Financialisation of water and the road to Rio+20

In his speech at the Alternative World Water Forum (FAME) in Marseille, Antonio Tricarico explains how the financialisation of water – basically the trading water and its derivatives on financial markets – threatens the idea of water accessibility for all.

As stated recently by chief economist of Citigroup, “I expect to see in the near future a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that will exceed the capacity of those for oil and gas today.

I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG. I see new canal systems dug for water transportation, similar in ambition and scale to those currently in progress in China.”

“I expect to see a globally integrated market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments...will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.”

We should thank William Buitler for making such a clear case for what you might call financialisation of water.

We live in a time of finance capitalism, when trading money, risk and associated products is more profitable and outpaces trading goods and services for capital accumulation. That is in short what people refer to often as “financialisation” of the economy. This has huge implications for where capital is invested and the everyday exposure of people to capital markets, as more and more aspects of everyday life – from home ownership to pensions and schooling – are mediated through financial markets rather than just markets.

Financialisation should be regarded as more than just a further stage of commodification. Financialisation reduces all value that is exchanged – whether tangible, intangible, future or present promises, any work, product, service and so on – either into an exchangeable financial instrument or a derivative of a financial instrument.

Financialisation is now penetrating all commodity markets and their functioning and expanding from areas like social reproductive systems (pensions, health, education, housing) into natural resources management. Just as the privatisation of public services served as a building block for the first financialisation of the economy, so the further commodification of the natural commons is the basis for the financialisation of natural resources.

When applied to natural resources and commodities through financialisation, this ‘turbo-capitalism’ has serious implications because it does not simply promote the commodification of nature and the commons in general, but it puts the management of the commons into the hands of financial markets for years to come. In so doing these markets address both the problem of how to invest the massive amounts of private wealth and liquidity available today and at the same time how to generate new forms of capital accumulation (crisis of accumulation, need for new financial assets).

This approach is a long-term project that aims to lock natural resources management into the future structure of capital markets so that will dramatically reduce the possibilities to reclaim the commons and their collective management by directly affected communities. This systemic “financial enclosure” of the commons, coupled with existing trade and investment liberalisation agreements, would produce a long-lasting legal enclosure that drastically shrinks the political space for social movements reclaiming the commons as the basis of their livelihoods.

That's why it is strategic that social movements fighting water privatisation and commodification tackle since the beginning this trend in order to reinforce struggles against financialisation of other natural commons. As Buitler admitted today water is less financialised than other natural commons and thus preventing this to happen might have systemic importance.

Financialisation transforms the functioning of economic systems operates through three different conduits: the structure and operation of financial markets, the behaviour of non-financial corporations, and in economic policy.

There is a growing trend for all the corporations to make profits through the financial markets. Sometimes even more profits than through their primary activities, namely selling their goods and services. This applies to water utilities as well and it is possible thanks to the sophisticated financial products offered by the market (in particular if laws to do guarantee automatic profits). It is today possible to make money while issuing complex bonds and other derivatives transforming the gathering of liquidity in a potential profitable operation.

This is particularly true for public-private partnership (PPP) deals that are not producing profits and are short of financing. In order to ensure enough dividends are distributed, companies become more and more indebted on financial markets. These operations are great deals for the banks in charge of bond issuance and other financial products. Unfortunately the use of “creative” finance didn’t help the company that had paid so far higher interests compared with the classic banking system. This subtle and untransparent strategy is locking in privatisation in the long-term and making it harder and harder to reclaim these companies for the public good and to eventually re-publicize them.

The financing of water infrastructure is gathering more and more the attention of speculative actors such as hedge funds and private equity funds that are already set to play a major role. Water and energy infrastructure are becoming important targets for such players. Only one baseline data: between 2002 and 2007 total investments by the private sector in infrastructure projects alone in developing countries amounted to some $603 billion. As such, private investment far outstripped the $64.6 billion loaned to developing countries for infrastructure projects over the same six-year period by China (by far the biggest source of bilateral concessional development finance) or the $72.9 billion in development assistance for infrastructure provided by the 33 countries that make up the Organisation for Economic Co-Operation and Development (OECD).

You can claim that this approach is leading to a third wave of PPP, with the first being the privatisation of public assets at discount value and the second the creation of PPP vehicles to help privatised companies finance their business. This third wave is related to the creation of a financial system suited to finance, through capital markets, infrastructure which just serve private sector interests.

This is the most scary approach and it represents the next future if the trend will not be inverted.

The water is transformed itself in a commodity tradable on a large scale global market through water trading schemes. Some Western states in the US and countries like Chile, South Africa, Australia and Spain's Canary Islands have water-trading schemes, and other countries are considering following this model. In the case of Chile, it was under Pinochet that the water was totally privatized by the “water code” and remains so till this day. In Chile it is possible to buy and sell different types of water rights: hydroelectric, potable, irrigation, etc. The water rights are independent from the land tenure, this means that along a river the water can belong to a different owners than the land along its banks. Water rights can be either permanent or temporary.

If this model will be implemented globally a water stock market will be created where water rights will be traded as already happens with other commodities, raw material and carbon credits.

In a water trading market, the seller holds a water right or entitlement that is surplus to his current water demand, and the buyer faces a water deficit and is willing to pay to meet his water demand. Owning a certain quantity of water will mean to have a financial asset able to generate an income. Derivatives products on different types of freshwater could be created by the financial markets.

This approach goes far beyond the current privatisation of water services and utilities and would require a significant increase in the production of fresh water through desalinisation, purification and so on, as well as the storage, shipping and transportation of water through a new network of dams and large-scale canal systems to connect different water basins.

In short financial elites aim at building a global water market, then to establish scarcity through cap and trade systems or physical hoardings (for instance control of storages and dams) and then a financial speculative market can be built on it.

In this regard, “valuing water” was one of the key issues for deliberation at an EU conference on the future of European waters organised last May in Budapest by the Hungarian presidency. Once water is valued and monetised, and its global trading is established via large-scale systems for accumulation, water will easily become a financial asset, whereby merely holding a physical quantity of water would generate financial rent.

We, the peoples for public water, are at the forefront of this new global struggle against the financialisation of nature and the commons, which is at the heart of the hegemonic vision dominating the preparation of the Rio+20 conference and the promotion of the so-called Green Economy.

Opposing privatisation of water and more important promoting a remunicipalisation and republicisation of water utilities and water infrastructure is a key strategy to take water out of financial markets and shrink financialisation.

Promoting and practising alternatives out of the markets is the only way to counter financialisation. Therefore it is up to the peoples for public water and other social movements defending and promoting the commons to decide which green economy is needed today, and not up to corporations, financial markets and compromised governments.

The struggle goes on!