ABOUT TDM
|
Long term agreements in energy and water in developing and transition countries
I read your comments with interest and appreciate your observations on the privatization experiences in Eastern and Southern Europe. I would certainly agree with you that the earliest privatization efforts, which generated large amounts of cash for the host governments (and others), caused many countries to seek the same results by joining in the privatization parade. Through privatization the country, city or region was able to take an asset that had value, but could not be monetized, and then convert this asset to cash.
Those who sold this infrastructure had to realize that the acquiring company would seek to recoup their investment by increasing the prices for these infrastructure services. The country or region gained the immediate privatization cash and the consumers paid for it in higher prices over the long term. Thus, in at least some cases, the privatization was like throwing a huge party and putting the bill on a credit card--the balance had to be paid eventually. I do not mean to suggest that all all privatization efforts were so intended, I am sure that many officials believed (or rationalized) that an infusion of cash would permit more infrastructure development and help "jump start" the country's economic expansion programs.
It retrospect, we now know that many privatization efforts failed. The good news for millions of private citizens that had no say in this unfortuante business, is that many companies acquiring these privatized assets have not been able to raise prices to fully recoup their investments and/or expected profits. The bad news is that many of these privaitzations provided no discernable, long term benefits for the privatizing country, region or public.
For me this suggests two lessons. First, most ambitious efforts to completely modernize infrastructure systems that are currently undeveloped, or other efforts aimed at skipping the developmental stages that other countries had to go through, will result in failure. In short, the process of incremental change seems to be as important to achieving success as the goals themselves. Second, no contract and no host country promises can save a privatization (or other) deal that ignores fundamental economic realities. If the privatizing country is extremely poor, no matter what promises were made, increased prices will either not be permitted or will not be paid to the acquiring company. The same is true for deals that are seen as fundamentally unfair or based on misrepresentation/fraud.
As an observer (and perhaps participant) in many privatization processes that I have not reviewed or know of, I would appreciate your thoughts on this. Are my views unduly pessimistic or based on too narrow an experience base? In particular, are you familiar with infrastructure developments that were successful despite the fact that they attempted to move an industry and the public past many of the developmental stages? (Certainly the fact of telecommunication changes, and the successful introduction of the internet in even underdeveloped nations, suggests that my theory is at least partially incorrect). I would appreciate your thoughts.
I want to take the discussion a step back to look at the "why" some of these early - mid 90s projects are now in dispute;
1) There was euphoria in Central and Eastern European countries after the dramatic changes in the early 90s. Privatisation of infrastructure services provider was seen as a means to change circumstances quickly to the better. There, mainly French companies have established themselves, using - sometimes - the legal instability to their advantage. Clearly the French rely on their political support; Chirac personally intervened in Budapest and in Berlin, the latter being a merger of western and eastern utilities. The results of that policy of "early bird" acquisitions can be read in the commercial registers, which reveals ownership structures. If you want to criticise these "quick and dirty" privatisations, then one needs to turn against the consultants who advised these early transitional governments. The French just made use of what these Consultants have made Governments believe. (my view: some should be charged for this
2) There was a similar euphoria in Latin America when in the mid 90s the economies grew and mainly French companies spread out. Privatisation again was seen as the solution to get something right, quickly, cheaply (for the authorities) and painless.
3) If you acquire businesses, be that water services provider, electricity generators etc, in unstable conditions, which might allow you to ignore traditional procurement policies, then you do in fact risk (wilfully) that at some later stage, these deals will be "reconsidered" if not renegotiated or, in the worst case unwound. [French companies do take that risk, and frankly, so do we]
4) Clearly, if you do take that risk, you will need to take precautions as well. The French mainly rely on their political support and of course on their excellent legal advisors.
We (have to) take a different approach. Although we would love to be in a similar position as the French are, as an Austrian - Saudi company, the chances of achieving the same are somewhat limited;
For a start, in CEEC, we commit to SSIP (step by step investment programmes) where first the utility will be managed properly (through us) and appropriate techniques will increase operational efficiency. This is done in close cooperation with the locals to ensure it fits into the local frame of political, cultural and economic frame. This mirrors exactly what Thomas says in his article. Many times municipalities, governments dream of "Mercedes Solutions", ill advised by highly paid consultants, who work for their Client (Financial Institutions) and ignore local circumstances to an extent that makes you wonder whether they have ever been to these places. In most cases you do not need these "Mercedes Techniques", many times a new hammer will do the job just as well.
Secondly, we will have a simple adjustment system for tariffs, where, in a permanent discussion procedure with the local government and the tariff setting authorities (if not identical) the needs of the next step of the investment programme is laid out. If we need a tariff increase, Government can either increase over the full amount, partly and subsidise, not increase at all and fully subsidise, we can stretch the investment programme, or - if no compromise can be found (eg before elections), call it a day and delay it, until such time when Government (eg after elections) is willing to cooperate. Of course we are covered by the contract and have a "gliding clause", protecting us against eventual penalty provisions.
Thirdly, and TW is totally right in stating this, we have a compulsory mediation procedure, even before cases go to national jurisdiction. In CEEC we experienced the Stockholm Chamber of Commerce being highly regarded and appreciated and therefore being a nice (actually more efficient and cheaper) alternative to the traditional locaions.
Last but not least, we too dread the moment one of our projects turns sour and we would need to undergo endless national, unclear jurisdiction / administration in a field that is in many countries regarded and legally treated as a public service and duty; before we could refer our (hopefully never occurring) conflicts to the SCC.
Our French competitors (and I got huge respect for them, unless we lose a bid for whatever but objective reasons) do take a similar approach, but replace our detailed road map ahead with nonchalance and the political back bone which they all got.
