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 PART 2: The
privatization wave
By Henry
C K Liu
PART 1: The failed-state cancer
The US Declaration of Independence
issued on July 4, 1776, states that to secure
"inalienable rights", among which are life,
liberty and the pursuit of happiness, "governments
are instituted among men". It goes on to accuse
King George III of England of having "abdicated
Government here, by declaring us out of his
Protection". The declaration characterizes England
as a failed state and justifies the separation of
the American colonies from it to institute a new
government. Yet privatization, a movement to
abdicate government by declaring the people out of
the government's protection and placing them at
the mercy of the market, has since gathered much
ideological support in the name of liberty.
In the shadow of the Great Depression and
chastened by the horror of global modern war,
Western societies sought to redefine social
provision and the notion of public good. There was
renewed concern with the rights of citizenship and
entitlement to basic services (health care,
education, public housing, subsidized mass
transport and unemployment insurance) as part of a
"social wage". These programs were purposely
removed from the pressure of the market, to be
funded by general taxation at progressive rates
for the benefit of all. The strength of the
welfare state varied from one country to another.
It had its weakest foothold in the United States.
But the rationale was the same: social cohesion
and economic progress were furthered by a shared
sense of community. Forty years later ideology
took an about-face. The welfare state was under
attack, and nowhere more so than in Britain, one
of the countries where it was most advanced.
Margaret Thatcher as prime minister privatized
British Telecom (1984), bus transport (1985), gas
(1986), British Airways and the Airports Authority
(1987), water and electricity (1990) and,
eventually, the coal industry and the railways. In
the US, president Ronald Reagan viewed government
as an enemy of the people. Instead of allowing
government to protect the weak from the strong,
Reagan wanted to protect the strong from
government.
The meaning of
privatization
The term
"privatization" is generally defined as any
process aimed at shifting government functions and
responsibilities, in whole or in part, to the
profit-driven private sector. Privatization of
government responsibilities is touted by
conservatives as the remedy for government
inefficiency and corruption. Yet the record shows
that both public and private sectors, given the
opportunity, have shown equally high propensity to
become corrupt and unethical. In recent years,
corporate fraud and illegal machination have been
making headlines, with names such as Enron,
WorldCom, Tyco, Marsh & McLennan and Parmalat
becoming glaring symbols of corporate malfeasance.
New York state Attorney General Eliot Spitzer
describes the 1990-era Wall Street business model
of narrow institution interests in conflict with
the best interest of its trusting clients, in
which stock analysts worked hand in glove with
investment banking operations of brokerage houses
to defraud the investing public, as not only
"fundamentally corrupt but in fact fraudulent".
Yet few in the mainstream draw attention to the
fact that such corruption and fraud are
structurally traceable to the gradual easing and
eventually repeal in 1999 of the Glass-Steagall
Act of 1933 that, to prevent a repeat of the 1929
crash and to protect the investing public from
fraudulent sales pitches, prohibited commercial
banks (lenders to companies) from owning
full-service brokerage firms (marketers of same
company shares) and from operating
investment-banking activities (creators of same
company shares) because of inherent conflict of
interest against their retail customers.
Spitzer's investigation on
corrupt Wall Street practices led to a historic
US$1.4 billion "global settlement" between
regulators and 10 major Wall Street firms. The
giant insurance brokerage Marsh & McLennan
reached a $850 million settlement of civil fraud
with the New York attorney general and the state
insurance department as restitution for clients
who were cheated when the company rigged bids for
insurance contracts and steered business to
insurers who paid Marsh special contingent fees.
Enron not only committed fraud against its
investors, but it also manipulated the electricity
market to defraud the consumer public in the
California market by manipulating electricity
rates that resulted in statewide supply and fiscal
crises (see Capitalism's bad
apples: It's the barrel that's rotten, August
1, 2002).
"Privatization" is an
expansive term covering virtually any action that
involves exposing the operations of government to
market pressures, ranging from contracting out
janitorial services at government facilities to
selling off the Naval Petroleum Reserve. The
broader definition of "privatization" also
includes a wide range of public-private
partnerships, such as voucher systems to purchase
public services from private companies. The
military-industrial complex is a form of creeping
privatization. The creation of public
corporations, quasi-government organizations and
government-sponsored enterprises falls under the
general category of privatization through
corporatization. In such organizations, it is
often difficult to tell the difference between
government service and private enterprise, since
the motivation shifts from a commitment to public
service to the corporate objective of earning a
profit. Even non-profit corporations aim to make
profits, albeit their profits are not distributed
to private shareholders. "Not-for-profit" is not
to be confused with unprofitability, particularly
to the people running non-profit entities whose
pay and benefits are tied to profitability.
Activities that are governed by profit incentives
inevitably place public service as a necessary
evil. It is aptly described by the Chinese proverb
qui di yang zu
(kneeling to the ground to raise pigs),
meaning to kneel not out of respect for pigs, but
for the profit from such demeaning activities.
Privatization is in essence the selling of failed
government.
Government frequently allows
or permits or even depends on the private sector
to finance, build and operate public
infrastructure such as roads, rail systems,
container ports and airports, recovering costs and
profitable returns on investment through user
charges. Techniques commonly used for privately
built and operated infrastructure include
build-operate-transfer (BOT) arrangements in which
a private entity designs, finances, builds and
operates the facility over the life of the
contract. At the end of the contract period,
usually when private investment has been amply
rewarded and totally amortized, ownership reverts
to government. Often at the time of reversion, new
investment will be needed to upgrade the
facilities, leaving government with an asset of
negative worth. Another variation is the
build-transfer-operate (BTO) model, under which
title transfers to the government at the time
construction is completed at a value that includes
the private entity's profit and is then operated
by the private entity for further profit. Finally,
with build-own-operate (BOO) arrangements, the
private sector retains permanent ownership and
operates the facility for profit as of right.
Under pressure
Governments at all levels in
the US and around the world own enterprises that
are under neo-liberal ideological pressure to
commercialize, in such fields as electricity,
water and waste management and disposal, parking
facilities, insurance, tourist hotels and
convention centers, postal service, hospitals,
shipping companies, airlines, ports, airports,
marinas, etc. Interest by public officials in
privatizing such enterprises is growing as a way
of relieving government performance
accountability.
At the federal level in the
US, one major divestiture was the sale of Conrail
in 1987 for $1.65 billion via a public stock
offering. The private rail sector, unable to
compete with a heavily subsidized highway system,
had lobbied for nationalization of the decrepit
rail system earlier. Ironically, 19th-century rail
barons had insisted on being private while
demanding heavy government subsidy. When
profitability evaporated for the rail industry as
a result of the automobile age, it was time to
demand nationalization to bail out private
investment. When profitability returned as a
result of auto-traffic congestion, it was time to
privatize again. Privatization and deregulation
have totally wrecked the air-transportation
sector.
In 1995-96, the US Congress
approved the sale of the Alaska Power Marketing
Administration, the helium and naval petroleum
reserves, the US Enrichment Corp (USEC), as well
as auctions of the electromagnetic spectrum.
Legislation was also introduced to sell Amtrak,
the other four Power Marketing Administrations
(PMAs), the air-traffic-control system, the US
Postal Service, and the Tennessee Valley Authority
(TVA).
The federal government
produces 8% of the electricity consumed in the US
and sells it through the TVA and the five PMAs of
the Department of Energy. Two federal agencies,
the Bureau of Reclamation and the Army Corps of
Engineers, construct and operate the facilities
that produce most of the power that the PMAs sell.
About 60% of the government-owned generating
capacity and all of the Reclamation and Corps
capacity is hydroelectric. Private utilities and
consumer-owned cooperatives dominate the United
States' electric-power industry, supplying more
than 80% of the nation's power needs.
Neo-liberal policymakers argue
that the government should not be in the business
of producing and marketing electric power because
the private sector could handle those
commercializable functions more efficiently,
notwithstanding that this myth has been
definitively disproved by the Enron
smoke-and-mirrors accounting fraud and its
unscrupulous manipulation of the California
electricity market. Selling federal power assets
would cut the size of government, which is the
ideological fixation of neo-liberals. The claim
that if the price was right privatization would
ease the task of managing government fiscal
deficits is pure bunk.
Selling government power
assets is opposed by recipients of
government-produced power, who get it at
below-market rates and do not like the idea of
losing the subsidy. Moreover, most
government-owned facilities produce power as a
by-product of other services: flood control,
diverting and storing water for farms and cities,
providing recreational parks and lakes, and
protecting the environment. Some policymakers
believe that government ownership is needed to
make sure that those other functions do not
suffer. There is little logic, other things such
as good planning and management being equal, to
the supposition that the private sector can
deliver electricity to the public at a lower cost,
given that private financing is generally more
costly than government financing and private
profit must be reflected in user rates. Private
companies always aim to push rates up and rate
wars among competitors cause financial distress in
any industry, as has been evident in
telecommunication and air travel.
Power plays
The Alaska Power
Administration Asset Sales and Termination Act of
1995 authorized the sale of the Alaska Power
Administration, the smallest PMA. Assets to be
sold include two hydropower projects with their
generating equipment, transmission lines, and
administrative and maintenance facilities in small
river basins that do not involve irrigation,
navigation, or significant environmental
considerations. Sales of other federal power
facilities have been discussed, but these serve
other purposes beyond generating electricity, such
as providing water for irrigation which might be
dealt with on a private, commercial basis, but
flood control and some of the recreational and
environmental functions are more difficult to deal
with commercially.
During the Cold War, the
government built up a huge variety of reserve
stocks of various commodities. One of the oldest
of those is the Naval Petroleum Reserve, at two
sites in California and Wyoming. Those stocks of
oil no longer have strategic value, and the oil
is, in fact, sold into the commercial market
today. Congress approved the sale of the
California reserve in 1996. Another strategic
reserve is the Federal Helium Reserve, which
accounts for 90% of the United State' helium
sales. That reserve has a market value of between
$1 billion and $1.5 billion. Its borrowings from
the Treasury, plus accumulated interest, total
$1.4 billion, making net proceeds from the sale a
wash. But the sale would provide a ready way of
paying off the reserve's debt. In addition to oil
and helium, the Defense Department acquired
immense stockpiles of other strategic commodities
during the Cold War. Privatization proponents warn
that such stocks should be sold off gradually over
a period of years so as not to depress sharply the
market price of each commodity, making life
difficult for commodity producers and speculators.
Apparently, the aim of privatization is to keep
prices high for the producers, not prices low for
consumers. Such sales would remove the
government's ability to help stabilize commodity
prices to maximize consumer benefit.
The
oil embargoes of the 1960s and 1970s led the US to
create a huge civilian reserve stock of petroleum.
Privatization proponents argue that while the
reserve could prove valuable in a future situation
of unexpected supply shortages, it is the
existence of the Strategic Petroleum Reserve
(SPR), rather than its ownership, that is
critical. Private investors could buy out the
operation of the reserve, and the release of
stocks from the reserve in response to market
price increases would be less subject to
constraints than would releases under the current
political management. If the objective is
speculative private profit, why would a privately
owned SPR have any incentive to keep oil prices
from rising instead of maximizing speculative
profit? The Congressional Budget Office estimated
the market value of the SPR at $13 billion in a
recent paper on its possible privatization.
Fiduciary constraints within the rules of
corporate governance would compel the directors of
a privatized SPR to protect the interest of its
shareholders by taking measures to raise the value
of assets beyond its current market value.
The USEC saga
The notion that the private
sector can run everything more efficiently and
effectively than government was creeping into even
the national-security arena. Joseph Stiglitz,
former chairman of the Council of Economic
Advisers in the administration of US president
Bill Clinton, explains the trend only
half-jokingly: "Why not privatize the making of
atomic bombs - or at least the processing of the
uranium that goes into atomic bombs?"
USEC
Inc, a global energy company, is the world's
leading supplier of enriched uranium fuel for
commercial nuclear power plants. Revenues in 2003
totaled $1.4 billion. USEC operates the only
uranium-enrichment facility in the US: a gaseous
diffusion plant in Paducah, Kentucky. Uranium
enrichment is a key step in the production of
nuclear fuel, used by nuclear power plants around
the world to generate electricity.
USEC
is also the US government's executive agent for
the Megatons to Megawatts Program, a 20-year, $8
billion, commercially funded
nuclear-non-proliferation initiative of the US and
Russian governments. The historic 1993 US-Russia
non-proliferation agreement converts highly
enriched uranium (HEU) taken from dismantled
Russian nuclear warheads into low-enriched uranium
(LEU) fuel. As US executive agent for this
program, USEC purchases this fuel from Russian
sources for its customers' nuclear power plants.
This unique program aims to recycle 500 tonnes of
weapons-grade uranium taken from dismantled
redundant Russian nuclear warheads (the equivalent
of 20,000 warheads) into uranium fuel used by USEC
customers to generate electricity. The program, by
providing funding to keep former Soviet nuclear
specialists gainfully employed in recycling bomb
material for peaceful uses, is expected to reduce
greatly the prospect of Russian nuclear-arms
technology falling into the hands of parties
hostile to the US or terrorists of all colors.
Uranium enrichment for
commercial nuclear reactors began in the 1960s,
when the US government shifted some of its
enrichment capacity from military to civilian use.
In the early 1990s, USEC was created as a
government corporation to restructure the
government's uranium-enrichment operation and
prepare it for sale to the private sector. USEC
was privatized on July 28, 1998, and thereby
global nuclear arms-control implementation was put
on a commercial basis, held hostage to private
profits.
The US government was
encumbered by federal procurement rules that made
the government-owned uranium-processing
corporation vulnerable to foreign competition. By
the 1980s, the US world market share had declined
precipitously from the near 100% of its heyday to
less than 50%. This downturn was of particular
concern to two powerful Republican legislators.
Senator Wendell Ford of Kentucky feared that it
might lead to pay cuts or even layoffs at the
large uranium-processing plant the government
operates in his home state; New Mexico Senator
Pete Domenici worried that as more and more
uranium production moved overseas, the large
number of uranium mines in his state would suffer.
Ford and Domenici concluded that the solution was
to make the government's uranium business more
competitive by handing it over to private owners
with simplified procurement rules. And as
high-ranking members of the Senate Energy and
Natural Resources Committee, they were in a
position to put their views into action.
In the
1992 Energy Policy Act, passed less than two
months after the United States and Russia had
reached their preliminary agreement on the
weapons-into-peaceful fuel deal, the US Congress
directed the Department of Energy to transfer its
uranium production activities to a newly created
governmental corporation, dubbed the United States
Enrichment Corp, or USEC, which would be charged
with preparing itself for full privatization. The
president would have the power to hire and fire
USEC directors. However, in every other respect,
company management would be autonomous from the
government. As a further step toward
privatization, USEC was also freed from many of
the obligations that had been hampering the
government's program. Corporatization shifted the
mandate from serving national security needs to
regaining market share in uranium enrichment. By
September 1994, USEC was able to boast of
achieving an all-time enrichment production record
at both of its processing plants.
Even
if a privatized USEC became financially more
efficient, savings may not have filtered down to
US nuclear power consumers. With an almost total
monopoly on nuclear-fuel production in the US,
USEC would have little incentive to lower its
prices. So even on narrow economic merits, USEC
was hardly a paragon nominee for privatization.
But even worse, USEC
privatization could have dealt a devastating blow
to the vital weapons-into-peaceful-fuel agreement
with Russia. The whole idea behind the
nuclear-dismantlement deal was to make it "budget
neutral" by reselling the processed uranium
purchased from the Russians to commercial
nuclear-power companies. And since USEC inherited
the government's long-term contracts with nearly
all US and more than one-third of the world's
power plants, it would be difficult for the
Russian deal to be implemented unless USEC were
charged with carrying it out. Thus even before it
was officially created, USEC was envisaged by the
administration of president George H W Bush as the
deal's exclusive executor. But whereas the
government's chief objective was to get as much
bomb-grade uranium as possible out of Russia
without losing money, as a private corporation,
USEC's interest, in fact its fiduciary obligation
to its shareholders, was to maximize its profits.
The billion-dollar question, then, was whether
USEC would be able to do so while still fulfilling
the national-security goals of the
weapons-into-peaceful fuel deal. Or, to put it
more starkly, would US national security interests
be held hostage by USEC profit motives?
One
month after Clinton took office, the US and
Russian governments officially signed off on the
weapons-into-peaceful-fuel non-proliferation deal.
Over the course of the next five years the US
would purchase the diluted uranium from 10 tonnes'
worth of bomb-grade Russian material a year. For
the next 15 years after that, the United States
would buy at least 30 tonnes a year. However, it
was left to the USEC management team to work out
the details with the Russians, including the price
to be paid for Russian uranium. By January 1994,
USEC completed those negotiations, and the
company's chief executive officer, William
Timbers, traveled to Moscow for an official
contract-signing ceremony with Russia's minister
of atomic energy, Viktor Mikhailov.
The
new agreement was hailed as a historic achievement
and promisingly titled the "Megatons to Megawatts
contract". But in reality, the Russians, new to
the workings of a market economy, had proved
woefully inadequate in business negotiations. One
American familiar with the negotiations said: "We
snookered them."
As Harvard professor and
nuclear-security specialist Richard Falkenrath
notes in a comprehensive study, the Megatons to
Megawatts contract contained three potentially
problematic provisions. First, while USEC was
given the option of buying Russian uranium, the
contract did not actually obligate it to do so.
Second, the contract established an initial price
but stipulated that it was to be renegotiated each
October. The Russians had wrongly assumed that the
price would rise over time, while USEC took
advantage of the annual price flexibility to push
it down. Finally, whereas USEC would pay the
Russians upon delivery for diluting the bomb-grade
uranium themselves, it would not immediately
compensate them for one of the key ingredients the
Russians would have to use in the dilution
process, namely the $4 billion worth of natural
uranium needed to blend down the bomb-grade
uranium into the lesser-enriched kind used for
nuclear fuel. USEC would pay for the natural
uranium that had been added in only after the
company was able to sell or use an equivalent
amount from its own reserves.
The
Megatons to Megawatt provisions would have made
perfect sense if the contract had strictly been a
pact between the US and Russia as two sovereign
states, since both had a common interest in
preventing non-proliferation. Given Washington's
strong interest in ensuring the success of the
weapons-into-peaceful-fuel deal, it would have
been counterproductive to take advantage of the
contract's flexibility to try to fleece the
Russians. In fact the price flexibility was
intended to give the Russians continually
reinforced financial incentives to stay with the
deal for the long term. National security is an
achievement worthy of spending money on, not to
compromise in order to make small change in
profit. Conversely, the priority of USEC was to
make itself financially as attractive as possible
to potential private buyers; and the leeway
afforded USEC in the contract was a financial
advantage it was obligated to exploit as a matter
of fiduciary duty to potential private investors.
USEC was saddled with a privatization mission that
competed with US national-security objectives.
The
conflict of interest surfaced at the very first
annual price renegotiating session in October
1994. USEC claimed that, while not a money-losing
proposition, buying uranium from the Russians at
the initial agreed price was not nearly as
profitable as producing it in the US. Thus USEC
sought to slash the Russian price by nearly 20% to
keep its profit constant. Non-proliferation, while
a plus for US national security, was not a
tangible asset to a private corporation. To make
matters worse, USEC announced that, since US trade
restrictions prevented it from immediately selling
an equivalent portion of the natural uranium
ingredient in the diluted uranium purchased from
the Russians, and since the company also deemed it
unprofitable to use that equivalent portion of
natural uranium in its own processing activities,
USEC would be unable to pay Russia for the
natural-uranium ingredient until at least 2003, a
decade later. The Russians were furious. "This is
robbery in broad daylight!" fumed Mikhailov, who
threatened to sell uranium to Iran instead.
As a
profit-driven private corporation, USEC was within
its commercial right to squeeze the Russians for
every last financial advantage, even causing a
breakdown in the non-proliferation schedule that
dangerously delayed the removal of tonnes of
bomb-grade material from unsafe Russian storage
sites, leaving Russian specialists unpaid and
exposing them to black-market beckoning from
dangerous elements. By February 1995, the talks
between USEC and the Russians remained at an
impasse over money. From a financial point of
view, the delay posed no loss to USEC, so the
company felt no pressure to compromise. However,
US national-security interests were clearly being
compromised. By mid-1995, outside critics had
begun to take notice of the near year-long delay.
"The agreement's imminent breakdown, clearly
Washington's fault, is a huge national-security
blunder," wrote foreign-policy analyst Jessica
Mathews in a Washington Post op-ed. The blunder
was allowing national security to be endangered by
private profit.
After months of stalemate,
Senator Domenici began to question the wisdom of
letting USEC implement the swords-into-plowshares
deal. He devised a solution through which USEC
would compensate the Russians with natural uranium
from its own reserves rather than paying the
Russians in cash, and US trade restrictions would
be modified by the Senate so that the Russians
could sell that uranium to prospective consumers
for delivery at a future date. Domenici's scheme
was set forth in the 1996 USEC Privatization Act,
which also gave congressional approval for USEC
privatization and requested that Clinton make a
final determination on the matter on national
security grounds. All that was needed was a nod
from Clinton, and USEC could be put up for sale.
An
interagency group of representatives of the
National Security Council, the State Department,
the Department of Energy, the National Economic
Council and the Council of Economic Advisers was
convened to decide whether and when Clinton should
sign off on USEC privatization. Given the key role
USEC played in the Megatons to Megawatts program,
and its failure to prioritize national-security
goals over corporate profit while still a
governmental corporation, the national-security
community might have been expected to be dead set
against turning the public corporation over to
private ownership. Instead, USEC privatization
appears to have been regarded as inevitable. The
only issue seriously considered by all the
seasoned bureaucrats was how to limit its negative
impact. "People tried to deal in the art of the
possible," explained one official.
Complicating the picture, by
this point anyone contemplating a halt to the
privatization plan would have had to contend with
an uncomfortable budgetary conundrum. The 1996
USEC Privatization Act was lumped into a larger
appropriations bill called the "Down Payment
Towards a Balanced Budget Act", in which the
impending sale of USEC was counted as a $1.3
billion gain in revenues for the federal
government. This was actually merely an accounting
gimmick - at most the government would simply be
getting cash up front in an amount equivalent to
the value of the revenues USEC would have brought
in over the years were it not privatized. In fact,
for just this reason, in 1987 Congress passed a
budgetary law prohibiting one-time sales of
government assets from being counted as revenues.
But in 1995, Congress changed its budget
accounting rules such that USEC could be tallied
in. As a result, a ruling against USEC
privatization would have created a $1.3 billion
gap in the budget, something many administration
officials would be understandably loath to do.
Domestic politics over bogus fiscal discipline was
allowed to hamper national-security concerns and
jeopardize world peace.
Yet
the economists at the Council of Economic Advisers
led by Stiglitz raised the possibility of vetoing
USEC's privatization. The more the Stiglitz team
analyzed the situation, the more convinced they
became that privatizing USEC was folly. "You don't
have to use a lot of imagination to see that the
economic incentives are not there for USEC to
import Russian uranium. So you're putting
something that's in our national-security
interests in direct conflict with USEC's
private-property interests."
The
more USEC became enmeshed in contracts with the
Russians, the more impractical it would be for the
US government to yank it out of the deal. Thus the
threat of losing its status as executor of the
Russian deal was hardly a powerful deterrent.
Furthermore, once USEC was privatized, it would be
difficult to monitor its internal communication
and deliberation. Thus, noted Stiglitz, the
company might be quietly sabotaging the uranium
deal without even the government's knowledge.
As if
on cue, even while still a government corporation,
USEC provided Stiglitz with a perfect illustration
of just this scenario. At a meeting in Moscow in
January 1996, the Russians offered to sell USEC
nuclear fuel from six more tonnes of bomb-grade
uranium than the 12 tonnes USEC had already agreed
to purchase in 1997. From a US national-security
standpoint this was great news - those six tonnes
were enough to obliterate about 300 Hiroshimas.
Had the Russians been making their offer directly
to the US government, the United States would have
jumped at the opportunity. However, it was not in
USEC's commercial interests to buy the extra
uranium, so it declined.
The
Russian offer and USEC's refusal were reported in
diplomatic cables written by US Embassy officials
who were present at the meeting, but key officials
in the Department of Energy and the National
Security Council were somehow not informed of both
the Russian offer and USEC's refusal. The Russians
mentioned their frustration to a group of visiting
US nuclear-weapons experts who reported the
exchange in their cables back to the US. Senator
Domenici, upon learning of the outrageous
incident, became incensed at the company's selfish
behavior, despite being an advocate of USEC
privatization. Domenici fired off an angry letter
to deputy secretary of energy Charles Curtis,
subsequently "leaked" to Peter Passell of the New
York Times, in which the senator expressed his
conviction that "USEC is acting directly contrary
to the national-security interests of the United
States". USEC, said Domenici, should "be
immediately replaced as executive agent" of the
Megatons to Megawatts program, which by that time
was easier said than done.
Some
Clinton administration officials also felt they
had been deliberately kept in the dark by USEC.
"You find out that when you went to a meeting
where you were supposed to be discussing whether
to privatize USEC, and you were weighing these
incentive issues, at least half the people at the
meeting don't even know" that USEC had refused to
buy additional uranium, explained Stiglitz. At
this point, Curtis urged USEC to buy the extra six
tonnes. USEC quickly agreed and, not long after,
negotiated a five-year contract with the Russians
that locked in a price and increased the yearly
amount of uranium that USEC would buy.
Despite USEC's bowing to
national-security pressures, the danger of
privatizing it was still considerable. What would
happen once the five-year contract was up? And how
well would the interagency group be able to
monitor USEC once it was in private hands and
protected by privacy laws? But the revelations
about USEC behavior did not cause the
privatization advocates in and outside of the
Clinton administration to reconsider their
position. The administration, as part of its
ideological Third Way neo-liberalism, was clearly
satisfied that enough safeguards had been put in
place to justify continuing USEC's role in the
Russian uranium deal, and to allow privatization
to go forward. Assistant to the president for
economic affairs Dan Tarullo and national security
adviser Sandy Berger signed a joint memo
recommending USEC privatization. Soon afterward,
the president gave his okay and signed the
privatization bill in April 1996.
As of
December 31, 2004, the US-Russian Megatons to
Megawatts program of recycling nuclear warheads
into electricity had recycled 231.5 tonnes of
bomb-grade HEU into 6,823.8 tonnes of LEU
power-plant fuel, equivalent to 9,261 nuclear
warheads eliminated.
KBR:
Food for thought
The US
military has also privatized the feeding and
housing of its frontline troops, with disastrous
results. NBC News reported last December 12 that
the Pentagon repeatedly warned contractor
Halliburton-KBR that the food it served to US
troops in Iraq was dirty, as were as the kitchens
it was served in. The report came as President
George W Bush fended off Pentagon reports that
Halliburton-KBR overcharged $61 million for
gasoline it sold the US military in Iraq without
competitive bids. Dick Cheney ran Halliburton for
five years until becoming vice president of the
United States. The company feeds 110,000 US and
coalition troops daily at a cost of $28 per
soldier per day. This adds up to "a company that
arrogantly is overcharging when they can get away
with it and not providing the quality of service
that they agreed to do", Representative Henry
Waxman, a California Democrat, told NBC.
The
Defense Contract Audit Agency (DCAA) recommended
that the Pentagon suspend a payment to Halliburton
of nearly $160 million for allegedly overcharging
for meals in Iraq in 2003. The company's
subsidiary Kellogg, Brown & Root (KBR)
supplied the meals to the military. Halliburton,
which has been awarded more business in dollars
than any other firm working in Iraq since the
March 2003 US-led invasion and subsequent
occupation, faces a number of investigations in
the United States.
The New York Times reported
that against the advice of its own auditors, the
US Army said on February 5 that it would not hold
back tens of millions of dollars each month from
Halliburton until the company justifies bills for
past work in Iraq. Under a logistics contract that
could total more than $10 billion over time, the
Halliburton subsidiary KBR provides meals,
housing, fuel and other logistic services to the
military in Iraq. In the rush that followed the US
invasion of 2003, KBR started work without the
detailed agreements on scope and reasonable costs
that are normally required, and it handed in
nearly $2 billion in invoices that Pentagon
auditors said lacked proper backup.
Under
federal rules, the government usually protects its
interest in such cases by paying no more than 85%
of invoices until costs are fully accounted for.
But after months of public debate and
disagreements within the Pentagon, the Army Field
Support Command, which oversees the logistics
project, said it would not automatically withhold
money from payments to KBR. A spokesman for the
command said it was concerned about disrupting
vital services to troops in the field. Such
concerns are the reason privatization is
inappropriate for vital government services.
A
citizen group that includes Global Exchange,
CorpWatch and the Institute for Southern Studies
released a report that calls Halliburton the "most
unpatriotic corporation in America". It says the
firm used high-level political connections and
campaign contributions to win contracts that allow
it to profit from the "war on terrorism" in Iraq,
Afghanistan, Guantanamo Bay and elsewhere.
Texas-based Halliburton is one
of the 10 largest contractors to the US military,
with several lucrative guaranteed-profit deals in
Iraq. It earned $3.9 billion from the armed forces
in 2003, a whopping 680% more than in prewar 2002.
Halliburton's business in Iraq is three times as
much as that of Bechtel, its nearest competitor,
based in California. The citizen group's report,
"Houston: We Have a Problem", also provides
numerous case studies of Halliburton's business
dealings with governments that have been
categorized by the US as failed states or rogue
states, including Iran, Libya, Myanmar, Nigeria
and Kazakhstan, and with the former Iraqi tyrant
Saddam Hussein. "Many of these business deals were
subsidized with corporate welfare checks from the
World Bank and the US Export-Import Bank (ExIm
Bank)," says the report. According to the
document, since 1992, the World Bank has approved
more than $2.5 billion in financing for 13
Halliburton projects. ExIm Bank is an even more
significant financier of the company's global
expansion: its board has approved more than $4.2
billion for 20 Halliburton projects since 1992,
adds the report. The report also calls on Congress
to investigate and penalize war profiteering and
to adopt the War Profiteering Prevention Act of
2003, which would prohibit profiteering and fraud
relating to military action, relief and
reconstruction efforts in Iraq.
Privatization payoff check is
in the mail
The United
States Postal Service (USPS) is an independent
establishment of the executive branch of the US
government. It operates in a businesslike way
through corporatization, which is the main cause
of its problems. A national postal service,
similar to a national transportation network,
should aim to support the balanced development of
the whole nation. Corporatization or privatization
of such services under a deregulated regime favors
population centers while neglecting the needs of
small communities and remote locations, as a
natural result of economy of scale and location.
Privatization of the USPS has been proposed as a
way to improve the organization's ability to
survive and thrive in a rapidly changing market by
allowing it to reduce unprofitable services to
remote locations, thus rendering them more
inaccessible and less profitable to service in a
downward spiral. The unspoken penalty of uneven
national economic development remains unaddressed.
Because its monopoly status
lets the USPS subsidize new services with profits
from monopoly functions, competitors object to any
proposed new ventures by the postal service.
Critics point out that the corporate culture of
the USPS is still that of its predecessor
government agency, as if public service and
support for balanced economic development were
undesirable objectives that yield no economic
value. They claim that lacking shareholders who
can hold management accountable for maximum
commercial performance, and being constrained by
its procedural rules and red tape, the USPS is
simply unable to operate like a real business, ie,
serving only those who can pay and discontinuing
operations that are not profitable, externalizing
all social costs, notwithstanding that such is not
the mandate of the USPS. This attitude is not
limited to the US. Sweden and the Netherlands have
already privatized and deregulated their postal
services; Argentina, Germany and Malaysia are
planning to do so; and the United Kingdom and
Canada are considering the idea.
Privatizers argue that the
best way to address the concerns of postal workers
and management over privatization is to give them
partial ownership of the privatized firm.
Earmarking for workers and managers a meaningful
fraction (10% or more) of the shares in a firm
being privatized has become routine around the
world, especially for large, labor-intensive
firms. Turning workers and managers into
shareholders is sold as one of the best-known ways
to change the institutional culture of a
bureaucratic enterprise, giving every individual a
tangible stake in its success as a profitable
private enterprise. But in reality, minority
employee ownership translates into self-imposed
low-wage trade-offs for meager portions of
corporate earnings. The pension funds of US
workers have not been able to use their investing
power to keep workers from losing their jobs to
outsourcing to lower-wage economies.
Under
neo-liberal pressure, federal, state and local
governments in the US and around the world have
considered or proposed the sale of state-owned
airports, insurance funds, toll roads and water
systems, power plants, waste collection and
treatment plants, hospitals and parking
facilities.
Recent sales at the state
level in the US include the trade sale of the
Michigan Accident Fund, which was privatized on
June 14, 1994. A wholly owned subsidiary of Blue
Cross/Blue Shield of Michigan (BCBSM), the
Accident Fund Co is the largest
workers-compensation insurance company in the
state, with a market share of about 13%. It was at
the time the largest privatization of a public
agency, state or local, in US history. BCBSM paid
Michigan $255 million to acquire the Fund.
Started in 1912, the Accident
Fund of Michigan was far from being a costly
social-welfare program. Rather, it was so
successful that, during its last year of
operation, it produced a $36 million surplus
providing workers-compensation insurance to the
nation's most industrialized state, the home of
the US auto industry. It had become a model for
other states workers-compensation systems. But the
Fund's success rankled its commercial competitors
in the insurance industry, who complained that the
Fund enjoyed an unfair tax advantage. In response,
Michigan in 1990 set in motion a plan to use a
portion of the Accident Fund's surplus, equal to
the amount that would have gone toward federal
taxes had the fund been privately run, to support
injured workers whose employers had no insurance,
and to pay for workplace safety programs. However,
the insurance industry continued to call for the
sale of the Accident Fund. Meanwhile, between 1990
and 1994, statewide denials of
workers-compensation claims jumped from 29% to
36%. According to a study of appellate decisions,
workers were losing 65% of the time to private
insurance companies in claim disputes, a rate
considerably higher than that in a state-owned
fund.
Profiting from tragedy
The Port Authority of New York
and New Jersey, owner of the 6.5-hectare site on
which the terrorist-destroyed World Trade Center
(WTC) twin towers once stood, is a public body.
Its revenue comes mostly from the tolls collected
from the public on bridges and tunnels financed by
agency revenue bonds, and from fees from the
operation of the region's airports and ports. As
of June 30, 2002, it had assets of $6.8 billion
with a net of $5.6 billion after liabilities,
mostly in the form of outstanding bonds. The
mission of the Port Authority is to serve the
public interest by providing transportation
infrastructure and operating transportation
facilities while staying within the bounds of
sound public finance. This mission has become
murky in recent decades, as is natural with
long-standing public agencies. When the WTC was
being planned in the 1960s, critics argued that
the authority should reduce the tolls on bridges
and tunnels that had long since been fully
amortized, instead of investing in further
institutional empire-building, such as venturing
into development of commercial office space for
profit.
Much of the land under the
WTC, occupied mostly by discount electronics
retail tenants with leases from small landlords,
was condemned under eminent domain and assembled
through street closings into a superblock by the
city of New York and turned over to the Port
Authority for the controversial project. Eminent
domain is a well-established sovereign right to
take private property for public use, with
appropriate compensation, by virtue of the
superior dominion of the sovereign power over all
lands within its jurisdiction.
Yielding to neo-liberal
pressure to privatize, the Port Authority in July
2001 granted developer Larry Silverstein and
Westfield Holdings Ltd a 99-year lease on the
WTC's 1 million square meters of office space and
42,000 square meters of retail space, at a total
price of $3.2 billion. Some have suggested that
this was a sweetheart deal for a politically
well-connected developer, as the true worth of the
99-year lease was estimated to be more than $8
billion. Since the land was condemned, the $4.8
billion discount to Silverstein was actually money
that could have been returned to the original
small landlords. The lease gives the private
leaseholders the legal standing to protect their
private property rights should the public interest
interfere with potential private profits over the
99-year period of the lease.
Some
have suggested that the Port Authority should buy
back the controversial lease from the
Silverstein-Westfield team, which was merely two
months old at the time of the September 11, 2001,
attacks, so that the Port Authority can fulfill
its public-interest mission as a public agency
unencumbered by conflicting private profit
interests. Silverstein has answered in a terse
letter to the New York Times that the lease is
"not for sale" - understandably, for if he should
win his lawsuit against the insurance companies,
he stands to collect $7.5 billion in claims,
doubling the value of his lease, not to mention
the 99-year stream of future profit from maximum
development rights (see The towering
challenge of the WTC project, February 12,
2003).
The tax-exempt World Trade
Center Memorial Foundation is about to start on a
$500 million fundraising effort. The events of
September 11 were a national catastrophe, not a
private tragedy. It is hard to understand why such
a national memorial is to be financed by private
donations. Similarly, the heavy dependence on
private donation to fund relief efforts for the
December 2004 tsunami is part of the global
failed-state syndrome.
Social
insecurity
Social
Security privatization is currently the big
controversy in the United States. Proponents hold
out the promise of higher returns, but play down
the commensurate higher risk. Congress may succumb
to the urge to shift that risk to taxpayers rather
than keep risk linked to return in the event of a
market crash. Some recent projections indicate
that expenditures on Social Security retirement
benefits will begin to exceed payroll-tax revenues
and trust-fund earnings before the year 2020, and
the Old Age, Survivors and Disability Insurance
(OASDI) trust fund will be depleted within roughly
10 years of that date. If substantial changes are
not made in the Social Security system, then
expenditures are projected to exceed revenues by
more than 5% of the payroll covered by the Social
Security tax.
Numerous analysts,
commissions, business groups and labor
organizations have studied this situation and made
recommendations for changes in the system. One
proposal is for changes in the investment strategy
of the OASDI trust fund. At present, tax receipts
beyond current outlays are placed into the trust
fund, which is permitted to invest only in
special-issue US Treasury "bonds", which are in
essence accounting entries in the budget of the US
government. Neo-liberal reformers favor some type
of private investment of Social Security funds.
Proposals include (1) retaining the current
structure of Social Security benefits but
investing part of the existing trust fund in
private equities and corporate bonds, (2)
establishing small individual accounts that would
be centrally managed with some or all of the funds
being invested in private securities, and (3)
directing most of an individual's Social Security
taxes into private accounts that would have a wide
range of private investment opportunities. All
these proposals have one thing in common: they all
try to change social security into social risk.
The only party to benefit will be the
financial-services industry that provides the
investment advice and trades.
Proponents of investing a
portion of Social Security funds in corporate
securities, or allowing workers to invest part of
their Social Security taxes in corporate
securities, point to the higher expected returns
compared with current investment practices of
investing in ultra-safe government bonds. If the
funds were invested in the equity or liabilities
of private corporations and if they earned returns
similar to the average returns over the past 50
years, then Social Security recipients could enjoy
greater retirement benefits at the same cost, or
the same benefits with a lower tax burden, or some
combination of the two. Depending on the proposal
and the investment strategy, such a change in
investment practice could partially alleviate the
system's long-run financing problems.
Opponents of investing a
portion of Social Security funds in private assets
highlight the greater risk associated with private
securities relative to federal debt. Those risks
include greater variation in year-to-year returns,
possibilities of large capital losses, and the
risk of fraud and malfeasance in the management of
the funds specifically and in financial markets
more generally. Inevitably, with private
investments some retirees may have lower pension
benefits than they would have had if all funds had
been invested in government bonds, whereas other
retirees will have higher benefits, mostly the
rich, who are more informed about market
investing. Furthermore, while the long-term
performance of the security markets historically
rises, there have been down cycles nearly
regularly every seven years or so. After March
2000, when the stock markets last peaked,
investors saw $7 trillion vanished from their
portfolios by July 2002. That was 70% of the gross
domestic product of the United States. Bear
markets have been known to last for several years
and sometime take decades to return to their
peaks, which would leave most retirees in dire
straits over the short term. The idea of providing
"social security" by exposing retirees to the
volatility of the market is simply a risky gamble.
The market is reflective of
the structural soundness of the economy. The US
economy will be impacted adversely by
demographics. The number of Social Security
beneficiaries is growing faster than the number of
workers paying taxes to support them. The number
of elderly between now and 2050 will increase 100%
while the number of workers will only increase by
22%. People are living longer and collecting more
Social Security benefits. In 1940, life expectancy
in the US was 61.4 years for men and 65.7 for
women. By 2000, life expectancy was 74.2 for men
and 79.5 for women; by 2050, life expectancy is
expected be 79.2 for men and 83.4 for women.
Families are having fewer children as the cost of
bringing up children rises and government subsidy
falls. For each generation to be the same size as
the one before (the replacement rate), each women
must have 2.1 children. In 1940, the US fertility
rate was 2.23. Today, the rate is 2.07 and by 2050
it is expected to trend downward to 1.95. In 1940,
there were 42 US workers per retiree. Today the
ratio is 3:1; by 2050 it will be 2:1.
Social
Security was originally structured as an
inter-generational cash-flow scheme,
notwithstanding that politicians have been telling
the public that Social Security tax payments are
taxpayers' own money. The reality is that the
current taxpayers pay for the current retirees,
and the future retirement benefits of current
workers will in turn be paid for by future
workers. Thus when demographics change, the Social
Security system gets into trouble. But privatizing
Social Security will not solve the problem. For
increased returns on investment to neutralize the
shortfall in demographics, the returns would have
to be astronomical, at a level not achieved by
even the most risky hedge funds. It is
self-deceiving to expect the market to outperform
a structural demographic imbalance between the
number of workers and the number of retirees. An
economy with a shrinking working population
reluctant to support a rising retired population
is not a sound economy and it will not produce a
rising market. Furthermore, consumption by an
expanding retired population is of critical
importance to prevent shrinkage in aggregate
demand in the economy. Thus cutting Social
Security benefits will only add to the US
economy's already serious problem of demand
management.
Blue
gold
On October 16,
2002, the largest proposed municipal water
privatization in the United States was rejected by
the New Orleans Water and Sewerage Board. Private
corporations trying to privatize water supply in
the US were counting on New Orleans to serve as a
model and pave the way for other privatization
efforts from coast to coast. New Orleans citizens
and officials rightly determined that the public's
water should be kept in public hands.
In
1990, about 51 million people around the world got
their water from private companies. Now, 15 years
later, the number has grown to more than 300
million. Suez Lyonnaise, a French corporation and
the world's largest water and wastewater business,
operates in about 130 countries and serves 125
million people, 25 million of whom are in the
Asia-Pacific region. Vivendi Environment of France
operates in about 100 countries through 3,371
companies with a 110-million customer base. Thames
Water, a British concern now owned by the German
conglomerate RWE, has operated in the People's
Republic of China since 1989 and has been
operating in Hong Kong for decades since colonial
days. As one of China's leading private water
companies, it has built a customer base of 6.5
million. In 1995, the company won the contract for
China's first privately funded water-treatment
project in Dachang, Shanghai, and construction of
the major water-treatment works for the city was
completed in 1998, with Thames Water running the
new plant. In July 2002, Thames Water acquired the
largest single shareholding in the China Water Co,
which has 4 million customers in China. Thames
Water's involvement in Hong Kong includes the
building of a major water-treatment plant for the
new international airport. The company has also
signed a memorandum of understanding with the
Ministry of Water Resources in Beijing to perform
integrated water-resource management activities
across China.
Vivendi secured in March 2001
a 20-year contract to operate and renovate a water
plant in Tianjin, China. In 2002, both Suez and
Vivendi signed long-term deals, some for up to 50
years, to manage municipal water systems in China,
which face huge water shortages.
In
March 2002, ONDEO, Suez's water division, was
given a 50-year contract worth 600 million euros
($769 million in today's dollars) to design,
finance and manage water-treatment installations
and services for the Shanghai Industrial Park's
industrial wastes. Vivendi's Generale des Eaux and
Marubeni Waterworks Co Ltd are involved in bulk
water schemes in Chengdu, China, with "take or
pay" contracts, which ensure profits by requiring
consumption regardless of need. Saur, a French
group serving 55 million people throughout the
world, has been operating a drinking-water
production plant in Harbin, China (225,000 cubic
meters per day) since 1995 that serves 2.8 million
people. The BOT project is a partnership between
Saur and the Harbin Water Co for a contract term
of 28 years. Since January 2001, SFSW (Shanghai
Fengxian Saur Water), a Saur subsidiary, has been
operating the Shanghai Fengxian drinking-water
plant, which serves 700,000 inhabitants (southwest
district of Shanghai), with a contract term of 28
years.
New Delhi's water supply is
being privatized to Vivendi, which secured a $7.2
million drinking-water management in the state of
West Bengal. Degremont, a subsidiary of Suez, is
undertaking a 50-million-euro
design-build-and-operate drinking-water production
in Sonia Vihar, New Delhi, for 3 million people
with water from Tehri Dam. Vivendi's Onyx, which
specializes in waste management, was awarded the
contract to manage garbage and street litter in
Chennai, a major port city in southern India. The
company is paid $13,700 a day to collect and
dispose of garbage in three key areas in the city.
Its sister organization, Vivendi Water, was given
the contract to manage the water services in the
city. This is in an economy where many have to
live on less than $1 a day.
Thames
Water has provided technical advice and assistance
in India to improve Indian sewerage systems as
part of the Ganga Action Plan. The company also
worked on a major consultancy contract in Mumbai,
a thickly populated city in India. The 18-month
project will assess the operation and management
of the water supply in Mumbai and develop a
program to raise the technical and managerial
capacity of the local company. Other projects in
India include leakage control in Chennai and
provision of training for senior officials on
groundwater issues for India's Department of Rural
Development and management of the urban river
corridor.
In 2000, Vivendi Water Korea,
a subsidiary of Vivendi Environment, was
established, acquiring the industrial
water-treatment facilities of Hyundai
Petrochemicals for $125 billion, located in the
Daesan Industrial Complex, South Chungchong
province. In March 2001, Vivendi Water Korea
established Vivendi Industrial Development by
acquiring industrial water and wastewater
treatment facilities at Hynix complex in Incheon.
The contract with Incheon municipality provided
for the construction and 20-year operation of two
wastewater-treatment plants in partnership with
Samsung Engineering. In the same year, Vivendi
secured a contract with the province of Chilgok
for the operation of two existing
wastewater-treatment plants over a 23-year period
and the design, financing and construction of a
new plant. This project is in partnership with the
Hyundai Construction. Both the Incheon and Chilgok
projects were made possible after the introduction
of legislation to attract foreign direct
investment in the wastewater sector in South
Korea. Expected revenues from the two contracts
are estimated to be more than 20 million euros
annually. In January 2002, ONDEO signed a BOT
wastewater contract worth 200 million euros with
Yangju, a city near Seoul. In April 2001, the
South Korean city of Busan contracted ONDEO to
manage its wastewater. There have been reports of
worker protests in these projects.
Vivendi, a French
transnational conglomerate that filed bankruptcy
after defaulting on $7 billion of loans, is not so
much a water company as it is an effective
business lobby that hunts for overseas companies
that it can exploit profitably. In 1998, the
International Monetary Fund (IMF) conditionality
forced the South Korean government to instruct
Hyundai Electronics to sell its water-purification
plant that provides water for semiconductors.
Vivendi was the buyer. Since then, Vivendi has
entered the wastewater-treatment business in a
newly built city near Incheon, because it
recognizes that it is difficult to drive out an
existing company, and it is much easier to
establish dominance in a new territory.
In
1997, the World Bank arranged the privatization of
the water services in Manila. The contracts were
awarded to Maynilad Water Services Inc (MWSI) and
Manila Water. MWSI is owned by the wealthy Lopez
family's Benpres Holdings, and partly owned by
ONDEO, a subsidiary of Suez Lyonnaise des Eaux.
Manila Water is owned by the Ayala family, and
backed by Bechtel, a US construction conglomerate.
French consultants were paid P168 million (about
$3.1 million in today's dollars) by ONDEO. Of this
amount, P110 million was for consultancy services.
These consultants were taxed at a rate of 5% as
opposed to the standard rate of 10%.
Similar privatization schemes
were undertaken in Indonesia, Malaysia,
Bangladesh, Vietnam, Japan, Singapore, Thailand
and the United Arab Emirates. The world's private
water industry is dominated by just three
corporations: Vivendi and Suez, both of France,
and Thames Water of England, owned by the German
conglomerate RWE.
For the past decade, these
three water companies have been on an explosive
growth program. Just a decade earlier, they
operated private water utilities in 12 countries.
They now provide drinking water for profit in 56
countries, according to a new study by the
International Consortium of Investigative
Journalists (ICIJ). The water business has gone
from a low-return utility to a source of "blue
gold". Peter Spillett, a senior executive with
Thames Water, has called water the petroleum of
the 21st century. "There's huge growth potential,"
he said. "There will be world wars fought over
water in the future. It's a limited, precious
resource, so the growth market is always going to
be there." Not if the people of the world take
back the water that nature has given them.
"What's happening is that
water itself is being carved up and will be
parceled out according to people who have the
ability to pay," said Tony Clarke, author of Blue Gold and a critic of
global water privatization. The water companies
claim they can deliver water more efficiently,
which is far from their record of the past decade.
Water is being manipulated as a scarce commodity
for the maximization of corporate profit. The US
became a rich nation mainly because the control
and development of water resources remained under
government control throughout its history. The
state of New York under the liberal Republican
administration of Nelson Rockefeller established a
Clean Water Authority to provide its citizens
clean water and revitalized rivers and lakes,
financed with $1 billion Pure Waters Bond Act of
1965, later supported by the federal Clean Water
Act of 1972 that imposed stiff controls on
municipal and industrial waste and underwrote
waste treatment along rivers and bordering lakes.
David Boys, who works for a
federation of public trade unions, says the reason
water is profitable is the same reason it
shouldn't be a private business. Consumers are
captive clients because they cannot survive
without water. The ICIJ investigation shows cases
where service and access can improve under private
management, but that is because private management
narrowly defines its responsibilities of serving
its customers and often at the expense of the
non-customers. Around the world, privatizations
have also led to rising costs of clean water,
cutoffs for poor people, and companies defaulting
on contracts when they fail to make enough profit,
leaving the population with a water crisis. Water
preservation and purification should be financed
by the economy as a whole, in which case the cost
is financed by an expanding economy rather than
the rich users. Until the recent rise in oil
prices, bottled water was selling at a higher
price than gasoline in the US. Water issues, its
price and the distribution of its cost have
provoked heated debates and violent protests in
many countries. Though most privatizations so far
have been in Asia, Africa and Latin America, top
executives of the big three companies told the
press that they plan to expand next in China and
North America.
Privatization forces the
poorest of the world to pay more for clean water.
When water is privatized, the enterprises that
take over the water supply do not invest in the
renewal of the built infrastructure. That worsens
the quality of the water supply and pushes up the
cost of purification. Critics of the privatization
of water observe that Suez and Vivendi form part
of the World Water Council (WWC), which, together
with international institutions such as the World
Bank, has been advocating the privatization and
commercialization of water through a worldwide
private oligopoly. The international committee
that studies the global problem of water is
influenced by the companies that eventually would
profit from the solutions the committee proposes.
The "integrated water-resources management"
proposed by the WWC strongly advocates "handling
water as just another merchandise, whose just
price can only be set by the market".
The
World Bank has advocated the increase of water
prices to force a reduction of demand, but it
would also force the poorest people in the world
to pay more for water needed for survival. The
rich consumers in rich countries will always have
enough money to wash their cars and fill their
swimming pools. The World Water Forum defines
access to water as a "universal need", not a basic
human right, so as not to restrict the freedom of
the private institutions involved in water
management.
In a communique issued on the
celebration of World Water Day, the United Nations
Educational, Scientific and Cultural Organization
(UNESCO) emphasized that access to water has
always been a crucial element of any development
strategy. UNESCO said that at any given time,
about half the people living in developing
countries suffer from water-related illnesses such
as diarrhea, parasitic infections, river blindness
and malaria. "These diseases kill about 5 million
people each year, especially children under the
age of five," UNESCO said. Therefore, UNESCO
director general Koichiro Matsuura warned that a
water crisis is looming, and urged to integrate
"scientific, ethical and social sound principles
[in the global management of water] to secure a
sustainable water world for the generations to
come". UNESCO recalled that the global demand for
water has increased more than sixfold over the
past century - more than doubling the rate of
population growth. This disproportionate growth
illustrates the water crisis, UNESCO said:
"Without sound management of water resources and
related ecosystems, two-thirds of humanity will
suffer from moderate to severe shortages by the
year 2025," which might lead to new inter-state
conflicts.
State control over water
sources has led to international wars, but states
are failing to protect their control of water from
privatization without the slightest resistance.
Privatization of water is also related to rampant
corruption. The long history of collusion between
French water-management companies and the
country's leading political parties is an example.
Vivendi, a media conglomerate
floated on the back of a water utility, led by its
CEO and former wunderkind Jean-Marie
Messier, a former Lazard Freres investment banker
and public official, had bet on emerging synergies
among media assets, which would be fueled by the
mass acceptance of broadband. The vision was the
same as animated the AOL/TimeWarner merger.
Messier's biggest deal was the acquisition of
Seagram and its Universal media unit in 2001.
Vivendi, groaning under the weight of | | | |
