“Latin America served as a testing ground for the new financial and development political institutions, selling their shares of public water utilities to private firms and forming public-private-partnerships. However, as the cases of Bolivia and Chile reveal, these practices have caused negative consequences for a good governed society and sustainable resource management.”
By: Saskia Galias
With the beginning of the 1990s, the World Bank started supporting privatization as a solution to improve the water and sanitary systems (WSS) of countries from the Global South during a time when many public water companies in Latin America suffered from corruption, inefficiency and a lack of funding for public services. Therefore, the World Bank and other foreign donors made it their prerequisite to establish a privatized WSS to obtain further support. As many Latin American cities had a sufficient middle class and a large population, especially in the urban areas, it became attractive for private companies to invest there and establish privatization. As a consequence, Latin America was awarded with more privatization contracts concerning WSS than any other region. Likewise, neoliberal policies were adopted to a higher amount than in the rest of the world. Therefore, Latin America served as a testing ground for the new financial and development political institutions, selling their shares of public water utilities to private firms and forming public-private-partnerships. However, as the cases of Bolivia and Chile reveal, these practices have caused negative consequences for a good governed society and sustainable resource management. Especially, the case of Bolivia uncovers postcolonial corporative structures which lead to the downfall of water privatization. Though showing equal negative societal consequences for the Chilean society, water privatization is being uphold by the government, despite revealing harmful ecological consequences as analyzed through the Water-Energy-Food Nexus. This nexus acknowledges the interdependencies between water, energy and food security and serves as a method to create an all-embracing analysis concerning socio-political and ecological issues. Accordingly, a piece of action within one element of the nexus causes consequences which are closely analyzed through the lens of the nexus approach.
The case of Bolivia
In order to enable the privatization of public water sources in Bolivia, a catalogue of new laws was passed. The Drinking and Sanitation Law was one of them. It implied that the consumers of water services were responsible to bear the full costs private companies may demand. Therefore, water rights of the poor got denied while cost recovery rights were given to private companies. By decreasing the rights of its own population, the Bolivian government intended to attract the most promising investors to its. In 1994, Bolivia passed the Law of Popular Participation. Aspiring to promote the involvement of citizens in local government affairs, it did not succeed to vanish the low public trust to the Bolivian political system and its lack of legitimacy. Instead, participation was restricted to the provision of administrative channels for user complaints and appeals. When the privatization talks with firms took place, the society knew very little about the process (Esteban Castro, 2013).
After the pressure from the World Bank, Bolivia put up the municipal water supply company of the city of Cochabamba (SEMAPA) for auction. There was only one bidder namely Aguas del Tunari, a subsidiary of the US construction giant Bechtel Enterprise Holdings. The negotiations were held behind closed doors. Signing a contract with the only bidder, did not put the Bolivian government in a strong negotiation position. In 1999, Aguas del Tunari announced to have received concession rights to WSS in Cochabamba for a duration of 40 years. As Bolivia kept its part of the bargain to privatize its WSS, it received loans from the World Bank which stipulated that “no subsidies should be given to ameliorate the increase in water tariffs in Cochabamba,” as they intended to destroy corrupt and dubious trucks and handcarts systems providing water for the poorest, which were thought to be more expensive than the privatized WSS (World Bank, 1999, p. 6). As Aguas del Tunari had to build the infrastructure to connect the parts of the city without an anterior pipe system, they had to bear high costs, which were transferred to the bills of the population. The connection fee for the period from 2002 to 2004 rose from US$155 to US$196 for water and from US$180 to US$249 for sewage. The reaction were large-scale protests in Cochabamba, known as the Water War. In 2005, this popular uprising led to the cancellation of the contract and a renationalization. Aguas del Tunari got replaced by Empresa Pública Social de Agua y Saneamineto (EPSAS) (Esteban Castro, 2013; Hailu et al., 2012; Hailu & Hunt, 2008).
La Paz serves as an example of the government to give incentives for private bidders to improve services for low-income groups, demanding a participatory approach involving neighborhood organizations and the provision of a sanitary education. The first signed privatization of the country by the world’s largest water consortium Lyonnaise des Eaux, a French company, through their subsidiary Aguas de Illimani S.A. (AISA) won the concession for La Paz and El Alto. It has been chosen because it offered to install the highest amount of new connections and signed a contract over 30 years. While the cities’ wealthier society, which already enjoyed a working WSS, is located in the city of La Paz, the lower income households live in El Alto and on the steep slopes of La Paz. The poor neighborhoods had to be connected and were harder to reach, pushing the costs of the water infrastructure installation and maintenance up. Moreover, those who were able to afford the water prices and connection fees had already been covered by the former national WSS. Therefore, there was no opportunity for the private company to further exploit provision on a cost-recovery basis. Though stipulated that AISA should connect 100% of the households in La Paz and 82% in El Alto, summing a total of 78,252 new connections between 1997 and 2001, it only reached 65% of its signed target. Additionally, the Drinking and Sanitation Law allowed for AISA to increase its costs and bill the population for it. The fixed costs (i.e. the amount of drinking water consumed per cubic meter) rose from US$0.1 to US$0.22 per month and for the water and sanitation services (i.e. the expenditure on its construction, operation, maintenance and rehabilitation) rose from US$155 to US$ 196 and from US$180 to US$249. Even though the prices rose, the provided quality was low due to the installation of narrow diameter pipes which got frequently blocked, and often resurfaced and broke. Furthermore, the lowest income settlements on the periphery got excluded completely, as AISA argued that they were located outside the cities’ limits. Even though the contract included penalties for the non-compliance of contract goals, AISA did not face any of them. However, in the end the contract got canceled in 2005 for its poor quality of WSS, unfulfilled coverage rates and its high increase in water prices and connection fees (Esteban Castro, 2013; Hailu et al., 2012).
Regarding the analysis of the Water-Food-Climate Nexus, one can conclude that the target to enable water security through an improvement of coverage rates, was not reached. Though the election of the government during the bidding process was concentrated on who offered the widest network expansion, not taking lowest price criteria into account led to problems of higher poverty while having a low-quality water supply. The legal basis of Bolivia enabled loopholes for the exploitation of natural watersheds to maximize profits (Peredo Berltrán, 2004).
The analysis also reveals a clear postcolonial dynamic in which the high dependency and low power of self-determination of Bolivia in relation to its international/Western partners becomes clear. Poor countries, like Bolivia rarely have the autonomy to reject advices of the World Bank or the IMF, as they do not want to risk being denied international aid or loans. Even though the World Bank’s primary aim was to change the WSS for the better of the country, Peredo Berltrán (2004) reveals a “clear connection between bilateral investment treaties and favorable treatment of foreign investment and structural adjustment programs with the major role that multilateral development banks and the IMF are playing in their enforcement and implementation,” thereby enlarging their capacity to affect policy outcomes in countries of the Global South (p. 39).
The case of Chile
The Chilean experience highlight that the privatization of WSS is not only based on the influences from the World Bank and the IMF. Chile’s economic policy outcomes were initiated by Pinochet’s military dictatorship and neoliberal market advisors, known as the “Chicago Boys.” Privatization was less driven by the need to reform a corrupt system but for ideological reasons of a pro-free market and anti-statist development model, with only a minor degree of state intervention (Murillo, 2002). Nevertheless, WSS did not get privatized under Pinochet’s rule, but remained one of the few state-run services. The reasons were a lack of regulation and organization of the system, which were in need of improvement before being able to get liberalized. Therefore, in the 1970s, Chile began reforming the sector as a preparation to its planned privatization. The most important law was the Water Conduct of 1981, which is considered as the “most free market-oriented water code in the world” (Bear, 2014, p. 149). The bill allows water to be regarded as a fully marketable commodity and private property rights to water resources are ever since handed out on an unconditional and unregulated manner (Bauer, 2004). Still under public ownership, the state improved its hydro infrastructure to as close as 100% of coverage and an efficient operation under the public management especially in urban areas. Though Pinochet’s regime collapsed in 1990, the neoliberal pathway continued under the Concertación government, being equipped with a nearly full functioning WSS of the country. In order to realize a smooth transition between the public and private system, as of 1990 the government started to raise prices for water services. With the period of redemocratization of the country, a privatization of WSS through an engagement of international bidders got possible. Nevertheless, the government passed the Law 19,549 in 1998 which prevents the collection of excessive profits of private companies. The official statement of the government for the reason of privatization was the need of large investments to expand the treatment of wastewater, which the state-owned water companies would not have had the means to realize. One of these companies in question was EMOS. They claimed, however, to have enough financial possibilities and already worked out plans for the improvement of WSS. Thus, the government’s explanation remains highly questionable (Baer, 2014).
As a consequence of the historical continuity to establish a liberal and market driven system and the perfect temporal overlap of World Bank’s demands, the two biggest public-owned water companies EMOS and ESVAL were acquired by Sociedad Inversiones Aguas Metropolitanas Ltd. (which is as of 2007 known as Aguas Andinas). This company is formed by the Spanish Agbar Group and French Suez company (Baer, 2014). However, 35% of the shares of the sold companies remain in governmental hand through the Chilean Economic Development Agency (CORFO, for its Spanish initials), which acts as a working unit for the Ministry of Economy and Tourism. Thus, the government still indirectly collects profits through its shares in the privatized WSS (Aguas Andinas, n.d.). One important means of governmental power is its regular negotiation with the water service providers on the costs they may demand from the population. Every five years the needs for new investments, operations and maintenance costs are calculated and transferred into price models (Shirley et al., 2000). However, Baer (2014) criticizes the low transparency of the negotiations. Though NGOs like the Latin American Observatory of Environmental Conflicts (OLCA, for its Spanish initials) tried to participate in the 2008 tariff setting formula, they were not successful. Although, it might seem that the goal of water security is reached in Chile due to its well-working WSS, between 2013 and 2018, six national water protests took place. The protestors demand the de-privatization of the system and a new water policy for the country due to environmental harms, rising water prices and low quality of WSS. Accordingly, most rural water systems report at least one unscheduled water outrage every six months, the monitoring of the drinking water quality with one in ten failing to conduct secure bacteriological tests and especially rural areas face rising insufficiencies in the amount of provided water. Approximately 6% of rural water systems were supplied by water trucks in 2015. Though the government passed laws to minimize excessive profit-making from companies, rising prices are developing to be a huge burden for the population. As a premise, the government started in 2004 to fund a subsidy system assisting poor clients and preventing service cutoffs. The state pays 100% of the water bill for a minimum amount of water for the poorest families, thanks to the program “Chile supports”. Critiques see, however, an irony in this program, as the companies are kept unregulated demanding increasing tariffs, while the government pays these prices (Baer, 2014). This hints at the fact, that it is still more lucrative for the government to pay the bills of the poor while profiting from the high prices the rest of the country is forced to pay by themselves. The government still holds 35% of the shares of the privatized water companies and sets every five years the prices with the companies.
In summary, Chile’s system of water privatization meets the official criteria of water security though facing increasing social protest. However, the system lacks transparency and the politically enforced neo-liberal government supports postcolonial structures, while profiting from them and keeping up the sham to support its people.
When comparing the cases of Bolivia and Chile, the most prominent difference is that Bolivia hoped to attract foreign investors and private firms through the privatization of its WSS in order to build and renew a highly fractured public system, while Chile prepared this step very carefully selling a nearly fully intact public WSS. Moreover, the case of Bolivia demonstrates very clearly postcolonial structures through the demands of the international society to sell its public WSS as a prerequisite to get further financial aid. Although the World Bank hoped to help the country with this measure, it nevertheless pushed it to let a foreign Western force regulate fundamental structural entities which, as illustrated above, resolved in loud societal repercussions. Bolivia’s motivations for the privatization of its WSS were led by the hope, to receive help in developing the country’s WSS in a people-friendly and high-quality manner. Yet, Bolivia’s weak negotiation position was exploited by Western global players of the industry.
Chile on the other hand, did not become a playball of the grand Western forces, but planed in a long-term manner the privatization of its WSS. Though practically not in need of basic development help, it still profited from the improved network provided by private companies. While the country as a whole does not seem to face postcolonial structures, Chile represents the case where the government tries to gain major profits from the privatization of its most basic infrastructure on the costs of its population. Clear loopholes for governmental profits become apparent within the passed regulations. This phenomenon becomes also clear when analyzing the premises of the privatization of the system regarding the Water-Energy-Food Nexus. An economic overexploitation of natural resources by the mining and agricultural business can be seen influencing the quality and quantity of available water and food resources which reveals its consequences especially in climatic and ecological changes. Therefore, one can partially agree to the hypothesis that an earlier state-lucrative business model for water privatization has now been exploited through postcolonial overuse and climate change, which makes it doomed to fail. In this sense, while the civil society can be regarded to get exploited in a postcolonial manner, this statement is not applicable for the government.
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