Waves of discontent on the water front: U.S. municipalities planning to turn their water utilities over to foreign multinational monopolies should look to Cochabamba, Bolivia, to see what can go wrong

Insight on the News, July 1, 2002 by Sheila R. Cherry

Arbitration is expected to begin in June or July on what some industry analysts describe as "the most dramatic failure to date of a major franchise contract for supplying water and sanitation services to a large city." A cool $25 million is on the line for a water concession that went bad after five months. While the controversy involves missteps by government and industry a continent away--in Cochabamba, Bolivia--the dispute is said to be rife with lessons for municipalities considering "privatizing" utility services in the United States (see "Local Governments Employ Leaky Logic," April 29).

Cochabamba needed water and the public utility there, say critics, was mismanaged and inadequate. In November 1999, a corporate consortium agreed to repair problems that had plagued the city's municipal water system and expand service to the 43 percent of the residents who weren't being served.

Drinking water and wastewater treatment are two of the most popular public infrastructures to privatize around the world, explains Ron Utt, a senior fellow at the Heritage Foundation. Theoretically, it allows the public sector to focus more resources on other government services such as education, public health, roads and security.

A recent white paper in the Bulletin of Latin American Research, titled The Limitations of Water Regulation: The Failure of the Cochabamba Concession in Bolivia, has explored what happened. The multinational industry consortium that won the single-bid monopoly concession, Aguas del Tunari (AdT), was owned mostly by non-Bolivians.

The industry group's majority shareholder was International Water (55 percent), a creation of San Francisco-based Bechtel Corp. Bechtel opened International Water's administrative offices in Amsterdam and London in 1996 and, three years later, sold a 50 percent share to the Italian company Edison S.p.A., according to a company description. Spain's Abegnoga Servicos Urbanos owned another 25 percent of the consortium, and the remaining 20 percent is held by four Bolivian companies, each with a 5 percent interest.

According to Bechtel spokesman Jeff Berger, Cochabamba's citizens were represented by their local officials, who dominated the contract negotiations. A Bechtel fact sheet lists the Bolivian-government negotiators as representatives from the Ministry of Foreign Commerce and Investment, the superintendents of water and of electricity, and the prefect of the province.

Despite all that representation, the terms and agreements negotiated between the government team and the industry team somehow failed to be communicated to the Cochabamba community. The terms included a revenue risk-reduction clause that gave AdT exclusive rights not only to provide all water services, but to control all water resources in water-scarce Cochabamba.

It is unclear if negotiated price increases were publicly conveyed to the citizens of Cochabamba. "Nobody would be foolish enough to go [into a store] and buy something without figuring out what the price is," Utt notes. But even under that hypothetical, he says, if a customer was surprised at the checkout counter by a bizarre price he could turn around and take the item back to the shelf.

Tensions in Cochabamba already were rising over an economic crisis related to public-sector pay scales and a government-sponsored cocaine-eradication program that had caused former coca farmers looking for work to migrate into the urban service area. But when water-service customers began facing 10 to 106 percent rate increases after AdT took control of the monopoly, public discord escalated into rioting in the streets, leaving six people dead.

Berger chafes at accusations that Bechtel was at fault for the meltdown. AdT boosted water availability by 30 percent in its first months of operating the system, Berger points out. Prior to the takeover, the public system was in financial, physical and administrative shambles after years of mismanagement and inadequate investment.

Utt responds to the question of whether a vital resource such as water should be commodified with another question: "Why would you take something as basic and as important as water and allow something as incompetent [and inefficient] as the public sector to handle it?" Every monopoly, whether private or public, tends to be inefficient, he suggests. And public monopolies tend to be the most inefficient.

Furthermore, insists Berger, "More than half the rate increase resulted from such unrelated government requirements as paying down some $35 million of debt accumulated by the water utility that had run the system so poorly" for the city.

Both sides remain bitter. AdT has sought redress from a World Bank-affiliated arbitration panel for being forced out of Cochabamba in breach of contract by the besieged government. The International Center for Settlement of Investment Disputes (ICSID), like Bechtel's International Water affiliate, was established in 1996 by the World Bank to facilitate the settlement of investment disputes between governments and foreign investors. Bechtel argues that a bilateral investment agreement between Bolivia and the Netherlands, where International Water has an office, gives the ICSID jurisdiction over this international dispute.