Annals of Public and Cooperative Economics 82:1 2011 pp. 25–44 POLITICAL ECONOMY OF CONTRACTUAL DISPUTES IN PRIVATE WATER AND SANITATION: LESSONS FROM ARGENTINA by Hulya DAGDEVIREN ∗ University of Hertfordshire, UK ABSTRACT ∗∗ : This paper examines the causes of the contractual disputes in the water and sanitation sectors and the resulting reversal of the privatization process. The evidence has been gathered from four major case studies in Argentina. The discussion is based on the evidence contained in the legal submissions made by the Government of Argentina and the disputing companies to the International Centre for the Settlement of Investment Disputes. The findings of the paper offer important lessons for the design and management of similar contracts for other countries. 1 Introduction Many countries in the developed and developing world have implemented extensive restructuring and privatization of their essential services such as water, sanitation and electricity, often involving long-term contracts. Performance improve- ments have been achieved in some countries (Estache et al. 2005, Shirley 2002), while in others privatization of essential services has been accompanied by legal battles and renegotiations between governments and the private companies. 1 In Latin America, 76 per cent of all contracts in the water and sanitation sector were disputed and renegotiated, on average, within 1.6 years after contracts signed (Guasch and Straub 2009). A large proportion of renegotiations in the utility sectors were initiated at the request of the private operators and majority ended in favour of them, resulting in increase in tariffs, cuts in investment obligations and annual fees paid to the ∗ I am grateful to Procuraci´ on del Tesoro de la Naci´ on (PTN), especially to Mr Gabriel Bottini and Ms Mariana Lozza, for providing invaluable research materials, the case files and other support. I am indebted to Degol Hailu, the former director of the International Policy Centre for Inclusive Growth, for facilitating this research and the United Nations Development Programme – Argentina Office, for the same. I have benefited from conversations with Ricardo Ortiz and Santiago Urbiztondo and I am thankful to them. E-mail: [email protected]∗∗ R´ esum´ e en fin d’article; Zusammenfassung am Ende des Artikels; resumen al final del art´ ıculo. 1 See, for example, Estache (2006) and Guasch (2004) for the experience in Latin America, Lobina (2005) for South Africa and Belize, and Hall (2007) for East Africa. C 2011 The Author Annals of Public and Cooperative Economics C 2011 CIRIEC. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, MA 02148, USA
Transcript
Annals of Public and Cooperative Economics 82:1 2011 pp. 25–44
POLITICAL ECONOMY OF CONTRACTUAL DISPUTESIN PRIVATE WATER AND SANITATION:
LESSONS FROM ARGENTINA
byHulya DAGDEVIREN∗
University of Hertfordshire, UK
ABSTRACT∗∗: This paper examines the causes of the contractual disputes in thewater and sanitation sectors and the resulting reversal of the privatization process.The evidence has been gathered from four major case studies in Argentina. Thediscussion is based on the evidence contained in the legal submissions made by theGovernment of Argentina and the disputing companies to the International Centrefor the Settlement of Investment Disputes. The findings of the paper offer importantlessons for the design and management of similar contracts for other countries.
1 Introduction
Many countries in the developed and developing world have implementedextensive restructuring and privatization of their essential services such as water,sanitation and electricity, often involving long-term contracts. Performance improve-ments have been achieved in some countries (Estache et al. 2005, Shirley 2002), whilein others privatization of essential services has been accompanied by legal battles andrenegotiations between governments and the private companies.1 In Latin America,76 per cent of all contracts in the water and sanitation sector were disputed andrenegotiated, on average, within 1.6 years after contracts signed (Guasch and Straub2009). A large proportion of renegotiations in the utility sectors were initiated at therequest of the private operators and majority ended in favour of them, resultingin increase in tariffs, cuts in investment obligations and annual fees paid to the
∗ I am grateful to Procuracion del Tesoro de la Nacion (PTN), especially to Mr GabrielBottini and Ms Mariana Lozza, for providing invaluable research materials, the case files andother support. I am indebted to Degol Hailu, the former director of the International PolicyCentre for Inclusive Growth, for facilitating this research and the United Nations DevelopmentProgramme – Argentina Office, for the same. I have benefited from conversations with RicardoOrtiz and Santiago Urbiztondo and I am thankful to them. E-mail: [email protected]∗∗ Resume en fin d’article; Zusammenfassung am Ende des Artikels; resumen al final delartıculo.1 See, for example, Estache (2006) and Guasch (2004) for the experience in Latin America,Lobina (2005) for South Africa and Belize, and Hall (2007) for East Africa.
government (Guasch 2004). These trends raise concerns about the integrity and socialwelfare implications of such deals and raise serious questions about promotion ofprivatization for essential public services.
The aim of this paper is to move beyond the standard considerations of efficiencyafter privatization of utilities and analyze the real process of service delivery byexamining the interfaces between users, governments, regulators, legislators andsuppliers on the basis of the disputes and renegotiations in the water and sanitationsector after privatization. Argentina is chosen as a case study for analysis because itpresents us with a rich material base for the topic of this paper and its experienceoffer important lessons for other developing countries.
Argentina privatized most of its utility services in the 1990s. In comparison, itwas a success story for it attracted considerable foreign investment (FDI), includinginto its water and sanitation sectors, through privatization. The Bilateral InvestmentTreaties (BITs), entered with more than fifty nations in the 1990s, played aninstrumental role in this. The BITs provided guarantees against expropriation andfor profit transfers. They also included a designated arbitration mechanism in whichthe International Centre for Settlement of Investment Disputes (ICSID) of the WorldBank or the United Nations Commission on International Trade Law (UNCITRAL)could act as adjudicators (Ortiz 2006). The outcomes of privatization also appearedpositive in terms of the performance of utilities. The public sector’s capacity todevelop and implement administrative, regulatory and legal procedures for contractenforcement has been notable especially in comparison to the experience in lowincome countries.
In water and sanitation, altogether, 18 concession contracts were signed acrossthe country by the Provincial governments or the Federal State (Table 1).2 Mostconcession contracts were awarded through competitive bidding either on the basis oflowest-tariff or highest concession fee criteria. Multinational companies accounted foraround two-thirds of the concession awards. Only a decade later, Argentina witnesseda sharp increase in the number of cases submitted for international arbitration,3
largely because of the crisis that hit the country in 2001 when the federal governmentpassed an Emergency Law in January 2002, abolished the Currency Board andstarted a renegotiation of all public utility contracts (Urbiztondo 2003, Calomiris2007). By 2009, one-third of all concession contracts in water and sanitation werecancelled (Table 1) and the services were re-nationalized.
But not all cases in water and sanitation were triggered by the crisis. A numberof investment disputes had started well before the crisis. In this paper, we presentevidence from four of the six water and sanitation contracts that were cancelled beforetheir due date since 1997 whose details are presented in shaded rows in Table 1.These are: a. Compania de Aguas del Aconquija (CAA) in the Province of Tucuman.b. Azurix Buenos Aires (ABA) in the Province of Buenos Aires. c. Aguas Provincialesde Santa Fe (APSF) in the Province of Santa Fe. d. Aguas Argentina SA (AASA) inthe City of Buenos Aires.
2 There was also one management contract in the sector for a period of two years.3 More than 60 contracts for public services with private companies went to the WorldBank’s ICSID after the government abandoned the denomination and indexation of utilitytariffs to the US dollar (Haselip 2005)
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The contractual disputes in the cases of CAA and ABA started prior to thefinancial crisis in 2001 while in the cases of APSF and AASA after the crisis. Inall four cases, tariffs as well as service and investment objectives had been subjectto renegotiations between the companies and the responsible public authorities priorto the application of the companies for international arbitration. In some cases, thedisagreements were resolved in the process of these renegotiations, frequently infavour of the private companies, while in other cases they ended up with formalsubmissions, made by the respective companies, for international arbitration.
The analysis of the case studies provides important lessons for other developingcountries that have pursued similar reforms or are in the process of adopting suchreforms. Most importantly, they point to the inherent conditions in private waterand sanitation systems which under certain circumstances may lead to reversal ofprivatization. Such radical changes can even occur in the presence of appropriateregulatory institutions, rules and mechanisms as a result of three factors permanentlypresent in water and sanitation services: imperfect and asymmetric information,incompleteness of contracts and political economy issues.
Several practical issues emerge from the experience of Argentina. First, theprimary interest of the companies throughout the period after privatization has beento improve their financial position, justly or opportunistically, by requesting changesin three areas: increases in tariffs/revenues, reductions in their risk exposure andinvestment obligations. Second, the problems in the design and content of contractsfrequently lay at the heart of disputes and renegotiations. Third, the negligence ofsocial context by the state in the process of privatization has been an importantdriver of disputes and renegotiations as evidenced by the role service chargesplayed in the implementation and enforcement of contracts. Largely because of this,public authorities often gave into the pressures and compromised from investmentand service extension targets rather than accepting the politically sensitive tariffincreases. Fourth, the concept of ‘independent regulation’ as a panacea for the illsof the private service supply is problematic in that it does not recognize the intricateeconomic, political and social interests and the conflicts within.
This paper starts in Section 2 with a discussion of the common causes ofdisputes and renegotiations in water and sanitation sector in Argentina and continueswith an assessment of the political economy aspects of such disputes in Section 3.Following the conclusions in Section 4, reviews of four case studies described aboveare presented in the appendix without interpretation. These case studies haveprovided the material for the analysis presented in the main body of this paper.
concession fee, at least, six times greater than that of the next bidder and in less thana year after the takeover, it requested a renegotiation of the terms and conditions. Onthe basis of references to media and other publicity, the GoA raised similar concernsfor the AASA consortium that won the concession in the City of Buenos Aires. It ar-gued that the consortium knew other bidders’ proposals and was in a position to offerthe lowest tariff which they sought to renegotiate after the concession was granted.
While there are a range of case specific causes of disputes, two common andinterrelated issues recurred in all cases covered in this paper irrespective of thembeing related to the crisis or not. The first is related to the investment obligationsof the companies while the second is to the application of tariff regime and the coststhat could be passed on to customers.
2.1 Investment related disputes and renegotiations
During renegotiations, the private operators sought to reduce their risks,increase tariffs and establish an automatic tariff review process in response to thechanges in agreed price indices without regulatory evaluation and verification ofimpact on costs (what is known as ‘pass-through costs’). The counterparty from thepublic sector, on the other hand, often focused on the investment obligations andattainment of expansion goals.
One of the regularities that emerge from the case studies covered in this paperis that investment goals appear to have been soft targets of easy compromise inthe presence of disagreements between the parties. Quite often, governments, unableto agree on tariff rises with fear of public opposition, consented to reduce, suspendor reschedule investment obligations in order to reach some sort of settlement andprovide the private sector with an indirect source of revenue. In other words, loweringinvestment targets was a trade-off for politically thorny rises in water charges. Therenegotiations before and after the crisis with APSF in the Province of Santa Feand AASA in the City of Buenos Aires (Appendix 2) all resulted in reductions andsuspensions in the original investment obligations. In some cases cuts in investmentwere accompanied by tariff increases.
The evidence produced by GoA in response to the companies’ claims beforethe ICSID demonstrates that non-compliances with investment and service levelobligations were widespread and severe in all cases in view of original contractualprovisions and related agreements. ABA’s non-compliance with water and sanitationexpansion targets ranged between 13 and 95 per cent in the regions it operated. AASAinvested 45 per cent less than it originally was contracted for. APSF’s investment wasshort of original expansion targets by more than 80 per cent. (PTN 2004, 2007a, b). Amore detailed analysis of contractual non-compliances regarding investment targetscould be found in Casarin et al. (2007) and Azpiazu et al. (2005).
Previous research indicates that companies have focused on the maintenanceof existing infrastructure rather than extending it to low income areas of poorfinancial viability (Baer and Montes-Rojas 2008). In some cases, the contractsexplicitly excluded the water and sanitation supply in the peri-urban areas (Bottonand Merlinsky 2006). In other cases contracts failed to specify the consequences ofnon-compliance with investment targets (Guasch 2004). However, assessing the true
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extent of contractual breaches is fraught with difficulties because of the repeatedrenegotiations which led to considerable reduction in investment targets.
2.2 Tariff related disputes and renegotiations
The hazards associated with tariff increases after water privatization in de-veloping countries is well established in the literature (Loftus and McDonald 2001,Smith 2004, De Azevedo and Baltar 2005, Kirkpatrick et al. 2006, UNDP 2006). Watercharges have also been at the centre of disputes and renegotiations in Argentina.Typically, they have been triggered as a result of:
a) payment difficulties by the low income user groups;b) differences in the interpretation of the regulatory framework by the companies
and the public agencies.
One lesson that can be drawn from the evidence contained in the case studies isthat when the contractual rights of the private companies in the water and sanitationsector are instituted without a rigorous analysis of their implications for the relevantsocial context, they are likely to be unsustainable. For example, tariff rises after theprivatization of water and sanitation services in the Province of Santa Fe, the City ofBuenos Aires and the Province of Tucuman, though were permitted by contracts, theyall led to social unrest, political pressure on local governments, non-payment of billsand low revenues for the private operator, leading to renegotiations between the re-spective companies and the public agencies within one to two years after privatization(Appendix 1 and 2). Frequently, such renegotiations involved considerable reduction incompanies’ investment and service level obligations and modification in tariff reviewprocedure, for instance, involving automatic and more frequent adjustment to servicecharges. In the first two cases mentioned above, the bargaining for tariffs turnedinto a broader review of the whole contractual and regulatory processes in which theprevious risk allocation system changed significantly in favour of the concessionaires.In the last case the contract was terminated by the company while negotiations wereongoing.
Another major source of conflicts was the differences in the interpretation of theregulatory framework,4 describing what could be passed on tariffs, what triggers tariffreviews and what the procedures are for tariff adjustment. The review of the evidencein Argentina suggests that when the regulatory framework contains clauses that areopen to interpretations or its various elements are inconsistent or they are ineffectivein the presence of contingencies (a predominant feature of incomplete contracts), thenthe service supply after privatization can become hostage to the conflicts arisingfrom such circumstances. The case studies in the appendix provide a wide range ofexamples.
In the City of Buenos Aires, for example, tariff reviews had been a highlycontentious issue after the crisis. According to the contract changes in the peso-USdollar parity could trigger a tariff review which led the company to request tariff
4 The regulatory framework consisted of the provisions of the relevant concession con-tracts, water acts and terms and conditions of bidding.
adjustment. The GoA’s interpretation of the regulatory framework was different: thecrisis did not only lead to a change in the peso-dollar parity but it led to a completeabandonment of the Currency Board. The previous contractual framework had notprovided any guidance if the pegged exchange rate regime were altered. More impor-tantly, this case presented a serious legal inconsistency because what the contract per-mitted (i.e. the indexation of tariffs to the US dollar) was explicitly prohibited by theConvertibility Law at the time (Chisari and Ferro 2005, Baer and Montes Rojas 2008).
Similarly in Tucuman, the treatment of taxes had been an issue for the deter-mination of tariffs. The contract had defined all taxes as costs, hence transferable ontariffs, but this was later revised within the Bidding Terms and Conditions. Althoughthis revision was legally binding it was in the interest of the company to insist on thevalidity of the draft contractual specification.
A number of conflicts between the public authorities and the companies arecaused by the directives issued by the Privatization Commission at the stage oftendering and bidding. While these aimed to clarify confusions, rectify errors orincorporate omitted information, Commission’s acts in some cases raise questionsabout its motivation: Was it too concerned for the speedy and lucrative executionof its task that it acted imprudently to maintain a high investor appetite? Forexample, the treatment of the concession fee started a dispute between the operatorand the public authorities in the Province of Buenos Aires (Appendix 1). In theutilities sector, the concession fee usually reflects a compensation for the right touse the existing assets previously financed from tax revenues. The legal documentsgoverning the concession did not allow it to be passed on tariffs. However, a directiveissued by the Privatization Commission at the prompt of the concessionaire haddefined it as ‘amortizable investment’ which then – by one interpretation – could beregarded as cost with reference to the Water Act of the Province. In the same case,another directive by the Privatization Commission permitted the winning consortiumto abandon the use of the coefficients that distinguished tariffs between differentzones of the supply area. This implied a significant rise in water charges and therevenues of the operator, at the cost of consumers. However, the contract did notpermit the water bills to be higher than the last bills before privatization whicheffectively made the Commission’s directive redundant.
These examples demonstrate that inconsistencies within and between theregulatory framework and the terms of the contract can create conflicts between thecompanies and the public authorities. Even in cases where such discords are resolvedthrough existing regulatory proceedings, the relationship between the companies andpublic authorities may be frustrated in the process. This is well demonstrated by thedispute about tariff increases associated with the rise in real estate and tax valueof properties in the Province of Buenos Aires where Azurix operated (Appendix 1).While the regulator eventually approved the updating of property values and henceallowed increases in tariffs, resolving certain elements of this dispute took about twoyears. By that time the company had terminated the contract. Did the regulatorpurposefully delay the process, as argued by the private operator? It may be sobecause the associated rise in water and sanitation charges could have been politicallyunsustainable. Alternatively, it may be the case that resolution of disputes involvingverification etc. normally takes a long time and there was no ‘conspiracy’ against theoperator, as argued by the GoA in its defense files submitted to the ICSID. Whichever
CONTRACTUAL DISPUTES IN PRIVATE WATER AND SANITATION 33
is the real reason, both point to the difficulties associated with the governance ofprivate supply of water and sanitation services.
Furthermore, the desire of the private operators to reduce their exposure tovarious risks through re-interpretation of the regulatory framework has been animportant driver of the renegotiations. For example, in the cases of APSF and AASA,the original tariff determination was based on price-cap. However, after repeatedrenegotiations the original contractual specification was changed and a mixed tariffsystem, combining price-cap with a rate of return regime, was introduced.5 In the caseof APSF, this was achieved through the introduction of the concept of ‘economic andfinancial equilibrium of the concession’ into the regulatory framework for the recoveryof all costs. In the case of AASA, the term ‘net financial exposure’ was incorporatedfor the same purpose.
A mixed tariff regime of this kind is potentially very gainful for the companiesbut disadvantageous for service users. Tariffs cover all costs and provide somereturn while any costs savings, for example due to improvements in efficiency, areretained by the companies rather than being passed on to consumers. Such costsavings constitute an indirect return for companies in addition to the rate of returnincorporated into service charges.
After the crisis, each company endeavoured to return to the previous statusquo and repeatedly requested the re-establishment of ‘the economic and financialequilibrium’ in the process of bargaining. They requested automatic adjustment oftheir tariffs reflecting the change in the exchange rate without the proof of impact ontheir costs which would have been justified under a pure price-cap system. The publicsector counterpart, on the other hand, required the companies to prove the impact ofprice changes on their cost structure.
Furthermore a detailed reading of the case files submitted to the ICSIDhighlight the importance of the fact that risk is a dynamic phenomenon in business.It may appear moderate during normal economic circumstances. But at times ofsevere financial and economic crisis it may be amplified to unsustainable levels. Risktaking in some areas is largely a private matter without significant externalities. Inthe provision of public services such as water and sanitation, however, it can havesignificant social cost and affect the sustainability of the service supply. This is clearlyrevealed in cases where companies pursued an investment funding strategy basedon high levels of unhedged debt, denominated in US dollars. This was a profitablebusiness model when peso-dollar parity was stable since loans in international markethad longer maturity and lower interest rates.
Another revelation is that tendency of companies to maintain a high leverageratio was associated with perverse incentives embedded in the original or renegotiatedcontractual framework which permitted cost of borrowing to be passed on service
5 Under a price cap regime, the predetermined tariffs are adjusted when there is a changein a price index specified in the contract. This system is considered to be providing incentivesto the operators for cost efficiency as any cost saving under a price-cap would be a gain for theprivate operator. However, it is also known for its perverse incentives causing underinvestment.On the other hand, in a rate of return system, tariffs are set in a way to cover all contractuallyspecified costs and provide a fixed rate of return for the operator. This system often leads tooverinvestment and cost inefficiency.
charges and lowered tax obligations of the companies. Such benefits would not havebeen available had the companies financed investments largely through own capital.The companies insisted that the government (or more accurately, the public) bearthe cost of the risks associated with their high leverage while the designated publicrenegotiation unit refused to do so.
3 Political economy of disputes and renegotiations
The cumulative evidence contained in the four case studies underscores acrucial issue. Privatization of water and sanitation with complete focus on efficiencyand utility performance and negligence of political economy considerations can leadto the adverse consequences seen in Argentina. Privatization does not privatize theentire governance of the contracts and process of service provision in water andsanitation for two reasons: First, the market structure in the sector is monopolisticand abuse of market power under private ownership is probable. Second, water isan essential service with considerable externalities. Hence, the state and its variousagencies, including regulators, remain in the sphere of governance to ensure thattariffs do not yield monopoly rents; water quality conform to health and safetystandards and adequate investments are undertaken not only to ensure presentsupply but also the future security of supply.
Nevertheless, private supply of essential services remains problematical evenin the presence of regulators between the consumers and the private operators asdemonstrated by the cases discussed in this paper. This is because there are inherentproblems in the management of such contracts. Some of these are already discussedextensively in the literature. First, the uncertainties regarding what the future holdsand the long-term nature of the concessions inevitably lead to what is termed as‘incomplete contracts’ by Hart et al. (1997) and Hart (2003) between the publicauthority and the private company. This is very well demonstrated in Argentina byrepeated renegotiations of contracts and the differences in their interpretation.
Second, effectiveness of regulation is complicated and problematic as a result ofthe potential for ‘capture’ (Stigler 1971, Posner 1974, Parker and Kirkpatrick 2004,Minogue and Carino 2006, Dal Bo 2006) as well as inherent information asymmetriesbetween regulators and companies (Sappington and Stiglitz 1987, Martimort 2006).Such information asymmetries determine the power of different agents and influencegains or losses to different parties. The case files submitted to the ICSID Tribunalsby the GoA contain myriad evidence of difficulties faced by the regulators due toabsent, defective, misleading or inconsistent information presented by the companies.For example, in the case of ABA, the GoA argued that the company had submittedunsatisfactory five-year plans and annual progress reports, causing considerabledelays in the implementation of expansion programmes. In the case of AASA, it wasmaintained that the company submitted information on costs without justificationand with inconsistencies which made the assessment difficult; failed to observe itsobligations to present audited economic and financial projections and compare thesewith those of a model company, which it never designed and submitted.6
6 Every five years, the AASA had to demonstrate that it was at least as efficient as themodel company, designed by itself. The company never complied with this requirement and the
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However, these theories overlook the importance of the role of politics andpolitical economy factors after privatization in sectors such as water and sanitation.Because water is an essential service with substantial externalities, conflict ofinterests between social/public and private objectives becomes more pronounced afterprivatization. When/if the welfare of users is negatively affected by the actions orinactions of profit driven private operators (e.g. high water and sanitation charges,water contaminations) they will put political pressure on public authorities.
The sustainability of private supply under such conditions would depend oncountry or case specific factors such as the capacity and integrity of institutions(including regulatory, judicial and administrative bodies), state of general and sectorspecific laws, general economic conditions, conditions of income distribution andpoverty, state of infrastructure for water and sanitation and investment needs.
The cases presented in this paper lend us many examples which demonstratethe importance of non-economic factors, especially political factors, in the governanceof private water and sanitation services and enable us to make a set of observations.First of all, the political and economic costs of failure of privatization of waterutilities were too high for administration to bear. This has affected the outcomes ofrenegotiations with companies before the crisis. A senior regulatory expert, who wasa witness for the GoA in the dispute proceedings of the AASA, put this succinctly bystating that government had to give in to the pressures for renegotiations in order toavoid failure:
‘. . .such an important concession looked at by all the world . . : It was not possiblefor it to fail, it was imperative to find remedies to give it sustainability. . .’ (PTN,2006b: 35)
The intervention of the World Bank in 1996 for finalizing the renegotiations betweenthe CAA and the provincial government in Tucuman – in spite of the legislature’sreluctance for approval – can be seen in the same light (Appendix 1). Failures wouldhave damaged the credibility of the neo-liberal ideology – of which privatization wasa major element – that the Bank promoted.
Second, the conflicts between the private and public interests in water andsanitation have not been sufficiently contemplated in the process of privatization,contract design and regulatory mechanisms. Such considerations have emerged onlyas afterthoughts following a series of disputes and renegotiations with the privatecompanies. A prominent example is the fact that the GoA defended the EmergencyLaw and its implications for public services before the ICSID with reference to adoctrine in international law on the defence of necessity. It argued that the EmergencyLaw aimed to protect a ‘fundamental human right in the face of a grave and imminentperil’ caused by the crisis and it was necessary, reasonable and proportionate.7
Had this consideration about ‘defence of necessity’ been built into the regulatoryframework as well as the BITs the economic and political challenges after the
evaluation of its investments, operations and performance were conducted in the absence ofthis important benchmarking instrument.7 The unaffordability of the US dollar indexed service charges in the light of the economiccrisis, when poverty rose by more than 50 per cent and unemployment increased to 36 per cent,has been central to the arguments of the GoA.
privatization of services could have been reduced although this may also have reducedthe appeal of the water and sanitation utilities for private investors.
Third, the contracts in this sector are designed without the participation ofusers who are one of the major stakeholders. They have had very limited and indirectrole, if any, in influencing the process of privatization. It was presumed that variouscomplaint mechanisms and regulatory actions are sufficient to address the concerns ofthe service users. User groups have had no voice in the ICSID proceedings, except forthe case of AASA where the Tribunal allowed written representations from a numberof NGOs in 2007. The legislation for service users to participate in the renegotiationsbetween public authorities and the companies was enacted only in 2002 following theeconomic crisis, possibly as an attempt by the Federal Government to improve itshand in the game of renegotiations.
Fourth, the case studies provide some valuable evidence regarding the role ofthe regulators. A repeatedly asserted claim by the companies was that the regulatorslacked independence and their decisions were directly or indirectly influenced bythe governmental departments. While this may be the case, there is also plenty ofevidence on how companies have negotiated not only with the regulators but alsowith the key ministries, sometimes bypassing the regulators, sometimes hoping touse the ministries to pressurize the regulators. However, there was also tendencyfor regulators to be used as scapegoats in the process of the disputes. The tribunalsand companies accused them for lack of independence while the governments andresearchers have charged them for being captured by private interests. For example,the tribunal in the case of CAA blamed the regulator for being politically motivatedfor it initially approved the incorporation of taxes into tariffs but a short while laterreferred this matter to the Attorney General, leading to the reversal of the initialdecision. The problem with this judgment is that it fails to recognize that reversalor change in regulators’ decisions, following due procedures, is common becausemany aspects of essential services under private ownership and their regulation areinherently subject to challenges by different interest groups as some of the evidencepresented so far points out.
Finally, the resolution of the conflicts between the private and public interestsis not only a legal or administrative process but a political one which often involvenormative judgments. For example, in a controversial judgment, the ICSID tribunaldecided in favour of the shareholders of the CAA in the dispute regarding the extentto which taxes could be passed on tariffs. It justified its decision on the grounds thatthe disputed amount (8–10 per cent of monthly bills) between the counterparties is‘a relatively small sum for the average customer’ but for CAA it was considered tobe a substantial amount relative to its projected return (ICSID 2007). Clearly, thesignificance of the burden caused by a rise in monthly water bills would depend onhouseholds’ income levels. A ten per cent rise in water charges may have seriousconsequences for the welfare of the poor households. Hence, reference to ‘averagecustomer’ is not useful in a context where the payment problems are experiencedby the poor and the low income groups. Even if they constitute a small proportion ofpopulation, such conflicts have the potential to destabilize the whole system as theydid in the case of CAA. From this perspective, the conclusion of the tribunal maybe seen to have a high degree of subjectivity and negligence in the evaluation of themerits of the counter arguments.
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The political sensitivity of service supply is particularly evident in cases ofincidents involving deterioration in the quality of water. The problems with waterquality, especially the ongoing incidents of high nitrate levels in the peak demandperiods, was one of the reasons for the termination of the AASA’s contract in theCity of Buenos Aires. The company argued that a small proportion of population(0.6 per cent) was affected and that this was only a pretext for the termination ofcontract. Similar water quality problems in San Miguel where CAA operated and inthe province of Buenos Aires where ABA operated attracted considerable politicalattention due to the public pressure about water quality. The companies blamedthe governments for causing or not preventing the panic. In the case of CAA, theICSID tribunal concluded in favour of the claimants and decided that the incidents ofturbidity in Tucuman were non-harmful and affected a small part of the populationand occurred for one to two months.
Once again, the subjectivity of this judgment could be shown with reference toseveral points. First, the tribunal had the advantage of assessing the circumstances,retrospectively, a long time after the incident took place when more information wasavailable, public pressure vanished, the uncertainties disappeared. Making such aclear judgment may not be possible while the events unfold, public protests continueand the duration of the turbidity is unknown. Second, the provision of polluted waterfor one-to-two months can hardly be categorized as a short period of time. Third,polluted water would and should cause a serious concern no matter how small is theproportion of population affected. Panic may be inevitable between the time when theturbidity appears and when the results about its non-hazardous nature are revealed.Even in cases where the cloudy and odorous water is certified to be safe to drink, it isunreasonable to expect the public to do so. Water is expected to be delivered in goodquality not only in terms of its nutrients and bacteriological content but also in termsof its appearance, e.g. free from any colour or odours. Otherwise, it is natural for therespective companies and public offices, especially regulators, governors, governmentsand legislators to come under public pressure.
4 Conclusions
The discussion presented in this paper aimed to open ‘the black box’ in theprivate water and sanitation concessions in Argentina with potentially useful lessonsfor other countries. Several themes of the paper could be highlighted. One of theseis that the shift from the public to private provision of water and sanitation wasadvocated by a narrow perspective that purely focused on performance and efficiency,neglecting the intricate processes as well as legal, economic, political and socialconflicts that characterize such systems as demonstrated by the evidence presentedin this paper.
Repeated renegotiations often resulted in significant changes in the originalcontractual specifications, tariff regime and investment and service improvementstargets. Some have produced considerable gains for the operating companies. Servicecharges and investment targets have been the principal subject of disputes andnegotiations. Political sensitivity of the former often led to compromises from thelatter. The regulatory systems that used a mixed tariff regime operated in favourof the companies as they enabled them to benefit from all the advantages ofthe price-cap and rate of return regimes without releasing their benefits for thepublic.
Heavy indebtedness of the water and sanitation companies in foreign currenciesplayed a crucial role in determining the scale of impact of the crisis on their viability.Some incentives in the micro and macroeconomic environment have been influentialin their choice of financial policy such as the low foreign interest rates, stability of theexchange rate, the ability of companies to pass the cost of borrowing on to consumers.The resulting leverage levels did not cause much concern until after the devaluationof peso that led to an explosion in the level of indebtedness after the crisis and defaultby some companies.
The disputes and renegotiations with private operators also highlight theinherent problems in the design of the contracts. Writing contracts without any scopefor reinterpretations and achieving consistency between contractual specificationsand other legal provisions is very difficult. It appears to be even more difficult todraw socially, economically and politically acceptable contracts that strike a goodbalance between the incentives for private operators to provide good quality servicesand improve the system while at the same time catering for the need for full andaffordable access by the population.
Political factors played a crucial role in private water and sanitation services.Changing politics together with changing economic conditions facilitated the entryof private companies to the sector in the 1990s as well as their exit only a decadelater. Political authorities and lobbying activities have been endlessly present inthe renegotiation of contracts. The permanent presence of politics in this sectoris due to the fact that public/social interests emerge as a major factor in deter-mining the viability of private contracts. The stability of policy changes for theaccommodation of private interests or profit would be precarious in the presence ofpublic discontent about the safety, affordability and reliability of supply. Governmentsmay or may not contain the dissatisfaction of public and private interests and theconflicts between them as reflected by the process of renegotiations and disputesin Argentina. Their stance has been influenced by a variety of factors includingtheir political orientation, time of elections, strength of public opposition, the social,economic and political costs of maintaining the concessions or allowing them tofail.
The independence of regulators from politics has been doubtful. Thereis considerable evidence that regulators gave in to pressures by the compa-nies as well as by the governments. There was also a tendency for the com-panies and the state to use the regulators as scapegoat in the process ofdisputes.
CONTRACTUAL DISPUTES IN PRIVATE WATER AND SANITATION 41
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Economie politique des litiges des contrats dans le domaine prive de l’eauet des installations sanitaires publiques. Lecons d’Argentine
L’article examine les causes des discussions des contrats dans les secteurs de l’eau etle secteur sanitaire et le revirement qui en resulte dans le processus de privatisation.Des donnees ont ete rassemblees a partir de quatre grandes etudes de cas en Argentine.Le debat est base sur les donnees reprises dans les soumissions legales realisees parle gouvernement argentin et les entreprises qui contestent au «International Centrefor the Settlement of Investment Disputes». Les resultats de l’article proposent deslecons importantes pour l’elaboration et la gestion de contrats similaires dans d’autrespays.
Politische Okonomie der Vertragsstreitigkeiten mit privaten Wasserver-und Abwasserentsorgungsunternehmen: Lehren aus Argentinien
In dem Beitrag werden die Grunde von Vertragsstreitigkeiten im Wasser- und Ab-wassersektor sowie die sich daraus ergebende Umkehr des Privatisierungsprozessesuntersucht. Die Ergebnisse entstammen vier großen Studien aus Argentinien, wobeidie Diskussion auf Befunden aus Eingaben der argentinischen Regierung undder streitenden Unternehmen an das Internationale Zentrum zur Beilegung vonInvestitionsstreitigkeiten basiert. Die Ergebnisse der Untersuchung bieten anderenLandern eine wichtige Lehre fur die Formulierung und das Management ahnlicherVertrage.
Economıa polıtica de los litigios en los contratos en el ambito privado de losservicios de aguas y en las instalaciones sanitarias publicas. Lecciones
privatizacion. Estos datos se han reunido a partir de cuatro grandes estudios de casoen Argentina. El debate esta fundamentado en los datos obtenidos de los procesoslegales sustanciados por el gobierno argentino y las empresas que responden al“International Centre for the Settlement of Investment Disputes”. En sus conclusionesel artıculo propone lecciones importantes para la elaboracion y la gestion de contratossimilares en otros paıses.
