The 1990s were golden years for the companies that operated concessions for public services in Argentina. The era ended abruptly when the Argentine peso was devalued in 2002 and utility rates were frozen by the Public Emergency Law of that year. Those measures threatened the earnings of these companies, which are majority owned by foreign companies.
Over the past four years, many plans have gone awry. The government has frozen rate increases; private companies have suspended major investments; customers have faced problems with the supply of services and regulatory agencies have not honored their responsibilities. In addition, the executive branch of the government changed hands.
Néstor Kirchner, Argentina’s president for the past two years, has launched a ferocious attack on the privatized companies that provide public services in that country. In his view, the companies are not fulfilling expectations about projected investments and expansion targets. As a result of this battle with one of the country’s most controversial companies, private investors in the water utility Aguas Argentinas — Agbar of Spain and Suez of France — decided last September to get of that business. Before throwing in the towel, both corporations had tried in vain for three years to negotiate an increase in their rates. They had even denounced the Argentine government in 2003 in the World Bank’s global court because of losses they suffered when their rates were frozen at the start of 2002.
Suez and Agbar have 90 days to withdraw from their concessions, which have provided services through their main subsidiary to ten million people in the province of Buenos Aires. Meanwhile, the Argentine government has its hands full trying to find another investor. There has even been talk that the government itself might take over the service on a provisional basis, as it did with the Argentine Postal Service. However, no one knows at this point if there will be another bidding process [for concessions].
Ariel Casarin, professor of business, society and economics at the Austral University’s school of management and business, suggests that the problem of Aguas Argentinas is not all that serious. “You don’t have to dramatize the situation. In 90 days, you can supply the service with any operator because the staff of Aguas Argentinas has the training to do that.”
Mixed Ownership Versus Private Ownership
What would the new contract need to be? Analysts disagree. According to Casarin, “You have to differentiate between the operation and the expansion of the public service. From the point of view of the operation, I think that it is convenient that it remains private because [Argentina’s] operators have demonstrated they are the most efficient in the whole world. However, expanding the service means something quite different. That’s because in developing countries like Argentina, the government has not been efficient. In this case, I think the best option is mixed ownership: The economic viability of the investments is very difficult because so much work remains to be done. On the other hand, there is not enough legal and institutional security (in the country) to tempt large investors.”
Marcelo Celani, professor at the Torcuato Di Tella University’s business school, agrees. Celani favors a mixed system in which “the public sector finances those expansions that are not related to rates — probably for those people who do not get water service — and the [private sector] finances maintenance of current installations and possible future improvements.”
In other countries, there are some examples of mixed systems that have yielded good results. In Paris, a mixed company is responsible for making water drinkable, and two distributors are responsible for water purification and cleaning up sewer water.
Wharton management professor Mauro Guillén has the opposite view. “I don’t think that mixed ownership is appropriate. In the case of electricity, water, highways, gas and similar services, the best thing is for ownership to be private, while also having an independent and impartial regulatory agency.”
The Guilty Ones
ETOSS, the regulatory agency for Aguas Argentinas, has been widely criticized for its lack of control. According to Casarin, that institution does things in a very unusual way. “ETOSS, the regulatory body, has only one enterprise to look after, which is Aguas Argentinas. When it comes to other services, each of the regulatory bodies [in those sectors] monitors more than five enterprises. This means that when it is time to negotiate [in the water sector], the two parties sit at the same table. ETOSS has made all sorts of mistakes as a result. You have to remember, moreover, that in the case of Aguas Argentinas, the regulatory body [ETOSS] has always been overshadowed by the executive branch. Ever since water service was privatized, negotiations have been managed, in turn, by ministers and presidents.”
In the future, says Celani, “The rules have to be stabilized and it has to be clear which parties are involved. The regulatory bodies have to be professionalized; the process of appointing people [to the regulatory bodies] has to be more transparent, and result from open competition. When it comes to turning these bodies into real institutions, the current situation in Argentina is extremely bad.”
Clearly, the executive branch and the regulatory agencies have failed to fulfill their roles, and private investors must share the blame. “Suez has had problems in the Philippines, Bolivia, Atlanta, England and France,” said Casarin. “In each case, something else went wrong, but it was also about the quality of their service, whether it was in developed countries or in developing countries.”
According to Celani, one of the fundamental problems is that consumers don’t associate their level of water consumption with economic input on the part of the utility provider. “Consumers are not used to paying for the level of consumption they get,” he says. “In this country, a lot more than half of the people who use the water utility do not pay according to their level of consumption.”
The Future of Foreign Investments
Suez, which owns 39.93% of Aguas Argentinas’ shares, would have to invest more than $140 million each year to cover projects that have been left hanging. According to the InterAmerican Development Bank, some 6.5 million Argentines still have no access to drinkable water, especially in rural areas.
Who would take care of this kind of work, if not the government? According to Casarin, “There are two types of capitalism. First, there is the sort of capitalism where the market imposes its own rules; second, there is the capitalism where companies negotiate with the executive branch. In the latter situation, rather than call for bids on projects, the state picks and chooses who will be the utility provider. Nevertheless, I think that investors who have experience lobbying and negotiating with governments will continue to come [to Argentina]. In any case, with regards to other public services, those companies that have already invested millions of dollars are facing this problem with resignation. Some companies have been sold to new ownership, and others are gradually leaving.”
Celani believes that the departure of European investors from Aguas Argentinas will be harmful to some degree, when it comes to attracting new capital, “despite the fact that this case in itself does not directly affect all investments in all sectors. Everything depends on how the conflict is resolved. This much is clear: In the water sector, the reputation of Suez has been damaged, and so has the reputation of the country. I am equally sure that the government will find some way out of the problem after the legislative elections scheduled for October 23. In fact, several contracts have been signed, and they are expected to be fulfilled. One example involves toll roads.”
For his part, Guillén believes that Argentina “must decide whether or not it wants to belong to the family of countries that observe the established rules of the game. I believe in the future of Argentina, and I would like the country to become completely integrated and in tune with the rest of the world. Whenever an investor leaves, anxiety and nervousness result. In the case of Argentina, it is important to reestablish credibility.”