The World Bank 'Privatising' Yerevan Water

A Parliamentary study into the World Bank’s Municipal Development Project, designed to improve water and wastewater services for Armenia’s capital city of Yerevan, exposed many project related irregularities, and they were reported to the Bank’s Country Manager at the time of the study in 2004. But by the end of 2006, the problems were not resolved and so the details were sent to Washington’s most influential Government Accountability Project, who subsequently submitted a claim to the Bank’s Department of Institutional Integrity (INT). Armenia continues to await the team of investigators the INT has promised to send to Yerevan to study the allegations.

The fundamental problem, however relates to the Bank’s continued determination to ‘Privatise’ water utilities, a process that has been an increasingly important aspect of Bank conditions for public utility loans. Although the Bank contends that it does not force water utility privatisation, research has shown that privatisation has played an ever-increasing role in World Bank lending policies. Privatisation is an umbrella term that includes selling assets to a private company, tendering a water concession to a private company, or awarding management contracts to a private company.

For the past seven years the Bank has been improperly imposing privatisation on Yerevan’s water utility, despite cries from the international community that ‘Commodifying’ water is not necessarily the best approach to providing continuous and safe drinking water.

The Bank’s Municipal Development Project is of particular interest, because it featured an ‘Independent’ International Operator, who was committed to a management contract with the beneficiary of the project, the Yerevan Water & Sewerage Company, to provide water and wastewater services. But early into the project, the ‘Independent’ International Operator took control of the water company, and its Authorised Representative was appointed General Director. The ‘Independent’ International Operator effectively became the company to which it was obligated under a management contract, a serious conflict of interests, in direct violation of the World Banks project requirements. The Yerevan water company became yet another World Bank water utility privatisation, and that formed the basis for wide-ranging fraud, corruption and the embezzlement of public funds.

The Municipal Development Project parameters were fundamentally changed. Costly pipes that were purchased for the project to replace the worst of Yerevan’s water distribution pipeline system were incongruously re-assigned outside the project. The Bank then approved a project amendment to include a program of blanket water metering, and Yerevan’s domestic water consumers were obliged to purchase and install the meters, which provided multi-million dollar bonuses for the project managers.

The priority objective of replacing old and corroded pipes was all but eliminated, and because the installation of water meters led to a reduction in water consumption, there was an increase in pipeline water pressure, which imposed an intolerable burden on the aging pipeline system. Yerevan’s water distribution pipeline system was in this way systematically abused, and by the end of the project, catastrophic pipeline failures had increased by a factor of more than four, to more than 5,000 incidents in 2004.

The Banks 2006 Implementation Completion Report nevertheless exalted the project performance and highlighted how, at the end of the Municipal Development Project, a remarkable four times more water was being lost from the system than was actually being used by Yerevan’s water consumers.

The Armenian water authority eventually announced that more than four hundred Million Dollars would be needed to replace the entire water distribution pipeline system.

The International Operator, in his capacity of General Director of the water company, also fraudulently manipulated company finances to show ever-increasing losses, and that formed the basis for further multi-million dollar bonuses and led to a series of tariff increases.

Today, the Bank’s privatisation process is essentially complete, Veolia operates Yerevan’s water utility under a long-term lease contract, and the series of water tariff increases now gives the water company sufficient annual income to cover its expenses more than two times over – complementing the World Bank loan for the project. The scenario is a classic repeat of so many other World Bank water projects.

The World Bank’s flexible approach to privatisation is detailed in the Implementation Completion Report of the Fourth Structural Adjustment Credit (SAC IV) Project, which states;

“At times it is very difficult to find investors to buy utilities, such as at the time of the SAC IV, and putting them up for sale can be risky. Under these circumstances, the Bank should explore new ways of combining the financing and expertise required to privatize. As long as the ultimate objective to transfer ownership of the utility and improve efficiency is achieved, it should not matter that the privatization was not carried out in a conventional way under ideal conditions with a well-funded, high expertise strategic investor.”

This Blog looks at the issues, details the problems, and repeats the request to the Bank’s Department of Institutional Integrity to send a team to Yerevan to investigate the problems.