Should a city trust a private corporation to deliver its water and remove its waste? This question looms large in the minds of an increasing number of city officials and urban dwellers across the world. Currently, about 80% of U.S. water delivery services are public, but growing numbers of debt-ridden municipalities like Detroit have contracted out basic services and infrastructure during the past twenty years.
Private control of urban water and sanitary infrastructure is not new in the U.S. or elsewhere. As UC Berkeley political scientist Alison Post explains in her new book, Foreign and Domestic Investment in Argentina: The Politics of Privatized Infrastructure (Cambridge, 2014) much of the urban infrastructure in the U.S. can be traced to cozy relationships between local companies and corrupt 19th-century political machines.
“Crony capitalism helped underpin the growth of our cities,” Post explains. “It is incumbent upon us to understand the circumstances under which these private infrastructure contracts have been more and less viable in political and financial terms.”
To research her book, Post examined infrastructure contracts between states and companies in 61 developing countries. Some contracts ended in “water wars”. Others improved water and waste services and garnered significant public support. Why the variation? Post’s book puts forth a simple but path-breaking answer: privatized infrastructure proved a political success when it remained a local affair.
Local companies that invested in their communities enjoyed greater public support when acquiring a water or waste system. When a conflict arose over prices or services, domestic companies also tended to exhibit more patience and negotiate informally with officials to resolve the issue. Both the cities and companies avoided costly lawsuits, and relationships between the companies and locals with whom they interacted regularly remained strong.
Privatized infrastructure proved a political success when it remained a local affair.
On the other hand, infrastructure contracts brokered between local governments and distant multinational companies did not fare so well. Urbanites often resented the takeover of public goods by powerful, foreign firms. When faced with a conflict, multinationals often threatened legal action or involved third-party institutions in lengthy disputes, embittering local officials and residents. As a result, services were interrupted and costs rose. Infrastructure suffered from erratic investment. Many contracts were ultimately cancelled.
In one case, the French water and sanitation firm Saur formed a consortium with the American company Enron and secured a water contract in Mendoza, a province of Argentina. Relations between the firm and the governor quickly soured. Facing a tight upcoming election, the governor asked the firm to postpone a new property valuation scheme that would raise rates. The company refused, referencing the contract’s provision for higher rates. The governor’s party lost the election, the company increased rates, and affected customers protested loudly and publicly. After months of political turmoil, lawsuits, and time in international courts, the government cancelled the contract and the firm pulled out of the country at a loss.
Post’s book offers rich insights into the debates over private and public ownership models while avoiding polemics. As she explains, the process of privatizing itself provokes public backlash, and frequently transforms longstanding complaints over prices and access into more visible, political issues. Whereas state-owned service providers might be criticized by opposing political parties, private service-providers come to represent a common enemy for all sides to disdain. “Both governing and opposition politicians can earn points with voters by championing consumers’ short-run interests,” Post explains. Public reproach can be “particularly strong in sectors like water, where access is increasingly viewed as a human right.”
Post’s book warrants reading by anyone interested in investment law, as her findings upend some of the most fundamental understandings of how property rights and contracts work in a globalizing world. For example, some scholars have claimed that contracts work best when they are enforced by strong legal institutions, reasoning that investors pour money into projects when they trust that governments will protect property rights enshrined in written law and strict contracts. Companies interested in international investment were thought to place particular value in legal recourse, and international treaties seemed to provide their only protection against volatile politics and the unknown intricacies of foreign legal regimes. Yet Post found the opposite to be true: multinationals protected by international institutions were more likely to sustain heavy investment losses. Supposed legal safeguards actually made contracts more vulnerable.
Professor Post’s book has already garnered praise from leading scholars of foreign investment and political economy for redefining common understandings of property rights. For her part, Post hopes the book will offer useful lessons for those considering privatization as a solution to infrastructure and service problems, as her book sums up a simple cautionary lesson: “privatization does not depoliticize.”