WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— La Línea Regional Scheme, Colombia Erica Ortiz Moreno and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study La Línea Regional Scheme, Colombia Context • Upper-middle-income country • Aggregation covering urban and rural areas • Low level of water supply and sanitation (WSS) performance Purpose Performance, professionalization, economic efficiency Scope WSS functions and services Scale • Administrative boundaries • Localities covered: 4 for water • Population covered: 32,000 inhabitants for water • Coverage: 67%a for water • Connections: 5,051 for water Process Voluntary and incentivized Governance • Delegated (18 months and 15 yearsb) • Public-private partnership (PPP) • Decision making: the intermunicipal public company for local services is the contracting party signing the build-operate-transfer (BOT) contract • Asset transfer: assets remain the property of municipalities and are transferred to the operator for the duration of the delegation contract • Liability: liabilities and debts from previous operators are not taken over by the private operator • Staff transfer: none • Clear entry and exit rules as stipulated in the PPP contract Outcome Negative Findings Political opportunistic behaviors, lack of long-term financial support, lack of utility champion and governance leader, blurred definition of asset ownership and associated duties, set targets to be reached gradually (allow some time for improvement) a. This figure corresponds to the average coverage for the four municipalities: San Estanislao de Kostka (95%), Soplaviento (98%), Villanueva (30%), and Santa Rosa de Lima (45%). b. Operation was terminated prematurely. Giscol operated for six years. 1 Within a context of poor conditions of WSS infra- financing sources. The plan also allows the possibility structure and low service quality, the Empresa for the General Participation System (Sistema General Intermunicipal de Servicios Públicos Domiciliarios de Participaciones, or SGP) to directly transfer de Acueducto y Alcantarillado (Inter-Municipal resources to service providers, as an incentive to E.S.P. Regional La Línea) decided in 2007 to entrust aggregate. The 2010–14 NDP continues to acknowl- to a private operator the construction of an aqueduct edge the importance of aggregation by creating the and the operation of the WSS services of the four possibility of implementing regional schemes for municipalities it encompasses. The contract started ­ service provision in municipalities of categories 4, 5, in 2008 and was to last until 2023. This aggregation and 6,1 including their rural areas, through exclusive initiative, known as Acueducto Regional La Línea, service zones. Furthermore, it allows the defining of was developed with the support of the national gov- unified prices for regional markets of non-intercon- ernment through the Ministry of Housing, City and nected systems served by the same provider, under Territory (Ministerio de Vivienda, Ciudad y Territorio, the supervision of the Water and Sanitation Regulatory or MVCT), as a solution to a regional issue regarding Commission (Comisión de Regulación de Agua the provision of WSS services in the Bolívar depart- Potable y Saneamiento Básico, or CRA). The current ment. However, because of political, economic, NDP (2014–18) further develops the guidelines set by social, and technical difficulties, as well as a failure previous plans for implementating aggregation. It to adequately consider context, the contract was ter- establishes that the national government and the minated prematurely by the Superintendency of departments will promote the creation not only of Public Services and was taken over by the original regional markets, but also of schemes of municipali- service provider. ties and metropolitan areas. It also establishes that the national government and the departments will An Aggregation Trend Supported by the strengthen regulation, monitoring, and control pro- Successive National Development Plans cesses in the WSS sector where aggregation is applied, but with Limited Success to generate incentives to increase productivity and In Colombia, the water sector policy has set aggrega- efficient management of service providers. In addi- tion as one of the strategic paths to follow to improve tion, CONPES 3819 of 2014 (Policy to Consolidate a service quality, given its potential to generate econo- System of Cities in Colombia) has included, as one mies of scale through the aggregation of users. As a strategy of its action plan, the development of regula- result, the last four National Development Plans tory and legal instruments to incentivize aggregation (NDP) have all included references to aggregation. and encourage mayors to create unique public service The 2002–06 NDP, which provides guidelines for the authorities at an intermunicipal level. As a result, CRA supply of public services, establishes for the first time issued a resolution in 2013, in which it defines the that the government must create incentives for WSS concept of the regional market as “a set of users –10 utilities to invest in aggregation schemes. The 2006­ served by the same WSS service provider through NDP reinforces the WSS aggregation trend by linking interconnected, interconnected or mixed sys- non-​ it with the implementation of departmental water tems, in a specific geographical area larger than one plans (planes departamentales de agua, or PDA) to municipality and within a department or bordering achieve effective coordination between national, departments, whose joint provision allows for the departmental, and municipal levels to improve ser- improvement of the coverage, quality and continuity vice quality, achieve higher control of resource alloca- conditions in public services.”2 To date, only one com- tion, and allow more effective management of pany has applied for and received approval to become 2 Case Study—La Línea Regional Scheme, Colombia a regional market, although there were 20 regional water coverage rates, low water drinking quality, service providers in Colombia in 2013. The limited and  an absence of micrometering. For sewage, the success of regional market development can be lack of  infrastructure resulted in the disposal of explained by the lack of commercial attractiveness of wastewater in latrines and septic tanks. Much of the ­ loss-making water systems, by the difficulty for oper- wastewater was discharged on public roads and in ators to meet stringent performance requirements at rainwater pipes, generating contamination pockets the beginning of the contract when they are just start- and proliferation of diseases. Taking into account the ing to provide service in remote areas with low user poor conditions of WSS services in the four munici- payment capacity, and by the reluctance of municipal palities, the MVCT conducted a diagnostic assess- administrations (a) to lose control over WSS provision ment of infrastructure and service provision in 2005 and (b) to provide financial support to WSS and started structuring a service provision scheme to operators. hire a specialized operator, within the framework of the Business Modernization Program (Programa de An Aggregation Aimed at Addressing WSS Modernización de la Economía, or PME). In 2007, Poor Conditions and Low Service Quality Inter-Municipal E.S.P. carried out a BOT bidding pro- cess to hire a specialized operator to provide WSS in From 2003 to 2008, the Empresa Intermunicipal de the four municipalities. The process was supported Servicios Públicos Domiciliarios de Acueducto y by the MVCT, and in October 2007 Inter-Municipal Alcantarillado (Inter-Municipal E.S.P. Regional La E.S.P. and Giscol S.A. signed a BOT contract estab- Línea) provided WSS to four municipalities (San lishing that Giscol would start operations by January Estanislao de Kostka, Santa Rosa de Lima, Soplaviento, 2008. and Villanueva) located in the Bolívar department, representing an urban population of 48,562 inhabi- tants. (See table 1.) Implementation of Aggregation through a BOT Contract The service provision in the territory of the four The BOT contract covered managing, financing, oper- municipalities was inadequate because of poor oper- ating, rehabilitating, building, expanding, and main- ative and maintenance conditions of the supply sys- taining infrastructure for WSS service provision in the tem, insufficient storage capacity, absence of network municipalities of Santa Rosa de Lima, Villanueva, San cadastre, low continuity of service, obsolescence or Estanislao de Kostka, and Soplaviento in the Bolívar deterioration of more than half of the water network, department. (See map 1.) The specific water supply of and illegal-connection issues. In terms of service Santa Rosa de Lima was to be provided by the com- provision indicators, the four municipalities had low pany Aguas de Cartagena (Acuacar) through a bulk water sale contract. The BOT contract included the TABLE 1. Municipalities Served by Inter-Municipal E.S.P. construction of works (namely, a regional water aque- Urban population duct) during a period of 18 months (from January 2008 Municipality Water users (inhabitants) to July 2009) and the operation of the service for San Estanislao de Kostka 11,189 1,890 15 years (from 2009 until 2023). Soplaviento 8,039 1,298 Resources for the execution of the contract were Villanueva 16,413 1,379 to come from the World Bank via a loan taken out Santa Rosa de Lima 12,921 2,637 by the Colombian government through the Source: Departamento Administrativo Nacional de Estadística (DANE), http://dane.gov.co. Ministry of Environment, Housing and Territorial Case Study—La Línea Regional Scheme, Colombia 3 MAP 1. Municipalities Covered by La Línea Regional Scheme Source: Colombia Ministry of Environment, Housing and Territorial Development. FIGURE 1. PPP Institutional Framework for Service Provision Development, as well as from subsidies from the four municipalities through an Ministry of housing, city and territorial agreement signed with Inter- development Municipal E.S.P. Regional la Support in the scheme Municipalities structuring process and Inter-municipal E.S.P. Línea in 2007. (See table  2 funding Contracting party Financial contributors and figure 1.) The contract established water GISCOL S.A E.S.P. supply fees for users with and Operator without metering, valid for three years (planned term for contract Source: Author’s elaboration. consolidation). After that time, 4 Case Study—La Línea Regional Scheme, Colombia the operator would be entitled to establish the service lose the performance guarantee. Similarly, a procedure provision costs and carry out corresponding cost and for the restorating the contract’s economic balance tariff studies in accordance with CRA regulations. In was also defined. the event of early termination of the contract because Inter-Municipal E.S.P. was the contracting party that of the operator, the contracting party would immedi- signed the BOT contract with the operator. It was ately take over the operation and the operator would responsible for the operation and works supervision and for the transfer of subsidies to the operator accord- Annual Amounts Committed by the TABLE 2. ing to the agreement signed with municipalities, Municipalities among other things. Giscol was responsible for WSS Municipality Amount (US$) provision and for building and upgrading infrastruc- San Estanislao de Kostka 94,937 ture. The BOT contract specified that the private oper- Soplaviento 87,644 ator should progressively comply with general targets Villanueva 139,049 throughout the first four years of operation as well as Santa Rosa de Lima 198,974 during the whole operation period. (See table 3.) Source: Inter-Municipal E.S.P., 2007. TABLE 3. Performance Targets for the First Four Years Santa Rosa de Lima Villanueva San Estanislao de Kostka Soplaviento Water supply continuity (%) Year 1 50 35 50 50 Year 2 75 64 75 75 Year 3 100 100 100 100 Year 4 and after 100 100 100 100 Water supply coverage (%) Year 1 35 43 80 74 Year 2 70 43 81 74 Year 3 100 100 100 100 Year 4 and after 100 100 100 100 Micrometering coverage (%) Year 1 0 0 0 0 Year 2 50 50 50 50 Year 3 75 75 75 75 Year 4 and after 100 100 100 100 Nonrevenue water index (IANC) (%) Year 1 50 50 50 50 Year 2 45 45 45 45 Year 3 40 40 40 40 Year 4 and after 35 35 35 35 Source: Inter-Municipal E.S.P., 2007. Note: IANC = El Índice de Agua No Contabilizada (Nonrevenue Water Index). Case Study—La Línea Regional Scheme, Colombia 5 Failure of BOT Contract to Deliver the properly designed. Although Acuacar and the Ministry Targeted Purposes Because of Political, had a preliminary agreement on the bulk water price, Economic, Social, and Technical Difficulties that agreement did not take into account the impact of bulk price on end-user charges. That oversight During the contract execution, several modifications resulted in a water tariff that exceeded end-users’ pay- were made to the initial terms and provisions of the ment capacity. Finally, the performance targets works construction. Various postponements also took embedded in the contract were not clearly set. place because of difficulties in the network intercon- nection between Santa Rosa de Lima municipality and As a result, the aggregation of WSS services through Cartagena. Furthermore, some political, economic, the PPP contract was not successful, as reflected by the social, and technical difficulties arose. Before the performance indicators achieved by Giscol. Continuity beginning of the BOT contract, infrastructure was of services, sewage/water coverage, and micrometer- already in poor condition, and, because of the lack of ing coverage remained below 100 percent. Drinking asset inventory, the resource allocation planned by water quality did not improve, either. (See table 4.) the national government was not properly estimated. An initial public hearing3 resource allocation of nearly 4.20 million Col$ was planned, as well as another allo- A PPP Terminated by a National Supervisor cation in 2007 of nearly 7.00 million Col$. However, and an Aggregation Scheme Taken Over by a Public-Private Joint Venture initial estimates anticipated the need of nearly 44.68 million Col$. On top of that underestimate of invest- In November 2014, the Superintendency of Public ment need, technical studies failed to capture demand Services4 imposed sanctions on the private operator, needs because of obsolete population data. Because of thus “prohibiting the direct or indirect provision of a lack of local political empowerment, mayors trans- ­ public services by Giscol for a 10-year period starting ferred only 86 percent of the committed financial 3  months after the execution of the resolution.” As a resources, in the form of subsidies, which they com- result, Inter-Municipal E.S.P. took responsibility for ser- mitted to the project. Taking into account the fact that vice provision without having the proper organizational most of the investment was to be subsidized, the oper- structure or the capacity to do so. Given this s ­ ituation, ator failed to implement the investment and ensure the MVCT and the Bolívar governorate decided to pro- service provision enhancement as required. As a vide support to Inter-Municipal E.S.P. in the form of a result, users werer unwilling to pay because of the technical assistance contract (1.9 million Col$). In June nonprovision of service. On average, during the years 2015, the joint venture Aguas de La Línea (formed by the 2008, 2009, and 2010, the collection ratio amounted companies Aqualogy and Aguas de Cartagena) was cre- to only 18 percent, 30 percent, and 26 percent respec- ated. The joint venture’s objective is to support and pro- tively. Low billing collection resulted in high operat- vide technical assistance to Inter-Municipal E.S.P. in the ing deficit, which hindered service provision by legal, commercial, financial, technical-operational, Giscol. The community rejected the installation of administrative, and social management of the public meters, and the operator was not well accepted. Also, aqueduct service provision within the urban areas of issues with the energy provider resulting in discontin- the four municipalities. The main purpose of the agree- uous supply of electricity affected the continuity of ment is to improve the organizational structure of the water supply. There were also delays in the the  regional provider by designing tools such as execution of the investment plan, so that by July 2011, ­ operating manuals, risk manuals, user cadastre, assis- ­ only 82 percent of the work was done. The bulk tance in complying with legal obligations, information provision contract with Acuacar was not water  ­ technology (IT) commercial software, and information ­ 6 Case Study—La Línea Regional Scheme, Colombia TABLE 4. Results of the Service Provision Indicators Santa Rosa de Lima Villanueva San Estanislao de Kostka Soplaviento Water continuity (%) 2011a 0 15 31 31 2013b 0 42 54 54 2016e 42 46 50 50 Water supply coverage (%) 2011a 0 38 69 72 2013b N/A N/A N/A N/A 2016c 60 70 95 85 Micrometering coverage (%) 2011a 0 0 8 0 2013b 0 0 8 0 2016c 0 0 8 0 Nonrevenue water index (IANC) (%) 2011a N/A 60 60 60 2013b N/A N/A N/A N/A 2016c N/A N/A N/A N/A Water quality (IRCA)f (%) 2011d 25.4 17.2 11.1 30.5 2013b 50 49.2 1.6 N/A 2016e 9.52 9.52 7.14 10 Sources: a. Superintendency of Public Services, 2014; b. Ministry of Housing, City and Territory, 2017; c. Intermunicipal service provider; d. Ministry of Housing, City and Territory, 2013; e. Acuacar, 2015. f. IRCA (Índice de Riesgo de la Calidad del Agua para Consumo Humano) is a water quality indicator that combines physical, chemical, and biological variables. It ranges between 0 and 100 according to the following ranges: 0%–5%: Water out of risk; 5.01%–14%: Low risk; 14.01%–35%: Medium risk; 35.01% –80%: High risk; 80.01%–100%: Unfit for health. Note: IANC = El Índice de Agua No Contabilizada (Nonrevenue Water Index), N/A = Not applicable. campaigns with communities to improve the payment (c) a good-governance code, (d) an accounting records culture and efficient use of water. Currently, as a result formulation and implementation, (e) a training program of the first phase of the technical assistance provided by for staff, (f) a user cadastre, (g) an operation and risk Acuacar, Inter-Municipal E.S.P. has improved its organi- manual, (h) some supply and purchase plans, (i) a secu- zational structure and has hired 36 people, two-thirds of rity and occupational health program, (j) a nonrevenue whom have operational profiles. In addition, Inter- water program, (k) an invoice implementation process, Municipal E.S.P. now has (a) a proper cost study, (b) an (l) a collection program, and (m) an emergency plan to agreement with municipal councils regarding subsidies, secure water supply. Case Study—La Línea Regional Scheme, Colombia 7 A Lose-Lose Scenario Mainly Because of committed financial resources, in the form of subsi- Overlooking Context dies, which they committed to the project. Taking into account the fact that most of the investment was La Línea Regional Scheme is an example of an aggre- to be subsidized, the operator failed to implement the gation process failing because of political, economic, investment and ensure service provision enhance- social, and technical issues combined with the incom- ment as required. In addition, the aggregation suf- plete assessment of overall context. From the start, fered from the absence of a large populated city to act the structuring process failed to correctly assess the as a nucleus and allow the implementation of cross- investment needs and the user demand. Furthermore, subsidies among settlements to balance differences in there was a lack of appropriate and timely supervi- system sizes, because systems of different sizes do sion. In a context of a low-payment culture and low not exhibit the same production costs. invoice collection, and taking into account municipal- ities’ failure to provide agreed subsidies, Giscol failed Lesson 2: Defining Principles but Allowing Flexibility in to comply with the contract provisions. As such, the Implementation Ensures Local Ownership aggregation process turned into a lose-lose scenario In most case studies, aggregation reform was imple- for all parties. mented as a top-down process led by national stake- holders. However, national reforms are more likely to Aggregation Case Study at a Glance be successful when they follow the principle of subsid- Key Lessons Learned from the Aggregation Case iarity and allow flexibility for local stakeholders to own Study the aggregation process and adapt it to their local con- Lesson 1: Neglecting to Acknowledge Context and text. In Colombia, La Línea Regional Scheme suffered Purpose When Designing an Aggregation can Lead to from a lack of political empowerment and ownership Failure at the local level, leading, to a certain extent, to the Context should be taken into account and purpose failure of the scheme. has to be clarified when designing aggregation. Disconnecting the former from the latter can lead to Notes failure. La Línea Regional Scheme, formed to build 1. Law 617 of 2000 establishes that all municipalities must be classified and operate an aqueduct, failed for various reasons under a category, from 1 to 6, according to their population and their current level of income; categories 4, 5 and 6 correspond to smaller linked with neglecting to adequately consider con- and poorer municipalities. text. During the structuring of the regional scheme, 2. CRA, Resolution No. 628 of 2013. investment needs were underevaluated. Technical 3. Public hearings were the mechanism used to identify and select studies failed to capture demand needs because of drinkable water and basic sanitation projects that were to be funded obsolete population data. Moreover, the aggregation by government budget resources. did not benefit from the support of a local political 4. The Superintendency of Public Services is a national-level technical leader. Because of that lack of local political empow- entity that is in charge of the inspection, monitoring, and control of erment, mayors transferred only 86 percent of the public service providers. 8 Case Study—La Línea Regional Scheme, Colombia © 2017 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. This work is subject to a CC BY 3.0 IGO license (https://creativecommons.org/licenses​ by/3.0/igo). The World Bank does not necessarily own each component of the content. It is your responsibility to /­ determine whether permission is needed for reuse and to obtain permission from the copyright owner. If you have questions, email pubrights@worldbank.org. 10  SKU W17073