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Resources 15
Cour des Comptes report on French water industry
Private finance: troubled French water


At the end of January 1997, the Cour des Comptes - France’s equivalent of the National Audit Office - published a highly critical report on the French water industry.

The report is of great interest to the rest of the world, and especially the UK, for two reasons:

  • it is a glimpse of the future under the UK’s private finance initiative (PFI), which is introducing exactly the kind of privately financed, long-term concessions which the report criticises
  • the French model of privatisation is being recommended as a model to follow throughout the world

In France, local authorities are responsible for water and sewage systems. Increasingly, they delegate the management of these systems to private companies, who now run 75% of the water system in France. Authorities are motivated by the large investments and technical skills required.

‘Organised’ competition and ‘negotiated’ procedure

The report points out the existence of ‘organised’ competition:

'There is a high degree of concentration. That is not to say competition is absent, but it is organised competition,' (Francois Logerot, author of the Cour des Comptes report).

The system has not produced real competition - the core theoretical benefit of privatisation. By a process of mergers and takeovers, there are now only three companies in the field - Generale des Eaux, Lyonnaise des Eaux, and SAUR/Bouygues (there was a fourth company, CISE , but it was taken over by SAUR just two weeks before the report came out). And they sometimes form joint ventures between themselves - for example, at St Etienne and the Paris Stadium (see previous article). The UK experience of market testing has also produced such a concentration, with for example just two contractors holding more than 100 contracts each in the NHS.

The report also highlights the extent to which authorities avoid evaluation of bids according to public criteria, by "repeated use of the negotiated procedure, nearly always with the same companies".

Yet this ‘negotiated procedure’ is precisely what the UK government has encouraged all public authorities to use for PFI projects.

Endless renewal

Other practices associated with this kind of privatised concession make things worse.

One is "A tendency to extend existing contracts" without subjecting them to tender, which has created "substantial profit margins". Another is the problem of long-run concessions lasting 30 years or more.

In Dinard (Ille-et-Vilaine), "CISE got the water contract in 1929, and its concession has been renewed up to 2005. The same company will have run the water system for 65 years without ever being subjected to competition"

These long-term concessions are exactly what is being introduced under PFI (see for example the Norfolk and Norwich hospital PFI contract - awarded for 60 years, with review after 30 years: PN 42).

Poor evaluation and supervision - and abuses

The lack of "transparency"; is identified as a major problem by the report. The move to privatisation was rarely properly evaluated; contracts are ambiguous; sub-contracting goes to sister companies in the same group without competition; and procedures are exempted from procurement rules.

As a result, says the report, "The lack of supervision and control of delegated public services, aggravated by the lack of transparency of this form of management, has led to abuses".

  • In the city of Metz, the water company did not submit any accounts for a period of 20 years
  • "A substantial mistake was made in the figures for the invoiced amounts when the joint water authority of the valley of Auzon (Puy-de-Dome) renewed its water concession. Only the company with the water concession at the time knew the true situation - and it finally won a renewal of its contract for 12 years"
  • In Bandol-Savary (near Toulon), where OTV (a Generale des Eaux subsidiary) was contracted to build and run a new water treatment plant, the plant ended up costing at least 15.3 million Francs more than it should. The final insult was that OTV arranged to charge the council twice over for the same treatment, every year. To the amazement of the regional auditor, the company tried to defend this on the grounds that the procedure had been agreed with the council.
Corruption

The report highlights the corruption that has emerged from the system. A number of cases are still being investigated. The convictions that have resulted so far include:

  • In Grenoble, the former mayor, Alain Carignon, and the executive of Lyonnaise des Eaux, Jean-Jaques Prompsey, both received prison sentences for corruptly receiving and giving bribes to award the water contract to a subsidiary of Lyonnaise des Eaux.
  • Two executives of Generale des Eaux have pleaded guilty to corruptly bribing the mayor of St-Denis (Ile de Reunion) to obtain the water concession.
Price rises

"The increase in prices has to be seen in relation to the privatisation of services"

Water prices have risen at an average rate of 10% per year in France since 1992, but most of all where water has been privatised. The companies claim that most of this is due to the heavy investments required, but the report found many cases where price rises had no possible link with investments.

In the town of Egletons (Correze), the price of water was more than doubled by the private contractor in three years following privatisation, even though capital investment remained the responsibility of the local council.

This was made worse by councils using the concessions as a roundabout way of improving council finances, so that privatisation "became an elaborate way of boosting the council’s budget at the expense of the consumer and taxpayer". One way of doing this - now illegal - was to take ‘entry payments’ from the company getting the contract.

In St Etienne, the council was paid 388 million Francs by Stephanoise des Eaux (jointly owned by Generale des Eaux and Lyonnaise des Eaux) to win the water concession in 1990. The company simply increased the water bills to get their money back, and so prices then rose from 3.52 Francs per cubic metre in 1990 to 8.50 Francs in 1996, with further rises to 12.0 Francs planned (until consumers won a court order stopping the practice).

 Weak authorities facing powerful multinationals

Finally, the report repeatedly emphasises the disparity between the local authorities and the three giant companies. The system "left elected councillors on their own, without support, to deal with conglomerates wielding immense political, economic and financial power" (Le Monde, 28th January 1997).

Once again, there are echoes of this in the UK. The government’s insistence on PFI in the health service has left small trusts to try and negotiate deals with consortia of multinationals, instead of central negotiations by a strong department.

(from an article in Privatisation News No 44, February 1997)