WATER GLOBAL PRACTICE KNOWLEDGE BRIEF Incentives for Improving Water Supply and Sanitation Service Delivery A South American Perspective Berenice Flores Uijtewaal, Amanda Goksu, and Gustavo Saltiel This analysis is based on the premise that strengthen- South  American country case studies—Argentina, ing the water supply and sanitation (WSS) sector, its Brazil, Chile, Colombia, and Peru. institutions and stakeholders, calls for the alignment of sector incentives. The objective of this Knowledge I. South America in the World Brief is to introduce how integrated policy, institu- South America represents a mosaic of diverse people tional, and regulatory (PIR) interventions can help shaped by different geographic, historical, societal, align incentives for more sustainable WSS service cultural, and political conditions. The continent wit- delivery. Ultimately, the objective for governments nessed a wave of democratization in the 1970s when is to design incentives that motivate people (as indi- countries—at varying paces—started to shift away viduals or as part of an institution)1 to provide uni- from authoritarian systems towards democratic sys- versal and sustainable services. This brief provides tems. Until the 1990s, South America lagged western a snapshot of sector experiences gathered from five countries due to its overreliance on primary commod- ities and weak institutions, oftentimes still a heri- tage of its colonial past. Following a series of foreign 1. Sector stakeholders may range from the national government (minis- debt crises, countries started to transition towards tries) and local governments, to the sector regulator and water sup- ply and sanitation (WSS) utilities, and may also include (international) a free-market economy in the 1990s—which proved donor agencies and nongovernmental organizations (NGOs). a major trigger in pulling countries out of debt. The Consumers, as the beneficiaries of the services, have a key role as region is also economically diverse, encompassing well, not only regarding the financing of received services, but to ensure accountability among sector actors. developed markets (such as Chile), emerging markets 1 W18009.indd 1 14/05/18 9:00 pm (such as Brazil, Colombia, and Peru), frontier mar- challenges like climate change and rapid urbaniza- kets (such as Argentina), and developing markets 2 tion (box 1), South American countries, compared (such as Bolivia and Paraguay). Today, the region is with other low- and middle-income countries, beginning to recover from a 2-year economic slow- have achieved relatively high rates of coverage of down, with 0.9 percent gross domestic product (GDP) WSS services. The region met the 2015 Millennium growth in 2017. Going forward, growth is expected to Development Goals (MDGs) to halve the proportion gain momentum, reaching an estimated 2.7 percent in of people without access to improved WSS; today 2020 as conditions in commodity exports continue to 95 percent of people in the region have access to improve.3 improved (basic) water supply and 87 percent to basic sanitation (figure 1).4 Water and Sanitation in South America South America, home to only five percent of the Inequality in Access world’s population, has 30 percent of the world’s However, hidden behind these average statistics are freshwater resources. But water availability at the marked differences within countries, reflecting dras- regional level does not ensure water security at the tic inequalities between income and ethnic groups, local level, as evidenced by cities, like Lima, located as well as primary language and education level.5 For in areas under severe water stress. Despite facing example, Argentina (along with Chile and Brazil) has BOX 1. Key Characteristics of Water Supply and Sanitation in South America • Nearly 75 percent urbanized; Argentina, Uruguay, and the Bolivarian Republic of Venezuela having the highest level of urbanization at 92, 95, and 89 percent, respectively. • Governments opt for highly visible infrastructure projects with fewer resources for maintaining service quality. • Service quality is low; many with formal water access continue to purchase bottled water. • Public service providers dominate the sector, but many countries have had early adoption of private sector participation, with mixed results. • Wide use of formal regulatory agencies. • Increasingly vulnerable to the impacts of climate change, and water related natural disasters including floods and droughts. 2. “Frontier markets” refers to those countries which may also be con- 4. Basic, known as “improved” under the Millennium Development sidered “emerging markets” but are in an earlier stage of economic Goals (MDGs) is restricted to the following: flush toilet, sewer con- development. These countries may have experienced a recent eco- nection, septic system, flush to a pit latrine, pit latrine with slab, ven- nomic crisis, making it a particularly challenging environment for tilated improved pit latrine, or composting toilet, and is also not a investment as they have lower market capitalization and are gener- shared facility. Data for these five countries only. ally very illiquid. 5. According to the Joint Monitoring Programme, improved sanitation 3. World Bank. 2018. Global Economic Prospects, January 2018: Broad- and improved drinking water coverage is lower among indigenous Based Upturn, but for How Long? Washington, DC: World Bank. people in several countries with data; and, in Paraguay, speaking only 2 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 2 14/05/18 9:00 pm FIGURE 1. Shifting the Baseline from Access (MDG) to Sustainability (SDG) a new approach to meet this new, more ambitious, goal. WSS ser- vices are considered sustainable High MDG access rates … … but a low SDG baseline when access and quality of ser- Water Sanitation vice are provided on a continuous Argentina 99% 96% Access to safe and a ordable Brazil 98% 83% services in PERU is: basis, without any time limit, and Chile 99% 99% at affordable prices. To meet the Colombia 91% 81% scale of this challenge, govern- PERU 87% 76% 50% 30% ments will need to ensure that the right incentives are aligned to Sources: 2017 SDG Index and Dashboards Report; 2017 Objetivos de Desarollo Sostenible, Pan motivate stakeholders to provide American Health Organization. Note: MDG = Millennium Development Goal; SDG = Sustainable Development Goal. high quality services that do not diminish over time.6 This brief among the highest levels of coverage at the national considers how sector incentives level, but provinces report as low as 60 percent have or have not contributed toward South America’s access to formal water networks. In general, the WSS success in meeting the MDGs and draws pertinent les- deficit in South America mainly affects rural areas, sons for meeting the SDG challenge. dispersed communities, informal urban settlements, and indigenous populations, which are generally the poorest segments of the population. Thus, while II. Aligning Incentives for Sustainable Water Supply and Sanitation Services countries invested large sums in infrastructure to expand access, the approach proved to be insufficient This Knowledge Brief considers sector reforms for reaching some population groups. Furthermore, implemented in five South American country case MDG monitoring reports highlight that institutional, ­studies—​Argentina, Brazil, Chile, Colombia, and policy and financial factors remain a challenge, and Peru—by analyzing the WSS interventions through international experience has suggested that govern- ­policy, institutional, and regulatory incentives” a “ ments need to better facilitate the role of structuring (PIR) framework. good policy and institutional support for improved “Incentives” are the motivating influences or stim- WSS. These factors, which go far beyond investing in uli inciting people, and thereby inciting institutions, infrastructure, will be critical for South America to firms, and other actors involved in the WSS sector to achieve universal access. pursue certain objectives or to behave in a certain way. Incentives may arise from specific policy, institutional, The Sustainability Challenge or regulatory interventions (or mechanisms) or from In 2015, the MDGs were replaced by the Sustainable the combined PIR framework that characterises the Development Goals (SDGs). SDG 6 calls for universal WSS sector at any point in time. and equitable access to safe and affordable WSS ser- vices, which requires a re-set of the baseline (figure 1). Understanding the Policy, Institutional, and Along with the rest of the world, South America needs Regulatory Incentive Framework The policies developed, institutions created Guarani (an indigenous language and one of the primary languages and empowered, and regulations designed and of Paraguay) is strongly associated with use of unimproved sanita- tion. WHO (World Health Organization) and UNICEF (United Nations Children’s Fund). 2017. Progress on Drinking Water, Sanitation and 6. Mejía, Abel, Miguel Nucete Hubner, Enrique Ron Sánchez, and Hygiene: 2017 Update and SDG Baselines. Geneva: WHO and UNICEF. Miguel Doria. 2012. Water and Sustainability. Paris: UNESCO. Incentives for Improving Water Supply and Sanitation Service Delivery 3 W18009.indd 3 14/05/18 9:00 pm BOX 2. Understanding Policy, Institutional, and Regulatory Incentives Public policy—the framework by which governments undertake decisions that guide specific actions with the objective of achieving specific public goals or addressing a perceived problem. Policies can be implemented through laws, regulatory measures, courses of government action, and financing priorities. Policies provide guidance and improve accountability between government and citizenry by setting expectations. Institutions—the social, political and economic relations governed by formal and informal rules and norms. They provide a structured, predictable manner by which people interact and, shape incentives for people and organizations, which in turn can also contribute to institutional development. Institutions shape service provision as they outline the roles and responsibilities of actors from national policymakers to frontline service providers, and they determine the costs and benefits associated with alternative choices available to institutional actors as well as the legitimacy of their actions. Vertical alignment of institutions (across several tiers of government) as well as horizontal alignment (across ministries, for example) is critical for implementing incentives. Regulation—“the sustained and focused control exercised usually by a public agency over activities that are valued by a community”a and involves the setting of rules and ensuring that those rules are enforced. Economic regulation usually refers to the “setting, monitoring, enforcement and change in the allowed tariffs and service standards for utilities.”b In the context of emerging markets, this definition has often been broadened to encompass social or development goals of access and equity. In this vein, economic regulation can take a broad range of forms including regulation by agency or contract and; functions, such as performance management and enforcement of accountability and transparency mechanisms. a. Ogus, A. 1994. Regulation: Legal Form and Economic Theory. Oxford, UK: Hart Publishing. b. Groom, Halpern, and Ehrhardt. 2006. Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services. World Bank, Washington, DC. implemented (box 2) in turn provide the incentives for The relative success of these PIR interventions in the delivery of specific actions and resulting outcomes. achieving the desired outcomes of course depends Policies can create incentives, such as through signal- on how the PIR are designed and implemented. ing a change, or setting out the requirements for a reg- The  actors that are involved with, and/or are ulatory and institutional framework, and influence affected by, the implementation of the reforms actions and decisions of institutional stakeholders, include regulators, managers, staff of service pro- including private investors and consumers. Actions by viders (public or private), and consumers. External institutions are not only motivated by social goals, but stakeholders such as contractors, consultant firms, also by the political and economic costs and benefits and unions may also present new challenges to the associated with them. Accordingly, institutions can design and implementation process if they perceive create positive or perverse incentives depending on the misalignment with their interests. It is important type of relations and actions they promote. Regulation to note that P, I and R do not have wholly separate can create incentives through an established system of identities. As demonstrated through the interlink- rewards and penalties that incentivize specific actions ing circles that represent P, I and R in figure 2, there in line with the broader sector policies. is overlap. 4 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 4 14/05/18 9:00 pm FIGURE 2. Policy, Institutional, and Regulatory Schematic—Schematic: Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Enabling environment: Current state of the sector/ political economy/governance structures Sector outcomes may lead to some citizens demanding Provides the drivers for speci ic actions reform, removal of binding constraints, determining the P, I and R chosen De jure vs. de facto: Enabling environment will in uence the implementation of PIR and attainment of outcomes PIR interventions are crafted to WSS outcomes? meet sector Policy Sustainable water objectives supply and sanitation Provides the services incentives for (if binding constraints speci ic actions to are removed and deliver WSS service enabling environment Institutions Regulation allows for implementation of appropriate P, I, and R) Source: World Bank. 2018. “Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services: Report of the Water Supply and Sanitation Global Solutions Group, Water Global Practice, World Bank.” World Bank, Washington, DC. Note: PIR = policy, institutional, and regulatory; WSS = water supply and sanitation. The PIR framework identifies two broad levels of incen- (see box 3). This environment can either prevent tives, as illustrated in figure 2: (a) drivers for reform, reforms by presenting binding constraints or encour- or incentives that emanate from the enabling environ- age reforms by allowing key actors to design regula- ment, which can be either exogenous or endogenous tions, empower institutions, or initiate policies. The drivers, and (b) incentives that emanate from policy, challenges and constraints that emanate from the institutions, and regulation and that are used to ensure enabling environment regarding reform and actions that expected reforms can be implemented. influence not only the type and extent of reform intervention, but also set the context for implemen- Drivers of Reform. The drivers for reform and the tation—thereby determining the difference between types of reforms that are chosen do not arise in a vac- de-jure and de-facto reforms. The actors that initiate uum, but are influenced by the local enabling envi- the reforms include policy makers, politicians, senior ronment, including prevailing policies, governance government officials and donors. These actors will frameworks and broad political economy factors choose which types of reforms are to be implemented Incentives for Improving Water Supply and Sanitation Service Delivery 5 W18009.indd 5 14/05/18 9:00 pm to address the problems and constraints faced by the III. South America through the Policy, sector to achieve sustainable WSS services. The driv- Institutional, and Regulatory Lens ers to initiate and carry out WSS reforms come from The objective of the global PIR initiative is to analyze both internal and external sources (box 3). how integrated policy, institutional, and regulatory Feedback-loops (depicted by the arc-like arrow in interventions can help align incentives for more sus- figure 2) may exist or be created between the drivers ­ tainable WSS service delivery. Alignment refers  to originating from the enabling environment and the harmonization between sector objectives, rules of PIR incentives. The nature of the problems and con- the game, and the organizations and mechanisms straints that emanate from the enabling environment that implement related actions. The rules of the regarding reform and actions may influence the type game reflect agreed principles, established through and extent of PIR interventions and provide the con- political and/or social processes and can either be text for implementation. Also, outcomes of PIR inter- formal (e.g., law, decrees, and regulations) or infor- ventions may influence certain stakeholder groups to mal (e.g., customs, social norms, and established react and voice their concerns to the government. relationships). BOX 3. Drivers of Reform—Endogenous and Exogenous Incentives Incentives for change are shaped by the local enabling environment and political economy factors, which in turn have a significant impact on the success or failure of reforms. Incentives that emanate from the enabling environment, or drivers for reform, can be either exogenous or endogenous. Endogenous drivers for reform arise from local political processes, including citizen feedback, to change the status quo, and from incentives to harmonize policies and institutions in line with broad national policies, such as private-sector participation (PSP) or decentralization. Exogenous factors include the influence of donors and other external financiers. Endogenous and exogenous drivers for reform are not mutually exclusive, and some endogenous factors can be influenced by exogenous factors. In Brazil, endogenous incentives spurred major sector reforms. The public water supply and sanitation (WSS) institutions born under Brazil’s military rule (1968–86) became more fragile and less sustainable because of the country’s macroeconomic crisis. Service providers became financially and technically weak as they became politicized (i.e., tariffs were kept low to combat hyperinflation). The crisis, however, also opened doors to PSP in WSS, and, along with more investment in some urban areas, came with increased transparency, financial controls, and better governance. In turn, these improvements have reduced political pressure on WSS institutions and enabled some efficiency gains. This PSP has been a welcome complement to (and with benefits that overflow to) public providers, which serve 95 percent of the population. Exogenous incentives, such as the influence of an external financier, can be a driving force for reform but also carry the risk of generating misalignment. For example, Argentina as a signatory to UN Resolution 64/292, has declared water and sanitation a human right, but only three provincial constitutions have adopted the human right as law. Similarly, global pressure can cause many countries to declare certain goals (such as the MDGs or SDGs) as their own national goals, but then fail to define or support the policy, institutional, and regulatory (PIR) mechanisms needed to achieve them. 6 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 6 14/05/18 9:00 pm The global PIR initiative refrains from recommend- (PRODES), the Federal Government essentially pays ing a set of universal interventions to be applied in service providers for treating wastewater based on cer- any country. It does, however, conclude some key tified outputs, instead of financing inputs such as civil messages for governments approaching the design of works. Up to half the investment costs for wastewater sector reforms. This Knowledge Brief provides exam- treatment plants are eligible to be reimbursed over 3–7 ples from South America, focused on the urban WSS years, provided that the quality of the wastewater dis- sector, in support of a select number of the global PIR charged meets the norms. If the norms are not met in initiative’s key messages. The brief focuses on formal 7 one trimester, a warning is issued. If they are not met PIR interventions, while also recognizing the critical in the following trimester, the payment is suspended. importance of the informal rules of the game that are 8 If  the norms are still not met in the next trimester, a key factor in the success of any incentive regime. the service provider is excluded from the program. This provides strong incentives to properly operate In South America, and maintain plants. In short, the program does not KEY MESSAGE 1 68 percent of house- fund promises, but results. The program enhances the holds are connected Technical solutions alone are financial viability of utilities, and thus increases their to a sewer. This rate, unsustainable. For reform ability to access commercial credit, through develop- measures to persist through which is 18 percent- ment banks (such as the Caixa Economica Federal) time, it is essential for positive age points above the and commercial banks. The operational risk is clearly incentives to be embedded global average, is due assigned to the service provider, which is best able in policy, institutional, and to recent investments to manage that risk. To prevent overinvestment, the regulatory structures. in hard infrastruc- treatment plants have to be included in basin plans ture. However, the adopted by water basin agencies as a necessary con- wastewater treatment plants to which these sewers dis- dition to be eligible for financing under the program. charge are often inoperable or operating below design capacity. Due to a lack of PIR incentives for operators Colombia’s experience with sector finance provides to meet discharge standards, only 30 percent of the col- an example of how integrated solutions work best to lected wastewater is treated. The challenge is to devise 9 tackle multifaceted challenges. After decentralization programs to channel investment subsidies in an efficient in Colombia during the 1980s, many municipalities manner, while promoting efficiency and operational faced challenges accessing finance for development and environmental sustainability. projects. In response, an innovative financing insti- tution was established (FINDETER). This specialized In 2001 Brazil introduced a program that meets financial intermediary channels transfers from the these criteria. Under the basin restoration program central government to local governments through loans to first-tier financial institutions, primarily com- 7. For more information, refer to the blue box at the end of this mercial banks. However, FINDETER is not solely a Knowledge Brief. financial solution as it also offers technical assistance 8. In the water supply and sanitation (WSS) sector, informal institu- tions, including informal rules of the game such as cultural and social to local governments and domestic banks to bridge norms, as well as informal entities such as community or village the knowledge gap between borrowers and lenders, groups, play a significant role in shaping the sector and its develop- thereby providing an incentive for them to establish ment. Therefore, in analyzing and designing institutional arrange- ments or institutional intervention in the WSS sector, these formal new relationships. Thirty years since its founding, institutions need to be taken into consideration. FINDETER now has 30 percent of its capital invested 9. Those connected but without treatment are not considered to have safely managed sanitation. Data only for the 5 countries included in in the WSS sector and can offer borrowers competitive this study. loans at 15-year maturity, compared with the average Incentives for Improving Water Supply and Sanitation Service Delivery 7 W18009.indd 7 14/05/18 9:00 pm 5-year loan available in the market. The  institution investment processes. Ultimately, the targeting of has been critical to the country’s achievement of high investments has been poor. Above all, more infrastruc- WSS coverage. ture does not necessarily yield better services, which requires significantly more resources over time than Countries throughout South an initial capital investment, for proper maintenance KEY MESSAGE 2 America have provided incen- and operation. tives for building, more than Individual policy, institutional, maintaining, infrastructure. Regulation is a critical part of ensuring the de facto and regulatory interventions This focus on access to ser- implementation of incentives and can vary in both must be aligned to ensure vices over quality of services form and function. Its functions can go beyond tariff sustainability, as misalignment leads to distortion of incentives. has distorted the incentives setting to include the setting of standards for access needed to achieve today’s to and quality of services, establishment of efficiency national WSS goals. The 2010–15 period in Peru’s WSS incentives, performance monitoring, and addressing sector exemplifies this misalignment. The large amount user complaints.12 Peru and Colombia are using reg- of financial resources allocated to the sector 10 addressed ulation as part of the mix of policy instruments that the infrastructure deficit toward achieving the MDGs. seek to ensure that public utilities offer good value During this period, annual average sector investments and quality services to the public, and ultimately in in Peru reached US$1,450 million which is equivalent view of depoliticizing tariff setting and providing inde- to 0.78 percent of GDP, for a total of US$7,410 million. pendent oversight. For example, in Peru, the National These levels largely exceed investments made in pre- Water and Sanitation Regulatory Agency (SUNASS), vious periods—US$637 million in the period 2000–04 mapped to the Prime Minister’s office, is responsible and US$2,325 in 2005–09. While s ­ ector improvements 11 for the economic regulation of WSS services, and for were effectively made in the 2010–14 period (improv- monitoring and following up on customer complaints. percentage points and sani- ing water coverage by 11 ­ While the form of regulatory enforcement can include percentage points), these results tation coverage by 5 ­ a national or local agency, which is prevalent across are not relative to the investments made. Similar Latin America, regulation can also be undertaken by improvements were booked in the previous 2005–09 contract. period requiring significantly lower investments. This In contrast, the absence of adequate regulation can points to the inefficiency of the investments made. create perverse incentives. For example, the regula- There was a need to better evaluate the performance tory vacuum that persisted in Brazil from the 1990s to of existing infrastructure and the quality of services the early 2000s was a factor in the failure of some pri- provided, prior to constructing new infrastructure; a vate concessions and the sustainability of public pro- need to link specific investments to previously defined viders. The elimination of PLANASA in 1988—which service coverage targets at the national, regional, had secured the country’s commitment to financial and municipal levels; and, a need to better revise sustainability of service providers through a central the project cycle to redefine the pre-investment and agency to approve tariffs—gave space to keep tar- iffs artificially low to control inflation. Not until the 10. Financial resources allocated to the sector in the 2006–11 period (0.78 2007 Law of Water and Sanitation were these policies percent of gross domestic product [GDP]) were also significantly above the average annual sector investments made in the Latin American and Caribbean region (0.20 percent of GDP). World Bank. 2017. “Rethinking Infrastructure in Latin America and the Caribbean.” 12. OECD (Organisation for Economic Co-operation and Development). 11. World Bank. 2017. “World Bank Investment and Financing Proposal, 2015. “The Governance of Water Regulators.” OECD, Paris. http://dx​ 2016.” Internal document. World Bank, Washington, DC. .doi.org/10.1787/9789264231092-en. 8 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 8 14/05/18 9:00 pm reinforced through adequate regulatory policies, insti- providing services to half of the country’s urban tutions and mechanisms. population. It was decentralized without a sectoral policy, which resulted in the deterioration of ser- Peru’s national tariff policy specifies that consumer vices. Peru’s national political and fiscal decentral- tariffs for WSS services should support three key goals: ization process, initiated by the Decentralization (a) to guarantee the sustainability of services; (b) to Laws of 2002 and 2004, aimed to improve the effi- create incentives for consumers and service provid- ciency and quality of public spending, and ensure ers to reduce costs; and (c) to help service providers that all levels of government met the specific needs meet consumer demand for quality services. However, of citizens. However, Peru failed to consider all polit- there is misalignment between policy and practice. ical economy issues, resulting in an “incomplete” First, SUNASS only authorizes tariffs based on histor- and asymmetrical15 decentralization system under- ical costs, and thus they often do not fully recover the mining government accountability, and generating cost of service. Consequently, tariffs send incorrect inequities and inefficiencies in public investment pricing signals to consumers, causing inefficiencies and service delivery.16 Regarding the WSS sector, in consumption. In turn, subsidies are used to fill the there was little consideration of the capacities and gap between the cost of service and the tariff, which financial resources available at local government provides a perverse incentive to continue inefficien- levels, and little understanding of the overlapping cies. For example, there is not an incentive to select mandates created by the devolved structure. The least-cost projects or technologies.13 Above all, service lack of financial sustainability of providers has left providers should be given incentives to maintain exist- them highly susceptible to political interference and ing infrastructure, and they should have the right to control. Achieving the desired long-term outcomes charge tariffs that are in line with the future and incre- of WSS service delivery in Peru requires understand- mental costs of additional supplies.14 ing and addressing its challenges, including poor institutional coordination (horizontal and vertical), Peru’s WSS decen- inefficient linkages between financing and  results, KEY MESSAGE 3 tralization process poorly defined roles and responsibilities and poor started in 1990 Specifically, changes in governance at the service provider level, and lack when the national institutional arrangements of clarity on what the WSS tariffs should include, in and the regulatory framework government trans- addition to the lack of career lines within the water need to be supported by ferred WSS provision utilities. the necessary laws and to municipalities, policies to be effective and except for SEDAPAL, Colombia’s WSS sector made the policy decision to sustainable. the main WSS utility attract private-sector participation (PSP) through its 15. Peru’s fiscal decentralization trends highlight the profound asymme- 13. In Peru, the capital expenditure per incremental person served varies try between revenue and expenditure decentralization. In Peru, from S/. 740 (US$215) in Lima to S/. 24,000 (US$7,000) in Cajamarca, spending is far more decentralized than taxation. As a result, inter- with a national average of S/. 3,050 (US$900). It would be more ratio- governmental transfers are the dominant financing source for nal to oblige service providers to reduce such high incremental costs regional and local governments. Due to their reduced access to credit through a combination of demand management measures; accurate markets and the tight borrowing restrictions imposed on them, and universal metering; and offering safe but lower-cost technolo- regional and local governments have limited recourse to borrowing gies  to consumers who are not being served, or who are being to finance their expenditure responsibilities, leaving them heavily poorly served. dependent on intergovernmental transfers (World Bank 2017). 14. World Bank. 2017. “Peru: Support to the Water Sector Modernization 16. World Bank. 2017. Peru—Systematic Country Diagnostic. World Bank, Program.” Internal document, Water Global Practice. World Bank, Washington DC. http://documents.worldbank.org/curated/en/919181​ Washington, DC. 490109288624/pdf/Peru-SCD-final-3-16-17-03162017.pdf. Incentives for Improving Water Supply and Sanitation Service Delivery 9 W18009.indd 9 14/05/18 9:00 pm regulatory framework. A key element of the central Urban Population (PROSANEAR) project, implemented government public utility reform agenda was the pro- through a World Bank loan during the 1980s and 90s. motion of private sector management, including the Taking a demand-driven approach, the project pro- principle of maximizing competitive forces through vided incentives for neighborhoods to work together transparent bidding and award processes. It establishes to select an affordable and alternative technology, minimum requirements for contracts and provides a finance the construction, and operate and maintain coherent set of performance indicators that serve as simple, condomin- the system. Many groups selected ­ the basis for contract supervision and control and tar- ial sewerage systems which uniquely fit the needs of iff setting. The framework is also intended to provide unplanned settlements at a cost that is around 20 per- for consistency between the private sector contracts, cent less than traditional water and sewer systems. municipal development plans, and sector policy. The More than 1 million people in 60 communities have a private partnerships framework established for public-­ new water or sanitation connection to their residence, (PPP) in WSS was broad enough to permit and support and what were informal private providers are now a variety of PSP modalities. serving customers with formal addresses. The Water and Sanitation Law of 2007 and the 2013 PLANSAB For instance, decentralization encapsulate Brazil’s commitment to reduce inequali- KEY MESSAGE 4 policy is intended to c ­reate ties and ensure access to WSS services for low income incentives for improved Policy direction and households. Some municipal governments have service delivery in a more commitment need to be moved toward an Integrated Urban Water Management responsive, inclusive and supported by institutional approach to slum upgrading which includes solid accountable manner, as local arrangements that are waste and other services, which has worked well to conducive to implementing the government has a direct line manage pollution and improve a range of services. policy and achieving the targets. to citizens. However, as wit- The challenge now is to scale up these approaches and nessed in Colombia, reform embed them in formal institutional arrangements to can present secondary challenges (box 4). Despite ensure the poor have incentives to participate in for- the national government’s strong policy direction and mal planning. commitment to decentralization, the decentralization process shed light on the weaknesses of the regulatory Numerous countries in institutions that lacked the resources to effectively South America rely on KEY MESSAGE 5 regulate the 1,300 service providers over which they ­specific regulatory frame- Design and implementation were mandated oversight. Furthermore, the regulatory works for the WSS sector. of sustainable institutional structure now required a high degree of inter-institu- Some of these frameworks reforms requires a nuanced tional coordination, which was lacking. have a national scope, understanding of the local such as Chile, Colombia, institutional context. The lesson is also relevant when considering pub- and Peru, while other ­ articipation, inclusion and accountability in Brazil, lic p countries have state, provincial or even municipal where there is great disparity in WSS access rates jurisdiction, as in the cases of Argentina and Brazil among regions of the country, as well as between (although Brazil has established guidelines for the urban, peri-urban and rural areas. PLANASA, Brazil’s national application of the regulatory framework). formal sector framework, brought services to mostly middle and high-income households. To fill gaps in Although regulators are most often not financially or underserved, poor areas, the government financed managerially independent from the public institu- the Water and Sanitation Program for Low-Income tions under which they sit, they can still be effective at 10 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 10 14/05/18 9:00 pm BOX 4. Coupling National Regulation with Decentralization in Colombia Colombia’s regulatory framework is complex and is further complicated by the decentralized nature of the water supply and sanitation (WSS) sector, as well as the existence of a wide variety of public, private, and mixed service providers. Nevertheless, Colombia implements a centralized methodology for tariff and service standard setting that is enforced by multiple public bodies across all public and private service providers. This separation of regulatory powers is deliberate, as Colombian administrative tradition requires that a single body should not be responsible for both making and enforcing rules: a) the Regulatory Commission for Water and Sanitation Services (CRA) establishes the tariff-setting methodology. Providers set their own tariffs in accordance with this methodology (or apply to the CRA to set the tariffs a different way); and b) service standards are set by the Ministry of Economic Development. The Public Services Superintendence (SSPD) monitors the providers to verify that they are following the tariff-setting rules and complying with the service standards. Source: Water Regulation: Regulation by Contract with a Separate Regulator; PPP IRC; World Bank. enforcing standards. A national regulator, for example, the National System of Public Investment (SNIP). has been cost-effective in smaller countries like Chile, However, this law failed to consider the financial especially given that regulating private providers is challenges the utilities were facing, and therefore relatively easier than regulating pubic providers due to excluded taking up the interest, arrears, and adminis- the lack of political interference and thus, the greater trative expenses that had been generated, leaving the effectiveness of incentives. Brazil, by contrast, with its utilities largely indebted. The 2013 Modernization Law 5,570 municipalities, relies mostly on sub-national reg- allowed for the creation of the Technical Organization ulators (with less success relative to other countries) for Water Supply and Sanitation Services Management and an informal national benchmarking system that (OTASS) tasked to enhance the financial sustainabil- enhances competition through “sunshine regulation,” ity and professionalize the service providers, with and can help providers gain access to federal funding. the right to intervene in underperforming utilities to Colombia has been successful designing a regulatory induce a turnaround. system that works within the complexity of its WSS The region has also had mixed results in the use sector (box 1). What works for each country is highly of PPPs in the WSS sector. Gradual introduction of context specific. PPPs to Chile’s already well-functioning public sec- In the case of Peru, the 2007 Law to Optimize the tor helped finance much of the country’s wastewater Management of WSS utilities was approved to treatment infrastructure. In contrast, some interna- improve utility performance—by addressing financial tional PPPs in Argentina failed due to poor designs and technical challenges faced by utilities—in view of that did not account for local circumstances. The improving their management indicators and restruc- Buenos Aires concession in the 1990s, for example, turing their debts. The law also included a package was signed despite a weak regulator and high foreign of supreme decrees to expedite the approval of proj- exchange risk. The peso devaluation in 2001 then ects submitted by utilities within the framework of led to a cancelled contract. External actors can bring Incentives for Improving Water Supply and Sanitation Service Delivery 11 W18009.indd 11 14/05/18 9:00 pm much-needed expertise and financing to the sector, like Peru, Brazil, and Chile, Argentina does not have but their ability to influence must be shaped and lim- a national sector law, but rather each province has its ited by local realities. own WSS regulatory framework. While this does per- A lack of integration between mit the use of “fit-for-purpose” approaches, it also expected reforms and the means that sector institutions, which rely heavily on KEY MESSAGE 6 human and financial resources federal subsidies, are poorly coordinated both verti- Appropriate local capacity needed to implement them can cally and horizontally. The 2016 National Water Plan (human and financial resources) create a gap between de-jure addresses these deficiencies through a new National to undertake reforms is required and de-facto policies. In large Water and Sanitation Plan (PNAyS), which aims for to avoid the development of countries, like Brazil, a range universal coverage and improvements in efficiency gaps between de-jure and of capacities exist in munici- and quality over 4 years. To guide, plan, and monitor de-facto reforms. pal and state level institutions. actions and government targets at the national level, Brazil’s National Sanitation the Directorate of Drinking Water and Sanitation was Plan (PLANSAB), requires that all municipalities com- created as part of the Water Resources Sub-Secretary, plete a water and sanitation master plan to access SSRH. It is tasked with the formulation of sector funding. The plan is also used to define goals which policies and investment planning. It will develop the WSS sector should pursue and regulators then a national data system, carry out specialized stud- use to monitor progress. The pre-requisite, while a ies, promote good practices, and assist providers in good incentive for attaining sector targets, is not in programming the maintenance and management of line with local capacity constraints across the coun- infrastructure, toward strengthening provincial and try, and many municipalities do not have the initial municipal services. The de facto way in which these funds or the skills needed to complete the planning. new institutions will operate and coordinate remains Policies should work toward creating a level playing to be seen. field across institutional actors, with the overall aim of Peru has taken a more step-wise approach to reform. ensuring equity in service provision. In contrast, Chile National political and fiscal decentralization, which has been able to enact a consumer subsidy program to began in the early 2000s, was first only partially imple- ensure the bottom 15 percent of customers can afford mented in WSS, which did not have a sector policy in a basic amount of water, and has done so by using the place at the time. Moreover, most local governments Chilean WSS regulator, SISS, to identify the qualified did not have the financial resources, human resources, areas and process payments to the designated utilities. or sufficient incentives to effectively exercise their Argentina has learned the responsibility in the sector,17 reinforcing urban-rural KEY MESSAGE 7 need for a broader, national inequities in WSS access and quality. Peru’s experience approach to meeting WSS showcases that of a learning process. Some years later, Reform is not an event or a goals. The country has a sig- the National Sanitation Plan 2006–15 was formulated linear process, and its success nificant backlog in terms of to establish sectoral policies and targets in each area of relies on incorporating a high service coverage and quality, intervention: urban, small towns, and rural areas, with degree of learning. requiring large investments a view to complying with the national objectives of the to close the gaps. Economic instability over the past decades has resulted in limited capital investments in 17. WSP (Water and Sanitation Program, World Bank). 2007. “Evaluation of Small-scale Providers of Water Supply and Sanitation Services in WSS, and perhaps most notably the failure of large- Peru.” World Bank, Lima, Peru. http://www.wsp.org/sites/wsp.org​ scale PPP schemes. Moreover, in contrast to countries /­files/publications/wsplibroing.pdf. 12 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 12 14/05/18 9:00 pm BOX 5. Chile’s Holistic Approach to Sector Reform Public reforms in Chile’s water supply and sanitation (WSS) sector were driven by a commitment to eliminate state subsidies for public services and were sustained by a long-held view that WSS services should provide social and economic benefits for all. Chile recognized early on the importance of universal access at affordable rates, as well as the economic benefits associated with developing wastewater for reuse in agriculture, and the positive impact on tourism, both major contributors to economic growth. The country benefited from its strong enabling environment whereby democratic rule presented a low political risk to potential private investors. This was complemented using regulation first and foremost to protect customers, the environment, and the quality of service. Moreover, the law establishes a tariff system based on the principles of equity, efficiency and transparency. It mandates universal access while also requiring that operators become self-sufficient. Tariff increases are only approved in line with the marginal cost of service as applied to a model company. This forces operators to make efficiency improvements, which are translated into lower costs for consumers. sector and aiming to achieve MDG 7, a target which improving WSS services are aligned. A holistic and Peru did successfully achieve. It is important to note comprehensive approach is the best way to engage in that the plan went hand in hand with increased expen- sector reform (box 5) but a more piece-meal process ditures in the sector which grew considerably since can also be successful if it leverages a high degree of 2004 (see key message 2) thanks to the country’s eco- learning. The individual experiences of each country nomic growth and the policies implemented to finance are diverse and cannot be fully appreciated here,18 the expansion of access. However, the efficient alloca- however, a few major conclusions based on these 5 tion of public investment in the WSS sector remains a case studies can be drawn. challenge to be addressed especially in view of achiev- ing the SDGs by 2030. First, countries that make progress toward their WSS goals are those where sector objectives (often aligned with global goals like the MDGs or SDGs) are in har- IV. Conclusion mony with the rules of the game and have adequate South America has relatively high rates of access to mechanisms for implementation. Therefore, a holis- basic WSS, including high rates of formal sewerage tic approach is needed when designing PIR interven- coverage, but achieving sustainable universal access tions to align incentives created through different (including better quality and efficiency) in WSS ser- reform efforts. Changes in institutional arrangements vices will require stronger institutional arrange- and regulatory frameworks prove more effective if ments, with increased coordination and planning and supported by laws, policies, policy direction, and greater accountability. The traditional approach taken commitment. Colombia’s FINDETER institution, throughout South America, to invest in large-scale infrastructure, is insufficient for achieving the SDGs 18. Countries not included in this study (Bolivia, Ecuador, Guyana, Paraguay, Suriname, Uruguay, and Venezuela) would bring an addi- because it doesn’t address sustainability. tional range of PIR approaches and WSS sector outcomes to be The 5 case studies in South America support the considered. For example, Uruguay having universal access to both safe water and sanitation services, and Paraguay and Bolivia experi- main findings of the global PIR report, namely, that encing more challenges in the sector particularly concerning access when interventions are integrated, incentives for to sanitation in rural areas and water quality in (peri-) urban areas. Incentives for Improving Water Supply and Sanitation Service Delivery 13 W18009.indd 13 14/05/18 9:00 pm Brazil’s PROSANEAR program, and Chile’s pro-poor utilities in Brazil can leverage private finance through subsidy policies show how technical solutions must stock exchanges. But behind these successes lay a be supported with advocacy, capacity building, and long history of public sector support19 and significant a high level of resource coordination to achieve the improvements or reversals in institutions and regula- intended results. Second, because context matters, tion. It is also important to note that the use of PSP there are no one-size-fits-all solutions. “Best prac- itself has promoted better governance, efficiency, tices” should not be emphasized over new approaches and transparency in these countries. The reversal in that reinforce the endogenous drivers for reform. Buenos Aires, from privatization to re-nationaliza- Local administrative realities and capacity are critical tion, is another learning experience which is currently inputs in the design of successful reform. Regulation, being formalized through a new national sector plan for example, must be “fit-for-purpose.” Private pro- and new institutions. What matters is that these coun- viders in Chile react well to regulatory incentives, tries not only scaled up what worked, but they went and other countries have also been successful with back to the drawing board when strategies failed or enforcement of public providers, especially when were incompletely implemented. they have the mandate to both measure performance Achieving sustainable service delivery requires a and provide technical assistance. comprehensive approach that integrates PIR incen- Brazil shows how increasing data transparency can be tive structures. The lack of a holistic approach as or more effective at improving performance than interlinking these structures may produce perverse formal institutions. Similarly, decentralization can take incentives that will not bring countries any closer many forms, and success depends on PIR incentives to achieving their sector goals. Ensuring availability being embedded in the local institutional context. For and sustainable management of WSS for all will also example, while fiscal transfers can be a positive incen- require moving beyond the technical solutions that tive for promoting better decentralized service provi- enabled many countries in South America to achieve sion, their efficacy requires targeting, local capacity, the MDGs. Reforms should be designed through an and a continued commitment to support local financial inclusive process with careful consideration of the and managerial autonomy. drivers for reform, local capacity, and the best fit for the prevailing institutional context. Third, it is critical to take a long-term process approach that incorporates learning. The range of 19. Before private-sector participation (PSP) was aggressively promoted delivery modalities used in South America—public through legal reforms in 1990 in Chile, coverage rates in urban areas were already very high (97% for water; 84% for sanitation) and all to private and in between—provide similar lessons. customers had a micrometer at the household level, which enabled Privatization was highly successful in Chile at the end the companies to set a baseline for improving performance. Moreover, a strong regulatory framework and institution were con- of its reform process, and three corporatized public tinually strengthened alongside greater use of PSP. 14 Incentives for Improving Water Supply and Sanitation Service Delivery W18009.indd 14 14/05/18 9:00 pm W18009.indd 15 14/05/18 9:00 pm This Knowledge Brief is an output of the World Bank Water Global Practice’s initiative on Policy, Institutions, and Regulatory (PIR) Incentives, developed by the Water Supply and Sanitation Global Solutions Group. The content presented in this brief is based on a series of internal case studies developed under the PIR framework on Argentina, Brazil, Chile, Colombia, and Peru. For more information, please refer to the global study “Aligning Institutions and Incentives for Sustainable Water and Sanitation Services” (World Bank 2018), which will be available online via the World Bank Open Knowledge Repository. Those interested in exploring and understanding the current policy, institutional, and regulatory situation in a specific client country, may start by employing the Institutional Diagnostic Tool (IDT) developed by the World Bank’s Water Global Practice.a The IDT may serve as a first step to understanding the water supply and sanitation (WSS) sector enabling environment and institutional dimensions. The tool is available to sector practitioners on request as a “beta test version” with the aim to stimulate discussion among key stakeholders on possible reform approaches and project interventions. The IDT tool will be tested in several countries, and lessons learned will be incorporated into future updates of the tool. For more information please contact Gustavo Saltiel (Lead Water and Sanitation Specialist, Water Global Practice). a. The IDT is an Excel-based tool, which guides the user through a list of targeted questions that were designed to identify institutional gaps, identify priority areas and provide suggested activities to address gaps and strengthen institutions in the WSS sector. The purpose of this tool is to point out certain current weaknesses and gaps in the WSS sector. ­ ank. Some rights ­ © 2018 International Bank for Reconstruction and Development / The World B reserved. The find- ings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, represent. The World Bank does not guarantee the accuracy its Board of Executive Directors, or the governments they ­ work. This work is subject to a CC BY ­ of the data included in this ­ (https://creativecommons.org/ 3.0 IGO license ­ /­ licenses​ ­ ontent. It is your responsibility by/3.0/igo). The World Bank does not necessarily own each component of the c ­ wner. If you have to determine whether permission is needed for reuse and to obtain permission from the copyright o pubrights@worldbank.org. questions, email ­ 16  SKU W18009 W18009.indd 16 14/05/18 9:00 pm