The big pong down under

Introduction

ADELAIDE, Australia — Fifteen months after Adelaide signed a contract turning over its waterworks to a private consortium controlled by Thames Water and Vivendi, the city was engulfed in a powerful sewage smell, which became known as “the big pong.”

The smell plagued Adelaide for much of a three-month period in 1997. While water company and government officials attributed the intense rotten egg stench to weather patterns that prevented normal urban sewage odors from dissipating, citizens complained of mood swings, nausea, sinus problems, asthma, headaches and sleeping disorders.

Early in June, the third month of the pong, an independent investigator tracked it to the largest of Adelaide’s four wastewater treatment plants, at Bolivar, 11 miles north of the city. Once identified, the problem was resolved by chemical dosing of the plant’s extensive lagoon system, which soon eliminated the smell.

The investigation, funded by the government and led by University of Queensland water treatment expert Ken Hartley, found that weather conditions at the time of the pong were no different from previous years. The pong — a stench, in colloquial English — resulted from equipment failures and inadequate monitoring, which allowed raw sewage to be flushed directly into settling lagoons, according to the investigative report.

The consortium’s drive to minimize costs was what brought on the failures, Hartley believes — a familiar story in the water privatization game.

“It was dollars driving everything,” Hartley said. “The big emphasis was on minimizing costs. The Bolivar incident is an illustration of what can happen when things like monitoring and maintenance are cut to the bone.”

Thames Water denied staffing levels had anything to do with the incident, claiming that the employment level at United Water, the Australian consortium, is quite high compared to United Kingdom standards.

“It was human error really,” Peter Spillett, head of the company’s environment, quality and sustainability division, told ICIJ. United Water has concurred that it “should have done more” to deal with the events leading to the smells at Bolivar.

Hartley’s specific findings were that a meter inadvertently left out of a control panel that measured sewage flows through the plant had resulted in incorrect information for 14 months before the error was detected. Then in April, at the time the pong was first noticed, untreated effluent went straight into the lagoons for six days while a gate was being overhauled. The danger presented by the increasing loading on the lagoons “was not appreciated by the operators” whose “monitoring program was inadequate,” according to Hartley’s report.

The state government later paid A$72 million ($43.8 million) to upgrade the plant, effectively giving United Water a new plant to manage.

For outside critics, the pong is evidence of “what can happen when you sell your water to private companies intent on cutting corners to maximize profits,” as John Spoehr, director of Adelaide university’s Centre for Labour Research, put it.

The pong is not the only bad taste that water privatization left in the mouths of South Australians.

Mirage in the Outback

In the early 1990s, Australia began restructuring its water industry, farming out contracts to international companies such as Vivendi, Thames andSuez Lyonnaise des Eaux.

The companies viewed Australia as a launching pad to Asia and the Pacific region, where the World Bank was forging a policy of privatization. Australian officials, in turn, saw privatization as a way for their country to gain partnerships and know-how that would enable Australians to get in on the expanding regional business.

By 2000, about 50 significant water contracts had been awarded to the private sector. By mid-2001, an estimated 25 percent of Australia’s drinking water was provided by foreign multinationals.

Adelaide was the only Australian city, however, to hand the entire management and operation of its drinking and waste water systems to a private company.

An alliance of Vivendi and Thames, joined with one of South Australia’s most powerful businessmen, captured the A$1.5 billion ($876 milion) water contract in a bidding process mired in irregularities that sparked two government investigations and an inquiry by a parliamentary committee.

Once in control of water, the consortium, called United Water International, failed to provide many of the benefits that were extolled as centerpieces of the contract. “The public was not told the truth about the nature of the contract [by the government],” South Australian state Premier Mike Rann, who was in the opposition when the water deal was signed, said in June 2002.

But Rann and future South Australian governments are stuck with the contract until 2011. “It’s very difficult to unscramble the egg,” a spokeswoman in Rann’s office lamented.

“When a corporation wins a highly unpopular contract over public goods like water, it gets the privatizing government by the balls,” Christopher Sheil, a University of New South Wales historian, said in an interview with ICIJ. “Politically, the government cannot afford to let the privatization fail. This opens up large arbitrage opportunities for the firm, which effectively gets its operations government-guaranteed.”

Adelaide, a city of about one million people, is a three-hour drive from the edge of Australia’s vast, red desert, the outback. Adelaide draws its water from the muddy Murray River, a 1,460-mile waterway that helps drain an area the size of France and Spain. The city’s salty water is considered the foulest-tasting of any capital in Australia. “Even the dogs wouldn’t drink it,” the locals joke.

Maintaining water quality has always been a serious challenge. A recent government study concluded that at the present rate of salinity increase in theMurray-Darling basin, “Adelaide will not have water fit for human consumption by 2020.”

Public concern about drinking water is high. A poll secretly conducted for the government by Harrison Market Research, and leaked to Rann’s Labor Party after the contract was awarded, showed 54 percent opposed privatization and only 8 percent strongly supported it.

Nevertheless, Adelaide went ahead and tendered the 15-year contract in 1995. The offer included the operations of Adelaide’s six water treatment and four wastewater plants, plus water distribution. The only thing that wasn’t on the table was billing, which remained the responsibility of the state government water agency, South Australian Water Corporation, known as SA Water.

Something fishy about the bids

Adelaide’s water privatization plan attracted the major players from Europe and the United States. They quickly formed Australian companies and allied themselves with local businessmen and powerbrokers before making their bids. The major groups were:

• South Australian Water Services, a company controlled by Suez Lyonnaise des Eaux. Its Australian partners were a property developer, Lend Lease, and a local Adelaide family.
• United Water International, Vivendi and Thames Water. Their Australian partner was a local engineering firm, Kinhill Pty Ltd, which held a 5 percent stake. Malcolm Kinnaird, a blunt-talking industrialist who established Kinhill in 1960 and built it into one of South Australia’s most influential companies, was made chairman.
• North West Water, (later renamed United Utilities), partially owned by the U.S. engineering giant Bechtel corporation. North West put Nick Greiner, the former New South Wales premier, on its board of directors. Greiner had championed the outsourcing of Sydney water treatment plants when he was in office.

All three consortia spent millions of dollars on their bids and on lobbyists, public relations and pollsters to persuade the public they would deliver great benefits. With Kinnaird’s contacts and the combined resources of Vivendi and Thames, United Water was considered the frontrunner from the beginning.

“As soon as I saw the name Kinhill,” said one politician, “I thought, ‘Here we go again.’ Whatever contracts are around the place, this mob seems to do extremely well.”

Kinnaird, for his part, viewed North West Water as the chief competition. “I mean, they had Greiner involved,” he told ICIJ. “The game was on.”

The initial United Water offer was not as good as North West Water’s, a subsequent investigation showed. But that changed — under murky circumstances.

Final bids were due by 5 p.m. on Oct. 4, 1995. At 3:46 p.m. on deadline day, United Water advised SA Water its submission would be one or two hours late due to “computer printing problems.” United was granted an extension without the other bidders being notified. North West Water lodged its submission before the deadline. South Australian Water Services was 12 minutes late.

According to subsequent investigations, the bids from North West Water and South Australia Water Services were opened and distributed to government staff not long after the deadline expired. An auditor overseeing the process left the office at 6 p.m., and videocameras recording staff movements ran out of tape half an hour later. Then several staff members left the building.

United Water finally delivered its bid at 9:20 p.m. — four hours and 20 minutes late.

The final bids from the two other companies were largely in line with figures previously negotiated with the government. United Water, however, had dropped its price for operating Adelaide’s water system to an amount just below North West Water’s offer. It also boosted its economic development commitment by A$255 million ($149 million) — slightly higher than North West Water’s final bid.

When SA Water announced United Water as the winner, United Water’s competitors were furious, as were opposition politicians and some government officials. Several investigations eventually were held into the bidding process.

Kroll Inc., the global risk analysis and investigative firm, and the Government’s Crown Solicitor’s Office concluded that the bidding process had broken down and that the absence of a proper audit trail for the opened documents “constitutes an extremely serious situation,” according to the Auditor General’s report.

United Water subsequently provided an inquiry with statutory declarations that all the material information in its submission, including price, was finalized by 12:30 p.m. on Oct. 4.

SA Water, which oversaw the bidding process, claimed it was completely honest. But the state auditor general, Ken MacPherson, found that the opening of the two bids “had the potential to compromise integrity in the bidding process” because information in the bids could have been passed to United Water.

MacPherson found that while the process had left open a risk of improprieties, there was no evidence they had occurred. But many were convinced otherwise. “There appeared during the tender an air of inevitability about the whole thing,” an insider told ICIJ.

It appeared from their reports that investigators did not ask United Water to provide evidence of its computer problems. But Industry Minister John Olsen, part of the then-ruling Conservative Party, accepted the company’s claim. “I didn’t have a basis to be able to say to them ‘I simply don’t believe you…give me further proof’ because the probity auditor had in effect signed that off,” Olsen said.

The public didn’t learn about the late bid until Dec. 8, 1995, when Kinnaird testified on the affair before a parliamentary committee.

The Labor Party demanded that the government cancel water privatization, at which point all the companies involved threatened lawsuits against the government — the losing companies to recoup the millions of dollars they had spent on their bids, and Thames and Vivendi, if the contract did not proceed.

Faced with court action, Solicitor-General Brad Selway and Comptroller MacPherson conducted separate inquiries to determine whether there were legal impediments to the contract with United Water International. Selway concluded that the two unsuccessful bidders had no persuasive legal case against the state. United Water, on the other hand, “would seem to me to have a better prospect of successfully taking proceedings against SA Water if the contract is not executed.”

Armed with Selway’s report, Premier Dean Brown on Dec. 18 accepted the contract.

John Spoehr, whose Centre for Labour Research in 2002 produced a report on privatization called “State of Secrecy,” questioned the government’s response to the lateness of the bid. “The objective,” Spoehr said, “seemed to be to get the contract signed rather than protect the public interest.”

The losing bidders questioned the entire bidding process. Pierre Alla, managing director of Suez-controlled South Australian Water Services, told a Parliament committee in 1997 that United Water could easily have reworked its figures after the other bids were opened. “There was only one line to change to make it the winning offer,” he said. “Four hours is long enough to change a figure.”

North West Water executives also were dissatisfied with the bidding process, and the company’s senior executive, Gerry Orbell, was expected to give Parliament damning evidence. However, he never did. According to one manager, North West decided there could be “huge down sides” for the company if Orbell testified.

North West Water was one of several consortia bidding for a separate, A$115 million ($67 million) Riverland contract to build, own and operate 10 filtration plants in rural South Australia. Eight months later, NW Water’s parent company, United Utilities, won the contract.

“Orbell’s non-appearance was very odd and never properly explained,” Spoehr said. “When his company later won the Riverland contract, some suggested that commercial imperatives might have been the motivation.”

Thames and Vivendi collect higher rates, shun ‘Australianisation’

Despite government promises to the contrary, privatization has meant huge water rate increases. The Centre for Labour Research said that between 1993 and 2000, prices for the first 136 kilolitres (35,000 gallons) of water, the standard consumption used to set charges, jumped by 59 percent or by A$70.67 a year to A$190.67. Prices for heavier use of 250 kiloliters (66,000 gallons) increased by 38 percent or by A$80.93, to A$301.25 between 1993 and 2000. Over the same period, inflation was 11 percent.

Privatization led to the slashing of jobs at SA Water by 48 percent — from 2,707 to 1,390. Four hundred of these employees transferred to United Water, resulting in a total water workforce of 1,790 — an overall reduction of 33 percent.

United Water won’t release the financial details of its contract, but Kinnaird described its returns as excellent. “We’re not here because we love the state and we’ve got bleeding hearts, for Christ’s sake. We’re here to make money. We’re here to do business.”

The limited public information seemed to confirm Kinnaird’s statement. United Water’s profits grew each year. Its 2001-2002 corporate profile showed it had total assets of $43.8 million and turnover of $76 million. Its operating profit before tax was $5.9 million, the after-tax profit was $4.1 million.

SA Water’s total revenue in the 2000-2001 fiscal year was A$613 million ($258 million), up from A$546 million ($319 million) in 1997-98. Profits have steadily increased, reaching a record of A$223.4 million ($130 milion) in 2001-02, compared with A$171 million ($100 million) in 1997-1998. The profit was achieved from increased revenue of A$26.5 million ($15 million) on the previous year and by containing spending.

In 2000, the government’s income from SA Water increased to A$225.3 million ($131 million), almost A$40 million ($23 million) more than three years earlier. The next year it fell to A$206.2 million ($120 million), mainly because of cuts in capital repayments.

Privatization of Adelaide’s water was sold as a deal by an Australian-led consortium that would bring millions in lucrative deals to South Australian firms and workers. But that proved to be an illusion. As it turned out, United Water would remain what it was — essentially, a joint venture of two multinational companies — and those companies would show little interest in South Australia as they went about amassing business in the rest of the region.

Even though no World Bank money was involved in the privatization, the bank’s plan to spearhead A$800 million in privatization projects in Asia and the Pacific played an important role in convincing government officials that the outsourcing of water services was a good idea.

Private companies, the government believed, would help transform Adelaide into an industrial center for water expertise. Aware that the foreign water companies would win some of the regional water contracts, it calculated that Adelaide water companies would provide goods and services for them.

Executives from SA Water met with World Bank officials to assure themselves that the companies selected to bid in Adelaide were likely to get contracts stemming from World Bank projects. The executives later told a state parliamentary inquiry the World Bank officials had recommended the three international companies bidding for the contract as the best in the business.

“We needed companies that had World Bank and Asia Development Bank track record performance, credentials and therefore access to their funding,” said John Olsen, who was the state industry minister, and later premier, during Adelaide’s privatization.

On paper at least, the foreign water companies supported South Australia’s goals. Vivendi and Thames drew up an agreement not to compete with their Australia-based joint venture for contracts in Australia, New Zealand, Papua New Guinea, Indonesia, Vietnam, India, the Philippines, certain provinces of China, and the Pacific islands — “almost all of Asia,” as Premier Dean Brown said in 1995.

But the contract signed by United Water and the government contained a huge loophole. United Water would be the companies’ Asian bid vehicle except “in circumstances where the prospects for a successful bid would be enhanced by having CGE (Vivendi) or Thames bid independently.”

According to Spoehr, “It allowed the government to sell the idea publicly that Adelaide would become a key water industry center, with lots of innovative local companies helping out and jobs being created.”

The promised river of international contracts has not reached Adelaide. United Water’s contract obliges it to assist local water companies in generating A$627 million in exports over 10 years. The contract also sets an additional target over the same period of A$852 million, resulting in a total export target of A$1.48 billion.

ICIJ obtained a confidential government document that breaks down year-by-year the components of United Water’s export commitment. Of the total, according to the document, A$160 million ($94 million) in so-called “exports” is listed as “UWI profits & dividends.” A further A$47.4 million ($22 million) is listed as being generated by Thames Water and A$72.8 million ($43 million) by Kinhill. The category “other manufacturing” earns A$187 million ($109 million); an activated carbon plant accounts for A$21 million ($12 million); and A$45 million ($26 million) is from the export of electric motors. “Engineering services” generate A$43 million ($25 million), and “other professional services” A$50 million ($28 million).

SA Water and United Water said the company has exceeded its export obligations. But opposition Labor politicians said the figures are skewed because they include repatriated profits and management fees to Vivendi and Thames. Spoehr said the government uses a broad interpretation of exports in calculating performance under the contract. There is, for example, no stipulation that the exports should go offshore, rather than interstate.

United Water said it “helped facilitate” A$325 million of “export opportunities,” almost A$100 million more than demanded in its contract. Spokesman Chris Marks denied that repatriated profits and management fees were included in the figures. Exports from South Australia to other parts of Australia were not included.

United Water secured a key 30-year management, maintenance and operation of water and waste water systems contract in New Zealand’s Papakura district in 1997. But that is the extent of Adelaide’s international success in winning major water and sewage contracts.

A promise that Thames would move its Australian corporate headquarters and 100 staff from Melbourne, Victoria, to Adelaide was not kept.

Nor did United Water become an Australian-led firm, as promised in public statements in 1995. United Water’s Kinnaird had said he anticipated that a public float within two years would dilute Vivendi’s and Thames’ equity interest from 95 percent to 40 percent. Industry Minister Olsen claimed United Water had undertaken to be 60 percent Australian owned, with six of its 10 directors Australian residents.

But after winning the bid, those promises died quickly. Kinnaird told a parliamentary committee investigating the privatization that promises to “Australianize” the company with a share float were “to some extent a beat up,” that is, an exaggeration.

By the end of 2002, United Water remained 95 percent British- and French-owned, and Kinhill was also foreign-owned. Kinnaird had sold it for A$46 million ($35 million) in 1997 to the international engineering firm Kellogg Brown & Root, part of the American-based Halliburton group, headed at the time by Dick Cheney, now the U.S. vice president.

Kinnaird, now a consultant to Kellogg Brown & Root, told ICIJ that he did not get a “material personal advantage” out of the United Water transaction. “In the scheme of things it wouldn’t have been on anybody’s mind. It [United Water] is minuscule” compared with Kinhill’s other assets, he said.

ICIJ uncovered details of a backroom agreement, endorsed by SA Water, that show United had a fall-back position were it forced to become a truly Australian company.

One document, a briefing note written by an adviser to Premier Brown in November 1995, shows that the state government knew about a plan by Vivendi and Thames to retain control of United Water.

The two companies had established a jointly owned company in Adelaide called United Water Services, this time excluding Kinhill from a shareholding. The purpose of United Water Services, according to the briefing note, was to ensure foreign control of Adelaide’s water system. United Water Services was needed “to ensure that Thames and CGE [Vivendi] can continue to direct the management of the Adelaide O&M [operations and maintenance] contract after ‘Australianisation'” of United Water International.

The two companies would have mutual contractual obligations but “UWS has the contractual right to direct UWI as to how to perform,” the note said.

Marks, the public relations officer for United Water, denied that was the purpose of United Water Services and that the company was established as a short-term measure until the structure and board of United Water International were finalized. “UWS was set up and signed the contract with SA Water on behalf of UWI. This was then transferred over a few weeks later when the company structure was formalized,” he said.

United Water Services had been inactive since 1996. Asked why the company was not deregistered, Marks said that maintaining UWS “costs us nothing.”

Key aspects of United Water’s performance and financial arrangements remain secret. A spokeswoman for SA Water told ICIJ that contract breaches and penalties were public information. However, when asked for the details she would say only that United Water had committed and was fined for “five or six minor breaches.” United Water confirmed this, but said that its compliance rate to strict performance criteria exceeded 99 percent.

United underwent a review of its contract after five years, including an examination of pricing issues. South Australians were told the review “reached a satisfactory conclusion after six months of detailed negotiations.” But no information about the contract, financial matters or the lengthy review process were released.

Although water quality has improved in Adelaide, the government attributes most of that to upgrades at metropolitan water treatment plants that it funded.

No independent water monitoring exists. United Water is responsible for assuring quality and monitoring it. United uses the Australian Water Quality Centre — part of SA Water — as a service provider to do sampling and testing. The results are reported to SA Water, which releases a report on water quality at the end of each financial year.

In the October 1997 state election, only a few months after the “big pong,” Labor candidate Rann opened his campaign at the Bolivar plant surrounded by supporters in boiler suits and gas masks. John Olsen, who had become premier, suffered a 9-percent swing against his government, but hung on to power.

In November 2001, Olsen resigned after an investigation found he had given inaccurate and dishonest evidence to an inquiry into a government radio network contract. In 2002, Rann came to power, and Olsen was made consul-general in Los Angeles.