Court rules in favour of Pecs decision to terminate Suez water contract

A Hungarian arbitration court has ruled that the city council of Pecs was legally entitled to terminate its water service contract with the multinational Suez Environnement, and take over the running of the service itself. In March 2010:
"The arbitration court of the Hungarian Chamber of Commerce and Industry has declared the decision of the Pecs (S Hungary) city council to terminate its contract with the French-owned waterworks company Pecsi Vizmu (PV) to be legal, city Mayor Zsolt Pava (Fidesz) announced on Thursday. The decision is non-appealable. The local council of Pecs, which is controlled by the main opposition party Fidesz, annuled Suez's contract to operate its waterworks in September 2009 after it failed to reach an agreement with the company regarding repurchase of its stake in the utility. In early October, the local council set up a company to take over operation of the waterworks. The local council of Pecs owns 50.05pc of the waterworks, while Suez holds 48.05pc and 1.9pc is in the hands of other local councils.Suez Environnement Hungary Managing Director Zoltan Csorba has said Suez wants its ownership rights to be recognised before it starts any negotiations with the local council."
MTI March 19, 2010 Friday Arbitration court declares termination of Pécs Waterworks contract to be legal  
 In September 2009 Pecs city council gave notice to Suez that, at the end of September, it would terminate the water contract with the joint Suez-municipal company Pecsi Vizmu (48% owned by Suez, 52% by the municipality), because of excessive profits and high prices: "the company's acquisitions of stakes in other small water utilities, and the high water utility fees charged by the firm, did not serve the interests of residents." The contract was originally awarded in 1993, without any competitive tendering.
The company did not attend a meeting proposed by the council, and so in October 2009 the city council created a new company, Tettye Forrashaz Zrt, 100% owned by the municpality, to continue operating the water works to ensure no disruption in the water supply. It then closed the head office of Pecs Vizmu and locked out the management. (Reuters 6 october 2009 )
The arbitration ruling was made despite strong political pressure from French and other foreign governments. Ambassadors of 10 EU countries wrote a public letter claiming that the action by Pecs, amongst other things,  was undermining the confidence of foreign investors in Hungary:
"President Nicolas Sarkozy of France complained to Gordon Bajnai, Hungary's prime minister, who in turn attracted fire from opposition politicians for "protecting the foreign capitalists and not the people" after he spoke up for Suez."
(The Economist November 7, 2009  Less welcome; foreign investors in Hungary)
"the embassies of the United States, Belgium, France, the Netherlands, Japan, the United Kingdom, Germany, Norway and Switzerland said foreign investors could be deterred by reports of "non-transparent behaviour" in areas of public utilities, broadcasting and elements of Hungary's transport infrastructure....the French owners of the waterworks of the Hungarian city of Pecs were denied entry into the facility after the local council decided to reclaim it. Mr Bajnai called the case in Pecs an "atrocity", saying it was without example."

(Hungarian News Agency (MTI) November 23, 2009 Monday EMBASSIES HAVE NO GRIPE WITH GOV'T, SAYS PM)
This was not the first time that the city had tried to terminate the contract. In 2004: "the mayor of the city of Pécs announced that they were considering the re-nationalisation of the water works (partially privatised in 1997 to the French-based Suez corporation), mainly because the price of water was increasing, on the one hand, and investments were not forthcoming, on the other. Since the municipal water network is partly privatised, the city cannot have access to EU funds for water infrastructure development. That is, privatisation did not bring the benefits of cheap additional investments." But Suez won a court case claiming it was entitled to massive compensation for lost future profits, which the city could not afford, and so forced the council to continue the contract. By contrast, Pécs had earlier successfully remunicipalised its previously privatised waste collection company on similar grounds: i.e. that prices had increased and infrastructure development had became more difficult to finance. (Zsolt Boda and Gábor Scheiring Hungary: Water privatisation in the context of transition. Public Services Yearbook 2005/6 )
The original privatisation arrangement was a classic example of how a multinational gained total control of a company, although the municpality was majority owner, while the municipality guaranteed its profits, which were based on cutting wages and employment: "In Pecs, the contract specifies that Lyonnaise des Eaux has exclusive, 100% control of the management of the company (although it has only 49% of the shares)....In both Pecs and Szeged, the concession contracts include clauses stating that if the tariffs are not sufficiently high to provide an operating profit, then the council must make good the loss for the the case of Pecs in Hungary, a company executive said that 100% of the profits come from reduction in labour costs."
The form of the joint venture was a way of evading the intention of a Hungarian law restricting private ownership: "Pécs and several other municipalities or regions opted for the following formula: in the privatisation arrangement only a minority (less than 50 percent) stake of the company is transferred to private hands, making it a ‘partial privatisation’. This affords the municipality some control, potentially giving them the power to protect the public interest. This is mitigated, however, by the privatisation agreement which gives management rights to the private partners, thus limiting the authority of the municipality. The minority owners – typically a multinational company or a consortium of companies – get management rights on the basis of a long term concession contract for fifteen (as in the case of Budapest) to twenty-five years. It is to be noted that the legality of this contract is somewhat dubious as the private partners gain management rights over assets which could not be privatised otherwise. " (Zsolt Boda and Gábor Scheiring Hungary: Water privatisation in the context of transition. Public Services Yearbook 2005/6 )