Privateers Make a Water Grab

Facing increasing opposition abroad, over the past several decades, global water privatizers like Veolia and Suez have begun to see U.S. cities as expansion markets. These corporations have aggressively interfered in the democratic governance of water and have sought to trap cities in unfavorable privatization contracts.
Ellen Dannin
November 24, 2014
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In Kim Stanley Robinson’s Mars Trilogy, set in our near future, corporations own countries.

These multinational corporations have grown so large as a result of globalization that they have sufficient economic power to take over or strongly manipulate national governments, initially only relatively small third-world governments, but later, larger developed governments too, effectively running whole countries. In Robinson's future history, the metanational corporations become similar to nation-states in some respects, while continually attempting to take over competitors in order to become the sole controller of the interplanetary market.

The newly released report on water privatization Troubled Waters: Misleading Industry PR and the Case for Public Water, Public Services International Research Unit (PSIRU) suggests that we are closer to that reality than we realize.

The report identifies worldwide deceptive practices used by the water privatization industry. For example, it has become common in the United States that, when public infrastructure is privatized, for the public “partner” to receive a large up-front payment in exchange for a multi-generation contract that effectively makes the private contractor the owner of the asset.

Part of what makes water privatization attractive is the promise to provide modern innovations as part of the deal. In fact, this study finds that the true innovation is not technology but, rather, the up-front payment made to the public.

Cash-strapped governments are thrilled to get what seems to be so much money that it can solve all their financial needs. However, they do not understand how such a long contract will play out and find it hard to resist signing the contract. It is for just that reason that France outlawed up-front payments as part of privatization two decades ago – it distorts decision-making.

The US not only permits up-front payments, they are standard in American infrastructure privatization contracts. It is not surprising that would be the case, given the view that government can do nothing right while the private sector is always efficient. What most people do not understand is that the privatization industry owes no obligation to the public. Rather, private corporations’ obligation is owed only to shareholders, and that obligation is to maximize  profits for its shareholders.

The report finds that private water corporations meet their duty to maximize profits to their shareholders by “a) weakening their greatest competitor, the public water sector, b) opening up the water market and creating business opportunities for themselves, and c) removing as many obstacles as possible to the profitability of their operations.”

The one thing that imposes accountability on a private company is vigorous market competition with many sellers and buyers. Infrastructure privatization seems to take on the role of a public entity, but because it is a monopoly, it has no competition and no market accountability. There is also no public sector accountability, such as open meetings acts, freedom of information acts, or other forms of oversight, because privatization means the asset is private.

The study finds, “The reality is private contracts and commercial law shield private water corporations from nearly all risks, meaning they have no incentive to behave efficiently . . [and have a] track record of raising rates and failing to invest adequately in water systems.” In fact, the private water industry lobbies aggressively to amend recently enacted water legislation to extend public water funding to subsidize the private sector.

Privatization and Lost Democracy

The report describes how water privatization imposes a second cost on the public – it degrades democracy. The author provides many examples of ways in which the “private water industry’s political interference threatens the democratic governance and sustainable management of public water systems.”

In some cases, contractors have stolen money that was required  by law to be returned to the public. In other cases, private water companies have been willing to harm the public opposing issuing boil-water notices when water becomes contaminated. After all, a private company’s duty is to maximize shareholder profits, while it has no duty to the public.

This well documented report reads like a crime novel. For example, “In East Cleveland, Ohio, a consultant bribed the former mayor’s office in order to secure a no-bid  contract for CH2M HILL to run the city’s water system. The contract eventually paid out $3.9 million to the  corporation for services that the city had been providing  for less than half of that amount. The former mayor  and the consultant have been convicted of racketeering, and the city sued the corporation for $14 million for  breach of contract.”

This report on global water privatization shows why infrastructure privatization is not just an important topic, but, perhaps, the most important issue of our time. As the report points out,

“Democratic participation and oversight of  our water systems are absolutely critical for the long-term sustainable management of these systems, but for United Water, they are potential risks to profit.”

The report is by Emanuele Lobina, Public Services International Research Unit (PSIRU) with Corporate Accountability International,  Troubled Waters: Misleading Industry PR and the Case for Public Water,  November 2014.

Interview with Katherine Sawyer, Organizer, Think Outside the Bottle & Public Water Works!

1. Please comment on the effects of water privatization on the health of democratic governance.

Facing increasing opposition abroad, over the past several decades, global water privatizers like Veolia and Suez have begun to see U.S. cities as expansion markets. These corporations have aggressively interfered in the democratic governance of water and have sought to trap cities in unfavorable privatization contracts. Veolia and United Water have long track records of attempting to secure private water contracts behind closed doors or with minimal public discourse or transparency.

Private water contracts themselves also evade the democratic process by limiting the responsiveness of public water utilities to the communities they serve. In fact, United Water lobbied legislators in New Jersey to oppose legislation that would increase its accountability to the communities where it operates. Private water corporations see transparency and accountability as undermining their commercial objectives. The details around many private water contract negotiations are not public nor available in Freedom of Information Act requests. Private contractors often claim that information on privatized infrastructure is "proprietary information" they contain – it is in the best interest of private water to keep their operations from being transparent. Public-public partnerships, however, focus on information sharing and increase transparency.

2. Please sketch out the incentives and perverse incentives created by water privatization and how they operate.

The private water industry lures many cities into contracts with promises of increased efficiency and industry improvements, but fails to deliver on those commitments. Many cities across the United States, from St. Louis to Detroit to Baltimore, are targeted by the industry, enticed with empty promises of savings and efficiency. Recent World Bank studies found either no significant differences in efficiency between the private sector and public sector or decreased efficiency with the private sector. Private water corporations are primarily concerned with efficient generation of corporate profit whereas public water systems are mandated to provide equitable access to clean and safe water for the entire community.

Private water is also packaging privatization in more palatable terms in order to entice cities. Common terms euphemistic for privatization include “public-private partnerships,” Veolia’s “Peer-Performance Solutions,” and “consulting contracts.” No matter the name, these contracts are either privatization by another name or a foot in the door to future privatization. These contracts often include subtle mentions of “shared” management or outline future phases with increased involvement and control.

The private water industry is interested in profit and the interest of its shareholders, not the communities where it operates. Time and time again, it has shown that it prioritizes the interests of its investors over the needs of the communities it purports to serve.

[Thanks to the author for sending this to Portside.]

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Ellen Dannin is author of Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance

November 23, 2014