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Resources 17
Aguas Argentinas: the private model
(extract from "Water Concessions: ownership, control and regulation", May 1997)

In 1993 Argentina privatised the water and sewage system of Buenos Aires to a company called Aguas Argentinas, owned by a consortium of multinationals led by Lyonnaise des Eaux. This concession is regarded by the company as a model of how a multinational can improve a public service. (sources: "The Buenos Aires Case" by Marc Fornacciari of Lyonnaise des Eaux, May 1995; article in Les Echos, 2nd May 1994; report by Argentine trade unions to PSI conference in Montivideo April 1995).

  • Technical and service improvements

Out of 9m people in Buenos Aires, only 6m were connected to water supply, and 5m to sewage. The contract allows the consortium 30 years to connect everyone to both services - not a very challenging target. In the first 18 months, Lyonnaise report that they connected another 0.4m to water, and 0.25m to sewage - at which rate it will take just 24 years before everyone is connected to sewage.

The company also reports that in the first 18 months it has repaired 250km - about 2% - of the water network and reduced leaks; increased water supplied by 30%; reduced the number of blocked sewers, by using "a fleet of specialised equipment" which can clean up to 2000km - 25% - of the sewers each year; introduced new equipment to monitor flows. This record is fair enough - but no more than should be expected of any new, trained management with $200m per year to invest.

  • Labour

The main area of savings came from voluntary redundancy for 3,830 out of 7,500 workers - a 50% cut in staff in the first three months. The company invested $50m in severance payments to acheive this huge reduction.

  • Financial efficiency

The most dramatic improvement was the increase in revenue collected - up from $54m to $90m per quarter. By mid-1995 the company expect that 95% of users will be paying, as compared with 55% in 1993. This was achieved in a number of ways:

  • urgent action to create a new computerised invoicing system, so that 2.3m invoices were issued after just 24 days;
  • updating the customer database - using field and aerial surveys to get information on size, type and location of dwellings;
  • "an efficient implementation of recovery mechanisms"
  • detection of 500,000 "unauthorised connections and fraud" - the action taken is not specified (It is unclear whether the company ended up severing more "unauthorised" connections (500,000) than it created new ones (400,000)).

The company also says it tightened up procedures on purchasing, use of materials, and administration.

  • Investment

The company promised $1,000 million investment in the first five years. Lyonnaise worked hard to negotiate money from the Interamerican Bank for Development ($100m); from the IFC, a world bank agency (raised $115m. to $250m. dollars in loans, and put up $300m. itself, and has now taken taken 5% of the shares of Aguas Argentinas); and the rest was raised by issuing medium-term company bonds.

Lyonnaise des Eaux itself is putting up no more than $30m - the company’s 25% of the $120m. capital of Aguas Argentinas. Local Argentine banks are investing far more (about $--m loans + $60m equity) than all the multinationals in the consortium put together ($60m).

  • Prices

There was no increase in prices at first - in fact, the contract specified a price reduction. However, it provides for steady real increases in prices for the next 30 years. This is subject to 5-yearly reviews, however, and the company regards these reviews - and the possibility of devaluation of the Argentine peso - as potential risks to the profitability of the contract.

(extract from The Privatisation Network, 1996)

In 1997 Aguas Argentinas found that it was making losses when it made new connections, as required by the contract, because the newly connected households could not afford to pay. The government revised the contract in November 1997 to allow it to increase prices.

"Water company Aguas Argentinas has become the country's latest privatized utility to suffer a barrage of consumer criticism over plans to hike rates for its services. The row between consumers and the firm, operated by France's Lyonnaise des Eaux-Dumez, hit the front pages after local media reported it planned to bill its clients an extra Dollars 2-Dollars 4 every two months.

The company said it wanted the contract redrawn to compensate it for losing Dollars 60 million after the government asked it to build water and sewage connections for free last year after protests over charges in poor areas….Sources close to the negotiations say Aguas Argentinas wants to charge all its customers Dollars 2-Dollars 4 more every two months but the government may insist on a smaller charge.." (Reuters 29 September 1997)

This has been unpopular with consumers. In March 1998 the high court ruled that the price increases were illegal, and the company said in that case it would cut investment in the water system.

"Aguas Argentinas said on Tuesday it will be unable to expand its water networks as planned because its revenues will be reduced after a court barred it from billing customers the Dollars 4 'solidarity' charge.

The court ruling 'will hurt expected revenues from the concession, which will make it impossible to advance with the expansion of new networks,' the company said in a press release. A judge on Monday barred the company, controlled by France's Lyonnaise des Eaux-Dumez , from billing its customers an extra Dollars 4 every two months to cover losses incurred in its services to poor areas. The fee, known as the 'solidarity' charge, was introduced last November. Jorge Maiorano, the independent public ombudsman, challenged the fee in court, saying the company had not met the investment targets outlined in the 1993 Aguas privatization contract, and therefore had no right to charge the fee. Aguas, however, said it had met its obligations under the contract, ploughing Dollars 1.02 billion into network expansion and quality improvements so far. But its Dollars 240 million 1998 investment budget 'will be severely affected by this ruling'" (Reuters 17 March 1998)

An offical of Lytonnaise des Eaux, the leading multinational in the company, has described their contract as 'a living thing, with social relationships'.

(extract from "Water Privatisation in Latin America" July 1998