Do not let Hungarian water be the property of colonizing French investors! - blared the internet forums in Pécs whenever the activities of the Pécsi Vízmű Zrt. (Pécs Waterworks Co.; PV), jointly owned by the local government of Pécs and Suez (50,05% and 48,05% respectively; the remaining 1,9% is owned by 10 neighboring settlements), was mentioned. The main reason for the population's grudge is that the drinking water of Pécs is one of the most expensive in the country.

Páva (peacock) and the chanticleer

With the leadership of Zsolt Páva from Fidesz, city management is now to bounce the private investor from the operation and repurchase the minority stake. It is not a rarity per se - there are almost 400 water distribution companies on the Hungarian market whose management contracts may be terminated by the local governments under certain circumstances. That is what happening in Pécs now, but the party to be sacked is a financially sound multinational company, against which the city management stepped up with unusual firmness. It turns out however, that repurchasing public utilities, which Fidesz would support in other places if elected into government, is not easy.

The case started in 1995 with the partial privatisation of the waterworks, when Pécs - under the mayorship of Zsolt Páva - involved the French investor group, Lyonesse des Eaux, into the newly established Pécsi Vízmű Rt. The parties signed five privatisation contracts for 25-30 years; for 330 million HUF in cash, the French got 48,05% of the shares and the management rights. The latter means that the French can take out 2% of the PV's revenues every year, that is, calculating with a revenue of 6-7 billion HUF per year, 120-130 million HUF. As an offset, the investor - the name of which became Suez Environment in the meanwhile - promised to deliver such procedures and information that result in the enhanced efficiency of the company and reduced water prices. According to the management contract, the water utilities did not become the property of PV, the disposal rights remained with Pécs, and PV pays a rent for using them.

Initially, water quality and efficiency improved, and the joint company brought a profit to its owners - 267 million HUF after taxation in 2008 -, but water prices were also creeping upwards. According to calculations, the PV has achieved a 25% rate of return in Pécs, whereas the average on the water utilities market is 5%.

French intrigue

A study, made by the law firm of Iván Szabó for the local government this year, points out the increasing conflict of interest between the city and the French. The main problem - as Szabó explains to our paper - is that PV and the investor deviate from the principles laid down in the contract. The Waterworks should have been working on improving the services and possibly reducing the price, but instead it bought itself into other water distribution companies using the money of the citizens of Pécs. Moreover, Suez has taken out large sums of money from the company. As Szabó counted, if Pécs buys out the French co-owner, an annual 500 million HUF would remain with the indebted city, therefore they suggested terminating the contract. The shareholders' agreement of 1995 makes it possible to abrogate the management rights even if no breach of the contract is occurred, on compensating the investor. The latter can happen in two ways: either a joint expert is appointed to estimate the price of the shares of Suez, or a formula is applied to calculate what buying out the shareholding costs. On 10 September, the local government of Pécs unanimously decided to terminate the management contract and asked the French to make a proposal on the price of their block of shares and the degree of compensation by 30 September. At that time Szabó estimated that the buy-out would cost 1.3 billion HUF.

The great seizure of the waterworks

Both parties claim that they tried to negotiate during the ominous 20 days - which is considered to be an unreasonably short deadline both by Suez and the Hungarian water profession -, but the other party did not react on the merits. Since there was no improvement by the end of the month, on 1 October the representatives of Pécs stated that the French remained aloof from the negotiations, breaching their contractual obligations to undertake negotiations in good faith, and the management rights of the waterworks ceased as of 30 September. The company was called upon to convey the waterworks to Tettye Forrásház Zrt., established with an invested capital of 5 million HUF. Tamás Winkler, CEO of Biatorbágyi Vízművek Kft. and former CEO of Nemzeti Lóverseny Kft. was appointed as CEO of Tettye Forrásház Zrt.

Tettye, registered on 2 October, seized the waterworks on 5 October. Winkler and Szabó processed in attendance with a new security group - as enacted by law, water public utilities must be guarded, and the PV, who is no longer the operator, could not undertake this task -, and prevented PV management from entering the building so as "not to cause any damage", since the process monitoring dispatching center, that operates the whole system in the city, is located in the headquarters of the waterworks. Rumours said that due to the litigation water provision may be at risk, and that is why they hurried so much with the occupancy, though they built on the responsible approach of the workers. The 360 employees may continue working, it is only the managers appointed by the French Tettye does not take over - explained Szabó. He compares the termination of the management contract to the situation when the owner of a flat is dissatisfied with his tenant and terminates the lease contract leaving time for him to move out. Suez was stonewalling, "building upon the corrupt Hungarian society", and did not reckon on such quick action. In the PV's interpretation it was an arbitrary seizure, since managing the company is practiced by the owner through the general assembly and the management and the PV general assembly was not yet convened.

In the meanwhile, the French initiated a trespass proceeding, since the office house is being used by the Tettye, while the building is owned by the PV. In connection with it, Tamás Winkler said that since the water public utility act is not yet ready, it is difficult to separate the operational and the water public utility assets from each other in a particular case. The privatisation contracts should be examined to adjudicate if everything happened lawfully - said an anonymous expert. But for now it is impossible. It is not clear either if the Tettye is in possession of the necessary licenses, since not much time has passed since its establishment. But even if such infringements happened, these are not penalised too strictly by the authorities. By all accounts, a part of the Hungarian water profession considers the solution unfavorable from the point of view of service safety.

Given these premises, Szabó's evaluation seems to be realistic, who envisages several years of legal proceedings, and the negotiations concerning purchasing the shares can also take up months. Due to the complexity of the issue it is conceivable that the International Court of Justice will make the final decision. And what is the cost to Pécs? Zsolt Páva talked about a 2-5 billion HUF compensation. Szabó expects a smaller amount of money that can be saved in a few years' time calculating with an annual 500 million HUF profit. In turn, water may become cheaper; if calculations verify it, representatives may make a proposal for reductions on the general assembly on 15 October.

Suez as scandal company?

Suez Environment, one of the world's biggest water distribution company, started its international expansion in the nineties, and took over the management of the water supply in several cities. Some places regretted letting Suez in: in Bolivia, the subsidiary company of Suez asks for half of the people's yearly income for connecting the water, which is unaffordable for many. It led to a riot. In Manila, Philippines - where service was provided by Suez and the American Bechtel - water was reliably accessible only for a few hours a day, and the water prices increased by 400-700% in seven years. Atlanta, USA, has terminated the 20 year contract with Suez subsidiary company after four years, since following the takeover, tap water became undrinkable. Paris terminated the management contract with the company last year. According to a survey, in the French cities served by Suez, water prices are extremely high, and the net margin is 26-42% of the revenues.

In Hungary, Suez is involved in the Waterworks of Budapest, and used to be present in Kaposvár. The name of the French company was also mentioned during the debate this summer on the preparation of the possible privatisation of the state owned regional water public utilities. According to rumours, Suez would be interested in getting involved into the regional companies.

Objections against the Pécsi Vízmű Zrt.
and the French owner:

Since 2002, Pécsi Vízmű (PV) has taken a share in 17 commercial undertakings. Most of these do not benefit the citizens of Pécs, and serve solely the expansion aims of Suez in Hungary.

The PV acquired minority holding in other water companies for disproportionately great amounts of money. (An example is the 6,91% share in the Komló Waterworks for 30 million HUF.)

The PV finances the losses of its subsidiaries through a complicated financial system from the water and sewer fees paid by the citizens of Pécs.

The services provided through management rights are not worth paying 120 million HUF annually from the citizens' money. The usefulness of some of these services is questionable: why is software demonstrating how to prepare for a flood in the Sydney waterworks needed in Pécs?