Entrepreneurship and tech, Politics

Selloff of Argentina? Experiences of Private Water Supply

Argentinian flag spilled in water

Javier Milei was elected president with the promise to cut state spending and privatize state-owned enterprises. This idea is not new in Argentina, but the results have been ambivalent in the past.


by Miguel dv.


Comparison of Javier Milei, the new President of Argentina, to former US President Donald Trump is common, placing him among a long line of Latin American politicians mockingly dubbed “Trump”. Brazil’s Jair Bolsonaro was labeled the “Trump of the Tropics” by The New York Times, while Nayib Bukele was referred to as El Salvador’s Trump by Foreign Policy.

Has Milei risen as the “Trump of the Pampas”? Well, both were political outsiders before taking public office, but aside from their wild hairstyles and rough rhetoric, the two have little in common. Both strive for a MAGA: Make America/Argentina Great Again. However, despite mutual admiration, they represent very different economic policies: Trump is an economic protectionist who calls himself the “Tariff Man”, while Milei is a libertarian advocating for unconditional opening of the country to trade and market liberalizations.

Milei at his swearing-in ceremony for the office of the Argentine President. (2023-2027), (Source: Wikicommons.org, 2023)

Milei at his swearing-in ceremony for the office of the Argentine President. (2023-2027), (Source: Wikicommons.org, 2023)


Anarchy in Argentina?

Milei describes himself as an anarcho-capitalist and gained fame through passionate speeches and participation in controversial televised debates. He expresses his libertarian views and deep disdain for the state, which he aims to drastically reduce and cut spending. Milei’s commitment to cutting state spending reached a comic peak midway through his presidential campaign when he appeared at political rallies with a chainsaw. Later, he expressed a desire to abolish most government ministries and hand many of their tasks over to private companies. He justified this by stating,

“The government is not the solution, it’s the problem!”

According to him, anything the government does is inferior compared to the private sector.

Despite his polarizing campaign promises of spending cuts and privatization of state-owned enterprises (SOEs), Milei won the election with a clear eleven-point lead. This was no easy feat in a country where 18.2% of the workforce was employed by the state. However, the country, plagued by poverty and an inflation rate of 211% in 2023, had little to lose. Moreover, it was the younger generation that voted for Milei. Sixty-nine percent of Argentinians between the ages of 16 and 24 voted for him. It’s no wonder: Milei was a glimmer of hope for a generation facing record unemployment rates. Twenty-eight percent of men and nearly 25% of women under 30 are unemployed.

Milei with his trademark: the chainsaw. It symbolizes how the libertarian economist aims to trim down the state administration and the government. This image has become so popular that it's even marketed as action figures of Milei.

Milei with his trademark: the chainsaw. It symbolizes how the libertarian economist aims to trim down the state administration and the government. This image has become so popular that it’s even marketed as action figures of Milei.

 

Even after his election, Milei continued to relentlessly pursue the privatization of state-owned enterprises despite widespread resistance and large demonstrations:

“Anything that can be placed in the hands of the private sector will be placed in the hands of the private sector.”

Early in his presidency, he expressed his intention to privatize the state water company, Aguas y Senemientos Argentino (AySA). This also led to large protests, as liberalization could lead to job losses and restrict access to water and waste disposal for poorer households.

Sale of the Argentine State?

Indeed, the potential restriction of access to clean water seems inhumane at first glance. Water is the most basic human need, and functional sewage disposal is essential for health. The UN lists access to water and sanitation for all as one of its 17 global sustainability goals. But would the privatization of water supply actually disadvantage people?

Not necessarily, according to a study by development economist Sebastián Galiani, former Secretary of Economic Policy at the Argentine Ministry of Finance. In the 1990s, during the financial and economic crisis raging in Latin America, Argentina privatized large water and wastewater companies. About 30% of indebted Argentine municipalities, covering about 60% of the population, privatized their companies in this area of public service. In addition to reducing the budget deficit, privatization aimed primarily to modernize the long-neglected physical water infrastructure. The privatizations had an immediate impact. Not only did investments in infrastructure increase, but the quality of services also improved. According to Galiani’s study, child mortality in Argentina, attributable to water-related infectious diseases and parasites, decreased. In communities where water supply was privatized, this effect was eight percent higher. Overall, the poor benefited even more than the wealthier.

The share of households by income quintiles that gained access to water and sanitation between 1992 and 2002. The poorest benefited the most from privatization: 20 percentage points more in access to water and 16 percent in sewage disposal. (Quelle: Galiani, Gertler, & Schargrodsky, 2005)

The share of households by income quintiles that gained access to water and sanitation between 1992 and 2002. The poorest benefited the most from privatization: 20 percentage points more in access to water and 16 percent in sewage disposal. (Quelle: Galiani, Gertler, & Schargrodsky, 2005)


In general, such water supply services are not provided by private companies. The infrastructure requirement often makes market entry difficult, and positive external effects, such as public health, are not priced into private company services, prompting governments to intervene. There are only a handful of countries where the private sector is involved in water and wastewater management. In these cases, private companies provide these services under agreements such as concessions, leases, or management contracts. While these arrangements can lead to efficiency gains, full privatization remains rare. Considerations such as accessibility to services or their quality, over which the government retains control, play a role.

The transition to private companies opens the door to cronyism

The largest privatization in the 1990s was that of Obras Sanitarias de la Nación (OSN), the public water supply company of the Argentine capital Buenos Aires. Under the leadership of the French company Lyonnaise des Eaux, now Suez, the private consortium Aguas Argentinas was awarded a 35-year concession to supply the city of 13 million inhabitants. Massive investments were made in infrastructure and operations were rationalized. In the course of privatization, the inefficient state-owned company became a highly profitable company after just one year. Thus, privatization benefited both shareholders and consumers: water fees were reduced by 27 percent and access to the company’s services expanded, with investments reaching around 200 million dollars annually between 1993 and 2000. However, the workforce was also reduced from 7,365 to 3,800.

But why privatize again? In 2006, the government of Peronist President Nestor Kirchner re-nationalized Aguas Argentinas. He was accused of breach of contract and possibly detected health-threatening levels of chemicals in the water supply. Aguas Argentinas would have been doomed to fail from the start, according to Carlos M. Vilas of the National University of Lanus in Argentina. The pace at which the privatization program was carried out would have been technically and financially unviable. Not only negligence of the company but also corruption and collusion with state authorities were to blame for the inevitable failure of privatization, according to Vilas. Privatization enriched a group of union leaders, networks of businessmen, and government officials from former President Carlos Menem’s administration at the expense of the population.

Many proponents of privatization found highly paid jobs as executives and directors in these new companies, while others became wealthy by investing in the new firms. Menem’s environment minister, Maria Julia Alsogaray, who granted Aguas Argentinas numerous tariff increases and concessions, was charged with illicit enrichment. After the privatizations of electricity and water supply, she bought a villa in Buenos Aires and two apartments in New York. The matter remains unresolved to this day, as Aguas Argentinas executives blamed the unexpected financial crisis of 2011 for the company’s failure. Others, however, blamed the greed and corruption of the management.

Palas de Aguas Corrientes: the Palace of Running Waters, errected in 1894 symbolizes the long history of water supply in Argentinea. It is still used as a water pumping station and was once the headquarter of the state owned company Obras Sanitarias de la Nacion and is now again administered by Agua y Saneamientos Argentinos, the state owned succesor of Aguas Argentinas. (source: Wikicommons, 2011)

Palas de Aguas Corrientes: the Palace of Running Waters, errected in 1894 symbolizes the long history of water supply in Argentinea. It is still used as a water pumping station and was once the headquarter of the state owned company Obras Sanitarias de la Nacion and is now again administered by Agua y Saneamientos Argentinos, the state owned succesor of Aguas Argentinas. (source: Wikicommons, 2011)


Lessons for anarcho-capitalism

Years of neglect of public infrastructure by local authorities allowed private companies to take over operations and make them profitable relatively quickly. Privatization of water supply brought promising results, especially for the weakest and poorest members of society. It increased access to water supply, and child mortality decreased. Thus, fears of limited services and underserving the poor did not materialize.

However, Aguas Argentinas’ history can also serve as a cautionary tale for Argentina’s current government. It is a reminder that markets thrive on trust. Privatizations offered those in control wide opportunities for self-enrichment. Corruption eventually led to a deterioration of services and, worse, damaged the reputation of a liberal economic policy and undermined trust in the Argentine government’s ability to respect private property rights.

Rule of law and adherence to agreements are indispensable foundations of a market economy to provide wealth creation and economic security. Argentina has privatized and nationalized again. Now, as state-owned enterprises are again nearing bankruptcy, they are supposed to be privatized again. But how can investors trust that their investments will not be nationalized again by the next government in a few years? Milei’s great task will be to restore this trust; only then will private investors open their wallets for Argentina again. But this is a matter of time. In the meantime, let’s hope Milei does not try to privatize the air we breathe.

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