Tapped out: Argentina's utilities mostly foreign-owned want rate hikes, but government and consumers balk.

For 30 years, Osvaldo Perez and his neighbors in the working-class neighborhood of Lomas de Zamora, outside Buenos Aires, fought to have water installed. Service finally arrived in the mid-1990s, at the hands of then French-led concessionaire Aguas Argentinas.

What happened next in Lomas de Zamora is indicative of a stinging truth of Argentina's go-go days of mass privatization under President Carlos Menem in the 1990s. Perez and his neighbors saw their initial euphoria quickly fade when they found that the water coming into the house wasn't being properly drained but dumped instead into the porous earth below their homes. Although the company laid more than 2,000 kilometers of pipes, it was slower to install sewers.

A pine tree Perez had planted with his children turned bone white from too much water. Then the ceramic tiles and wood paneling in the house began to splinter. Today, where Perez used to enjoy a Sunday barbecue with friends, there stands a fetid swamp. "We fought 30 years for water and now that we've got it 1 wish we hadn't," says Perez, who lost his job as a technician when the state-run telco Entel was privatized in 1991. He's been jobless since.

Lots of companies swooped down on billions in fat contracts that promised strong margins and little oversight during the Menem years. Despite double-digit profits then, multinationals that bought Argentine highways, water systems and electricity plants are now suing the government for rate hikes to cover losses stemming from the historic, debt-induced economic collapse of late 2001. Spain's Telefonica and the U.K.'s BG Group are among 20 other companies filing US$3 billion in claims with the World Bank's arbitration tribunal, the International Centre for Settlement of Investment Disputes, on behalf of their local affiliates.

At issue is Argentina's flouting of its contractual obligations by its decision to convert utility rates from dollars into pesos and then freeze them. Utilities want higher rates, something President Nestor Kirchner can ill afford to foist on a country suddenly facing a 57% national poverty rate. "Unfortunately, there are still people who haven't realized the paradigm has shifted." says Economy Minister Roberto Lavagna. "A rate hike is legitimate for companies to expect. But our economic agenda consists of more important things than satisfying narrow sector interests." The utilities' industry spokesman declined comment.

Only a few years ago, the paradigm was different indeed. "Surgery without anesthesia" was the slogan ex-President Carlos Menem chose for the political master stroke that made him the star pupil of the International Monetary Fund and World Bank in the last decade. Almost overnight, the country's oil, water, postal services, even the elephants at the Buenos Aires zoo, were handed over te private firms, more often than not with little prior deliberation.

Early on, nobody much complained about the higher utility bills--or stellar profits earned by the foreign multinationals who had walked away with las joyas de la abuela, grandmother's jewels. Argentina then was the darling of the emerging markets and annual growth regularly topped 8%. Ordinary people were just happy to be free of the daily nuisances of a crumbling infrastructure, including routine blackouts and a seven-year waiting list for a telephone line.

Then the economy cracked under the strain of $150 billion in public debt, leading to a merry-go-round of four caretaker presidents that ended with Kirchner's election in May. Ever since the devaluation 19 months ago, rates cbarged for telephones, water and electricity have barely budged, even while the peso has slid 66% against the dollar.

Meanwhile, several companies, like Buenos Aires electricity distributor Edenor, whose main shareholder is Electricite de France, have taken out full-page newspaper ads to warn consumers that service could soon suffer. Already, the waiting time for a new telephone line has lengthened to three weeks versus just 48 hours a few years ago. Strapped for cash, the entire utility sector has stopped paying its foreign bank loans and bonds, sparking a $30 billion wave of corporate defaults that's the largest the world has ever seen.

The government could push back final settlement of the rate issue until 2004. For an economy desperate for investment, that's hardly the carrot companies are looking for. "Until new rules are set and companies can calculate their revenues they'll only spend the bare minimum needed to maintain their investments," says Fernando Navajas, chief economist for Fundacion de Investigaciones Economicas Latinoamericanas.

The government, however, seems unmoved, intent instead on attacking the companies for their own peccadilloes. When French Finance Minister Francis Mer visited Argentina in July to lobby on behalf of Electricite de France, Vivendi, France Telecom and other French mnltinationals, he was warned by Planning Minister and close Kirchner aide Julio De Vido to stay away if all he came to talk about was a rate hike. Meanwhile, government regulators who were asleep at the wheel for years have started flexing their muscles again, conducting surprise inspections of trains and water services.

Hard-nosed. Amid the ruckus, President Kirchner has tapped Daniel Azpiazu, a heavily bearded 55-year-old economist, to FLX matters with the foreign utilities' owners.

Although Azpiazu holds no official title--the obsure researcher is an advisor to the newly created Ministry of Federal Planning and Public Works--his hard-nosed analysis of the social inequalities engendered by Argentina's 1990s privatization process is now the government's guiding light in a politically risky attempt to overhaul the country's regulatory system.

The weight of the task is astounding. A special government commission has vowed to renegotiate 61 contracts worth billions, including heavy projects such as toll roads and hydroelectric dams. Argentines back the scrappy president's effort to end corruption fed by the previous decade's market-friendly economic model. Yet a powerful cadre of international investors profited handsomely from that same model and don't look highly on having their red carpet pulled from under Lhem. "This transcends economics," says Azpiazu. "What the government is confronting is a monster."

Kirchner's critics concede that many privatizations were flawed from the outset. Multi-million dollar subsidies, tax cuts, promises to restrict competition--all were part of the privileges generously doled out to attract foreign capital in the early 1990s. Among the more irksome is a clause, part of almost every contract, which automatically adjusted prices to U.S. inflation--16% from 1995 to 2001--even though prices in Argentina were steadily falling under the weight of a fiveyear recession. "It was a win-win situation for utilities," says Azpiazu. "When the economy was strong things went good; and when it went sour, they were safely outside the business cycle."

Kirchner has a lot on his plate. The economy is in tatters, and the International Monetary Fund expects payment on $6 billion expiring before year-end. How far he is willing to take the crusade against the utilities is unknown. But polls show Kirchner has 80% approval, prompting the president to hint that some companies behind on royalty payments to the government could see their assets confiscated.

Such is the case of Aeropuertos Argentina 2000 and Correo Argentino, two concessions in longstanding disputes with the government over royalties. In the case of Aeropuertos, which manages the country's 32 airports on behalf of a locally led consortium that includes Italian investors, Kirchner aimulled a decree signed weeks earlier by Duhalde that would have sliced royalty payments owed the government in half.

Pressure is also building to revoke the contracts of several railroad operators, which in some cases have seen service deteriorate close to pre-privatization levels despite receiving annual investment subsidies of up to $390 million. Even if Kirchner keeps his promise to negotiate in good faith, there's no doubt his nostalgia for the days of big government, like that of most Argentines, runs deep.

The problem with projects like the Buenos Aires water contract wasn't tbe lack of business opportunities. Unlike in Europe or the United States, where the boring business of providing drinking water normally fields returns of around 7%, from 1994 to 2000 Aguas Argentinas boasted average annual margins of 19.1%. "There's legitimate grounds to rescind Aguas Argentinas' concession," says Azpiazu, who estimates the company only fulfilled 50% to 60% of its investment obligations. The president of Aguas Argentinas, Juan Carlos Cassagne, declined a request to be interviewed for this story.

All that means little to Osvaldo Perez, who a year ago moved out of his house and in with his daughter. Every morning he prays it won't rain, as the water table continues to rise and his home slowly rots. "I want the president of Aguas Argentinas to spend just one week sleeping here," Perez yells, slamming a front door that won't shut because it's too engorged with water. "This house used to be worth $45,000. It's criminal what they've done to me."