Privatization of Water and Wastewater Infrastructure in the Americas

Kevin L. Patrick & Ramsey L. Kropf
Patrick & Stowell, P.C.
Aspen, Colorado

Introduction
In the next twenty years, US$ 117 billion will be spent on wastewater infrastructure in the United States alone; worldwide, the anticipated costs over this period are expected to exceed US$ 1 trillion. U.S. Environmental Protection Agency, Clean Water Act Needs Survey (1996). An additional US$ 138+ billion will be spent on potable water infrastructure in the United States in the same period; worldwide, these anticipated costs should exceed another trillion US $.

In this century, the most serious singular threat and test to world leaders and the business community will be planning for and addressing a growing world water scarcity and demand for wastewater treatment. Currently one-half billion people suffer from a scarcity of water and an estimated one billion suffer from unsafe drinking water supplies. Two out of the world’s six billion people suffer from inadequate wastewater infrastructure systems. The task of planning for and meeting the demands of the estimated increase in the world population from six billion to nine billion over the next twenty-five years presents the need for creative governmental and private investment to plan, finance and develop water and wastewater infrastructure.

The extent of capital required to meet these challenges has forced providers to consider all available options of managing and financing water and wastewater utilities. As a result, privatization of water and wastewater utilities has begun to garner acceptance in the effort of improving efficiencies and extending services. Because of the infinite variability of privatization models, the success of such efforts is difficult to define. Societal norms where water and wastewater service are viewed as a basic human resource and a social service cause resistance to changing a largely public model for water delivery. However, continued disease and environmental degradation are fostering world wide efforts toward privatization on some scale.

The Concept of Privatization
The concept of privatization takes many shapes ranging from centralized management service agreements to outsourcing of collection, treatment and/or distribution services, to total ownership and owned and operated utilities. Any private sector involvement in the collection of water or wastewater, treatment of water or wastewater, distribution of water, collection of wastewater or management of operations that have historically been undertaken by public-governmental enterprises is construed as privatized. Some of the major privatization models are listed below.

• Public ownership with private management of operations (Operations, Management and Maintenance AOM&M)
• Transfers from public entities to private concerns with public employees
• Build and transfer of private facilities to public ownership (Build-Operate-Transfer or ABOT)
• Build and transfer of public facilities to private management and ownership
• Management and service contracts for publicly owned utilities
• Short or long term concessions of public facilities
• Phased approaches of varying levels of private investment and control
• Outright private ownership and management of utilities, which involves partial or complete divestiture of public utilities
• Entrepreneurial enterprises which grow from complete public failure

There are no limits to the forms and models that can be created. Instead, the constraints are primarily legal, political, and social. Conflicting jurisdictions, inadequate legislation, public acceptance, adequate tariff control, and trust and perception of the private entity drive success or failure. As with any ownership model, controls and formats must be carefully analyzed, molded to individual circumstances, and meshed with the local cultural perceptions and limitations.

The Case for Privatization
The renewed occurrence of cholera sparked new efforts to improve water and wastewater services in Latin America. Widespread water contamination from wastewater inadequacies has resulted in privatization efforts globally. In developing countries, the challenge is to provide extensive new infrastructure to population bases that lack economic resources to pay for capital improvements or even pay for operation and maintenance costs. Within these conflicts are the additional layers of social issues that befall the extension of infrastructure and management of facilities within rural versus urban areas. Some of the most common justifications for privatization include: (i) private enterprises which have developed expertise in meeting and maintaining environmental compliance foster cost containment and reduce risks; (ii) private enterprise management of multiple utilities allows for cost efficiencies, economies of scale, shared management costs and centralized audit/reporting; (iii) the sale, lease or concession of utilities allows a community to transfer fixed assets that have been developed over decades to private enterprise thereby creating liquidity for other public goals; (iv) fixed revenue streams and reduced liability for a public entity; (v) increased competitive framework encourages market pricing of services; and (vi) encouragement of capital to an area, with the resulting in positive impacts on employment and compounded spending.

Resistance to and Fears of Privatization
Until recently, water and wastewater utility services were perceived to be a right, a public responsibility, and a social good. Other than air quality, water was perceived to be a "higher good" than all other natural resources (i.e. like electricity, oil, coal, etc.) that have found acceptance in private ownership, control and distribution. The bulk of the world’s freshwater runs unmanaged to the oceans. That which is captured is done so out of necessity, not profit. Little or no action is taken in many third world countries to treat wastewater before returning it to the natural system. In many cultures the concept of private rights in or control over water and wastewater is as alien as control or capture of the air we breathe. Overcoming the perception of water and wastewater services as social rights or goods and viewing such as economic goods is the mantra of privatization. Understanding this social fabric and historic public policies are a driving force for meeting the world’s drinking water and wastewater treatment demands.

It therefore is not surprising that the public often has real and significant apprehension and fear over the relinquishment of control or ownership over water and wastewater utilities. Some of the most common fears over privatization are: (i) rate resistance to services, particularly when previous experience provided inadequate service; (ii) integrity and long- term capability of the privatization entity; (iii) loss of employment for public employees; (iv) loss of control over land use and integration of land use patterns with utility planning; (v) cultural and government power transfer concerns; and (vi) tensions between national and local political powers. Accordingly, for the private enterprise, the decision to privatize must factor in: (i) the condition and extent of knowledge of the condition of infrastructure; (ii) contract enforceability and remedies for contract failure; (iii) known and undiscovered environmental costs, including hidden defects in the water source; (iv) the level of water availability or scarcity; (v) expectations for infrastructure replacement, extension, construction, operations and management; (vi) rate expectations, including public sector cooperation and ability to collect from consumers; (vii) regulatory risks inherent in varied legal regimes; (viii) cultural, social and political risks; and (ix) risk mitigation measures which can include financial guarantees, risk mitigation insurance, sovereign contractual guarantees, currency inconvertibility, expropriation, civil disturbance or war. See the programs of The World Bank, at www.worldbank.org/html/fpd/water/, and the Multilateral Investment Guarantee Agency, at www.miga.org/.

Reconciling the Benefits of, and the Resistance to, Privatization
The central point to be made in any privatization assessment is that there is no single model appropriate for all uses. Every utility, community and culture is different and will influence the decision to privatize and the complexion of the privatization format to be developed. Central to any decision to privatize is the public information process and full disclosure respecting the state of the utilities, public expectations and private enterprise’s capacity and expectations. If a methodical and honest disclosure of risks and expectations is undertaken, a decision on the appropriateness and format of privatization can best be achieved.

Selected Case Studies from the Americas
The Americas provide several case studies for assessing current attempts to implement various degrees of privatization to improve delivery of potable water and wastewater services. While private participation in Latin America’s water sector is in its infancy, privatization efforts have been far more developed in South America, though with varying degrees of success.

Bolivia
Bolivia’s water and wastewater service varies greatly between urban and rural areas. As of 1999, 84% of urban residents were connected to central water systems, and 63% to central sanitation; while only 24% of rural residents were connected to a central water supply, and 17% connected to central wastewater. This has led to a high infant mortality rate which is attributable to bacteria from polluted water sources. See Alexander Orwin, Environmental Probe, The Privatization of Water and Wastewater Utilities; An International Survey (August 1999). In the early 1990s, Bolivia instituted transferring power for controlling the water sector from a central level to a municipal level. Various loans from international development banks have been secured with the intent to reform regulatory systems and encourage private sector involvement.

However, at least some of Bolivia’s privatization efforts have been intertwined with political unrest, jurisdictional conflict and violence. In part, this reflects a common problem for implementing privatization, because of conflicting jurisdiction between central and local governments. When the central government has dictated terms to local governments, results have been negative. The municipality of Cochabamba appealed to Bolivia’s Supreme Court, asserting the national government did not have the authority to grant a private concession. In April 2000, an emergency rule of martial law was invoked to quell violence in Cochabamba, which was at least partly blamed upon protests to a government contract with Aguas de Altuni and International Water Limited ("IWU") to provide a public water system. Rate increases were seen as untenable by the public, causing a state of siege in the area for days. The private entity, IWL, also pointed to other social factors which contributed to the unrest, including proposed water legislation, economic difficulties in Bolivia, government crackdown on coca-leaf productions, and police salary protests.

Earlier efforts to implement privatization occurred in La Paz and El Alto, when those cities contracted with the French company, Lyonnaise de Eaux, in 1997, for their water and wastewater systems. Again, the transition resulted in large-scale protests and public discontent, and the El Alto mayor created a separate municipal water company during the effort to grant the concession. However, the community was able to weather the change and transfer operations to a private consortium. More success has been found by implementing rudimentary systems in rural areas in the Altiplano region, which worked by developing water sources for small communities, and included local investment. The rationale was that the local investment gave the communities a stake in proper operation and maintenance. While the project expanded basic facilities, there still are reported sanitation problems, with solutions uncharted.

Part of Bolivia’s problems stem from inadequate legislation which increases jurisdictional conflict. Conflicts in Bolivia’s legislation caused tensions, which were not resolved. In order to reduce risk for private investors, more recent water regulations and detailed contracts are hoped to increase chances of successful partnership between public and private sectors.

Argentina
Argentina is a more affluent country than most of its South American neighbors. Yet, as of 1999, only 69% of urban residents were connected to central water, and only 17% of rural populations have wastewater treatment of any kind. In addition, sewer treatment is largely primary, with only 8% receiving secondary treatment. In the 1980s, Argentina decentralized control of water and sanitation systems, and embarked on a privatization program in 1989. Failures resulted in Tucuman, where a thirty-year contract with Aguas del Aconquija terminated and Vivendi, a major partner in the consortium, sued the local government for compensation.

In a different city and situation, Aguas Argentinas took over Buenos Aires’ system in 1993, which serves a population of nine million. The originally British-installed sewer system was aging, few meters existed, water consumption was double that of a typical metered system, pressure was low, and water losses were high. Within two years of the 1993 concession, Aguas Argentinas was profitable. By 1997, contract stipulations to make new connections were eroding profits and rates were raised. Protests ensued, and a court decision ruled that the price increases violated the concession contract. As of 1999, the private company continued to operate, but the obligations under the concession contract remained fluid.

On June 30, 1999, Azurix Buenos Aires SA, a subsidiary of Enron’s struggling venture into the water privatization arena, Azurix, signed a thirty-year contract with the Province of Buenos Aires to operate the water and wastewater utilities. The combined urban and rural population in the Azurix service area is projected at 1,520,000, and came at a cost of $438.6 million for the contract. Azurix espouses investment and operational goals to improve water quality, expand customer metering, increase water and wastewater connections, and reduce water losses. The ability of Azurix to perform such goals is tempered, as its parent company, Enron, took a $326 million aftertax charge to cover problems at Azurix in the fourth quarter of 2000. February 12, 2001’s Business Week article on Jeffrey Skilling and Enron predicts Azurix is "likely to be busted up." These problems may be related to reports in January 2000, that Azurix had complaints for delivering low water pressure to some concession areas.

One component that Argentina has adopted to assist the fledgling private water utilities is an independent regulatory authority, which is funded from fees from the concessionaires, and is ultimately passed on to consumers. While the success, autonomy, and public accountability of the agency are questioned, including this feature in Argentina’s model may assist in maturation of the privatization model.

Chile
The success story for privatization in Latin America belongs to Chile. In urban areas, 99% of residents have central water supply and 89% are connected to central sewage service. Rural coverage is less and water losses remain high, but coverage is better than Chile’s neighbors. One commentator finds that Chile differs from other Latin American countries by fostering a market in water rights in the early 1980s. The government limited its role to granting concessions, financing some of the infrastructure and enforcing property rights. Still, most of the water markets are agriculturally centered, where most water is used.

Similar to Argentina, the Chilean model provides an autonomous regulatory agency, which scrutinizes 13 different regional companies, each with four separate concessions for water supply and treatment, water distribution, sewer operation and treatment. Legislation has been adopted to encourage privatization; in December 1996, a bill to fully privatize state water works was introduced. Political negotiations resulted in legislation providing that the government must retain 35% equity in water systems and places some control in company employees. Wastewater treatment privatization was similarly encouraged, and by 1999 at least 55% of both water and wastewater utilities were expected to be privatized in Chile.

The predictions are that Chile has the greatest potential for success in water privatization, given the government’s participation and increasing regulations to protect water supplies. The commitment from the government, and its ability to tame jurisdictional conflict and implement guiding legislation appear to be helpful in Chile’s transition to a market-based utility. Recently, two of the largest and most respected privatization ventures entered the scene. Suez Lyonnaise de Eaux acquired Santiago’s system, and more recently, in December 2000, Thames Water, a member of RWE Group, completed purchase of the controlling interest in Concepcion’s (Chile’s second largest city) water and wastewater services. Concepcion has approximately 1.5 million persons in its service area. Thames Water earlier acquired the majority interest for the water company ESSEL for service to Rancagua, Chile, with a population of 500,000.

Conclusion
Other countries in the hemisphere are entering new privatization models through the back door. For instance, in Paraguay, where the central government is the sole operator and maintains control of the water systems, small private vendors, termed aguaterias, have cropped up, which exist to fill the voids left by the public system. These operate with little government interaction or oversight. One study predicted up to 400 aguaterias operated in 1997, and suggested that Paraguay use such vibrant economic entities to help guide privatization efforts. See Drangaert, Melgarejo, Kemper and Bakalian, Aguaterias – Small Entrepreneurs Bring Competition to Paraguay’s Small Town Water Sector, World Bank Conference (May 5-8, 1998). While privatization may come about through abject failure of the central governments in the Americas, we believe that improved regulatory structures and legislation will be the institutional mechanisms to guide privatization in these developing countries.