The Process of Privatizing The Canal Isabel II

Update on the current situation

On 30th May, the Madrid government announced its decision to give up for the time being, the privatization of the Canal Isabel II. Due to the actual economic situation posing an obstacle to its sale to private companies. However, it still announced the creation of a 100% public limited company, called Canal de Isabel II Gestión SA to manage the full cycle of water.

On the 6th of June, the board of directors of Canal Isabel II approved the establishment of the new company, signed off the inventory of assets and statutes of the new company and its program of activity, even though the vote was opposed by the company’s work council, a representative body of workers and management. Its members had not received sufficient information to formulate a position on the establishment of the new company.

On 12th June, the council of the Madrid government authorized the creation of the company and registered it in the Commercial Register.

On 1st July, the large majority of personnel of the Canal Isabel II were transferred to the new company after a traumatic process without any negotiation.

A provisional victory

The stopping of the privatization of the Canal Isabel II is a success, but it must be emphasized that it is temporary, until the conditions to privatize improve.

The privatisation of the Canal is halted due to:

  • A lack of private buyers
  • Citizen mobilisations
  • Legal uncertainty which could lead to the use of administrative complaints and complaints of unconstitutionality
  • Requirements from potential buyers

However, the creation of the company means a retreat from the current business model and a step towards privatization.

The creation of the new company

The process of creating the new company was characterized by a lack of transparency and information.

The contract-programme was evaluated by Rothschild at around 3 to 3,3 billion euros. The involvement of commercial companies was evaluated by BBVA at 270 million euros. Heritage assets were valued by TINSA at 73 million euros. The share capital and shares of the new company were valued at 1.074 billion euros.

The studies conducted by Rothschild, BBVA and TINSA were not made public. As a consequence, access to these studies and the complete texts of the contract-programme have to be demanded.

Several aspects of the contract-programme

The contract-programme will last 50 years.

The functions and competencies of the Canal Gestión SA as well as its revenues are defined in the contract-programme but are not known.

The annual tariff increase rates will follow the index of consumer prices and the company must reach a financial balance.

Several aspects of the Canal Gestión SA

The general assembly occurs in the presence of all shareholders.

The Board consists of 3 to 12 members representing the Madrid government and signatory municipalities. The State and the workers are no longer represented in the S.A. Members of the Board hold office for six years and are remunerated by fees, whose amount is determined by the general assembly.

The Board may allocate the amount it deems appropriate to reserve funds or others. The rest will be distributed as dividends to shareholders in proportion to their capital.

Spectacular increase in water bills in 2012

The Madrid government actions through Ordinance 2304/2011 of 30 December 2011, has led to increases of between 10 and 20%, without justification by introducing a new formula that affects the fixed service and supply distribution.

This decision runs counter to a report by the Economic and Social Council, which recommended in December 2011 to maintain the old formula.

The increase is part of the efforts being made to facilitate the sale of the Canal to private investors, increasing revenues and enabling higher profits.