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United Nations Environment Programme
Division of Technology, Industry and Economics
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Newsletter and Technical Publications
<International Source Book On Environmentally Sound Technologies
for Wastewater and Stormwater Management>

5.6.1 Regulatory framework

The water and sanitation sector is a typical example of a natural monopoly which results in justifiable and perhaps inevitable intervention from the Public Power at least to determine and establish the rules for the work otherwise leaving space for overpriced tariffs, low competition and/or provision of deficient services to the users.

The question that has swept the Region over the present decade regarding the water and sanitation institutional framework is whether to adopt a new model which would include the participation of the private sector in the hope of bringing more efficiency and new sources of funding, entrepreneurs and operators to the Sector, with strategic decisions still being taken by the Public Power.

Chile and Argentina have pioneered the insertion of the private companies in the sanitation sector, although it must be noted that in Chile the regulatory processes were established by the Government before privatisation started, and in Argentina both actions were initiated almost simultaneously.

Chile

The Sanitary Services Office (SSS) was created in 1989 as a result of the lessons learnt from the privatisation processes which occurred in the early 80’s in the energy and telecommunications sectors. It is a relatively small, autonomous and decentralised agency, comprising about 100 employees, administratively linked to the Public Works Ministry, with its general Director being chosen by the country’s President. Its operational costs are born by the country’s annual budget. SSS’s responsibilities include the awarding of water and sewerage concessions to private contractors, the establishment of criteria for the provision and implementation control of (i) tariff schemes and (ii) service quality codes and standards.

As the Chilean experience has been considered to be the most successful to the sector at the Regional level it has been found useful to summarize SSS’s main regulatory characteristics as follows:

  • a clear institutional partition between regulation and operation activities;
  • the implementation of a tariff structure easily understood by the users, that is based upon efficiency criteria that are revised every five years;
  • the use of a coherent cross-subsidy policy that benefit low-income users;
  • the adoption of a long-term profit system under given internal rates of return.

Argentina

The sectoral regulatory framework established for Buenos Aires, Argentina, was created in April, 1993; it describes the basic parameters to guide the services to be provided by Aguas Argentinas (the concessionaire) and the duties of both the Government and the users. The regulatory entity, Ente Tripartito de Obras y Servicios Sanitarios (ETOSS) is an autonomous agency whose main responsibilities are to assess the concessionary performance before its contract obligations, including the approval of expansion and maintenance programmes.

ETOSS's Board comprises six persons, two for the Federal Government, two for the Buenos Aires City Hall and two for the Buenos Aires Province. About 110 professionals whether staff or consultants work for ETOSS, whose expenditures are covered by a charge of 2.67% over the water and sewerage tariffs issued. This agency is divided into six sections, a fact that has been blamed on a somewhat low-speed response to decisions. Some sort of administrative merge is under discussion to solve the problem. There is also an ongoing debate between ETOSS and the concessionaire regarding contracts and norms, with the former stressing that as a representative of the asset’s owner - the Government - the goals must be achieved under adequate procedures, e.g, including environment protection and high quality standards, and the latter pinpointing only the needs for the achievement of the goals. The background issue is the level of freedom to leave up to the concessionaire the achievement of the goals under an optimised investment strategy without posing threats to the public health.

5.6.2 Institutional arrangement

From the end of the last decade, Regional countries have been engaged in a process of sector reform. Tremendously pressed, it is fair to say, by multilateral and bilateral agencies, especially The World Bank and IDB. In turn some Region’s Ministries of Health still keep using as much as possible the WHO water and sanitation model especially for rural areas and small urban communities. Whereby the major targets are not the utilities' economic/financial positive situation but the support to users even under major subsidies. Quite often these two policies are applied simultaneously in the same country which makes the sector working in a very peculiar situation, nevertheless with an expected likelihood of prevalence in the future of the multilateral banks' Earrangement.

These reforms were prompted by the lack of efficiency of the agencies in the sector. In fact, water and sewerage agencies have been highly subsidized by the central and local governments and served as a place of employment. One important aspect of this modernisation of the sector has been a move towards decentralisation, municipalisation and towards increased participation of the private sector in the water sector through various reforms. The World Bank, for instance, haven’t agreed to fund the Nicaragua Water and Sewerage Project unless the Country’s sectoral system was transferred to the private sector through a management contract; an analogous procedure has been taken before SANAA, in Honduras.

The largest sanitation coverage by private organizations has been reported by Argentina, with an estimated 9.5 million people served by five agencies. Other countries like Bahamas, Brazil, Chile, Honduras, Peru, have also reported limited institutional shifts towards private entities. In Chile, the Regional Water and Sanitation Companies have decentralized and are operating on a commercial basis; In Brazil, companies previously established in the States under the National Sanitation Plan have initiated management contract schemes following the Central Government policy; in Colombia, greater responsibility has been given to the municipalities for the development of infrastructure services, including drinking water and sanitation.

Some of the following cases of sectoral privatisation in the Region are important because they tend to establish in one way or another the new working model promoted by the multilateral agencies.

Buenos Aires, Argentina

The services provided by Obras Sanitarias de la Nación (OSN) were far below adequate standards, bearing all the problems used to characterize the government as a fragile entrepreneur, such as operational weakness, defective administrative and financial management, virtually nonexistent systems maintenance and too much political interference. In 1993 an international competitive bidding was run by the Government with the World Bank’s support whereby a 30 year management contract was awarded to Aguas Argentinas (see above), a private consortium established by French, British and Spanish water companies as well as two Argentinian financial corporations.

In 1994 IFC an affiliated organization to the World Bank took 5% of the new company's shares as a matter of demonstrating the Bank’s interest in the process. The contract describes the new company’s targets in physical terms as a 100% water coverage and 95% sewerage coverage before its expiration, against present and respective figures of 70% and 58%. Nearly US$ 4 billion is expected to be invested by the new company to meet the established coverage figures. Personnel and all OSN’s physical assets have been transferred to the new company. By the end of the contract’s expiration the latter have to return to the Government in adequate working conditions.

It must also be stated that other major Argentinian provinces such as Corrientes, Santa Fé Formosa and Tucumán have also undergone similar privatization processes.

Cartagena, Colombia

By the year 1995 the water and sewerage coverage in Cartagena, Colombia was respectively only 70% and 58%. The Empresas Públicas Distritales (EPD) used to give the people a very inadequate set of services. Various Governments submitted EPD to restructuring processes, nonetheless with poor results, so that in 1993 the City’s Mayor decided to shut it down and asked the World Bank support for the establishment of the new company. The bidding process was won by Aguas de Barcelona, a Spanish group, and after a set of negotiations 50% of the new company’s shares became divided among Aguas de Barcelona itself and some private investors, with the Cartagena Town Hall bearing the remaining 50% for the 26 years of the management contract. It is expected that the investments made by the new company will maintain the same high level achieved in the first years of the management contract.

Rio de Janeiro, Brazil

Financial and institutional questions appear to play an important role in the water and sewerage sector, especially in the coastal and tourist areas of the City of Rio de Janeiro. The State Water Company (CEDAE) has reached its threshold of investment capacity, with present deficiencies in the maintenance and care of its systems, facts that are unlikely to reverse in the foreseeable future. Even without writing the rules for a new management model it is quite clear that the State Government has decided to split CEDAE to pieces and leaving parts of the company to the Rio City Hall and to private companies, the latter under management contracts.

Given the demonstrative capacity of the cities covered in these examples (Santiago, the Chilean capital, might also have been described for its importance) it would seem the privatization trend in the Region is a given for the future, especially for the large and even some medium-sized cities. It is hoped cross subsidies may make systems feasible even for low-income people by improving attractiveness of delivery for the private sector. Nevertheless, there are still areas of concern regarding the less wealthy areas that suffer the same problems depicted above for publicly-run water companies; where for example sewerage tariffs have been diverted to the water systems so as to hide the presence of inefficiencies causing major long term problems.

5.6.3 Policy Framework

There are no doubts that the sectoral policy trends are towards some sort of private insertion to the provision of services, with the likely prevalence of the concession arrangement over a "pure" private scheme such as the British one. So, within this framework the major question relates to the level of independence of the regulatory agencies which will allow the agency and service providers the maximum level of performance. The relative weakness of Regional Governments tend to convey them to the adoption of some sort of Government-controlled agency instead of giving agencies the freedom to establish policies and assess performance level indicators/parameters, thus avoiding the existence of a Government inside the Government. On the other hand it is clear that, especially in poor countries, the risk of manipulation in terms of loosened measures and low-competitive practices as a result of pressure made by private entrepreneurs is not low, so that the “one country, one model’E scheme perhaps will come true in the Region. In Buenos Aires, for instance, there are some complaints that the vast majority of services hired by the concessionaire come either from their stockholders or from subsidiairy companies of one of the owners. But in one way or another the private sector will take the major role as a matter of sectoral policy for the future, leaving it up to WHO to approach part of the outskirts of the urban centers and the rural areas and to NGO’s some small share of the demand.

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