WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— Mercado Regional Del Atlántico, Colombia Erica Ortiz Moreno and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study Mercado Regional del Atlántico, 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: 15 for water and 8 for wastewater • Population covered: 2,173,616 inhabitants for water and 1,945,277 for wastewater • Coverage: 99% for water and 88.6% for wastewater • Connections: 475,349 for water and 393,090 for wastewater Process Voluntary and incentivized Governance • Delegated • Public-private partnership (PPP) • Decision making: according to the PPP contract provision • 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 Positive, inclding lower marginal costs Findings Strong cooperation between municipalities and operator made easier by clear aggregation institutional arrangement (ownership, duties); good reputation and achievements of operator that contributed to acceptance from population, with new municipalities joining; accountability efforts (awareness campaigns, meetings w/social leaders, creation of social control committees); utility champion and governance leader 1 The MERCA (Mercado Regional del Atlántico) is the service provision in municipalities of categories 4, 5, first regional scheme in Colombia to be granted the and 6,1 including their rural areas, through exclusive status of regional market by the Water and Sanitation service zones. Furthermore, it allows the definition of Regulatory Commission. The aggregation of WSS ser- unified prices for regional markets of non-intercon- vices took place gradually, over two decades, as the nected systems served by the same provider, under private company Triple A signed 10 operations con- the supervision of the Water and Sanitation Regulatory tracts with the 15 municipalities in the governorate. Commission (Comisión de Regulación de Agua The regionalization, which was financially supported, Potable y Saneamiento Básico, or CRA). The current acted as a Big Push and delivered some benefits in NDP (2014–18) further develops the guidelines set terms of service coverage, water quality, and continu- by  previous plans for implementing aggregation. ity, as well as collection ratio. This outcome was made It  establishes that the national government and the possible thanks to the stable support of a local cham- departments will promote the creation not only of pion, the existence of a large city acting as a regional regional markets, but also of schemes of municipali- nucleus, and strong accountability mechanisms. 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 utilities to invest in aggregation schemes. The 2006– served by the same WSS service provider through 10 NDP reinforces the WSS aggregation trend by link- non-interconnected, interconnected or mixed sys- ing 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 financing sources. The plan also allows the possibility a regional market, although there were 20 regional for the General Participation System (Sistema General service providers in Colombia in 2013. The limited de Participaciones, or SGP) to directly transfer success of regional markets development can be services to service providers, as an incentive to ­ explained by the lack of commercial attractiveness ­ –14 NDP continues to acknowl- aggregate. The 2010­ of  loss-making water systems, by the difficulty for edge the importance of aggregation by creating the ­ operators to meet stringent performance require- possibility of implementing regional schemes for ments at the beginning of the contract when they 2 Case Study—Mercado Regional Del Atlántico, Colombia are just starting to providing service in remote areas localities: Baranoa, Barranquilla, Galapa, Juan de with low user payment capacity, and by the reluc- Acosta, Palmar de Varela, Piojó, Polonuevo, Ponedera, tance of municipal administration (a) to lose control Puerto Colombia, Sabanagrande, Sabanalarga, Santo over WSS provision and (b) to provide financial sup- Tomás, Soledad, Tubará, and Usiacurí (map 1). port to WSS operators. The incorporation of these municipalities into the regional scheme happened gradually. In each instance, A Gradual Aggregation Strategy Supported the municipality was incorporated to address a critical Financially situation with regard to WSS services provision—most The Mercado Regional del Atlántico (MERCA) is an notably, a lack of infrastructure maintenance and a low aggregation initiative structured around a private WSS quality of water. (See table 1.) Under the guidance of service provider, Triple A. The initiative gradually the governorate and considering infrastructure proj- expanded its service area and currently supplies 15 ects under a regional approach, municipalities decided municipalities with water services and 8 with sewage to adjust their service provision scheme accordingly to services, which makes it one of the largest aggregation allow improvements in terms of coverage, water qual- schemes in Colombia. The regional market of MERCA ity, and continuity. Barranquilla joined in 1992; Puerto is located in the Atlántico department and represents Colombia in 1997; Soledad and Galapa in 2002; 2.2 million inhabitants. It encompasses the following Sabanalarga in 2004; Sabanagrande, Santo Tomás, MAP 1. Localities Served by MERCA Source: AAA. Case Study—Mercado Regional Del Atlántico, Colombia 3 TABLE 1. Service Provision Indicators Before the Aggregation Process Year Water Sewage Continuity Micrometering IANC Water Collection Municipality operation coverage coverage (hours/ coverage (%) (%) quality rate (%) started (%) (%) day) Puerto Colombia 1997 50 N/A 0 N/A 70 N/A N/A Soledad 2002 43 41 0 N/A N/A N/A N/A Galapa 2002 N/A 0 0 N/A 43 N/A N/A Sabanalarga 2004 39 30 0 1 N/A N/A N/A Baranoa 2005 62 0 0 6.5 66 N/A N/A Polonuevo 2005 68 0 0 9.6 N/A N/A N/A Sabanagrande 2005 69 66 0 18 77 N/A N/A Santo Tomás 2005 45 40 0 2 N/A N/A N/A Juan de Acosta 2008 77 0 94 N/A 63 0.84 35 Tubará 2008 80 0 N/A N/A 82 0.57 32 Usiacurí 2008 80 0 98 N/A 80 3.87 16 Piojó 2009 100 0 99 N/A 68 N/A 28 Palmar de Varela 2013 85 0 0 N/A 76 N/A 30 Ponedera 2014 100 0 32 N/A 69 0.86 N/A Source: Triple A. Note: IANC = El Índice de Agua No Contabilizada (Nonrevenue Water Index); N/A = not available. Baranoa, and Polonuevo in 2005; Tubará, Juan de stability and leadership to the process. Municipalities Acosta, Usiacurí ,and Piojó in 2008; Palmar de Varela in were incorporated into the regional scheme in response 2013; and Ponedera in 2014. to specific situations. (See figure 1.) In 2004, the new governor of the Atlántico department In light of the operation difficulties it was facing, set the improvement of the WSS sector as one of his the operator of aqueduct and sewage services in main objectives. He then created a position of water Sabanalarga offered to assign its existing contract and sanitation secretary within the governorate; the with the municipality to Triple A. The agreement, in secretary was supported by a multidisciplinary team which the municipality acted as the contracting hired specifically for that purpose. The governorate party, was signed in June 2004. It included opera- supported contract assignment from the existing oper- tion and investments in WSS infrastructure as well ators to Triple A. Similarly, the governor approached as some complementary activities. Its term was Triple A and its business group to persuade them to get expanded from 20 to 30 years. Eighty-five percent of involved in service operation with guaranteed finan- the investment funds would come from municipali- cial support from the governorate to fund necessary ties through a trust fund. The national government investments. That financial support acted as a Big Push and the governorate would also fund 75,000 million that helped WSS services escape the low-level equilib- Col$ to be leveraged by the department for a new rium trap. The following governor maintained the water source with a regional approach. That water same policy and continued supporting the develop- source would supply not only Sabanalarga, but also ment of the regional scheme, thus providing long-term the municipality of Ponedera (which would sign a 4 Case Study—Mercado Regional Del Atlántico, Colombia FIGURE 1. Institutional Framework for Service Provision ARCOS, the regional WSS service provider of the municipalities of Tubará, Juan de Acosta, Usiacurí Ministry of housing, city and and Piojó, opened a public bid to territory Atlantic governorate contract with an operator for the Policy maker, support in Local operation of and investment in investments financing associations Regional leader, (in municipalities) resource contributor the WSS services. The Ministry allocated 8,146 million Col$ for Contracting parties the integral aggregation project Municipalities of WSS services in the four Triple A S.A. Resource contributors municipalities under a construc- E.S.P. tor-operator scheme. Mayors Regional operator pledged financial resources to subsidize investment over 15 Source: Author’s elaboration. years. In 2006, Triple A signed the contract and became the WSS 20-year contract with Triple A in 2014). Gradual operator for Juan de Acosta and improvement targets were established with regard Usiacurí. Operation started in June 2008 in Tubará to micrometering, the nonrevenue water index and in May 2009 in Piojó. The term of the contract was (IANC), and collection. 16 years, and the time of execution of the works was 9 months. In Sabanagrande and Santo Tomás, WSS services were provided by an association supported by the governor- The municipality of Palmar de Varela joined the ate. According to the supervising public authorities, regional scheme in 2013 after a public bid for a 20-year this association did not have the capacity to provide contract for WSS services operation and investment. adequate services: resources were managed without Provision of the water supply started in March 2013, planning or compliance with financial and accounting and sewage service provision started in March 2015. regulations. In that context, in 2005, municipalities signed a 19-year contract with Triple A to improve the The Creation of the First Regional Market distribution network infrastructure and service conti- in Colombia nuity with the support of the Atlántico governorate. Provision costs that were not recovered through billing In 2011, the National Development Plan established collection would be paid by municipalities. The national the possibility for providers supplying regional mar- government committed to fund 66,861  ­ million Col$, kets with non-interconnected WSS services to define and the department 2,930 million Col$. unified or integrated provision costs according to the tariffs methodology issued by CRA. Considering such a In 2005, because of its inability to provide adequate possibility, Triple A applied for a regional market sta- services, the Sociedad Aguas del Norte, which was the tus before CRA, and the application was approved in WSS operator of the municipalities of Baranoa and 2014. As such, the Mercado Regional del Atlántico Polonuevo, assigned the service provision contract to (MERCA) became the first official regional market in Triple A. The national government pledged to contrib- Colombia and was granted this status for a period of ute 9,638 million Col$ to the WSS infrastructure invest- 29  years. However, if the number of municipalities ment over four years. under MERCA changes, Triple A is to submit a new Case Study—Mercado Regional Del Atlántico, Colombia 5 request to CRA for the declaration of a new regional operation started in Sabanagrande and Santo Tomás, market. The status of regional market entitles the collection ratios were low. However, after water quality operator to establish a regional user charge, which and continuity improved, the collection ratio increased; allows cross-subsidies that will help the operator take it is currently 90 percent. The operator’s reputation on the challenge of developing water supply systems and management helped Triple A obtain resources to in small municipalities. In the future, Triple A plans to make the required investments to improve and expand supply rural areas of the municipalities currently form- infrastructure—which, added to the improvement of ing the regional scheme and to expand its service to operation, social work with communities, and optimi- other municipalities in the department. The regional zation of the commercial scheme, allowed the com- scheme status also allows Triple A to benefit from pany to accomplish significant and positive changes in economies of scale with regard to energy and chemical the provision of services. The evolution of quality and costs, and it facilitates access to qualified personnel, coverage indicators for the past years shows evidence better technology, and better laboratory supplies. of this improvement (tables 2 and 3). A Successful Aggregation That Faced Several Difficulties TABLE 3. Evolution of the Water Quality Indicator Triple A brought significant improvements to the cov- Water quality Continuity (hours/ (IRCA, %) a day) erage of WSS services in the Barranquilla district. When Municipality Before Before 2015 2015 aggregation aggregation Barranquilla N/A 0.11 N/A N/A Evolution of the Coverage Indicator for TABLE 2. WSS Services Soledad N/A 0.10 N/A N/A Sabanalarga N/A 0.03 1 23.72 Water coverage (%) Sewage coverage (%) Before Before Puerto N/A 0.16 N/A N/A 2015 2015 aggregation aggregation Colombia Barranquilla 60 100 50 100 Baranoa N/A 0.14 6.5 23.08 Soledad 43 100 41 75 Galapa N/A 0.16 N/A 23.7 Sabanalarga 39 74 30 61 Sabanagrande N/A 0.16 18 23.57 Puerto Colombia 50 100 N/A 100 Santo Tomás N/A 0.14 2 23.65 Baranoa 62 92 0 32 Palmar de N/A 0.04 N/A 24 Galapa N/A 93 0 48 Varela Sabanagrande 69 96 66 85 Juan de Acosta 0.84 0.18 N/A N/A Santo Tomás 45 100 40 80 Ponedera 0.86 0.32 N/A 24 Palmar de 85 100 0 34 Polonuevo N/A 0.18 9.6 23.89 Varela Tubará 0.57 0.15 N/A N/A Juan de Acosta 77 99 0 N/A Usiacurí 3.87 0.11 N/A N/A Ponedera 100 70 0 N/A Piojó N/A 0.38 N/A N/A Polonuevo 68 93 0 N/A Source: Triple A. Note: N/A = not available. Tubará 80 98 0 18 a. IRCA (Índice de Riesgo de la Calidad del Agua para Consumo Humano) Usiacurí 80 95 0 N/A is a water quality indicator that combines physical, chemical, and biological variables. It ranges between 0 and 100 according to the Piojó N/A 100 N/A N/A following ranges: 0%-5%: Water out of risk; 5.01%-14%: Low risk; Source: Triple A. 14.01%-35%: Medium risk; 35.01%-80%: High risk; 80.01%-100%: Note: N/A = not available. Unfit for health. 6 Case Study—Mercado Regional Del Atlántico, Colombia Thanks to cross-subsidies implementation under the (municipalities, associations of municipalities, regional market, small municipalities that face high municipal utilities), rights, responsibilities, and duties service provision costs could achieve lower user of all parties were clearly established, thus lowering charges through the aggregation. As a result, the region- conflict risks. Triple A has developed a strong social alization process was successful in achieving improved policy, which helped build good relationships with equity and economic efficiency. (See map 2.) communities through well-established accountability mechanisms. Before arriving in a new municipality, The positive outcome of Triple A’s aggregation process Triple A would carry out a demographic characteriza- is based on a number of factors. The operator has tion to identify the social and security situation and to demonstrated a strong financial and technical have a baseline to start with. Before starting service c apacity. It succeeded in reducing marginal costs of ­ provision and installing meters, the operator would chemicals, electrical energy, and other goods, allow- implement awareness campaigns with communities, reduction mainly in small municipalities. In ing tariff ­ focusing on topics such as the importance of saving the contracts signed with the contracting parties water and of paying water invoices in a timely MAP 2. Comparison of Charges under Independent Provision Models Source: Triple A. Case Study—Mercado Regional Del Atlántico, Colombia 7 manner, how metering works, and other relevant helped overcome political resistance. In Colombia, the t ­opics. Triple A also carried out annual health bri- structuring of the regional aggregation Mercado gades and held meetings with social leaders to explain Regional del Atlántico, which provided services in a how the company operates, how the WSS systems large city as well as in small surrounding municipali- work, what the company’s contractual obligations are, ties, was eased by the involvement of a political leader and how utility bills are calculated, among other who facilitated the negotiation with mayors and other things. Community leaders are considered allies and political actors. He also encouraged those individuals act as speakers in some areas. The aggregation also to fully comply with their responsibilities, such as benefited from the existence of a nucleus (a large transferring all resources agreed upon in due time. As a city—in this case, Barranquilla), which is a develop- result, the operator—Triple A—has received strong ment hub and which allows for horizontal coopera- political support from the successive governors of the tion, economies of scale, and cross-subsidies with Atlántico region during the past 12 years, leading to a smaller municipalities. successful aggregation. Despite these positive results, aggregation also Lesson 2: Aggregation Takes Time to Show Results; triggered some political and economic difficulties ­ Gradual Improvement Strategies With Consequent during the execution of the various contracts. The Focus on Results are Particularly Successful operator faced political difficulties related to changes Both the design and the implementation of aggrega- in municipal administrations. In many such cases, tion take time; in particular, implementation is a con- incoming mayors request revision of contracts, which tinuous process that can spread over decades. As a involves changes in the initial provisions and creates result, aggregation benefits also take time to material- an additional administrative burden. In addition, ize. A gradual improvement strategy with regard to when the aggregation process started, municipalities the main purpose of the aggregation has proven suc- did not transfer financial resources they had commit- cessful in many cases because such a strategy spreads ted to, which jeopardized the investments. But with over time the efforts and changes to be made, thus not the increasing community acceptance and the burdening utilities with having to do too much too improvement in service provision, the municipalities quickly. It also can allow a greater focus on tracking began to do so. Triple A also faced economic difficul- and achieving concrete results. In Colombia, the oper- ties related to municipal tax policy, which were not ator Triple A was assigned gradual improvement tar- planned and thus not integrated in the business plan gets in terms of micrometering level, water quality, of the company. As such, these tax policy decisions and billing collection ratio. When operation started in burdened the operator’s economic balance. 2004, billing collection levels were very low, but after quality and continuity improvements, the operator Aggregation Case Study at a Glance was able to increase invoice collection, which is cur- rently 90 percent. Key Lessons Learned from the Aggregation Case Study Lesson 3: Having a Large Utility as Nucleus can Work, Lesson 1: Having a Stable Champion throughout the but Aggregation of Similar-Sized Small Utilities can Aggregation Often Improves the Likelihood of Success also be Successful In some case studies, aggregation has proven success- Most case studies display aggregation examples that ful because of the presence of a local stakeholder act- group urban and rural settlements. In such configura- ing as a champion among the aggregating service tions, larger urban utilities act as the nuclei around providers. This is especially true where this champion which less-populated, less-profitable, and less 8 Case Study—Mercado Regional Del Atlántico, Colombia well-performing service providers aggregate. The period in which the law was in force. This tax discount nuclei help surrounding service providers improve. In could represent up to 40 percent of the investment Colombia, the presence of a large city in the regional amount. scheme of Atlántico, which is a development hub, allows for horizontal cooperation and economies of Lesson 5: Strong Citizen Engagement and Clear Accountability Mechanisms Should be Put in Place in scale. It also allows the implementation of cross-​ Parallel with the Aggregation subsidies among settlements and thus the balancing of ­ differences among water systems that do not have the In Colombia, the water operator Triple A built a strong same production costs. In small and economically social and communication policy with communities depressed towns, most users have low incomes and before and during the aggregation process. Awareness purchasing power that would not allow them to access campaigns were organized before starting service pro- public services otherwise. vision and before installing metering. These cam- paigns focused on water-saving behaviors, appropriate water use, timely payment of utility bills, and other Lesson 4: Financial Support and Incentives matters. Triple A also carried out annual health bri- (A Big Push) are Important to Help Services Escape gades and supported training for local social commit- the Low-Level Equilibrium Trap tees. The operator also organized meetings with social To boost the success of an aggregation reform, leaders to explain how the company operates, how national and external stakeholders can provide finan- the service provision systems work, what the compa- cial support to aggregating utilities to help them ny’s contractual obligations are, how utility bills are achieve the reform’s goal. In most cases, those subsi- calculated, and so on. Meetings with mayors, council dies are used to fund investment programs, thus act- members, and active members of the administration ing as a Big Push, which helps WSS service providers were also held. escape the low-level equilibrium trap. In Colombia, the operator Triple A benefited from investment pro- Notes grams to expand supply capacity that were funded by 1. Law 617 of 2000 establishes that all municipalities must be classified central and regional governments, representing up to under a category, from 1 to 6, according to their population and their US$ 50 million. On top of this funding, the financial current level of income; categories 4, 5 and 6 correspond to smaller and poorer municipalities. incentives also took the form of a tax alleviation that was granted to public services companies during the 2. CRA, Resolution No. 628 of 2013. Case Study—Mercado Regional Del Atlántico, Colombia 9 © 2017 International Bank for Reconstruction and Development / The World Bank. 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