30730 T I O N A L BA N NA K ER F T O IN R WORLD BANK T REC EN ON PM ST O RU L CT E VE ION AND D June 2004 No. 50 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region IMPROVING WATER AND SANITATION SERVICES IN COLOMBIAN MUNICIPALITIES THROUGH PRIVATE OPERATORS Menahem Libhaber, Fernando Troyano and Luis Fernando Ulloa Introduction less developed than elsewhere in the country. In 1994 and 1995, the government of Colombia provided Municipalities that choose to participate: (i) agree to support to the municipalities of Cartagena (population transfer management and operation of their water utilities 850,000) and Barranquilla (population 2 million), in the to an SPO; and (ii) must reach agreement with the Caribbean coastal zone, to Ministry of Environment, Housing incorporate private operators in and Territorial Development (MOE, managing their water utilities. In the Ministry in charge of the water 1995 and 1996, water utilities sector) on a tariff increase to a level Aguas de Cartagena at least covering operation, (ACUACAR) in Cartagena and maintenance and depreciation AAA in Barranquilla were costs, and as higher than that as established under the socially and politically possible. management of Specialized Private Operators (SPOs). The The Project finances public SPOs have had staggering investments in water and sanitation success in improving water and infrastructure, beyond what can be sanitation services, transforming financed out of tariff revenues; and two of the worst utilities in Latin technical assistance to participating America, which had long been in municipalities for incorporating the crisis, to the best water utilities SPOs in the management and in Latin America. operation of the services. Private Sector Participation (PSP) is Building on Experience ­ believed to be the best way to scaling up improve the performance and services of water utilities. It is Based on this experience, the Co- expected to result in: (i) more lombian Government prepared a efficient and reliable services; (ii) Water Sector Reform Project, supported by the World expanded coverage; and (iii) Bank, aimed at improving water and sanitation services in increased service access for poor consumers. medium and small municipalities (serving populations of up to about 12,000 and 400,000 respectively), especially The preferred option in PSP in the water sector is a full for poor consumers, using SPOs to manage and operate concession, under which the concessionaire commits to the services. Implementation began in June 2002. The provide all investments required during the contract project focuses on low-income municipalities in the Car- period. However, conditions in medium and small ibbean region, in which water and sanitation services are municipalities in Colombia make full concession 1 agreements unrealistic. Most of these cities suffer required to meet national drinking water quality significant infrastructure backlogs and need large standards. investments, while current tariffs are quite low. In most medium size cities and certainly in all small Small municipalities: Private sector management of municipalities, even if tariffs were increased to a socially utilities in small municipalities is perhaps the most acceptable maximum level, tariffs could not finance all significant innovation. This project is the first time that the works required in the next 10-30 years (the contracts any government in Latin America is supporting PSP in period range). numerous small C o n s e q u e n t l y, municipalities with SPOs hired to populations below manage utilities 12,000 people. The will be required to common perception invest up to levels is that the private that can be sector has no interest recovered from in utilities serving tariffs. The rest of fewer than 40,000 the investments people, making need to be privatization of provided by the small utilities public sector i m p o s s i b l e . (national and/or However, in local government) Colombia and other through subsidies countries, there are or loans to service successful small-size users. private operators in the water and sanitation sector, Two Sizes, Two managing utilities Approaches without any government support. Two different In small mechanisms were municipalities, so- developed during project preparation to facilitate the called "Constructor Operator" contracts are signed with incorporation of SPOs in small municipalities (up to (small) private operators. Prior experience in operating 12,000 inhabitants), and medium size cities or regional water systems is not required from bidders. The selection associations of municipalities serving up to 400,000 criterion is the bidder asking the lowest subsidy to inhabitants. From the private sector's standpoint, the construct, operate and maintain the infrastructure. business is different in the two size ranges. And the required type of operator differs. In medium size Text Box 1. The Constructor Operator Model cities, only an experienced operator with The Constructor-Operator model is basically a concession tailored for small proven credentials in municipalities, in which the government finances, in the form of a subsidy, most of the operating utilities of required water and sewerage infrastructure investment in participating municipalities. comparable size can be Government subsidies are required because small municipalities suffer significant hired. For small infrastructure backlogs, and the population does not have the capacity to finance the municipalities, proven backlogs through higher tariffs. This model is similar to the operation model in medium experience in operating size cities, with three differences: comparable systems is not · In small municipalities, the operator is also the constructor, which was required for the required, but rather the creation of the operators' market; capacity to operate them. · the level of government subsidy will probably be greater (as a percent of total The 12,000 cut-off point investment) in small municipalities; and the duration of the contracts differ: 10-15 also coincides with an years in small municipalities and 20-30 years in medium-size cities. administrative division in Colombia. All SPOs hired under the project will be 2 Table 1: E volution of P erformance in S oledad S ince the S P O Took Over municipalities restrict Management R esponsibility participation to those with P erformance Indicator Value in 2001, before S P O Value in 2002, after C ontract predominantly poor C ontract S P O C ontract Target populations (municipalities Water C overage 43% 73% 75% with a value of 5 or less for the social indicator S ewerage C overage 36% 64% 68% INDEMUN 1 (Indice de Desarrollo Municipal ­ Number of C onnecti ons 59,677 68,537 Municipal Development Metered C onnecti ons 20,540 36,722 Index). Water P roducti on C apaci ty (MC M/Month) 3.6 not all potable 4.3 not all potable all potable Subsidy Policy: The tariffs for each stratum are structured so C onti nui ty of S ervi ces (hr/day) 12 18 18 that high income consumers in Response to B reaks 52% 90% strata 4, 5 and 6 pay their wi thi n 24 hr share in the investment Number of employees per 1000 connecti ons 5 2.1 program through the tariff and do not receive any subsidies. Thus all the investment Medium size cities: The operators for medium size cities subsidies financed by the World Bank benefit only must be private companies or joint ventures with proven consumers in strata 1,2 and 3, i.e., population residing in experience in operating similar size water and sewerage low income areas. This approach is a requirement of Law systems, that are financially solid enterprises able to 142 and consistent with the project objective of mobilize the required funds for investment. Their so- supporting the poor. called "Operation with Investment Contracts" define the project model. The investment commitment of each SPO In addition to the municipalities specifically mentioned, depends on the level of tariffs agreed with municipal as part of the project, preparation is under way for authorities. Where the tariff level can support only incorporating SPOs in many other municipalities, mainly operation, maintenance and depreciation, a management small municipalities which will employ the Constructor- contract is signed (operation without investment). Operator model. However, most SPOs are expected to sign "Operation with Investment Contracts" (OWIC) under which they provide Results on the Ground part of the required investments, with the public sector (municipality, government or both) providing the rest. The Most SPOs only recently took over utility management OWIC stipulates the long-term program of investment responsibilities, so it is still too early to expect major (POI) required to bring the system to optimal conditions performance improvements. But the impact is already proposed by the winning bidder, and the part to be clear in two of the first municipalities to undergo the financed and constructed by the operator. The intention is reform process: Soledad and Nataga. to use Project funding to fill the additional investment needs defined in the POI of participating utilities. The Soledad MOE and municipal authorities will agree with each operator the works and/or goods of the POI to be financed Soledad is the largest municipality participating in the by the government subsidy. The government financial project, with a population of 360,000, all in social strata 1, contribution will not go to the SPO, but will directly 2 and 3 which are considered poor in Colombia. The finance additional infrastructure that will continue to be winning bidder for serving as the SPO for Soledad under owned by the municipality, but operated by the SPO. an OWIC was AAA, the operator of the nearby city of The Operation with Investment Contracts have a 20-30 Barranquilla. AAA's remarkable achievements less than year duration, the time required to recover investments in two years after taking over the services are presented in these types of contracts. If the authorized tariff level is table 1. AAA intends to continue to improve the water and sufficient, the contract is awarded to the bidder who offers the highest reduction in the authorized tariff. __________________ 1 INDEMUN is a territorial development indicator summarizing Ensuring Provision of Services to the Poor a set of social indicators (coverage of education , coverage of public services, health, unsatisfied basic necessities) and In medium size cities, to ensure service provision in poor financial indicators (tributary and non-tributary income per neighborhoods, the OWICs stipulate required capita and expenses per capita). It is determined annually by performance targets for the entire city and separately for the National Department of Planning (DNP) for each low income neighborhoods. Eligibility criteria for small municipality. 3 sewerage coverage rates to 95 and 90 percent respectively, · It is possible for governments to provide incentives higher than stipulated in the contract(1). that result in the emergence of local private opera- tors. This has been done in Colombia and has Nataga changed the dynamics of the sector. A significant number of small and large local operators are active Nataga is a the smallest participating municipality, with a in the country today. population of 2,520 inhabitants, all of · The private sector is them poor (strata 1 sensitive to the needs of and 2, with average the poor and the notion monthly family that private operators do incomes of US$ 70). not serve the poor well is The winning bidder a myth. for serving as the constructor and · Private sector participa- operator under a 10 tion in the provision of years Constructor- water and sanitation ser- Operator contract was vices in Colombia re- Almafama, a local sulted in increased access; small contractor with expansion that particu- the capacity to run a larly benefited the poor; small water utility. markedly improved ser- vice quality; and tariffs Nataga proved that the that generally increased Constructor-Operator but remained affordable model can function in for the poor. practice, as envisaged at the formulation stage. Within a very short period (less than 2 years), the selected operator managed to complete Conclusion construction of the required infrastructure and significantly improve service levels. Water coverage It is a common belief in many parts of the world that increased from 79 to 100 percent, sewerage coverage private operators serve the rich well but neglect the poor. increased from 55 to 100 percent and continuity of supply The experience in Cartagena and Barranquilla went up from 2 to 24 hours per day. demonstrates a very different reality. Private operators concentrated efforts on serving the poor, first because Beyond the Project they are obliged to do so under the conditions of their contracts and also because they are quite sensitive to The central government and several local governments in social issues. Out of all the water connections installed by Colombia have carried out additional processes (without ACUACAR, the SPO for Cartagena, during the years World Bank support) to incorporate private operators in 1995-1999, 92 percent were installed in poor management of their utilities, based on the principles neighborhoods (strata 1, 2 and 3). And all of the sewerage developed under the project. In total, about 50 connections installed by this utility are in poor municipalities of various sizes have already incorporated neighborhoods. During the same period, in Barranquilla PSOs in the provision of water and sanitation services, (where the SPO is Triple A), 82 percent of all water representing about 5 percent of all municipalities in connections and 70 percent of all sewerage connections Colombia and about 10 percent of the country's were installed in poor neighborhoods. population. About the Authors Lessons Learned Menahem Libhaber is Lead Water and Sanitation Specialist · Incorporation of the private sector in the provision of in the World Bank, Fernando Troyano is a Consultant, and water and sanitation services is the fastest way to Luis Fernando Ulloa is General Manager Tripla A Soledad. improve the level of services of ailing public utilities in developing countries. About "en breve" · The private sector is interested not only in large utilities but also in medium size and small munici- Subscribe to "en breve" by sending an email to palities, if the contract conditions are appropriate. en_breve@worldbank.org 4