ARGENTINA: Suez withdrawal heightens utilities doubts

Analysis

Following two years of negotiations to revise the concession contract to operate Aguas Argentinas, which provides water and sewerage services to some 10 million people in the city and province of Buenos Aires, French utilities group Suez announced on September 9 that it would withdraw from the concession. The decision follows the recent announcement by Electricite de France that it would sell its majority stake in electricity distributor Edenor to a local investment fund.

Although Planning Minister Julio De Vido suggested that negotiations could be renewed, the company has rejected this possibility. According to Suez, "confronted with the fact that it is impossible to re-establish the concession's economic and financial balance, Aguas Argentinas is no longer in a position to assume the risks and responsibilities linked to the water and waste services operations provided to the city of Buenos Aires". Minority shareholder Aguas de Barcelona (Agbar) announced on September 12 that it would also abandon the concession.

APSF abandoned. The Suez decision follows its announcement in May that it would rescind its 30-year concession contract for Aguas Provinciales de Santa Fe (APSF), which provides water services in 15 cities in Santa Fe province. Agbar, again a minority shareholder, will follow suit, though both are expected to retain their concession in Cordoba province, Aguas Cordobesas. The Santa Fe provincial government will take over service provision until a new tender can be completed; interested investors identified to date are local, rather than international. The provincial authorities have executed guarantees worth 68 million dollars against Suez, which, in turn, has brought a lawsuit for 310 million dollars before the International Centre for the Settlement of Investment Disputes (ICSID), arguing non-compliance with the contract terms following the conversion to pesos and freezing of tariffs in 2002 after the devaluation and default (see ARGENTINA: Tariffs turmoil deters investments - March 23, 2005).

Tariffs talks. Suez also has a 1.4 billion dollar lawsuit pending before ICSID relating to the freezing of Aguas Argentinas's tariffs. The lawsuit has been one, though not the most significant, of the sticking points in negotiations with the government:

• De Vido has suggested that the main stumbling block related to the company's demand that the government meet repayments on a 90 million dollar loan granted by the Inter-American Development Bank (IDB) before the service was privatised.
• However, the principal issue appears to have been Suez's demand for a 48% tariff increase in 2006. Although in practice the two sides were reportedly close to agreement on tariff rises, which would have implied a monthly increase of around 1 peso (35 cents) per household, President Nestor Kirchner rejected the signing of any tariff agreement prior to the October 23 legislative elections.

The future of Aguas Argentinas is now unclear. The concession may be divided into smaller units, possibly making it more feasible that local investors can be found, given foreign companies' concerns over the investment panorama.

Electoral issues. The October 23 elections remain key to the negotiating process. Having retreated from his earlier description of the elections as a 'plebiscite' on his administration, Kirchner remains heavily involved, designating hand-picked close confidants as his candidates and dedicating an increasing amount of time to campaigning. This is of particular concern in the city and province of Buenos Aires:

• Foreign Minister Rafael Bielsa, the government's candidate in the capital, is currently running well behind two opposition candidates. A loss for Kirchner's candidate in the city could prove a serious embarrassment.
• Kirchner's wife, Senator Cristina Fernandez de Kirchner, is the government's senatorial candidate for Buenos Aires province, the political stronghold of Kirchner's chief Peronist rival, former president Eduardo Duhalde. Although Fernandez currently holds a comfortable lead, Kirchner is particularly concerned about assuring victory in the country's largest province (see ARGENTINA: Elections take priority over government - July 15, 2005).

Given the political importance of the districts involved, the potential impact of an announcement on tariffs rises, however modest, is a risk that Kirchner will not take before the elections.

Foreign relations fracas. The tariffs issue is also key for foreign relations, especially with French President Jacques Chirac and Spanish Prime Minister Jose Luis Rodriguez Zapatero. The fact that Bielsa has been largely occupied with campaigning in recent months has also tended to undermine the negotiating process. The withdrawal of Suez and Agbar, and possible efforts to reverse the decision, will dominate meetings between Kirchner, Rodriguez Zapatero and French Prime Minister Dominique de Villepin in the context of the UN Summit in New York this week.

Tariffs prospects. Of the 49 public services contracts to be renegotiated (a further 15 have been either renationalised, or the subject of new tenders), only 23 have been signed. The economic emergency law adopted in January 2002 gave a deadline of December 2004 for renegotiations to be completed, later extended to December 31, 2005. There is every likelihood that this deadline will again be extended in light of the October elections:

• Inflation is a cause of increasing concern, and would be exacerbated by any across-the-board rise in tariffs: even if these are delayed until 2006, inflationary expectations will increase.
• Recent official statistics estimate that 11 million Argentines are living on less than two dollars a day (see ARGENTINA: Poverty pressures limit policy development - September 5, 2005). A significant increase in tariffs would have a disproportionate effect on the poor, generating the risk of social protests.

Investment strategies. Government policy points to increasing state involvement in utilities, especially the energy sector. This will take the form of either the creation of new state-owned companies (such as ENARSA, created in 2004), the renationalisation of existing companies and/or pressures to influence investment and pricing policies. In 2004, the government launched a five-year, 3.85 billion dollar energy plan (see ARGENTINA: ENARSA may signal privatisation reversal - June 14, 2004), and Congress is considering a bill which would authorise the creation of new taxes to finance public works projects focussing on energy infrastructure, in an effort to avert shortages of electricity and gas in particular. The 2006 budget will include an additional 3.5 billion pesos (1.2 billion dollars) for public works.

Given the likely inadequacy of public revenues, the government in August issued two decrees aiming to stimulate private investment. One relates to the creation of public-private partnerships, while the other resurrects the private initiatives regime implemented in the 1980s, which allows private companies to propose projects and to receive 'preferential treatment' when the project is adjudicated. Neither of these plans (the terms of which remain largely unclear) is likely to encourage sufficient investment in the continuing absence of clear regulations and a solid legal basis. A recent survey by the Argentine Institute of Finance Executives, in which over 50% said they would demand greater legal security and a better business climate before considering increased investments, tends to support this view.