The big sale in the water supply market

Irina Moulechkova; Plamenka Markova
Bulgarian Gender Research Foundation

Water supply, electricity, health and transport services, sectors that were formerly state monopolies, have all been privatised. This report focuses on the privatisation of water, which has been characterised by non-transparency and ineffectiveness, higher rates and a lack of infrastructure improvements. The restructuring of the water supply sector has already had a negative impact on the social and economic status of the population, as higher prices have eroded real household income.

Governmentalwater supply strategy

Accordingto the water supply draft strategy for development, transformation andmanagement, which will be adopted by the end of 2002 by the Ministry of RegionalDevelopment and Public Works, BGL 7.7 billion (approximately USD 3.85billion) inprivate foreign investments is needed to improve the country’s watersupply. In addition to the privatesector, other financial resources include the pre-accession EU fundsand direct state investment. The concrete parameters of the sharing of theinvestments will be identified in the National Programme for Economic andRegional Development. The main problem is the inefficiency in the management ofa water supply operated by 51 state and municipal companies (providing potablewater and sanitation) and the enormous losses of transferred water due toantiquated infrastructure, about 90% of which needs to be modernised. The resultis the high cost of potable water for consumers.

TheWorld Bank has demanded a new strategy for the involvement of the private sectorin water supply, which includes a concession, followed by the contracts formanagement and concrete services. The strategy for privatisation involves mixedforms of operation such as the plan for the private investor to build aproperty, use it for a certain period and subsequently transfer ownership of theasset to the State.[1]The government intends to implement the concession strategy in other big citiessuch as Khaskovo, Pernik, Kyustendil, Dimitrovgrad, Vidin, Montana, Vratza, etc.According to the government, the main advantage of the concession policy is theexpected high amount of private investment and the possibility for the State ormunicipality to have control over the investors. Now, after the rejection of thescheme in Varna and Schoumen, whether or not the other cities will adopt thismodel is uncertain.

Thecase of Sofia Water

Theuse of the water supply in Sofia was given by concession to the InternationalWater Ltd., a foreign company, at the end of 1999. In 1998-1999, 20 foreigncompanies expressed a preliminary interest in operating the capital’s watersupply of potable water and sanitation plus repairing the existinginfrastructure. On 6 October 1999, the winner of the bid in which four companies(among them Vivendi and the French company Lyonnaise des Eaux, which intended tobid for Varna and Schoumen as well but in consortium with Aqua Mundi) took part,International Water Ltd. (a consortium between US Bechtel Enterprise and BritishUnited Utilities International), signed a 25-year concession contract with themunicipality of Sofia. The Sofia Water Joint Stock Company was established with75% of shares belonging to the International Water Ltd. and 25% to the Sofiamunicipality. In November 1999, experts from Raiffeisen Investment (aninternational consultants’ group) warned that International Water Ltd. wouldprobably be incapable of investing in Sofia Water due to the lack of demand forthe company’s shares in the international finance markets and uncertaintyabout company’s financial status and investing capacity.

Poorperformance, higher bills and a lack of new infrastructure

Itquickly became evident that International Water Ltd. was incapable of fulfillingits contractual obligations. In July 2002, the municipality of Sofia accusedInternational Water of both contract violations and poor performance. Mostconsumers have been forced to pay disproportionately high water bills in advancedue to the mistakenly reported high quantities of consumed water that have notactually been consumed.[2]The media publicized the case of an elderly, retired woman living in a flat whogot a water bill as if she had an Olympic swimming pool. The concessionaireattributed the excessive charges to a new software system.

Thepresent rates (for citizens and companies) of the potable water are very highunder the excuse that the water supply utilities are very old and needmodernisation. The Sofia Watercompany is also accused of ignoring complaints by consumers such as delayedreaction to emergencies (for example, a failure in the central water-supplynetwork and the subsequent flooding of streets, basements, etc.); randomstoppages in water supply to homes and districts; and chaos in servicingconsumers. The transparency promised by the British company vanished. Moreover,the Sofia municipality has indirectly sided with the British investor againstthe interests of the taxpayers by not fulfilling its rights for control as amember of the joint stock company, Sofia Water. Other complaints against the newcompany, such as non-compliance of the new infrastructure, namely the newwater-meters, with the current standards and low water pressure on high floors,are currently under discussion.

Becauseof poor performance, the municipality threatened to cancel the contract with theforeign investor. However, no concrete steps were taken. In the meantime, otherscandals took place, such as the appointment of sub-contractors to maintaininfrastructure. According to legal experts, the procedure for the selection andappointment of the four firms’ sub-contractors also violated the contract.

Whois the owner?

InternationalWater Ltd. has sold its shares in the Sofia Water company, but the public doesnot know the new owner’s identity, even though this investor controls thewater supply of 1.3 million consumers. Although the mayor of Sofia claims thathe has been unofficially informed about the sale, the new contract needs to beapproved by the Municipality Council of Sofia and European Bank forReconstruction and Development (EBRD), thelatter being the financing institution of the concession contract. The NationalCommittee on Water Supply announced that International Water Ltd. had not beenregistered in Great Britain. It was registered in the Netherlands to benefitfrom liberal taxation as a foreign company operating in a third country.

Wheredoes the bill end?

Althoughthe provisions of the concession contract stipulated the preservation of theinitial rates for the first three years, the price of water increased twiceduring the second year of the contract. Sofia Water also demanded an additionalincrease of 16-17% in October 2002 because of the urgent need to repair the BeliIzkar dam reservoir—one of the capital’s main sources of potable water. TheSofia City Council did not approve the demand for the new price increase untilthe end of 2002. It argued that the rate of inflation is low and under controlbecause Bulgaria is under the Monetary Board, and that the company hasobligations under the contract to modernise the whole water supplyinfrastructure, including the dam reservoir as a part of the system.

Omonit,the regulatory agency, found out that the initial owners of Sofia Water reportedspending USD 6.2 million, but the company could only present relevant documentsfor just USD 1.9 million. The investor justifies the expenditure with the highcommission it had to pay to the EBRD and consultant fee to Price Waters Coopersconsultants. There is no transparent information for what services the feeincluded.

Themedia revealed that EBRD gave Sofia Water a loan of EUR 35 million for therepair of water supply infrastructure and delivered EUR 15 million of thatamount on 22 December 2000. From this amount EUR 13.5 million was transferredoutside the country by United Utilities International and International WaterLtd. Relevant documentation was presented by independent experts in January 2001to the Bulgarian parliamentarians from all political parties in the three Sofiaelectoral regions. Clearly, not only the municipality takes the side of theforeign investor (whomever it is now), but so does the State as a whole,including Parliament and the competent Ministry of Regional Development andPublic Works, by ignoring the dubious fulfillment of the contract whichundoubtedly affects the interests of water consumers and taxpayers.

TheSofia case is characterised not only by the illegal increase of water rates forthe population, excessively high bills, and payment of non-consumed water, butalso by the lack of a long term strategy for the repair of the water supplysystem. Reconstruction projects typically occur in case of emergencies, and thusthe water may be cut at any time. Some reconstruction projects started in thesummer of 2002, but they do not involve systematically the whole waterinfrastructure of the capital. Partial reconstruction of Beli Iskar damreservoir was one of Sofia Water’s justifications for the 16% increase in thewater rates dating from 5 October 2002. On the other hand, in its bid for thecontract the initial foreign investor promised BGL 81 million in investments for2002 and BGL 340 million for the next 15 years. The winner proposed the highestprice for the concession rights and the highest amount of the offeredinvestments. All these parameters were included as main provisions in theconcession contract.

Thebig sale

Theprivatisation of the water supply firms in the other locations also resulted innon-transparency and ineffectiveness at repairing old infrastructure. With theamendments of the water laws, the infrastructure—the network of pipes, pumpstations and purifying stations—will be withdrawn from the companies’ assetsas state or municipal property under different legal forms. The use of suchassets will then come under the control of the private investors. The processwill start in 2003, as by the end of 2002 the law for the national regulation ofthe sector will be in effect. A new agency that will supervise the quality andthe level of the service as well as the price of the water will be in placestarting in 2004.

Consequently,the big sale of the sector will begin in 2003. The selected concessionaire willhave the right to manage the water supply for up to 35 years from entering intoa contract, the terms of which could be prolonged by the mutual consent of theparties based on the decision of the Council of Ministers (the governingbody according to art. 6 of the Law on Concessions) but for no more than50 years (art. 3 of the Law on Concessions). In exchange, a certain amount ofinvestment is required. For example, for the failed scheme in Varna and Shoumen,the minimum amount announced was USD 108-110 million.In this case, in order to avoid the scandals that plagued Sofia Water, the lawis expected to regulate and control the investments and the performance of thecontract. However, it should be stressed that the process of privatisation andliberalisation of the water supply market is influenced by highly paid foreignconsultants promoting the interests of the potential foreign investors andthemselves at the expense of the taxpayers.

Therights affected

Theright to an adequate standard of living as agreed upon in the United NationsMillennium Development Goals Declaration means that States have to ensure thatall trade agreements under WTO auspices, as well as the process of privatisationand liberalisation of basic public services, will not jeopardise the social andeconomic condition of their citizens, their fundamental rights to life anddevelopment, as stated in art. 8 (1) of the UN Declaration on the Right toDevelopment.

TheInternational Financial Institutions continue to insist on marketising servicespreviously in the public and non-commercial realm, arguing that investments inthese areas will have a major effect on growth and poverty reduction and that theyneed to increase dramatically by attracting new sources of finance.However, it is clear that privatisation and liberalisation of the basic publicservices without any protective measures from the State could result inimpoverishment of the population as a whole and violation of the right to life,the right to an adequate standard of living and the right to development. Anysimilar policy would deprive citizens of their right to economic and socialprotection from the State. The restructuring of the water supply sector inBulgaria has already had a negative impact on the social and economic status ofthe population, as higher prices have eroded real household income.

Recommendations

TheBulgarian government has to take all possible measures to minimise the negativeeffects of the privatisation and liberalisation of basic services throughincluding parameters for the protection of the social and economic rights ofcitizens and their social security status in the negotiation process with theWTO, IMF and EU. The State has to comply with all previous internationalobligations arising from international agreements to which Bulgaria is already aparty, including the International Covenant on Economic, Social and CulturalRights.

Bulgariashould include viable mechanisms for the control and supervision of privatedomestic and foreign investors in the service sectors in its domesticlegislation before further service liberalisation proceeds.

TheState has to undertake adequate legislative and other measures to avoid andlimit corruption among state and municipal bodies in the process ofliberalisation of the trade in services that is imposed externally.

Bibliography

Pressinformation from newspapers “Capital”, “Monitor”, “Trud” and“Banker”.

Reportof the Protecting Consumers Association on Water Concession.

“Waterand Poverty”, remarks by J. Saghir, Director Energy and Water. The WB at theopening of the Water, Health and Poverty Day, WaterDome, 2 September 2002 inWSSD, Johannesburg.

ArielDinar and Ashok Subramanian, Editors. “Water Pricing Experiences: anInternational Perspective”. WB Technical Paper 386, 31 October 1997.

PaulHolden and Mateen Thobani. “Tradable Water Rights: a Property Rights Approachto Resolving Water Shortages and Promoting Investment”. Policy ResearchWorking Paper 1627, 31 July 1996.

Notes:

[1] Concession contracts last up to 35 years. The first one for 25 years was for Sofia, the capital of the country. Upon the advice of the World Bank and EU consultants, such contracts were planned for Varna (the sea “capital”) and Shoumen (a city in the northeast part of the country) as pilot programs. However, after the recent failure of the concession scheme in Sofia, the municipal authorities in the both cities rejected the pilot project.

[2] Each month Sofia consumers pay USD 2.6 million for drinking water, 36% of which is lost due to dilapidated infrastructure, theft and non-registered companies. Every day 700,000 cubic meters of water are directed to water pipes in Sofia while consumers actually receive only 448,000 cubic meters.

 

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