international water business. The company is engaged in intensive efforts to persuade the Argentine government to carry the burden of the losses. Contractual clauses had permitted Suez to link prices in Buenos Aires to the US dollar, but crisis legislation ended this dollarisation.[3]
2.2.2 Departure from Manila
Suez’ subsidiary Maynilad Water has formally announced that it is abandoning its concession in the western half of Manila, in the Philippines. Suez’ partner in Maynilad Water is Benpres, one of the local companies which dominate much of the Philippine economy. The concession was awarded in 1995, but was affected by the currency collapse in the Philippines two years later. Suez and its partner sought to impose heavy price increases, and then stopped paying the regulator the required fees as a way of restoring profits. In December 2002 Maynilad said it was abandoning the concession, claiming $303m compensation for all the investment it had made. [4]
This is the first time that Suez has openly abandoned a water concession. Previously, especially in the context of Argentina, it protested that it would remain even through the most difficult circumstances, in order to demonstrate its commitment to the local service. The exit from Manila may thus be taken as the first example of the new policy of ‘prepare for departure’.
2.2.3 Loss of contract in Atlanta
Suez must also be greatly concerned that it has lost one of its biggest contracts in one of their referred safe markets, the USA. The city of Atlanta, Georgia, USA, privatised its water in 1999 to United Water Resources (UWR), the US subsidiary of Suez, promising annual savings of $20m., which would enable the sewerage rate to be reduced. But a city audit has shown that “savings, while substantial at $10 million a year, came in at about half projections. And that money ended up subsidizing general government operations, not staving off sewer rate increase.” More surprisingly, audits also showed that UWR “failed to collect $33 million….And the firm also has asked repeatedly for a raise of about $4 million a year” [5]. The concession was terminated on January 2003 when “Atlanta officials and a unit of French utility giant Suez SA agreed to abandon one of the largest privatization efforts in U.S. history, a takeover of the city's water system that generated only half as much savings as expected and a mess for consumers”. The city council is now re-establishing a municipal water service. [6]
2.2.4 Protests in Jakarta
Suez’ contract in half of Jakarta, Indonesia (Thames have the other half) continues to attract opposition and protest, five years after it was given to Suez by then president Suharto. Suez had formed a water partnership with one of Suharto’s cronies in order to win this contract. [7]. The opposition to the Jakarta water privatisation has been revived in the context of a new bill in front of the current Indonesian government which critics charge will enable the privatisation of water nationwide. The World Bank claims that the bill will have no such implications and insists that will merely serve to decentralize what was an over-centralized Jakarta-based water management system. Under a decentralized system, regional governments may feel more pressure to sell off public water utilities. Environmental groups are organising strong protests against it, arguing that the damaging effects can be seen in Jakarta, where “Despite the entrance of two foreign companies, people in Jakarta still complain about the quality of the water they produce as well as disruption to water supply. The two companies have also failed to expand their networks, arguing that the city administration had increased water rates only a fraction of the amount they had requested [8].”
2.2.5 Image problems in Morocco
In Morocco, Suez is trying to bolster its image as new contracts for water and electricity in five cities will be tendered over the next few months. Suez’ problem is that it already has a contract to supply water and electricity to over half a million households in Casablanca, but it is not regarded as a showcase: “the company has received criticism from some quarters, accused of lack of transparency in its dealings with the municipal authorities. There have also been complaints about a rapid increase in charges, mainly affecting households.” [9]
2.2.6 Reliance on public sector development banks
Suez’ policy is concerned primarily with limiting, protecting and guaranteeing the profitability of its own investments. However, it continues to be ready to use debt finance provided by international and national development banks. In Brazil, for example, it has just received a US $ 19m loan from the state-owned national development bank BNDES for its water subsidiary Aguas do Amazonas, which has a 30-year concession for Amazonas state capital Manaus. The water multinationals have always relied heavily on the development banks to finance their operations, but Suez’ new policies may mean that their concessions are now almost totally reliant on debt finance from the development banks such as BNDES, plus whatever surplus Suez can extract from charging the users of water.
The present status of Suez business unit in Asia-pacific area is shown in appendix B.
3 Conclusions: no longer business as usual
Suez’ experience has taught the company that its previous profits model for water privatization in developing countries is not sustainable. The requirements set out by Suez for its future investments in developing countries are extremely demanding. The company is requiring unequivocal guarantees for its investments against all forms of risk, and requiring all of its operations – not just future contracts – to generate the cash for all investments.
This is a commercial impossibility for the poor, and so the companies are effectively demanding subsidies and guarantees from the development banks as a pre-condition for attempting to connect the poor. This is contrary to the rhetoric which Suez, especially, has employed in the past, that the companies can connect the poor. It also challenges the very reasons for involving the private sector in such an essential public service – the capacity to take on risk, to bring in their own capital and to provide the ‘benefits’ of competition. As it turns out, these multinationals are unable to do any of this.
The most basic lesson is for governments, development banks, donors and community organizations concerned with water to recognize these facts. It is not credible for the World Bank to continue making policy on the assumptions of the 1990s, when the flagship concessions of Buenos Aires and Manila are collapsing, and Suez says it will ‘prepare to depart’. It is no longer ‘business as usual’ with the water multinationals. The water multinationals are now clearly prepared to abandon concession contracts which do not meet the new demand for security for their investments. Communities, governments and public authorities, where there are existing concessions with the multinationals, especially Suez, should themselves initiate a review of the concessions and identify best options from the local perspective.
REFERENCE
[1] SUEZ introduces its 2003-2004 action plan: refocus, reduce debt, increase profitability Paris, January 9, 2003 www.suez.com
2)For more details on this see the PSIRU report on ‘Water Multinationals 2002’ August 2002
http://www.psiru.org/reports/2002-08-W-MNCs.doc
3)See for example “Maynilad - A losing proposition from the start?” Business World Manila, Philippines Thursday, December 19, 2002.
4)The Atlanta Journal and Constitution January 22, 2003 Water funds audit shows goals unmet.
5)Wall Street Journal January 27, 2003 Suez Unit, Atlanta Agree To Abandon Water Deal.
6) A brief summary is provided in Privatization Of Water Supplies In Ten Asian Cities - A Study by A. C. McIntosh and C.E. Yniguez for the Asian Development Bank January, 2000
7) Jakarta Post 21 Janury 2003
8)Agence France Presse 22/01/2003 Indonesian students rally against Megawati.
9) Business News Americas January 7, 2003 Bndes Approves Us $ 19mn For Aguas Do Amazonas
No comments:
Post a Comment