Multinational Monitor

NOV/DEC 2008
VOL 29 No. 3


The 10 Worst Corporations of 2008
by Robert Weissman

Carbon Market Fundamentalism
by Daphne Wysham

A Last Chance to Avert Disaster
testimony of James Hansen


Plunge: How Banks Aim to Obscure Their Losses
an interview with Lynn Turner

The Financial Crisis and the Developing World
an interview with Jomo K.S.

The Centralization of Financial Power
an interview with Bert Foer

“Everyone Needs to Rethink Everything”
an interview with Simon Johnson

Toxic Waste Build-Up
an interview with Lee Pickard

“Before That, They Made A Lot of Money”
an interview with Nomi Prins


Behind the Lines

Public Ownership, Public Control

The Front
Thirsty for Justice - Whitewashing Honda

The Lawrence Summers Memorial Award

Greed At a Glance

Commercial Alert

Names In the News


The Front

Tanzania: Thirsty for Justice

British water giant Biwater cannot use an investment treaty to make Tanzania pay millions for an abrogated water privatization contract, an international tribunal ruled in July.

But it remains unclear if Tanzania will be able to collect millions in damages awarded to it by a separate international arbiter, or whether Biwater will be able to use its corporate structure to avoid liability.

After Tanzania cancelled its contract in 2005 on the grounds that Biwater had failed to deliver promised services, Biwater sued the country twice. In a case filed in the UK under UNCITRAL (United Nations Commission on International Trade Law) rules, the company alleged Tanzania violated the terms of its contract with Biwater. In January 2008, the tribunal deciding the case ruled that Biwater should actually pay $8 million to Tanzania.

Biwater also filed suit at the World Bank-administered International Center for Settlement of Investment Disputes (ICSID), where it sought to enforce the terms of a Tanzania-UK investment treaty. In July 2008, the ICSID panel ruled for Biwater, but refused to grant any damages.

The Tanzania case at ICSID follows a long line of corporate investor cases arbitrated under bilateral investment treaty rules.

According to Nathalie Bernasconi, an attorney who works in Geneva with the Center for International Environmental Law, there are currently 2,500 bilateral investment treaties, under many of which corporations can initiate arbitration against a country.

Critics say the investment treaties give multinational companies access to international rules and global forums (like ICSID) that are heavily tilted in favor of private investors. Seventy percent of cases filed under bilateral investment treaties are resolved in favor of investors, either by final ruling or settlement.

“Biwater never performed”

Biwater signed a 10-year contract to manage the water system in the Tanzania capital city of Dar es Salaam in 2003.

The Tanzanian water deal was part of the privatization wave that swept through Africa in the 1990s, imposed through aid conditions from government donors and multilateral banks. The UK, Tanzania’s biggest benefactor, strongly supported the water deal. The UK even provided funds for a pop song in Swahili promoting privatization, with the lyrics, “privatization brings the rain.”

The Tanzanian deal offered generous terms for Biwater. It received a five-year tax holiday and no cap on profits from reducing operating costs (the standard for regulated utilities in the United States). Donors committed to directly fund required upgrades.

But Tanzanian and global activists said from the outset that privatization was a bad deal for Tanzania.

A report by ActionAid pointed out that 80 percent of Dar es Salaam’s residents would receive benefits from only 2 percent of the promised new investments, through a fund designed to connect households to the water system.

Tanzanian critics said the contract effectively redlined the poorest neighborhoods — a practice common in the world of corporate water privatization, because poor families do not have sufficient income to pay for high-priced, high-volume water services. Those in the poor neighborhoods of Dar es Salaam, without water connections, would continue to walk to pay inflated rates for small amounts of unsafe water from mobile water vendors, or hope for charity organizations to invest in water infrastructure.

It turned out that Biwater had trouble even servicing wealthier communities. Shortly after project inception, problems appeared. Households complained of increasingly unreliable service; scheduled investments in pipes and infrastructure upgrades were not made; and required progress reports to the Tanzanian regulator were not submitted.

A number of consultants, paid in part by the German government and the World Bank, assessed Biwater’s performance. All found that Biwater had not fulfilled its contractual obligations.

Starting in October 2004, the government and Biwater sought to renegotiate the deal, but could not reach an agreement. 

Even the company acknowledged that Biwater’s management was a complete failure. Biwater’s chairperson admitted that there was “corporate failure all the way to Dorking,” the UK town where Biwater is based.

“Biwater never performed under the contract,” says Mussa Billegeya, campaigner for the Tanzania Association of NGOs. “They were supposed to increase revenue, but couldn’t collect the water fees. They didn’t even pay the lease fee to the government. They owed around $3.5 million to the government in 2005. They did not contribute to a collection fund —which was meant to connect the poorest people. They were doing almost none of what they were supposed to do.”

Tanzania Prevails

In May 2005, after the failure of the negotiations, Tanzania announced it would cancel the contract. After City Water’s contract was cancelled, a new public corporation took over operations of Dar es Salaam’s water system.

The same month the contract was cancelled, Biwater initiated its contract case against Tanzania in the UK.

In August 2005, Biwater filed its claim at ICSID, saying Tanzania treated it unfairly under the terms of the UK-Tanzania investment treaty, and that it potentially lost as much as $25 million due to a government “expropriation.”

The July 2008 ICSID ruling agreed that Tanzania’s conduct had violated its treaty obligations, but found that City Water — the Biwater’s subsidiary handling the Dar es Salaam contract — had been operated so poorly that its economic value was “nil.”

Biwater condemned the decision. “The rationale is hard to fathom,” says Larry Magor, Biwater director. “We had invested approximately $14 million in City Water over a two-year period. The Tribunal found that the Government of Tanzania violated the terms of its investment treaty with the UK on four separate counts, and yet it did not provide any effective remedy in respect of these violations.”

Meanwhile, Biwater says it will not pay the $8 million awarded to Tanzania in the UK case — an amount sufficient to connect 50,000 people in Dar es Salaam to the water system. Biwater’s position is that the City Water subsidiary no longer exists, and so there is no entity to pay the award.

J.J. Gass, an attorney with the law firm Freshfields Bruckhaus Deringer LLP who served as lead counsel for the Tanzanian government in the Biwater cases, still has hope that the company will face up to its responsibility. “If Biwater leaves the government holding the bag in this fashion, one hopes the World Bank and other development institutions would remember that behavior the next time Biwater and its affiliates bid to participate in a donor-funded project.”

— Maj Fiil is the former director of Water for All

Whitewashing Honda

The sparkling new Honda Civics plant in the postcard-perfect town of Greensburg, Indiana is regarded as a major prize in economic development for southern Indiana.

National Public Radio described the new plant as “a major coup” for an idyllic little place “that could be a movie set for an ideal American small town.” 

But the seemingly genteel town of Greensburg has a sordid history of racism. “In 1906, Greensburg’s white residents [drove] out most of its black population,” writes Professor James Loewen, author of Sundown Towns: A Hidden Dimension of American Racism. “In the 2000 census, Greensburg still had only two black or interracial households among 10,260 residents.”

In a clumsy attempt to defend this history, then-Mayor Frank Manus told the Bloomington Times-Herald in 2007, “I think there might have been something way back when, but, hell, we don’t have anything like that now. We have several colored people who live in the city.”

Greensburg’s racist history provides a disturbing backdrop to Honda’s hiring practices, say critics of the company. Honda, which received more than $140 million in public funding to build the plant, has imposed rigid geographical limits on its hiring. This move is widely seen as minimizing the hiring of African-Americans and the thousands of skilled, experienced United Auto Worker members living just outside the hiring zone.

Honda’s “hiring radius” plan restricts jobs at the plant to those residing in 20 of Indiana’s 79 counties. Of those 20 counties, 19 are a combined 96 percent white. The 20th — which includes Indianapolis — is 24 percent African-American.

Critics see the state subsidizing a segregated workforce, permitting Honda to use the “hiring radius” policy as a thin pretext for eliminating blacks and union members from the pool of applicants.

“This hiring radius is the worst form of discrimination,” thunders State Representative Dennis Tyler. His home city of Muncie has lost thousands of manufacturing jobs, many of them once held by African-American workers.

The new plant, when it is fully operational, will employ about 2,000 workers at wages of about $15 an hour. Governor Mitch Daniels, formerly an Eli Lilly executive and then director of the Office of Management and Budget under George W. Bush, hailed the plant as a wise investment of some $50 million in state “incentives” and an additional $91.5 million in public funds for infrastructure provided by local governments.

While Governor Daniels crowed over landing Honda, much of Indiana felt left out of the celebration, and also cut out from benefits from the plant — although not its cost. Many people were outraged that Honda’s hiring strategy left them excluded from the jobs while still paying the tab for the state’s incentive package.

State Representative Tyler pointedly noted that Honda’s hiring plan eliminated thousands of laid-off autoworkers in Muncie, Fort Wayne, Kokomo and Anderson from the chance to apply. While Honda claims that it merely “wants workers to live within an hour’s drive of the plant so they can get to work on time even in bad weather,” Tyler dismisses that as a transparent ploy to avoid both African-Americans and laid-off union members who would likely move closer to avoid a costly commute.

Honda has not imposed such geographical limitations on all of its other plants in the United States. At its Alabama plant, the company says it hired workers from 66 of Alabama’s 67 counties. Having provided Honda with $158 million in incentives, an Alabama official told the Wall Street Journal, “We wanted to spread the opportunity across our state and wanted the plant to be able to hire the best people in the state.”

But Honda has adopted Indiana-style hiring restrictions in some cases. In 1988, the Reagan administration’s Equal Employment Opportunity Commission, not known for aggressive enforcement of civil rights, made headlines by negotiating a settlement under which Honda had to pay a total of $6 million in back pay to 370 African-American and female job applicants for Honda jobs in Ohio. Just as in present-day Indiana, the central issue was a hiring radius that included rural, nearly all-white areas but carved out the city of Columbus, which has a significant African-American population.

The present-day battle over Honda’s hiring policy — over a century since Greensburg expelled all its African-American residents — casts a spotlight on a little-discussed but increasingly obvious corporate strategy for locating new plants in the United States.

As sociologist Gregory Squires wrote in his book Capital and Communities in Black and White, “When corporations seek out greener pastures, they tend to seek out whiter ones as well, in part because of the presumption of a relatively greater attraction to unions on the part of blacks, in part to avoid equal opportunity requirements — and in part due to the perpetuation of traditional stereotypes and old-fashioned prejudice.”

This pattern of recruiting white workforces is pervasive, and is particularly evident in Indiana, says University of Indiana labor studies professor Ruth Needleman. “The fact is that African-Americans do not live in rural Indiana but the Klan does. So in general when they go to such locations to avoid people with union experience, they are avoiding blacks.”

“The data on unions is generally that blacks are more likely to join a union if they are able, and so blacks, Latinos and women are less anti-union than rural white workers,” she says.

The Indiana Economic Development Commission  declined to provide any figures on the hiring completed thus far at the Honda plant in Greensburg, and a Honda spokesperson says only,  “I will not be able to elaborate further for you.” Legislators have also been unable to obtain any figures on the results of $50 million in state funding.

The fight over the Honda subsidy and hiring practices also highlights ongoing state competition to get new plants and new jobs, a competition that costs about $50 billion a year, according to Greg LeRoy, executive director of the Washington, D.C.-based Good Jobs First. Fueled by rising job losses in manufacturing (102,000 in Indiana since 2000), as more firms shift their manufacturing to China and Mexico, public officials feel pressured to cough up more public funding while asking fewer questions about the quality of the jobs being received in return.

This competition for jobs allows corporations like Honda — which earned a profit of $5.27 billion in 2007 — to demand huge “incentive” packages even when they have plenty of capital themselves.

Nor has the public’s return on its investment of subsidies received thorough debate in Indiana.  Honda’s pay scale of about $31,000 a year in Greensburg places it far below the local manufacturing average, and less than half of the statewide figure of $69,725, according to state statistics.

For State Representative Tyler, the entire Honda deal reflects the huge imbalance between major corporations and communities. “The corporations have shipped out the good paying jobs to China and Mexico, but we’re giving lower-paying auto companies the moon to locate where we are,” he declared. “They know we won’t argue and fight because we’ve got to have the jobs. That’s what’s what wrong with our economy and our taxes. The jobs we’re keeping aren’t allowing us to keep up with our tax base for the public services we need.”

— Roger Bybee is a writer and consultant based in Milwaukee.


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