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In March 2006, after enduring years of lengthy water service cut-offs, flooding due to lack of proper drainage, huge rate increases and all manner of broken promises, Argentina tore up its 30-year contract with Aguas Argentinas, a subsidiary of the multinational utility Suez, to provide water service to Buenos Aires and its 10 million people.

So irate are Argentine authorities over Suez’s blundering that they have asked the courts to prevent top corporate executives from leaving the country, pending possible criminal charges for allowing high levels of nitrates in the capital city’s drinking water. And the government is trying to freeze Suez’s Argentine assets.

Initially, the World Bank helped Paris-based Suez – the world’s second-largest water company – achieve one of the biggest transfers of a public water system to private control in history with the Buenos Aires project in 1993.¹ But in recent years, it’s been another major international lender that has bankrolled this doomed privatization effort.

The Inter-American Development Bank has not received as much critical attention as the World Bank, but its lending policies may be doing just as much damage. The Suez disaster in Argentina is just one of many IDB-funded initiatives in Latin American and the Caribbean that have aroused mass opposition throughout the region.

Going Thirsty profiles Latin American water projects bankrolled by the IDB. The report documents how the IDB consistently requires privatization of water utilities without considering restructuring and rehabilitating the public water utilities, repeatedly provides funds that enable multinational corporations with a history of failing to meet the environmental and public health needs of the local population assume control of local supplies, and has prolonged water conflicts by bailing out failing World Bank projects.

Introduction to the Inter-American Development Bank

In scenes reminiscent of World Bank, International Monetary Fund and World Trade Organization meetings, hundreds of protesters gathered outside the IDB’s annual meeting in Belo Horizonte, Brazil, in April 2006. Led by newly elected presidents Evo Morales of Bolivia and Manuel Zelaya of Honduras, the protesters demanded that the IDB forgive billions of dollars in debt – debt that they charge enabled corrupt regimes to reward powerful corporate cronies by building projects that never benefited the majority poor populations in Latin America.

IDB debtor governments are forced to dedicate substantial portions of their national budgets to repay their loans – money that could fund basic public services like health care, water projects, and education. To add insult to injury, IDB loans often include conditions that require governments to privatize water and other public services and natural resources.³ Rather than address the real causes of poverty, IDB loans subsidize government elites and their corporate backers while promoting policies that have detrimental impacts on local populations and the environment.

Examples include the following projects:

• The Cana Brava dam in Brazil, built by another Suez subsidiary, which has displaced hundreds of families and caused massive environmental damage.⁴
• The Camisea natural gas pipeline through Peru’s Amazon rainforest, built by Halliburton board member and prominent fundraiser for U.S. President George W. Bush Ray Hunt, which has exploded and leaked several times, causing fires and injuries.⁵
• Massive eucalyptus tree plantations in Uruguay, which have depleted drinking-water wells and uprooted croplands.
• The Plan Puebla Panama, an enormous transportation, energy and telecommunications project that seeks to turn several Mexican states and all seven Central American countries into profit centers for multinational corporations.⁶

Since its founding in 1959, the Washington, DC-based IDB has provided $140 billion in loans and grants to governments and, increasingly of late, private corporations in 26 Latin American and Caribbean nations. IDB investments are approved by its shareholders, the 21 member nations that provide funds. With 30 percent of the shares, the United States is the bank’s largest single shareholder. Collectively, the borrowing nations hold just over 50 percent of the voting power collectively. The United States owns three times as many shares as the next-largest individual shareholders, Argentina and Brazil.⁷ It makes the U.S. the most influential member country and awards the United States executive veto power over IDB decisions. Washington, therefore, is more than just the IDB’s symbolic headquarters.

The IDB is the largest multilateral lender in the Americas, supporting energy, transportation, telecommunications, agriculture, urban development and health care projects.

And water projects – many of them.

In a disturbingly similar fashion to the World Bank and IMF, the IDB has a reputation of using its financial support to promote projects and policies that purport to help the poor and disadvantaged, but which are actually conceived by multinational corporations and driven by profit. And like these two other lenders, the IDB has been largely impervious to outside pressure from citizen groups and non-governmental organizations fighting to preserve the social, economic and environmental integrity of a region that is overly susceptible to predatory lending practices.

Inter-American Development Bank Water Projects

The IDB’s stated mission includes helping the estimated 125 million people in Latin America who live without household connections to clean water, and the 200 million people who don’t have sanitation.

But corporate involvement in Latin America water utilities has allowed prices to rise beyond the means of ordinary people and eroded service delivery as companies cut corners and fire workers in order to increase profits.

Even the IDB’s own internal watchdog division says the bank’s water policies – which focus extensively on public/private partnerships, the bank’s preferred term for privatization, and cost recovery – are “not appropriate” for helping the poor, do not emphasize environmental protection, ignore community input, and are not “producing the expected results.” ⁸

The box below summarizes water loans provided to Latin American countries in the 1993-2005 period. Our analysis shows that more than half of the loans consistently demand that users pay increased prices for water. More than two thirds make the demand that countries privatize services. Such demands ignore the need to provide affordable services and move towards full access to potable water for all. But even more importantly, IDB loan policy ignores the need for transparent and democratic decision making in the receiving countries. Instead of promoting best practices and finding solutions adapted to local conditions, the IDB consistently uses the same blueprint policy – and as we will see – a blue print that has consistently failed.

Inter-American Development Bank – Water & Sanitation Loans 1993-2005

* or Public Private Partnership the term used interchangeably for contracting services with a private company.

The following examples illustrate the IDB’s failures.

Buenos Aires, Argentina

With backing from the World Bank and, later, the IDB, Argentina signed a 30-year water service contract in 1993 with Aquas Argentinas, in which the France-based multinational Suez held a 40 percent share. Based on the sheer number of problems associated with Suez’s management of the water and wastewater system in Buenos Aires, it’s surprising that Argentina waited 13 years before ejecting the company:

• In 1997, Aguas Argentinas failed to fulfill 45 percent of its obligations to improve and expand service. The company was fined US$18 million in 2003 for not implementing construction plans, and another US$1 million that year for a service interruption that affected 6 million people.⁹
• At one point, water in seven districts in Buenos Aires had nitrate levels so high it was unfit for human consumption.¹⁰
• Aguas Argentinas boosted residential rates 88 percent from 1993 to 2002, despite the fact that inflation rose just 7 percent during that period. Aguas Argentinas reaped a 20 percent profit, up to triple the prevailing margin for water companies in the United States, United Kingdom and France.¹¹
  
  

Not only did tensions between Argentina and Suez deepen, but also relations between Argentina and France, Suez's home country, began to sour.

The IDB came to the company’s rescue in 1999, approving a US$300 million loan to Aguas Argentinas. The money was intended to help the company achieve connection rates of 100 percent for drinking water and 95 percent for sanitation in Buenos Aires, and enable it to treat 100 percent of the sewage.¹² Incredibly, the IDB loan did not define what “connections” were, nor did it specifically identify who would receive them.¹³

According to IDB’s internal watchdog division, only 44 percent of the poor living in the city’s outskirts received clean drinking water, and only 17 percent were connected to sewers in 2002 (compared to national averages of 55 and 30 percent, respectively).¹⁴ And, as of 2003, nearly 90 percent of Buenos Aires’ sewage was still being dumped into the Rio de la Plata – which, also due to industrial pollution, is one of the few rivers on Earth in which pollution can be seen from space.¹⁵

Absent the IDB’s US$300 million loan, Suez may have abandoned its Argentine operations several years earlier. Instead, long-overdue solutions were needlessly delayed, and the resulting mess grew messier.

The government terminated its 30-year contract with Aguas Argentinas in March 2006. A new firm called Aysa, which is 90 percent government-owned and 10 percent worker-owned, took over the system the next day.

How bad is the situation? Argentina’s ombudsman has asked the courts to block Aguas Argentinas from selling its assets and to freeze its bank accounts.¹⁶ The government has filed lawsuits against the corporation claiming US$487 million. And the government has asked the courts to block four top corporate executives from leaving the country, pending an investigation into the high nitrate levels. If convicted of endangering human health, the men could face prison sentences of three to ten years.¹⁷

With the French government’s backing, Suez is trying to recoup US$1.7 billion in investments it claims went uncompensated because some of its rate-hike requests were rejected through the World Bank arbitration court named the International Centre for the Settlement of Investment Disputes.¹⁸ Suez is trying also to collect US$19.5-32.5 million in unpaid water bills.¹⁹

La Paz and El Alto, Bolivia

In 1997, another Suez-led corporation, Aguas del Illimani (AISA), won a 30-year contract to provide water and sewer service to the 1.3 million people living in the capital of La Paz and neighboring El Alto. Initially funded by the World Bank, the IDB kicked in US$15 million a year later – under the condition that the government approve a series of laws to facilitate water privatization.²⁰

Coupled with outrage over proposed fuel price increases, citizens angered by AISA’s rate hikes and poor service launched protests and a general strike in January 2005, idling El Alto and blocking traffic between the two cities. Within days, the government announced it would cancel its contract with Aguas del Illimani.

Numerous grievances were raised by FEJUVE, a federation of community councils, and other groups:

• AISA engaged in “red-lining” – writing the contract so that it was required to deliver water only to certain neighborhoods – which left about 200,000 people, many of them poor, outside of the company’s “served area.” ²¹ The IDB financed this project while ignoring these obvious shortcomings.
• Some 80,000 families within the “served area” were effectively denied water service. One of the main reasons: AISA charged US$450 for a connection to the water and sanitation service – a poor family’s food budget for two years.²²
• In spite of these gross exclusions, AISA announced that it provided potable water to 96 percent of El Alto and La Paz.²³
  
  

The Bolivian government hired an auditing firm to review AISA’s performance, including the company’s economic, commercial and contractual compliance.²⁵ The audit confirms the contractual incompliance of the company, the lack of investment made, and the dismal environmental and social performance of the company.²⁶ As of this writing, the government has declared it is committed to forming a public water company.^{27, 28} While AISA had agreed in principal that it would leave El Alto, there were protracted negotiations between the company and the government regarding the precise terms of the contract dissolution which finally included a US$15.5 million exit package for AISA.²⁹

Guayaquil, Ecuador

The IDB provided a $40 million loan Ecuador in order to prepare for privatization. This loan enabled the Bechtel subsidiary International Water Services to take over the water and sewer system in Ecuador’s largest city, the port metropolis of Guayaquil.³⁰ Bechtel’s local subsidiary became known as Interagua.

Problems surfaced shortly after Interagua came to town in January 2001. The contract permitted Interagua to fire all workers from the once-public utility – which the company promptly did. Only after intense pressure did Interagua begin to re-hire the workers but just 20 percent were back on the job as of May 2002.³¹

In 2002 the press reported that the company was only treating 5% of the sewage and releasing the rest, including fecal material and domestic and industrial waste, directly into the river. The health department began to issue reports to the press documenting health problems that children were experiencing in communities to the north of the city, such as Acuarelas del Río and Guayacanes. Health problems included skin, respiratory and gastric problems such as rashes, asthma and diarrhea.³³ Investigations by the Commission for Civic Control of Corruption and the Public Defender’s Office concluded that poor service by Interagua contributed to a major Hepititis A outbreak in 2005.³⁴

By then, organizations such as the Observatorio Cuidadano de Servicios Publicos (Citizen’s Observatory for Public Services) were documenting the repeated contractual violations of Interagua and demanding that action be taken. The Citizen’s Observatory accused Interagua of evading the law that prohibits water cutoffs for more than 24 hours by cutting off water to neighborhoods for 23 hours a day for weeks at a time. They also objected that Interagua responded to middle- and upper-class water users while ignoring complaints from poor users.³⁵ The Citizen’s Observatory for Public Services is calling on the regulatory agency ECAPAG to enforce the appropriate laws and regulations and to fine Interagua for US$150,000 for non-compliance with its contractual obligations.³⁶

Interview with Cesar Cardenas of the Citizen’s Observatory in Ecuador
August 17, 2006

Why must Interagua/Bechtel leave Ecuador?
First of all, because the company did not comply with the terms of the contract. They were unable to provide water for human consumption. They’ve violated consumer laws as well as our Constitution, which states that these services must be efficient, opportune, and that access is guaranteed to the whole population. It’s already been 5 years since the concession contract was signed and now we are preparing the necessary legal documentation to sue the company for a series of violations against these laws. Most importantly, the reason [Bechtel must leave] is because the poorest sectors of the population are not guaranteed access to water when the service is privatized and dependent on concession contacts.


Who supports the struggle against Interagua in Ecuador?
The Citizens’ Public Service Observatory is a network of 49 organizations and institutions that include professional associations such as the association of civil engineers, associations of architects, UNICEF, and national organizations, such as the Women’s Permanent Forum and the Women’s Political Coordinator. There are also neighborhood associations, small community groups, and journalists associations. A large network of people are concerned that all people have access to quality public services.


What are some examples of instances breaches of contract?
Last year there was a huge water cutoff and Interagua did not provide an alternative water source, as the contract states they must do. We approached the company to demand they comply with their contractual obligations but they did not. They simply did not wish to do so. This caused a large number of expenses to families because two million people had no water for 3 days. In some areas of the city the cutoff lasted up to 15 days. Additionally, the company has been billing some families for services they don’t even have. Regarding billing practices for people that do have services, by law the company is not allowed to charge based on average consumption rates. However, Interagua is doing that, and ECAPAC [Empresa Cantonal de Agua Potable y Alcantarillado de Guayaquil (The Potable Water and Sanitation System of the District of Guayaquil)] allows it, sharing responsibility for these violations against consumer laws. The contract guarantees that in the first five years water services will be extended to all of Guayaquil, but they haven’t delivered. They should have made 55,262 water connections and sewage services. They’ve only made 38,000 water connections and 27,000 sewage connections. They haven’t even followed through with their original commitment. These and other examples clearly show that privatization does not guarantee quality services or access to the entire population, especially to the poor. Since water has been privatized the price has quadrupled. This is an attack on those that earn the least, as well as against businesses and trade.

Peru

The IDB’s involvement in Peru’s water systems dates to 1991, when the bank began offering technical assistance. A US$140 million loan followed in 1994, as well as a US$150 million loan from the World Bank that year. These loans contained the standard privatization conditions including creating new regulatory structures, increasing rates and cutting staff. During this time tens – perhaps hundreds – of millions of dollars were allegedly plundered by president Alberto Fujimori. (Fujimori fled Peru in 2000 where he faces corruption and human rights charges.) Fujimori’s excesses bankrupted public services, including the water system, driving up rates and reducing service to the poor.³⁷

The structure of the 1994 IDB loan is highly questionable – one might even call it sanctioned bribery. Only the municipalities that have agreed to conduct feasibility studies of privatization have been selected for the program and only those that agree to sign contracts with private sector companies will reap the financial rewards. The feasibility studies do not include a fair examination of all of the possible water sector management options, but rather serve as a vehicle to determine the arrangements necessary to guarantee profitability to a private sector company.³⁸

Thanks to another US$50 million loan from the IDB approved December 2005, water and sewage systems in six cities are being targeted for privatization: Huancayo (population 450,000), Paita (100,000), Plura (350,000), Pucallpo (200,000), Trujillo (850,000) and Tumbes (150,000). Four months before the loan was approved, the government changed its 1996 sanitation law to encourage water privatization.³⁹ The first contract was awarded to a Peruvian-Argentine consortium a month later – before the IDB loan was even approved – for Tumbes, situated along the country’s northern coast.⁴⁰

Interview with Luis Isarra Delgado, Federation of Water Workers, Peru
September 18, 2006

What impact have IDB policies had on the water sector in Peru?
My country has assumed a debt of US$2.4 million in order to “increase” connections and “improve” the systems by adopting a new administrative model for the development of the water company. The results are few. Actually, the debt has led to a crisis for the majority of water utilities. This allowed Fujimori’s government in 2000 to push for a law that would permit him to intervene in public companies run by municipalities with the goal of privatizing these companies. The labor movement supported the people and was able to stop this law from passing. However the problem of inefficiency in the current model still has not been resolved. This led Alejandro Toledo’s government to initiate “new actions and studies” for the implementation of a “legal reform” that would allow 54 public water companies in Peru to be lost to privatization.


What are the effects of privatization on the Peruvian people?
Water and sanitation services in the northern Province of Pacasmayo were privatized by a company called NORWASSER SAC in 2002 for a period of 60 years. However this utility was returned to the municipal governments in May of 2005. The utility had been turned over to a private company to increase the coverage of water and sanitation services to 95% of the population, raise the continuity of services to 24 hours a day, and bring up the percentage of treated water up to 100% -- all of which would be made possible in six months due to an assured investment of 1 million dollars, as elaborated in the Master Plan. After almost two years of running the water and sanitation services NORWASSER had not accomplished anything it had proposed since the company did not invest a single dollar. Additionally, the continuity of water services decreased after the water utility was privatized. There was also a high risk of epidemic diseases because the drainage infrastructure collapsed and was left in complete disrepair.


What are some of the victories of the movement against water privatization in Peru? What has made these victories possible?
Since 2000 the National Federation of Water and Sanitation Workers of Peru (FENTAP), in alliance with ratepayers, leaders of neighborhood associations, unions, professional associations, and representatives of youth and women’s groups, have organized Public Forums, where the problems are analyzed and conclusions are reached on how to implement changes in utility companies. In order to take action participants have formed part of the Front in Defense of Water and Life. However FENTAP’s propositions are not just in opposition of privatization of water. They seek to propose alternatives to the concession contract model. These new models must be participatory and be shaped by all of those involved.

In May 2005 in Lima, together with more than 200 organizations of farmers, workers, residents, ecologists, activists, NGOs, young people, women’s groups, and representatives from popular local eateries and free milk programs, a federation was built called the National Commission for the Defense of Water and Life. It has to raise the awareness of the movement for a constitutional human right to water and to build a social forum for water in Peru.

We are aware that the only way to stop those who promote privatization is through uniting people. This was demonstrated in June 2002, in the city of Arequipa, where I was born. The government turned over the public electricity company to Tractebel, despite not having the social license to do so. But the Arequipen people organized a few of days of mobilization. This cost two people their lives and hundreds were injured and detained. Today the company is back in public hands thanks to the unity and the strength of the people, even though Alejandro Toledo’s government had already turned the company over to Tractebel. We have learned that without fighting there are no victories, and that victories can only be achieved when people and organizations are united. It is clear that the struggle to stop our public companies from being privatized can be successful. Yet along with this movement we must build public participatory models to achieve modern and efficient companies that are socially responsible.

Auditing IDB’s Record on Water Projects

One has to look no further than the IDB’s own internal watchdog division – the Office of Evaluation and Oversight (OVE) – for evidence that the bank’s ideological promotion of water privatization policies is highly flawed. In particular, the bank’s recent increase in loans directly to private corporations, rather than public agencies, has come under attack.

Among the OVE’s many concerns, as reported in a major 2002 report:

• The bank’s policies are “not appropriate” for increasing coverage in rural and marginal urban areas, and even less so in poor, smaller areas. Compared to maintaining financial and economic stability of the systems, expanding access for people and environmental sustainability “could be viewed as a subsidiary or second-tier objectives.”
• Very few private companies are interested in moving into the region, risking the development of an “anti-competitive market.” It has also become clear that commercial banks are not interested in investing in water privatization, indicating the risks may be too great.
• Getting returns on investments is difficult, as many customers are unwilling or unable to accept rate increases, and Latin America has a culture in which people do not use much water.
• In conclusion, the OVE found, “in the short term, the policy is not producing the expected results [and] has not been able to become a turning point.”

The OVE recommends what civil society organizations around the world are urging the IDB, World Bank, IMF and many other international financial institutions to do: “expanding coverage for the poorest groups as a tool to combat poverty and [encouraging] environmental protection.”

The IDB’s internal watchdog division gives voice to concerns that civil society groups have been raising for decades: that privatization doesn’t help the poor, doesn’t help the environment, and doesn’t even make economic sense for the privatizers. Sadly, the IDB continues to push these failed policies proving their commitment to profit for the private sector is much larger than their commitment to clean and affordable water for the majority poor population in Latin America.

Recommendations: Fixing the Pipes

The Inter-American Development Bank structures its loans to promote business opportunities for large private sector corporations. In too many cases, IDB loans require governments to privatize their water utilities without undertaking a comparative analysis of the option of restructuring and rehabilitating the public water utilities. IDB loan conditions often result in a government commitment to water utility privatization without the participation, knowledge or even discussion among citizens, affected communities, local government officials, or parliaments.

In much of Latin America the water and sanitation systems are in desperate need of basic maintenance, rehabilitation, and expansion. But, private corporations have been unwilling to provide the needed investment to maintain, build and expand the water system and, instead, introduce new financial demands on the water sector. These include the demands for shareholder profits and dividends, which may be globally redistributed for investment in other corporate activities. Water and sanitation services continue to fail to meet the environmental and public health needs of local populations.

Food & Water Watch recommends the following reforms to ensure that IDB policies help those without access to clean and affordable water in Latin America:

1. IDB loans SHOULD NOT require water privatization (or public-private partnerships), increased cost recovery (higher consumer rates) for low-income consumers, or legal and institutional reforms that privilege the private sector;
2. IDB loans SHOULD prioritize public health and increased access to clean and affordable water for low-income communities;
3. IDB loans SHOULD NOT finance new business opportunities for private water companies;
4. IDB loans SHOULD support strong community/public sector partnerships that will ensure transparent and accountable public management of water services.

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