Privatisation, Poverty, and Politics - Aguas del Aconquija SA

The World Bank and its various regional partners have touted public-private partnerships (PPPs) in much of the developing world as the best solution for most infrastructural financing problems. Lecturer in Asian Business and Comparative Management, Lourdes Casanova, and Associate Professor of Economics and Political Science, Vanessa Strauss-Kahn, reveal how disastrously wrong such PPPs can go, including with the most essential of services. A French water services firm and one of Argentina's poorest provinces clashed over politics, pricing and regional vs. national sovereignty - to the ultimate benefit of neither party.

by Vanessa Strauss-Kahn, Lourdes Casanova
Last Updated: 23 Jul 2013

Every ten seconds, a child in the developing world dies from a water-borne disease. Most of these are easily preventable, but any comprehensive initiative to purify polluted sources in the poorest countries would run into hundreds of billions of dollars. In recent years, the World Bank and many of the regional development banks that routinely serve as its partners have increasingly looked to public-private partnerships (PPPs) in attempting to resolve public service objectives while enforcing economic efficiency.

Lecturer in Asian Business and Comparative Management, Lourdes Casanova, and Associate Professor of Economics and Political Science, Vanessa Strauss-Kahn, reveal how disastrously wrong such PPPs can go, including with the most essential of services. Argentina, under extremely intense pressure from the World Bank, IMF and foreign creditors to massively cut its public spending and get its shambolic macroeconomic house in order, was frequently persuaded in the 1990s to award concession contracts to private operators for major state utilities. Control typically went far beyond basic physical infrastructure. Project financing was also the domain of private foreign contractors, who often had limited experience in dealing with public authorities in developing nations.

The case explores the awarding of a 30-year water management concession in 1994 to a European and Argentine consortium led by French giant Compagnie des Eaux (CGE), (later part of the Vivendi consortium) in Tucumán province, one of Argentina's poorest areas. The initial 104% price hike immediately after the contract's agreement predictably outraged most customers, doing little to establish good corporate social responsibility credentials. Gubernatorial elections a year afterwards were won by a populist promising to renegotiate the rates. Shortly afterwards, the water became seriously discoloured, prompting mass protests The consortium had no choice but to renegotiate their deal. Meanwhile, it was forced to maintain the service while users were openly encouraged by the regulatory agency newly set up by the provincial government not to pay their bills.

The case illustrates the complexities that foreign firms can run into when various levels of government become involved. (The imbroglio even came up in discussions between the Argentine and French presidents as its profile grew.) In 1996, CGE filed a case with the World Bank's arbitration body. A framework agreement was reached under heavy pressure from all sides the next year. Losing money heavily, the consortium was anxious to exit Tucumán. The very heavily indebted new provincial government, however, was in no hurry to have the politically explosive issue become their sole responsibility. For its part, the World Bank was concerned that many of the high-profile privatisations it had overseen in several Latin American countries were proving untenable, and was actively trying to facilitate this settlement.

The case is interesting for its applicability in many levels of political risk analysis. The consortium's original agreement was at a private sector/regional government level, but soon involved the federal government and an international arbiter. And while there is no doubt that CGE (and later, Vivendi), created their own difficulties in several developments in Argentina, the case posits the question of whether any positive ex-ante country-risk assessment may be misleading when the investment itself (or subsequent actions) alters the political climate for the worse.

Another aspect of the case -- the most economics-intensive -- is meant to lead to a discussion of the viability of the private provision of water services. Concepts to be illustrated here include natural monopoly, second-best pricing, ex-ante competition etc. The managerial dimension of the debate asks whether getting involved is really a good idea for private companies.

Finally, the case leads to a debate about whether relations between foreign investors and host countries should be codified in a multilateral investment agreement - something in retrospect the consortium, which lost millions of dollars, surely wishes it had done.

INSEAD 2005

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