Water and privatisation: doubtful benefits, concrete threats

Tom Kruse; Cecilia Ramos
Social Watch Project - CEDLA

The Bolivian experience of privatisation of the companies that manage and distribute water is a good window on the conflicts triggered by the privatisation of basic services. It also shows the enormous difficulty – some say the impossibility – of making the search for profit compatible with an equitable and sustainable supply of basic services; that is, making privatisation benefit the poor.

X-rayof a conflict

Today,the body regulating basic sanitation covers 22 drinking water and sewage systemsin the country. Fourteen are cooperatives, seven are municipal companies, andone – the largest in La Paz and El Alto – is a private concession.[1] There would have been twoprivate companies, but in 2000, the privatisation of the Cochabamba water systemwas reversed following mass mobilisations opposing it.

Generaldata indicate that access to water (number of connections) has improved over thepast years but there is no clear correlation with privatisation (a singleconcession). At the same time, privatisation involves a reassignment of coststhat the promoters of privatisation themselves recognise as producing “adversewelfare effects,”[2] – that is to say, theyare “anti-poor.” Underlying these are the financial parameters demanded bythe financing institutions: full cost recovery and the elimination of direct orcross subsidies.[3]


Thefailure of water privatisation in Cochabamba is well known and much debatedworldwide. A relative scarcity of water creates excessive reliance ongroundwater sources and interruptions in the service. Up to 60% of the waterdistributed is lost or not invoiced because of the inadequacies of an olddistribution system. Half of the approximately 500,000 inhabitants are notconnected to the water network and depend on cistern trucks that sell the water– perhaps the most expensive in the region – or on systems built by localcommunities. The unequal access to water reflects inequities in the society atlarge.

Sincethe beginning of the 1990s, the World Bank had been demanding privatisation ofthe municipal water company, SEMAPA, as the only solution to the water problemin Cochabamba. In 1996, the WB conditioned a USD 14 million loan to SEMAPA toits privatisation.[4] And in 1997, the IMF, WBand IDB conditioned debt cancellation of another USD 600 million to theprivatisation of SEMAPA.[5]

Theprocess was complicated for several reasons: the local elite tied the watersystem concession to the execution of a very ambitious and costly constructionproject; the company had a large debt to be taken on by the concessionaire; theWB demanded a rigorous application of full cost recovery; and the companymanaged to establish a guaranteed high rate of returns during the negotiations.All these costs – reached by consensus during an absolutely secret processbetween the company, the government and local elites – was to be reflected inthe water rates prior to anyimprovement in the water system. In September 1999, a leasing contract wassigned in favour of the Aguas de Tunari consortium, directed by the giantengineering and building company, Bechtel Enterprises of the U.S. The contractset up a monopolistic concession.

Atthe beginning of 2000, bills for water containing a rise of between 200% and300% started arriving and the reaction was not long in coming. A consumerrebellion broke out in the city, and in rural and peri-urban areas peoplemobilised against Aguas de Tunari. These joint efforts ended in April 2000 withconfrontations with the police and armed forces, the declaration of a state ofsiege, hundreds of people wounded and one death. On 10 April 2000, thegovernment announced rescission of the contract and substantial changes in thelaw that had covered it and had left self-managed systems and rural customsunprotected.


Thefirst water privatisation in Bolivia occurred in 1997 when the governmentgranted a water concession to Aguas de Illimani, a consortium led by SuezLyonnais des Eaux, now Ondeo. Before privatisation the water rates wereincreased by nearly 60% for domestic use, 18% for commercial use and 21% forindustrial use.[6]At the time of the concession, there was a further 19% increase. The rates were“dollarised,” but then “de-dollarised” because of protests in December2000.[7]The rate structure is progressive (the cost per unit increases with moreconsumption). Previously, the consumption of 10 cubic meters of water was free,but now all water consumption is invoiced, which represents a clear blow to thepoor.[8]

Theproblem facing the company was – and continues to be – how to make moneyselling water where 60% of the population have an income of USD 0.80 per day.How to get water to poor homes at the least cost in order to guarantee profitsfor the shareholders? The answer was a “joint ownership” system, cuttingcosts by placing pipes over patios and pavements (not under the streets) andtaking advantage of user labour. These measures reduced connection costs, whichhad been prohibitive for the poor. To guarantee financial feasibility, makingprivatisation viable, extraordinary efforts were necessary: technical standardshad to be significantly relaxed; construction, maintenance and risk costs had tobe transferred to the users (community “participation”); campaigns had to beset up promoting greater water consumption; micro-credits had to be offered forthe construction of bathrooms and showers; and the financial cooperationagencies had to fund the necessary research and training activities to implementthe system.

Althoughcoverage expansion rates are considerable, their viability in the future underthe commercial rationale of Ondeo is fragile. A WB report concludes that fromthe standpoint of the company, the new connections for the poor could wellrepresent net losses; furthermore there are no incentives for the company tocarry out the necessary cultural re-engineering to increase consumption. Thereport also considers that the rate structure, in which the unit cost of waterincreases with consumption, makes it “unprofitable to serve homes having lowlevels of consumption.”[9]Thus, the sale of water to poor people is not a profitable business.

Todaythe concession is presented as an example of feasible, efficient privatisationwith “pro-poor” effects. However, there are various problems. The users havealready denounced the bad quality and fragility of the works. While thepromoters argue that the “joint ownership” system at least gives somethingto the poor, others – among them the Neighbourhood Councils – consider thatto make privatisation viable, separate and unequal systems are beinginstitutionalised – adequate systems for the rich and poor systems for thepoor.[10]

Ruralcommunities, water and the rules of the game

Over40% of the population live in rural areas, where it is estimated 5,450irrigation systems are in operation. Approximately 4,700 of these are“micro-irrigation” systems in the hands of peasants and traditionalcommunities.[11]

Farfrom being a simple commodity, water is the central element in a whole set ofsocial and cultural processes in thousands of local management systems, whichmaterialise the innovative capacity and collective sacrifice of their authorsand managers.

Thereis a basic contradiction between the requirements of the major water sellers andconcessionaires and the vision of rural communities and peasant organisations.For this reason, renewal of the Water Law has failed: over 30 drafts have beensubmitted and rejected. The last attempt at creating a new Water Law dates backto 1998, and was blocked by organised peasants. They rejected taxes or licenceson waters used for generations, a system of concessions favouring companystakeholders and in particular, the establishment of a Water Superintendent withwide powers to grant and rescind rights over water, with no social oversight ormonitoring.[12]

Inview of the impossibility of adopting a Water Law, the government “smuggledin” a Drinking Water Law, resulting from an IDB financed consultancy. The Lawcontained all the things that the peasants rejected: a commercial orientation,preferences for major commercial concessionaires, ignorance of the “usage andcustoms” and the de facto creation of a water “Tsar”.

Oppositionto the Drinking Water Law ended with imposed revisions in favour of thepeasants, and an explicit mention of respect for traditional “usage andcustoms.” However, the process of revision is stagnant in Congress because ofopposition from Aguas de Illimani and the WB. A specialist on the mattercommented, “a call by Aguas del Illimani to the World Bank could do more thanthe peasant mobilisations.”[13]

Exportsof crude water: the wolf in the chicken run

InNorthern Chile, overuse of aquifers has produced deserts and resulted in theestablishment of protected areas to limit exploitation of groundwater. Themining companies in Northern Chile must seek water elsewhere and have theneighbouring Bolivian territory, the north of Potosi, in their sights.[14]

Since2000, local elites in Potosi have attempted three times to open up the businessof exporting crude water. Each time, more or less successfully, regional,peasant and professional organisations have opposed it, arguing that Boliviamust avoid the environmental problems produced in Chile, not replicate them. Aglobal water policy for the region must be drawn up that will attend to thesocio-economic needs of its inhabitants, among the poorest in the country; onlythen, if possible, could “surplus” water be exported.

Thegovernment commissioned a study to define global policies that will take intoaccount environmental criteria and socio-economic needs, while verifying theexistence of those “surplus” waters. However, private consulting companieswill foot the costs of preparing the study, and in the event “surplus” wateris found to exist, the companies will have the right to exploit and market it.Thus, the government has asked the wolf to find out if there are chickens in thechicken run, so that he can later eat them.

Doubtfulbenefits, concrete threats

Theforces which support commercialising and privatising water are strong and haveconsiderable influence on legislative processes. Conflicts arising fromprivatisation have led to injured people, lost lives and postponed solutions.Privatisation and the continuous pressure for more commercialisation pose realand constant threats:

·       The“blind” imperatives of commercialisation and necessary profitability ignorethe cultural importance of water. Water in Bolivia is anything but a simple economic commodity. Inthousands of rural and urban communities people manage and use water accordingto a complex set of social and cultural concepts.

·       Thecompanies are powerful, the State weak.Although the provision of water through public companies requires a strong andefficient State, regulating a trans-national company may require even morestrength and efficiency. In the Cochabamban conflict, the State showed itself tobe incapable of adequately negotiating, regulating and managing a concession orrepresenting and defending the interests of the population.

·       There aredemocratic deficiencies in privatisation processes.Privatisation and the legislation to protect and sustain it, create an obviousdemocratic deficit regarding the transparency necessary for true publicparticipation and oversight. To achieve privatisation, the government has had to“smuggle in” legislation, distort laws already adopted and sign contractswith iron clauses of “confidentiality” that effectively make publicmonitoring impossible.

Whatdoes GATS imply in this setting?

GATSwill exacerbate these problems in three ways:

·       By imposingprivatisation.While the country is debating privatisation, GATS will help impose it byallowing state bodies to provide services only “in the exercise ofgovernmental authority,” which is defined as that “which is not suppliedcommercially or in competition with one or more service suppliers.” Thedefinition is so restrictive that almost no public operator in Bolivia wouldqualify.

·       Byrestricting public debate. While a strong participation of society in disputes over waterregulations has been the case, under GATS these debates will be prohibited. Theobject of GATS discipline is not the services themselves, but what theGovernments do or may do that can affect the trading of a service.Therefore, it is an instrument par excellence to limit “interference” bylegislation and governmental administration in the operation of the “free”market, and implies an explicit abandoning of the sovereignty of courts andlegislatures.

·       Bypreventing policy change. GATS discipline places investors’ rights above citizen rights andmakes privatisations almost impossible to reverse. The failed “experiment”of water privatisation in Cochabamba has been reversed, showing howurgent it is to be able to minimise the cost of correcting errors. GATS willmake it impossible or more expensive for society to make “corrections.”

Boliviais already experiencing that threat. The U.S. Bechtel Company is demandingcompensation for the rescission of its concession contract, arguing in the WBclosed arbitration panel that it has been the victim of an “expropriation”of its property. Under GATS, the proliferation of this type of litigation byprivate companies against sovereign States will be inevitable.


[1] http://www.sisab.gov.bo/empresasreguladas.html

[2] Grover Barja & Miguel Urquiola, “Adverse Welfare Effects,” in Captalisation, Regulation and the Poor: Access to Basic Services in Bolivia. WIDER Discussion Paper, No. 34, 2001, p. 1.

[3] Barja & Urquiola, op. cit., p. 20.

[4] Opinión (Cochabamba), 23 January 1996, p. 5A.

[5] El Diario (La Paz), 1 July 1997, p. 5A.

[6] Carlos Crespo, “La concesión de La Paz a los cinco años: elementos para una evaluación,” 2001, www.aguabolivia.org, p. 1.

[7] Barja & Urquiola, op. cit., p. 22.

[8] Ibid.

[9] Vivien Foster, “Economic and Financial Evaluation of El Alto Pilot Project: Condominial Water and Sewage Systems and Related Innovations,” http://wbln0018.worldbank.org/eap/eap.nsf/Attachments/Water-Informe/$File/InformeFinalApr09.pdf, 2001, p. 14.

[10] See Crespo, op. cit., p. 7.

[12] “Documento de Discusión y Consulta,” 27 April 1999, reproduced in TUNUPA, No. 2, May 1999.

[13] Comment to the author by an analyser having a decade of experience on water issues in International Cooperation.

[14] Juan Aluralde,  “Mitos y realidades sobre la exportación de aguas al norte de Chile,” mimeo, 2002, p. 9.