Resources 16
Water prices and labour costs

In 1992 the town of Rostock in eastern Germany contracted out its water and sewage systems as a 25-year concession to Eurawasser, (owned 50% by the German industrial firm Thyssen, and 50% by Lyonnaise des Eaux).

The UK company Welsh Water has taken over the running of the water and sewage system in South Bohemia, through a 36% stake in a company called SCVK. A recent report stated bluntly: "SCUK plans to make money in two ways: by cutting costs, and raising user fees. One area for potential cost-cutting is the 2,500-strong workforce..." (BCE Nov 1995 p. 48). The extent to which prices can be raised is sensitive, because Czech water prices are already 24 times as high as they were in 1989. However, the company is definite that "there will be enough gradual rises to ensure a profit", but "the issue of how much profit is being hashed out with the Ministry of Finance".

The company argues that they can do this better because "Job-cutting and price-hiking would be difficult tasks for any municipality to handle". The key decisions are still being made through political processes, however.

Trade unionists in Thailand have criticised the terms of a proposed contract for Thames Water. In September 1995 it was announced that Thames would take over the running of the water concession in Pathum Thani province, building and maintaining pumping stations and pipelines, and charging consumers for the water.

This deal was criticised in leaflets published by the employees trade union, because the compound price rise of 4.4% per annum would mean excessively high prices:"In the first year, residents were expected to have to pay about 15 baht for a cubic metre of tap water. The price would rise every year and in the 25th year the charge would be about 35-40 baht per cubic metre". The plans were also criticised for being technically flawed: "Thames's intention to build only three distribution stations would cost the state firm more in terms of maintenance since longer pipes would be needed" (Bangkok Post 16.9.95)

The first privatised water contract in Brazil was awarded in 1995 to a company owned 50% by Lyonnaise des Eaux, at Limeira. A new sewage plant is being built, and the water supply netwrok being repaired and capacity increased. During the 30 year concession, the company forecast investment of $100million, $26million of which is being provided by the World Bank. However, the company should not have to bother its shareholders for the rest of the investment.

It has already increased prices, in June 1995: "Aguas de Limeira has already launched a publicity campaign to promote water conservation and has this month instituted tariff increases of 6 to 7% to encourage more careful use" (FT Water Briefing 26.7.95). It also notes that about half the 55,000 people connected have meters that need repair or replacement, and that another 9,000 households only pay ‘minimum tariffs’. The company concludes that "....While potential monthly income is put at $1.65m the actual return is $1.1m". If the company manages to realise this, it will increase income from charges by $0.5million per month - which adds up to $180 million extra revenue over the whole contract. This sum is enough to finance all the investment needs and still provide $4million profit per year.

In addition, "The new company has also given early attention to rationalising costs. Only 60% of the existing 430 staff are being transferred from the former water company. Following interviews they are being offered initial 2 year secondments from their former employers". This cuts labour costs by 40% straight away, while avoiding the need for redundancy payments.

(extract from "The Privatisation Network", 1996)

Muncipalities are legally responsible for setting the price of water. In practice, however, it is clear that they have little option but to accept the recommendation of the water company. This was said repeatedly by managers of the companies and others.

In some cases the concessions include clauses which automatically compensate the company if it makes an operating loss:.In Rostock, water prices rose in 1996, because a fall in consumption would have led to losses for Eurawasser, and so "The shortfall automatically activated price-adjustment clauses within the Eurawasser contract" (FT Bus Rep 22 Feb 1995). In both Pecs and Szeged (Hungary), the concession contracts include clauses stating that if the tariffs are not sufficiently high to provide an operating profit, then the council must make good the loss for the company; and if the tariff does not deliver a reasonable profit in Plzen, the council is obliged to pay the difference.

If these clauses are the norm in concession contracts, then it is harder to apply price control.