Sunday, June 30, 2019

"Water and power: The French connection"

I was talking to a friend about Enron and Azurix and investing in water when he said "Since you follow investigative journalists for ideas, have you looked at what they say about water?"
And I had to confess I hadn't really thought to do that.

To partially fill this gap in the knowledge base here's the International Consortium of Investigative Journalists with a bit of a backgrounder, from their series The Water Barons:
March 12, 2012
PARIS — “You don’t send God to prison,” goes the bitter joke that circulated among citizens of the alpine city of Grenoble. Jérôme Monod must be God, they said — otherwise, how did the world’s leading water executive manage to avoid prison? Only God, after all, can walk on water.
While serving as CEO of the largest water utility, Suez Lyonnaise des Eaux, from 1987 to 2000, Monod helped plan the privatization of Grenoble’s water, a process that was enabled by bribes and resulted in the price gouging of customers. The city’s mayor and three water company officials were convicted of corruption in 1995, and the water concession was canceled. Monod, a close adviser to French President Jacques Chirac, was accused in testimony during the trials of having instigated the corruption, but he denied those accusations and was never charged.

Chirac and Monod, both Gaullist conservatives, have been close allies for most of Chirac’s four-decade political career, in which he has served as cabinet minister, Paris mayor, French prime minister and president. Yet despite evidence that Chirac’s party’s finances owe a debt to illegal payments from multinational French water companies, Chirac, too, has managed to float above the scandal.

France could be described as the birthplace of water privatization. Private companies have run French waterworks to one degree or another since the Napoleonic era. Suez and Vivendi Environnement are by far the largest private water companies in the world. Together with Saur, they control 80 percent of the water market in France, leaving the rest to municipal utilities. Comfortably secure in their home-market dominance, they set out in the early 1980s to privatize the world. Suez now controls water services in 130 countries on five continents and has about 115 million customers. Vivendi Environnement has 110 million customers in more than 100 countries. Number three Thames Water of the U.K., owned by German conglomerate RWE, has 70 million customers.
Back home in France, both Suez and Vivendi have come under scrutiny in a host of criminal and civil cases, with accusations that include bribery of public officials, illegal political contributions, kickbacks, price fixing, operating cartels and fraudulent accounting.

Suez and Vivendi have close ties to the French government; the water companies appear to be crucial sources of income for the political parties, particularly Chirac’s Rassemblement pour la République (RPR). In 2000, in fact, Monod, 69, left Suez and moved into the Elysée Palace, becoming a senior adviser to Chirac.

The government, meanwhile, has taken a protectionist approach to the water business. No foreign companies have water concessions in France (See sidebar).

Suez’s roots lie in the building of the Suez Canal in the 19th century. But its contemporary expansion began with the privatization of waterworks in cities such as Grenoble. The lengthy, widely publicized Grenoble corruption investigation reflected the deep political connections French water companies trade on and the unique nature of the water business itself, where padded billings can be difficult for a customer to detect.

Closer politically to home, as early as 1985 investigations by the Cour des Comptes, the federal comptroller, found that the Paris mayor’s office had signed a contract with the Compagnie Générale des Eaux (now Vivendi) and with Suez that allowed the two to indulge in fraudulent accounting. Auditors found that the companies, which share contracts for water distribution in Paris, had hidden enormous profits.

A handful of separate judicial inquiries in Paris have alleged that subsidiaries of Suez, Vivendi and other companies financed Chirac’s party through illegal commissions in exchange for public contracts ranging from elevator maintenance to water concessions. Prosecutors claimed the Vivendi and Suez subsidiaries formed a “pact of corruption” for public construction contracts in the province of Île-de-France, which surrounds Paris, according to court records.

One of these inquiries, which opened in June 1997 and is still ongoing, found that the companies colluded with civil servants by paying illegal commissions, primarily to Chirac’s party, the RPR. Prosecutors have charged that the pact operated between 1989 and 1995 and was involved in public contracts worth $3.3 billion. Up to $86 million was funnelled to the RPR, although many other parties got smaller kickbacks. Almost all public construction contracts in Île-de-France were awarded in violation of the law, the prosecutors have charged.

Both company officials and the party executives have admitted the companies agreed to pay 2 percent to 3 percent of the cost of each contract to political parties. Several party executives are awaiting sentencing. Vivendi refused to comment on the cases because they are still before the courts. A Suez official said there was no other way to finance political parties at that time and it was not clear whether these payment were in fact illegal. He noted that Suez has since sold the subsidiary involved in the corruption case.

Throughout this period, from 1977 to 1995, Chirac was mayor of the city — indeed, Parisian water was often referred to as “Chateau Chirac.” Chirac, himself, has been investigated — one prosecutor even summoned him for questioning — but prosecutors have not been able to question him. Under French law, a sitting president is immune from prosecution. Chirac was elected president in 1995, and re-elected in 2002.

The Cour des Comptes in 1997 accused the companies of deficient management, including imprecise accounting, inadequate management controls and a lack of competitive bids for services in Paris. Consumers paid dearly for this “lack of rigor.” The Water Union, which includes representatives from 144 regional municipalities around Paris, claimed at a 2002 news conference that water bills had increased 100 percent from 1990 to 2001....

Back to Azurix, while we have dozens of posts on Enron there are only a couple mentions of their water business. In "It's So Hard to Find a Decent Bet on Water (investment vehicles)" , coincidentally also from 2012 which we introduced with:
Water has confounded smarter people than me.

Enron's adventure in H2O is a cautionary tale, they bought Wessex Water in England, bought water concessions in Argentina and had a long term contract in Cancun.
Enron partially spun out the water sub, Azurix at $19.00. Within 18 months it was trading at $3.50 where Enron tendered for the 34% of the company that the public owned.

Not a very sweet deal for anyone involved. Water is tough business.
And, of course, Enron being Enron, they bid 100% more than any one else in the business to get the Argentina deal to have some big pre-IPO news....
If interested, another post linked to the post-mortem done by The Guardian: