Water and power: The French connection

Introduction

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.

Overbilling is a generalized practice, according to sources in the French water industry. “Water companies distribute their costs across all the municipalities they work for,” one source said. The companies charge a given city a percentage of their overall costs, using an “unintelligible equation” for distributing the costs. “This way, the companies can inflate the rates at will. If you added the percentages that a French water company bills to all the towns where it has contracts, you would end up with a sum that…far surpasses the general administrative costs the company actually has,” the source said.

Jean-Luc Trancart, deputy director general at Suez, defended the industry’s cost distribution practice. He said it provided “insurance for the municipalities that we can restart service in case of an accident or whatever interruption in a matter of hours. We keep a stock of equipment and technical personnel that guarantee that whatever happens, we can resume water service almost immediately.” Small companies operating locally cannot give this guarantee, he said.

“We have an ethical code that is very precise,” Gérard Payen, a senior Suez executive, told ICIJ. “Look at our records around the world and you will find that our track record is very good in fact. Other businesses are worse than ours.”

The Cour des Comptes found that Suez was depositing Parisian consumers’ overpayments into interest-bearing bank accounts and paying the interest to itself. In 1997, for example, Suez earned at least $500,000 in interest on overpayments. Suez did not reveal the gain in its annual reports. Trancart confirmed to ICIJ that Suez put the payments into interest-bearing accounts and did not include the profits in its annual report. He said the company has since changed its accounting practice to include these profits, but it still pays the interest to itself. “We consider this profit as remuneration for the management of money that doesn’t belong to us. It passes through our accounts due to the public [payment] system,” Trancart explained.

Grenoble: An ignoble story

The Grenoble water privatization was one of the most notorious recent cases of French corruption. It temporarily brought down a powerful politician in the government of President Jacques Chirac, laid bare the interlocking directories of power in politics and water, and revealed how the privatization of water offered the perfect opportunity for personal and corporate graft.

Just as Chirac remained mayor of Paris after becoming prime minister, Grenoble Mayor Alain Carignon was simultaneously environment minister under Chirac from 1986 to 1988. Monod, the Suez executive accused during testimony in the case of having proposed the bribery of Carignon, was the RPR general secretary between 1976 and 1978.

The facts of the case, as established by the courts, are these: A Suez subsidiary set up by Monod gave $3 million in bribes to Carignon and made illegal contributions to his electoral campaign. Carignon got 121 free plane tickets and the use of a private apartment in one of Paris’s most exclusive neighborhoods.

The court in 1994 sentenced Carignon — by then minister of communications in another RPR government — to five years in prison plus a $70,000 fine. Carignon lost his appeal and served 29 months of his sentence. The court also sentenced water executives Jean-Jacques Prompsy and Marc-Michel Merlin to three and four years in prison, respectively. A Suez lobbyist, Jean-Louis Dutaret, was given four years and a fine.

Lawyers for Merlin and Carignon both claimed during the hearing that Monod was a part or even instigator of what one attorney called the “pact of corruption.” But Monod denied the claim. He testified at the trial but was never charged.

A second court found in 1999 that the Suez subsidiary managing the city’s water services had for years overcharged customers through various fraudulent accounting procedures. The court ordered the company to pay back all water charges imposed between 1990 and 1998.

Carignon awarded the water concession to the Suez affiliate “solely because this firm would provide him with gifts and personal advantages,” the judges in the second court stated, and “the [corrupt] behavior of the defendants is linked to the increase of [water] tariffs.” In other words, Suez’s subsidiary simply transferred the corruption costs to its new customers.

After the court canceled the Grenoble contract and returned water services to the city, prices promptly fell. By the end of 2002, the price of water in Grenoble, at 2.14 euros per cubic meter, was considered among the lowest of all French cities. In nearby Saint Etienne, a city of comparable size, a cubic meter cost 3.76 euros. An independent regional accounting authority reported that if the contract had continued for its full 25 years, it would have cost the population of Grenoble an additional $145 million.

The decision to privatize Grenoble’s water had been finalized at an Oct. 3, 1987, lunch attended by Monod, Carignon, Prompsy and Merlin, according to Patrick Thull, a Grenoble official who testified at their trial.

Although Grenoble had efficiently managed its own water for more than a century, Carignon had decided to privatize it to benefit himself and Suez, the French Court of Appeal concluded. The lunch party agreed to form a private company, called COGESE (Southeast Water Management Company, in French acronym) to administer the waterworks. Suez would hold a controlling interest of 51 percent. Merlin would own the remainder.

Thull testified that it was soon clear that the privatization would be driven by “kickbacks.”

Grenoble’s 25-year water concession was awarded to COGESE in 1987. In a letter to Carignon, Prompsy promised, “you can be sure that our company won’t spare any effort to serve the population of Grenoble and you as you deserve.”

COGESE apparently felt that Grenoble’s population deserved to pay more. In fact, it was a series of letters to the Lyon prosecutor from Grenoble citizens complaining about the sudden jump in prices that led to the investigation of the deal in the first place.

“From the very beginning of the privatization, our water bills skyrocketed,” Vincent Comparat, a leading city activist against the privatization, told ICIJ.

As part of the contract, Suez’s COGESE had to pay “entry fees” in return for the concession to the city government, worth about $35 million, which would be paid in annual installments.

To recover the fees, COGESE increased water charges. It also reported fraudulent losses to justify fictitious interest payments on the loan it would have needed to balance its books, the court concluded. By 1993, COGESE was reporting a debt service of more than $1 million. Its actual debt payments were less than $400,000.

The contract with COGESE penalized the city for conservation. The company was allowed to increase the price of water if consumption fell below 12.8 million cubic meters a year, which meant an immediate price increase, since consumption levels in the city were falling, for reasons that are not entirely clear.

COGESE was in fact little more than a shell company, the court concluded, subcontracting most services to Suez at inflated prices. These services included accounting, insurance, property management, customer services, technical assistance, equipment procurement and information technology.

A week before the trial began in Lyon, Monod addressed the company’s personnel in a memo. He promised Suez would “support all our employees under investigation, for we are convinced that they have committed no offense. On behalf of management, I thank you all for the contributions you make daily to the development of our enterprise, and for representing our values, both in your private as well as in your professional life.”

After the convictions, though, Monod claimed that only Suez’s subsidiary — and not the parent firm — were responsible for the affair.

“Justice has been done,” he told a French newspaper. “Besides, those practices were tolerated at the time. I was the first to question these practices, and the first to demand that they be stopped and that a law prohibiting the financing of political parties be passed.”

The Grenoble case and other political scandals helped lead to a 1995 overhaul of French campaign financing laws that limited corporate contributions.

“Before 1995, French political parties didn’t have a way to obtain financing, so they frequently asked companies for help,” Suez Deputy Director General Jean-Luc Trancart told ICIJ.

As for the Cour des Comptes’ investigations, Trancart saw nothing alarming. “They are paid to look for errors,” he said. “If you compare any other report by the comptroller with their auditing of water markets, you will find that the French water management is the most virtuous of all.”

The comptroller’s 1997 report concluded that French water services’ management is “generally satisfactory,” Trancart added.

The report concluded that the delivery of “water and sanitation services throughout the country are generally satisfactory.” The statement said nothing of the honesty of management.

And it has never been legal for French parties or politicians to take contributions in exchange for contracts.

In any case, 1995 does not seem to have marked a cutoff date for water corruption:

• In 1997, the former mayor of Angouleme, Jean-Michel Boucheron, was sentenced to two years in prison and fined $172,000 for taking a $55,000 bribe from Vivendi. In return for Boucheron’s approval of a water-distribution contract, Vivendi put him on its payroll for a job that did not exist.
• In 1996, Vivendi’s deputy director general, Jean-Dominique Deschamps, was found guilty of paying illegal commissions to political parties in exchange for obtaining water contracts in approximately 70 French cities. Deschamps was sentenced to 18 months in prison and fined $27,000.
• Bribery charges against Michel Noir, mayor of Lyon, in 1995 forced his resignation. According to the accusations, Noir, a leader of Chirac’s party, benefited from secret bank accounts opened in Switzerland by his son-in-law, Pierre Borton, and fed by Saur’s corporate owner,Bouygues, and by Dumez-Nigeria, a Suez subsidiary at the time. Between 1990 and 1995, about $370 million passed through these Swiss bank accounts in anonymous transfers from the account Dumez held at a Paris bank. Prosecutors charge that $2 million of this money went to Noir. A court in 1995 sentenced Noir to a suspended sentence of 15 months in prison. The case, reopened after Noir appealed, was scheduled to go to court in Lyon in January 2003.
• In an earlier case, from 1991, André Fougerousse, the mayor of Ostwald, on the outskirts of Strasbourg, and municipal counselor of Strasbourg, resigned his post after he had been accused of receiving illegal payments from Suez, Générale des Eaux (Vivendi) and Saur. The three companies allegedly financed his holiday trips and paid 500,000 French francs to the Ostwald municipal government, which used it to pay Christmas bonuses. Fougerousse did not deny the accusations but claimed they were normal, arguing that other elected city officials had enjoyed similar favors.

These cases have given rise to mounting criticism of the water multinationals’ operations. In response, the companies often threaten litigation.

In November 2002, Suez won a defamation suit against French economics professor Jean-Philippe Joseph, who criticized the conduct of the water companies in an interview on French public radio. Suez received one euro in damages and the judge denied Suez’s request to have the judgment published in the monthly Le Monde Diplomatique.

Joseph has also criticized the French media for what he claims is a reluctance to investigate the water companies. The companies own major broadcasters — Canal Plus, M6 and digital TV broadcaster TPS — and are among the largest advertisers in Europe.

“Whenever somebody accuses us of corruption, we file a lawsuit for libel,” explained Trancart.

Yet scandals continue.

One recent case involved a $2 million bribery scheme by a Vivendi subsidiary to obtain a $100 million contract to construct a water treatment plant in Milan, Italy.

In 2001, Italian judges sentenced former Milan city council president Massimo De Carolis to nearly three years in jail for taking bribes from a Vivendi subsidiary during 1998 bidding on the contract. Alain Maetz, the subsidiary manager who paid the bribe, got a year and 10 months. Both De Carolis and Maetz are appealing their convictions.

Milan subsequently banned Vivendi’s subsidiary from the bidding process. In November 2001, the contract was awarded to Vivendi’s rival, Suez.

In the most recent case, prosecutors in October 2002 reopened a corruption investigation of RPR congressman Richard Cazenave, two former Suez executives and a Swiss financial adviser.

The case involves allegations of false invoicing at Cofreth, a Grenoble heating company and Suez subsidiary, which had been directed by Cazenave until 1995. Cofreth allegedly paid about $1.5 million to shell companies based in Monaco and London, which issued false invoices. The money was allegedly channelled through Swiss bank accounts to Raymond Roux, a former Suez executive, and to Jean-Claude Méry, an RPR financier, according to court records.

Cazenave has admitted in court he received more than $100,000, using it to finance his political career. Jean-Claude Joud, former director of the engineering firm Cabinet Martin, which issued some of the false invoices, told the Lyon court a substantial part of the money went to the RPR in Paris.

Méry, the RPR’s secret financier, died in 1997. He confessed in a videotape recorded in 1996 that up to 1993 he had often accompanied Roux to a financial consulting firm in Geneva “where the secret bank accounts of Suez Lyonnaise des Eaux, other French companies, and of the RPR were managed. Whenever I received the cash in Geneva, I would visit Michel Roussin to receive instructions on how to use it.”

Roussin was Jacques Chirac’s chief of staff between 1989 and 1993, when Chirac was mayor of Paris. In the videotape, Méry said that Chirac sometimes personally supervised his money deliveries.

Chirac, who is immune from prosecution, has denied allegations that his party received illegal funding. He has claimed publicly the allegations are “abracadabrantesque.” Chirac has refused to allow prosecutors to question him claiming that, as France’s highest judicial official, he cannot be questioned in a criminal case.

In the trial against Cazenave, Monod was questioned as a témoin assisté by the judge leading the inquiry. This French criminal category allows the prosecution to question Monod as a material witness in the presence of his lawyers — without formally charging him.

Having survived the water scandals, Monod is firmly ensconced in the Elysee Palace, working the reins of both French business and politics. His most recent success? He was instrumental in the removal of his former rival, Jean-Marie Messier, from the chairmanship of debt-ridden Vivendi Universal.