The Guardian | Thursday August 16, 2007
The water margin
Tanzania was glad to secure the services of a British-led consortium to run the newly privatised water system in its capital Dar es Salaam. But then the price of water started to rise ... Xan Rice reports
At 11.30am on June 1 2005, three British expatriates were detained by the police in Tanzania. Cliff Stone, Michael Livermore and Roger Harrington were the senior managers at City Water, a consortium responsible for managing Dar es Salaam’s water supply. After being held for several hours, the men were served with notices describing them as "undesirable immigrants" and told to leave the country. That evening at Julius Nyerere airport, they were escorted on to a plane bound for London. Their families were left to follow some days later.
Their departure from Tanzania signalled the end of a flagship World Bank privatisation deal that had been trumpeted as a modern solution to public water supply in an underdeveloped country. And it marked the beginning of a legal action that has proved hugely controversial in aid and development circles as Biwater plc, the Dorking-based private water company that led the consortium — and which is owned by Adrian White, a multi-millionaire ex-BBC governor and a former high sheriff of Surrey — pitted itself against the government of one of the world’s poorest countries.
The story of water in most cities in the developing world is that the group paying the most is the poor, because they have to resort to the water vendors who peddle this precious commodity around the streets. But in Dar es Salaam it is not only the poor. Decades of neglect and underinvestment in the city’s water infrastructure mean that fewer than 100,000 households — in a city of 3.5 million people — have running water.
Take Tabata, a low- to middle-income suburb whose houses of brick and concrete are set along beach-sand roads scattered with huge coconut palms: most have electricity, few have water. Sitting outside the house where she lives, Janet Gilliad, a 25-year-old woman with a broad, cheerful face, talks about her job: fetching water for the family, which consists of her month-old son, Evans, her husband, Kingston, who works as a builder, and her sister. For this household she must find, every day, 120 litres for drinking, cooking and washing.
If she is lucky — perhaps twice or three times a week — a tap belonging to a neighbour will have water. Along with dozens of other women, she will fill six 20-litre buckets at a cost of 20 shillings (1p) each. If the tap is dry, she must buy water from the "pushcart men" who pull their wagons piled with plastic jerry cans through the streets of Dar es Salaam. They charge between 300 shillings (12p) and 1,000 shillings (40p) for 20 litres of water of varying quality. "It’s expensive for us," Gilliad says. "But what can we do? We need water to live."
Plans to improve the system began more than a decade ago, when the government was trying to rebuild the economy after former president Julius Nyerere’s failed experiment in socialism. Many of the nearly 400 state-controlled organisations and services were being put up for sale. Leading the privatisation push was the World Bank. Britain, which pumps in more aid to Tanzania — £100m this year — than it does to any other sub-Saharan country, provided the background music. The Department for International Development gave a £444,000 contract to Adam Smith International, a British free-market consultancy, mainly to do public-relations work for the project. As part of this, the consultancy produced what was described as the world’s first privatisation pop song. It was performed by Captain John Komba, the country’s best-known gospel singer, who is now an MP.
"Governments and business people,/ Tanzania and foreigners,/ are like four legs of a table/ at which our children will one day feast," he sang. The song mentioned electricity, telephones, the ports, the railways - and water.
Privatisation of water-supply systems has always been controversial in the developing world, and in sub-Saharan Africa in particular. The conflicting motives of foreign companies, which want to maximise profit, and governments, which seek — in theory at least — to improve access to water for people with limited means to pay, means that so far there have been precious few success stories.
Still, the World Bank and International Monetary Fund had little doubt that it was the best way forward for the Dar es Salaam Water and Sewage Authority (Dawasa). They made the privatisation of Dawasa’s assets a condition for Tanzania receiving massive debt relief. When no buyer emerged, the bank removed its demand that the assets be sold. But it made clear that a $143.5m (£72m) loan package for upgrading the city’s water infrastructure would be forthcoming only if a private company operated the water system.
Three firms expressed strong interest. Two were from France, the country that traditionally has dominated the water-privatisation sector worldwide. The third bidder was the City Water consortium. Led by Biwater, the consortium’s other partners were a German engineering firm, Gauff, and a Tanzanian investor, Superdoll Trailer Manufacturing Company.
Founded in 1968 by Adrian White, Biwater had really made its name and helped earn White his fortune during Margaret Thatcher’s push for privatisation in Britain. Within the industry the company had a decent reputation for building and running water treatment plants, but had never taken charge of such a huge management operation before. When the French companies declined to submit a final tender, Biwater’s consortium won the day. "City Water submitted its bid at a rock-bottom price," says a British water consultant who followed the bid process. He believes the consortium was unaware that it was the only bidder. Even if it performed well, making money would be a huge challenge. "It was in the crap from day one," he says.
The fundamentals of the deal were that Dawasa would still own the infrastructure, while City Water would operate the system. The company’s job would include billing, collecting revenue from customers, making new connections, and doing routine maintenance. City Water had to invest a modest $8.5m (£4.3m) — mainly in "removable assets" such as computers to run the billing and management systems — during the 10-year contract; and it had a six-year tax holiday.
August 1 2003 was the day City Water took charge of Dar es Salaam’s water, and the day it started haemorrhaging money. Not only was the company unable to meet revenue collection targets agreed in the contract — and which were crucial to attain if it was to make a profit — City Water was collecting less money than its state-run predecessor. At the same time, though, the people of the capital saw their water bills rising.
City Water repeatedly complained to the Tanzanian water ministry that its bid was based on flawed information supplied by Dawasa. According to a subsequent World Bank report, signed by the bank’s then-president, Paul Wolfowitz, City Water stopped paying its monthly fee for leasing Dawasa’s piping and other infrastructure in July 2004, less than a year into the contract. The company was also insisting that its operating fee be raised.
Asked by Dawasa to assess if this was justified, auditors PricewaterhouseCoopers and the British engineering consultants Howard Humphreys rejected City Water’s arguments. (Biwater, for its part, directs blame at Dar es Salaam’s water authority, saying that Dawasa had "barely started" big capital-works projects on which rehabilitation of the system depended.)
Other reports were also critical of City Water. A study commissioned by the German Development Cooperation concluded: "It is clear that City Water performed badly." The unpublished World Bank report said, "The primary assumption on the part of almost all involved, particularly on the donor side, was that it would be very hard, if not impossible, for the private operator to perform worse than Dawasa. But that is what happened."
And a report subsequently commissioned by the World Bank, but never published, showed that members of the bank’s technical team in Dar es Salaam had reservations about the City Water offer from the outset. The project was based on an arrangement where the consortium was to lease the infrastructure for piping water while recouping the costs from the customer; the technical team felt that Biwater’s record in operating smaller versions of such "lease contracts" in other countries — including South Africa, Mexico and Britain — was patchy. It had also, in the report’s view, put forward an inexperienced team to lead the operation.
These and other concerns had led the team to ask their water experts at head office to review the project’s design. But the World Bank’s quality assurance group in Washington awarded the project a "highly satisfactory" ranking — the top score. And as Biwater said later in a statement to the Guardian: "The World Bank approved [City Water’s] bid after an exhaustive financial and technical assessment process lasting several months." Biwater also rejected any notion of gaps in its experience, noting that it has operated dozens of contracts in South America, Asia, Britain and Africa, where it points to "some outstanding results" from its public-private water operation in the South African city of Nelspruit. And, it said, several members of its Tanzania team had spent more than a decade in management positions in Africa.
Privatisation contracts are a business arrangement, and City Water’s was no different. Separate from the agreed capital spending, City Water’s one "social" obligation was to contribute towards a fund for first-time connections. "The fund was to be used to connect new, mostly poor, households to the piped system," says Maj Fiil, who followed City Water’s operations closely as a director at Food and Water Watch, an environmental campaigning organisation based in Washington. "It was never created." Two World Bank reports made the same assertion.
There were changes in City’s Water’s senior management in Dar es Salaam, but the company’s problems proliferated. Superdoll, the Tanzanian investor, was refusing to put in more equity without a bigger say in management. And some of the local staff were unhappy. Mathias Mulagwanda, an engineer who was among 1,300 employees taken on by City Water, says: "The chiefs were all whites. There was a distance between them and us, and they did not want to listen to our ideas. There was no teamwork and we did not really know what was going on."
Biwater’s argument was that the core problem was the low-operator tariff - its source of revenue. White twice flew to Dar es Salaam with his chief executive, Larry Magor, to try to renegotiate the contract, putting the case that the tariff (set as a percentage of the water price) was proving unfair to the company.
Meanwhile, the public mood was worsening. Few people had seen any benefits from privatisation. By agreement between Biwater and the government, water prices had risen sharply, yet there had been no discernible improvement in supply, reliability and quality. With an election looming, the government was under pressure to act. In a final attempt to save the deal, it appointed Tony Ballance, a former chief economist at the British water regulator Ofwat, to mediate between the parties. Various proposals were put forward, but none was acceptable to both sides. Tanzania’s government had had enough. On May 13 2005, it decided to cancel City Water’s contract.
Many aid and development agencies and water experts believe that the government had done little wrong up to this point. "If I was them, I would have given City Water one month’s notice and then kicked them out," says the British water consultant who earlier had been observing the bid process.
But the government, and in particular the then-water minister, Edward Lowassa (who has since become prime minister), chose a more dramatic method. They announced the cancellation at a televised press conference, giving the case a political hue, before making what could prove an expensive decision: forcing the three expatriates on to a plane out of the country.
Within weeks of the deportation, a Biwater advertisement critical of the Tanzanian government appeared in several African publications. "When aid flows through political pipes, it sometime leaks," it said. The company followed this on August 2, by lodging its case at a little-known affiliate of the World Bank, called the International Centre for Settlement of Investment Disputes, which sits in The Hague and other regional centres around the world. Biwater asked the tribunal’s three arbitrators to rule that Tanzania should pay the company between $20m-$25m (£10m-£12.5m) for actions amounting to expropriation of its investment, assets and revenues in Dar es Salaam.
Expressing regret in a press release at the time, Biwater said, "We have been left with no choice" — and added in its recent statement: "If a signal goes out that governments are free to expropriate foreign investments with impunity", then potential investors will think twice, an outcome that would "deal a massive blow to the development goals of Tanzania and [of] other countries in Africa".
Lawyers for Tanzania’s government, whose participation in such a tribunal process is among the terms of a bilateral investment treaty signed with Britain in 1994, argue that Biwater failed in its contractual obligations, performing worse than its inefficient state-owned predecessor. If the government was to meet its citizens’ need for safe water, it too had no choice, they claim, but to terminate the City Water arrangement just 22 months into what was meant to be a 10-year contract.
Despite the secrecy of proceedings - the tribunal is closed to the public, and Biwater sought and was granted a ruling that both parties refrain from speaking publicly to the media during the week-long hearing that finally began in The Hague in April — a host of interested parties will be closely monitoring the outcome in the wake of final arguments submitted as proceedings wrapped up in July.
The World Bank, which pressed Tanzania to enter into the contract, now faces the possibility of seeing the country penalised in a tribunal of the bank’s own creation. A bank spokesman declined to comment on the case, but says that a consultant had recently been appointed to provide a thorough review of the affair: "It is important for us to learn from what went wrong," he says. And if the tribunal rules against Tanzania, then Britain, which provided privatisation support and is Tanzania’s biggest donor, could end up funding any payout. Around the world, future participation in privatisation deals by other water and utility companies also stand to be influenced by the arbitrators’ decision. For their part, aid and development campaigners see the case as another example of global corporations trampling over the interests of the developing world. "What Biwater is doing is like finding a small child in a remote village with a single penny in his hand," says Rose Mushi, director of the charity Action Aid in Tanzania, "and then taking that penny away from him."
A decade ago, it would have been unusual for a company to launch a formal claim against a foreign government. What has changed that is the explosion in the number of bilateral investment treaties. These are signed between states - typically a rich country and a developing nation, though agreements between countries of similar economic status are becoming more common — to give commercial companies certain guarantees when they invest overseas, such as fair treatment and protection from expropriation. Included in such treaties is the right of companies to lodge claims against governments at the settlements tribunal. According to a new report published by the Washington-based Institute for Policy Studies, and Food and Water Watch, there are more than 2,500 bilateral investment treaties today, compared to 385 in 1989. And of the 255 investor-state lawsuits filed under these treaties, more than two-thirds have been lodged in the past four years.
The report’s breakdown of cases brought to the tribunal — which is funded by the World Bank and has an administrative council that is chaired by the bank’s president — also shows that the vast majority of claims filed since 2002 have been aimed at the governments of developing countries and that to date more than two-thirds of cases have ended with a government paying compensation to the investor. Argentina alone is facing 32 actions from foreign companies seeking recompense for the effects of emergency measures imposed by the government during the economic crisis of 2001-02, when the country was in financial meltdown. At the other end of the scale, 1% of current claims are aimed at the G8 group of leading industrialised nations.
Some aid and development groups say the investment treaties diminish a country’s sovereignty, and criticise the closed-door nature of the tribunal. Although the choice of arbitrators is agreed with the respondent’s consent, there is no right of appeal. The Biwater case in particular has outraged such groups. Vicky Cann, a policy officer at the World Development Movement, which recently held a protest outside Biwater’s headquarters, termed it disgraceful that a failed water privatisation project could lead to a poor country possibly "forking out millions of dollars in a court case being held in secret and on foreign soil".
In May, Bolivia gave six months’ notice to the World Bank that it would be withdrawing from the International Centre for Settlement of Investments Disputes, effective in early November. Bolivia cited the high costs of defending cases brought by companies. Venezuela has hinted that it may do the same. Whether withdrawal makes a country immune from such lawsuits is, however, uncertain.
Some lawyers also argue that many of these investor-state cases are inappropriate for arbitration as public-welfare issues are involved. Nathalie Bernasconi, managing attorney at the Centre for International Environmental Law in Geneva, who helped drafted a legal submission in the Biwater case, argued that the "human right to water" differentiated the action from a normal investment dispute. "In Dar es Salaam, there was an expectation that the water system would improve," said Bernasconi. "But all the studies show that the situation did not improve. If the private sector inhibits the government doing its duty, the government has a duty to act."
Since City Water’s contract was ended, Dar es Salaam’s water supply has been managed by Alex Kaaya, a small, scholarly looking man in his 50s based in an office on the airport road. He seems oddly optimistic, given the still awful state of water provision. Revenue collection is up by 40%, and costs have been cut, he claims. A new billing system is in place. He says he expects these improvements to come as a product of privatisation, a process he supported when he was working at the water ministry. "I still don’t think the idea was wrong. We just had the wrong managers. It set us back many years."
The total amount of money collected from water customers in 2006 was 17bn shillings, or £6.8m, he calculates, flicking through his files. That means that if the Hague tribunal finds Tanzania in the wrong and upholds Biwater’s claim, the government’s payout will absorb the equivalent of two years’ worth of water payments by the people of Dar es Salaam.