41914 The new operators in Peruvian Small Towns Designing a sustainable management model for water and sanitation services The new operators in Peruvian Small Towns Designing a sustainable management model for water and sanitation services Lima, January 2008 This publication has been made possible thanks to the support and effort of the following persons and institutions. Peer Reviewer: Enrique Oliveros, Consultant Water and Sanitation Program, Latin American and Caribbean Region Francois Brikke, Regional Director Iris Marmanillo, Coordinator for Peru and Task Manager of the STPP Report prepared by: Oscar Castillo, Institutional Development Specialist Jorge Luis McGregor, Consultant Mercedes Zevallos, Consultant Andrés Quispe, Consultant Production and editing: Beatriz Schippner, Regional Communications Specialist Luciana Mendoza, Communications Assistant World Bank Office, Lima Álvarez Calderón 185, San Isidro, Lima 27, Perú Phone: (511) 615-0685 Fax. 615-0689 Email: wsplac@worldbank.org http:// www.wsp.org Copyright acknowledgment: Base on the Universal Copyright Convention, WSP holds all the rights of this study. However, reproduction of the material is permitted for educational, scientific or development work purposes mentioning the source. Design and Layout: Ana María Origone Printed in Peru by LEDEL S.A.C. Contents Introduction ....................................................................................................................................... 6 1. Background................................................................................................................................... 8 2. Services in the small towns ........................................................................................................... 9 2.1. Coverage in the towns in the pilot project ............................................................................. 10 2.2. Charges ............................................................................................................................... 11 2.3. Investments in water and sanitation...................................................................................... 12 2.4. The high costs of inefficiency................................................................................................ 13 3. The new management model with a specialized operator............................................................ 16 3.1. From public management to the new model with a specialized operator............................... 17 3.2. The new Public-Private-Social Partnership ........................................................................... 18 3.3. The promotion of specialized operators ................................................................................ 19 3.4. The new institutional arrangement based on three actors ..................................................... 22 3.5. A shared decision between the municipality and the users.................................................... 23 3.6. The Community Neighborhood Supervision Board .............................................................. 24 3.7. The benefits of the new model for the municipalities ............................................................. 26 4. The new role of the municipality, the ordinances and the specialized operator ............................. 27 4.1. The municipality and the promotion of operators .................................................................. 27 4.2. Criteria and procedures for selection..................................................................................... 28 4.3. The charges and the poorest section.................................................................................... 29 5. Characteristics of the contracts of the new specialized operator.................................................. 32 5.1. Legal basis of the municipality-SO contracts......................................................................... 33 5.2. Contract guarantees............................................................................................................. 33 5.3. Adapting selection criteria to local conditions........................................................................ 34 5.4. Rights of the specialized operator ........................................................................................ 34 6. Creation of a market for specialized operators ............................................................................. 36 6.1. Factors that influenced the lack of demand .......................................................................... 36 6.2. Factors that influenced the lack of supply ............................................................................. 37 6.3. The success of the STPP and its scaling up ......................................................................... 38 6.4. Entrepreneurs and pioneers ................................................................................................. 38 7. Difficulties in the STPP pilot proyect processes............................................................................ 41 7.1. Lack of a specialized operator market .................................................................................. 41 7.2. Political and social problems................................................................................................. 41 7.3. Problems in terms of communications.................................................................................. 42 7.4. Problems with expectations in terms of infrastructure ........................................................... 42 7.5. The transfer process............................................................................................................. 43 Lessons learned .............................................................................................................................. 44 Acronyms CIDA Canadian International Development Agency PPSP Public-Private-Social Partnership PROINVERSION Agency for Promotion of Private Investment DNS National Sanitation Directorate EPS Service Provider Entity FONCOMUN National Municipal Compensation Fund INRENA National Institute of Natural Resources JASS Sanitation Services Administration Boards (that operate in rural areas) CNSB Community Neighborhood Supervision Board SO Specialized Operator (Private, Social or Mixed) PRES Ministry of the Presidency PCM Presidency of the Council of Ministers PRONASAR National Program for Rural Sanitation SAC Closed Corporation STPP Small Towns Pilot Project SUNASS National Superintendence of Sanitation Services MVCS Ministry of Housing, Construction and Sanitation WSP Water and Sanitation Program administered by the World Bank Introduction In Latin America, the issue of water and sanitation services in (Sechura, Quispicanchi and Loreto) and six district level (Tuman, small towns, is becoming increasingly relevant and is linked to Laredo, Talavera, Fernando Lores, Nueva Cajamarca and the processes of political and administrative decentralization that Tabalosos) municipalities, as a pilot initiative. This was a pioneering are being implemented in the majority of countries, especially in effort in the water and sanitation sector to find new water supply the Andean region. The delegation of capacities to sub-sovereign and sanitation services management models in these towns. governments1 is oriented towards ensuring that decision-making The initiative, with the participation of the local governments, was is shared closely between local actors and the users themselves. implemented through the "Small Town Pilot Project" (STPP) under Nevertheless, services in small towns, which in spite of their the WSP, financed by the Canadian International Development small size cannot be classified as rural areas or intermediate Agency (CIDA) and supported by the Vice Ministry of Construction cities, have certain unique characteristics. and Sanitation. The project was launched in the pilot project towns in October 2003 and was concluded in October 2007. The term small town denotes different sizes in different countries. In Peru, small towns have between 2.001 to 30.000 inhabitants, This is a unique and innovative experience in Peru and comple- in Bolivia it is around 5.000 inhabitants and in Colombia they can ments the initiatives developed in other countries of Latin America, be up to 70.000 inhabitants. But, notwithstanding these differen- such as Paraguay, Colombia and Ecuador2, in which other ces, it has been recognized that all these towns have an issue in measures have been implemented to promote participation of terms of the following aspects: financing (the small towns receive specialized operators in small towns. the least help and generate very less resources of their own); the legal framework (generally there is no express recognition of this The seeking of solutions to improve supply of water and issue); the management models (attention is prioritized owing sanitation services in the small towns of Latin America is not to direct administration of local governments) and the quality of limited to one single management model or to one single form service (and users of the services are not given any information), of intervention. On the contrary there are diverse and multiple among other aspects. options, which must be adapted to the social, economic and legal reality of each region, in each country. Thus in Paraguay, the In the strategies to fight poverty and achieve the Millennium drinking water supply service was managed by the private sec- Development Objectives, attention to small towns is of special tor with the "Aguateros" (water sellers) being the ones who took importance, considering the fact that at present they are not all the risks to develop this segment, without any Goverment taken into account as such in the national programs and plans. support. Colombia, in the nineties, witnessed the evolving of a More over, considering that in the case of Peru, it involves around market of small and medium suppliers who managed the servi- 20% of the national population. ces in the small towns, through ten-year management contracts. On the other hand, in Ecuador, thanks to the PRAGUAS project, Given this background, the Water and Sanitation Program (WSP) in association with the Peruvian Government, implemented a 2Drees, F., Schippner, B., Andrade, L.: "Delegating water and sanitaton project in Peru, involving nine municipalities: three provincial services to autonomous operators: Lessons learned from small municipalities in Ecuador". WSP-BM, Lima February 2005. O. Castillo: "Modelos de provisión de servicios de agua y saneamiento en el Paraguay", in AGUA, Sectoral Committee Bulletin, Lima, Perú, No 16, December 2003. J. 1 In Peru the sub-sovereign level refers to Regional Governments, Provincial Pinto, L. Arboleda. F. Ulloa: "Las PYMES de Servicios públicos", F. Konrad and District level Municipalities. Adenauer-CINSET, Colombia, August 2001. 6 management models involving delegation have been developed In this context, one of the key aspects in promoting the over the last fifty years, using different types of operators, such creation of specialized operators was the adoption of clear as the municipal company, users' cooperatives, municipality-user rules for provision of services. These were established associations who manage the services by virtue of a contract with through municipal ordinances, due to the legal authority of the local government. the municipalities to do so. For the new management model, accepted by the people to be implemented, it was necessary In the pilot project experience in Peru, we shifted from a for the municipalities to approve four municipal ordinances, municipality in which all the functions involving supply of water thus defining a new local legal framework for provision of and sanitation services were concentrated, with all its resultant service with a specialized operator. problems, to a municipality that promoted the presence of other actors ­civil society and specialized operators­ sharing with It must be highlighted that in August, 2005 the Vice Ministry them, in the form of a Public-Private-Social Alliance, the various of Construction and Sanitation, approved the Supreme Decree functions involved in the supply of services, with clearly defined Nº 016-2005-VIVIENDA, modifying the bylaws of the General tasks and objectives. With the municipality retaining ownership Law on Sanitation Services (SD 09-95-PRES), in which it intro- of the infrastructure and the power to regulate local services duced a new Title to the Regulation with reference to rural and also determine the conditions in which the specialized areas and small towns, facilitating the entry of specialized operator can operate, the dilemma of privatization of services3 operators, to support the municipalities in the supply of water has been resolved. This is a highly sensitive issue for the people and sanitation services. With this the STPP has contributed to and grassroots social organizations. provide the country's municipalities and the general public, a new management model for water and sanitation services, It must be pointed out that the STPP is a pilot project bringing sustainability in terms of the service and investments. from which we hope to learn lessons in order to replicate it on a larger scale. The sector authorities, that is the Vice Ministry The STPP is preparing a reference manual, which will contain of Construction and Sanitation, can incorporate these lessons guidelines to support change in the management model by in developing a strategy for intervention in small towns. It could incorporating a social focus and an interactive CD with the also be of help to Cooperation Agencies, interested in promoting tools and instruments developed during the project. sustainable investment. The STPP thus complements the activities of the National Rural Sanitation Program (PRONASAR) run by the Vice Ministry of Construction and Sanitation in 25 localities, which also seeks to establish a model of management involving Specialized Operators4. 3 Privatization is to be understood as the transfer of the State's assets. 4 See: WSP-MVCS: "Servicios sostenibles con nuevos modelos de gestión para las pequeñas ciudades del Perú: Memoria del Taller PRONASAR- STPP". Water and Sanitation Program of the World Bank, Latin American Region; Ministry of Housing, Construction and Sanitation. Lima, January 2007, 78 pages. 7 1. Background In the majority of the small towns in Peru5, it is the In response to this situation and within the framework of the municipalities, which directly provide water and sanitation decentralization process initiated in the country in the year 2002, services and make all decisions on the type of service and the Vice Ministry for Construction and Sanitation, with the the charges for it. Of the 644 small towns in the country financial help of the Canadian International Development Agency (with a population of between 2,001 to 30,000 inhabitants), (CIDA) and the technical assistance of the Water and Sanitation in 154 the water and sanitation services are managed by Program (WSP-LAC) launched the Small Town Pilot Project Water and Sanitation Companies (WSC) that are owned by (STPP), to develop new models of management of water and the municipality and regulated by the SUNASS, while in the sanitation services. rest of the small towns the services are mainly provided directly by provincial or district level municipalities. The basic concept of the STPP is that the municipality and the community should jointly decide to change the management According to the results of a study carried out by the STPP6, model, after studying the advantages and disadvantages of the services managed by the local government are marked the different options. That is to say this proposal was based on by low coverage, tariff charges7 that do not allow recovery of the demands of the interested parties. Thus, municipalities that costs, subsidies to the service within the budgetary limitations were interested in changing the way the services were managed, of the municipalities, inefficient operation and maintenance, were invited to participate in the Project. Fifty-six municipalities deficient management, political interference, high rotation responded to the invitation and eleven9 were selected on the basis of service personnel, delay in payment of charges and of their geographical location, population size and inadequate unwillingness on the part of the people to pay because of the quality and coverage of the service. The municipalities agreed in poor quality of service, as well as the municipal authority's a session of the Municipal Council to develop a new management unwillingness to charge for the service. The conclusion is model, undertaking to promote participative mechanisms for the that the municipalities face serious limitations in terms of community to approve the proposal and take the decision to efficient management of these services, unlike in the case change the management model. of other services where the results are different8. The towns that were included in the STPP as of December 2006 were Sechura in the Department of Piura, Laredo in La Libertad, Tamshiyacu and Nauta in Loreto, Tabalosos and Nueva Cajamarca in San Martín, Urcos in Cusco, Talavera in Apurímac 5 The D.S. 016-2005-VIVIENDA defines small towns as settlements with popu- and Tuman in Lambayeque. lations ranging between 2001 and 30,000 inhabitants. 6 HYTSA-ECSA: "Estudio sectorial de los servicios de agua y saneamiento en pequeñas localidades del Perú: Informe final." Lima, Dic. 2004. Water and Sanitation Program (WSP-LAC). 7 The Supreme Decree No. 016-2005-VIVIENDA stipulates that in the small towns that do not come under the administration of an EPS, the services are charged and the municipalities fix these charges. In the small towns that 9The STPP executed the project in 9 towns, as out of 11 towns three opted are under the administration of an EPS, tariffs are charged for the service out: San Jerónimo along with Saylla were replaced by Nauta and the and these are regulated by SUNASS. Santiago municipality was replaced by Tumán. Finally when the Ayabaca 8 See: O. Castillo and S. Ruiz. "Los servicios que brinda el municipio: ¿Por qué municipality dropped out, the Steering Committee of the STPP, decided not algunos son sostenibles y otros, no?" in: Revista AGUA, to replace it, because of the phase that the Project was in. Later in the last No 19, Lima June 2005. This is the magazine of the Sectoral Concertation phase, that is 2007, Nueva Cajamarca and Urcos dropped out due to politi- Committee, pp 27-39. cal reasons. 8 2. Services in the small towns At the national level, the water and sanitation service supply has In the following table it can be observed that the population coverage of about 76%, with marked contrasts depending on the of the small towns adds up to 4.1 million inhabitants, of natural regions, urban and rural environments. Only three fourths which 2.5 million falls under municipal administration and of the population at the national level has drinking water covera- others, and 1.6 million fall under the administration of ge, while more than half have sanitation services. The inequality a municipal EPS. between the urban and rural areas in terms of the drinking water supply is estimated at 19 percent. Table 1: Water and Sanitation coverage in Peru - 2004 Segments Service Population Water Sanitation Provider (millions) Coverage Coverage URBAN 19,9 81% 68% Lima-Callao SEDAPAL 8,1 89% 84% Urban in Provinces EPS 7,7 80% 64% Municipalities and 2,5 60% 33% Small Towns others EPS 1,6 80% 64% RURAL JASS and others 8,0 62% 30% Total 27,9 76% 57% Source: National Sanitation Program 2006-2015. In turn the inequalities between regions in terms of coverage indicate that in the coast region, in spite of the high cost of services, only 76% of the population has water; in the Amazon jungle areas this figure is bellow 40% and the coverage of sewage systems is only 30%. It must be pointed out in this group of small towns, only 24% is served by a municipal EPS, as shown on Table 2. In short a majority, that is 76% of the 644 small towns, is not covered by the EPS. These are concentrated in the highlands and Amazon jungle regions in Peru ­ areas with the least population. This means that the administration is exclusively done by the municipality, which owing to scarce human and financial resources, have serious limitations in terms of expanding coverage and improving the quality of water and sanitation services provided to the people. 9 Table 2: Number of towns according to population range and geographical zone Geographical zone Population range Administration coast mountain forest Total 59 19 5 83 Municipal EPS 2,001 to 10,000 32% 7% 7% 16% inhabitants 125 225 62 442 Municipalities and others 68% 93% 93% 84% 28 11 13 52 Municipal EPS 10,001 to 20,000 65% 42% 76% 60% inhabitants 15 15 4 34 Municipalities and others 35% 58% 24% 40% 11 5 3 19 Municipal EPS 20,001 to 30,000 58% 45% 100% 58% inhabitants 8 6 0 14 Municipalities and others 42% 55% 0% 42% 98 35 21 154 Municipal EPS 40% 11% 24% 24% Total 148 276 66 490 Municipalities and others 60% 89% 76% 76% Source: Scope and Management of the EPS. Districts Managed 2002. SUNASS and Pre-Census INEI 1999. In: ECSA and HYTSA (2004). 2.1. Coverage in the pilot localities The STPP towns had the following characteristics, when the project started: Table 3: Coverages in Small Towns localities Small Natural Dept. Urban % Water % Sew. Water supply Charge towns Region Population Cov. Cov. hours / day S/. Month Tabalosos Amazon jungle San Martín 8,053 54% 0% 4 5.0 Nueva Cajamarca Amazon jungle San Martín 21,162 75% 1% 12 5.0 Tamshiyacu Amazon jungle Loreto 6,079 0% 0% 0 0.0 Nauta Amazon jungle Loreto 15,467 46% 41% 4 8.0 Urcos Highlands Cusco 7,000 78% 66% 6 3.0 Sechura Coast Piura 25,741 89% 27% 5 12.0 Laredo Coast La Libertad 28,296 90% 64% 5 6.0 Turnan Coast Lambayeque 23,524 84% 66% 4 0.0 Talavera Highlands Apurimac 9,023 80% 73% 6 3.5 Total 144,345 66% 38% 5 4.7 Source: PPPL-town-wise technical and social diagnostics and development plans 2004-2005. Exchange rate is of US$ 1.00 = S/. 3.00 10 Formally, the coverage of water ranged between 46% and 90%, of 5 daily hours of water service, with no guarantees of it but in the majority of cases the quality and continuity was very being drinking water. The following table compares the monthly unstable. In all cases studied the sewage network coverage was charges in effect in each town (first column), with a per capita very low. Only in Urcos, Talavera, Tumán and Laredo, the sewa- monthly income (second column), the average number of ge network covered more than one third of the houses. While in members per household (third column) and the percentage Sechura and Nauta two third of the houses were connected to spent on drinking water with respect to the household expenses. a sewage network. But in Tabalosos and Nueva Cajamarca this The result shows that the expenses on water per household was almost inexistent and in Tamshiyacu it was not operational. were very minimal, and only in one case did it work out to 1% Likewise, with the exception of Sechura, in all the other cases, of the monthly family income. sewage was not treated, that is to say, this was disposed off as is into rivers and canals. In the STPP towns, in spite of the fact that the charges levied did not even cover operational costs, efficiency in terms of 2.2. Charges collection of payments was very low ­although that the sum involved a very small percentage of the family income. This In the nine towns, the monthly charges that were paid were resulted in the service having to be sustained by the municipal very low and in the absence of micro-measurements, these were income. However, the majority of the STPP municipalities did fixed for all the users. One household paid the municipality not have precise information on how much the subsidies for a between 3 and 12 new soles per month for water, for an average service of extremely poor quality, worked out to. Table 4: Estimated Expense with respect to the total expense per home Drinking water Per capita family income # Av. members % Water exp. / Municipality charges For the Home1/ (S/. per month)2/ Per home3/ Total Exp. -A- -B- -C- -A/(B*C)- Talavera 3.50 186.04 4.3 0.44% Urcos 3.00 197.25 5.8 0.26% Nauta 8.00 166.88 6.5 0.74% Nueva Cajamarca 5.00 181.50 5.3 0.52% Laredo 9.50 294.55 4.8 0.67% Tabalosos 5.00 186.07 4.3 0.63% Tamshiyacu 0.00 186.15 5.8 0.00% Sechura 11.90 237.82 5.0 1.00% Turnán 0.00 300.65 4.4 0.00% 1/ The most common charge that the houses pay for the use of drinking water (and sewage services in Laredo) has been selected. 2/ According to the District-wise Human Development index 2003. UNDP (2005). 3/ Information on the Development Plans of each Municipality. Source: UNDP (2005); Development Plans of the Municipalities. 11 In the small towns, the municipalities' ordinary resources do In turn, the balance sheets in the municipal budgets showed a not cover their current expenditure and therefore they have to marked contrast between the economic balances, that is to say, supplement it with transfers, from the Central Government, the effective earnings and expenditure and the account balance. of funds originally meant for investment. The main sources of While the former was positive in all the cases studied, the account the generic transfers that the municipalities receive from the balances, that is to say, the one which takes into account depre- Central Government are resources from the "National Municipal ciation, unpaid social benefits to workers and the amortization of Compensation Fund" (FONCOMUN) and from the different investments, showed negative results in six of the nine munici- types of taxes levied for the exploitation of natural resources in palities in the STPP (Nauta, Urcos, Nueva Cajamarca, Talavera, their jurisdiction. Although FONCOMUN is granted on the basis Tabalosos and Tamshiyacu). of population criteria and poverty levels, income from royalty is only earned incase the municipality has natural resources that are 2.3. Investments in water and sanitation subjected to taxes. This contributes to the fact that the munici- palities in the small towns have different options to sustain The investments in water and sanitation made by the 9 munici- their water and sanitation services. Thus for example, in the year palities were varied. Tabalosos had routed more than two thirds 2004, income in the STPP towns by way of Central Government of its investment expenditure in water and sanitation services, to transfers was between 14 million soles in the case of Sechura and the construction of new reservoirs and improving mechanisms for 1.9 million soles in Tabalosos. harnessing water and widening of sewage networks. Talavera had Table 5: Expenditure by way of Investment in Sanitation: Year 2004 Municipality Variables Sechura Nauta Urcos Nueva Cajamarca Talavera Laredo Tabalosos Tumán Tamshiyacu Total Investment 2004 4,962,845 3,254,056 2,482,668 816,078 1,279,305 652,269 340,517 833,745 1,589,459 Inv. in Health and Sanitation 2004 1,298,362 895,053 327,690 174,813 705,963 9,783 231,134 369,266 124,828 % Investment in San./Total invest. (26%) (28%) (13%) (21%) (55%) (1%) (68%) (44%) (8%) Inv. in Sanitation 2004 955,743 534,841 285,641 169,500 604,694 9,783 227,634 145,516 124,828 % Inv. in Health and San./Total invest. (19%) (16%) (12%) (21%) (47%) (1%) (67%) (17%) (8%) Source: National Public Accounting, Barrantes 2005. 12 networks. Only the cost of personnel was calculated, including all persons associated with the supply of drinking water and sewera- ge services. Each municipality had a minimum number of workers engaged in providing services, for operation and maintenance or repair works. Likewise the expenses on all the products, materials and equipment required to provide the services and the costs of repairing of networks were included. Similarly the costs involved in billing and collection of payment were also calculated, including all the costs that are normally shared with other municipal activities, for example, the use of computers and printers assigned for collection, as well as those used by the officials in-charge, were also included in this calcu- lation10. Finally the cost of purchase of water was also included in those cases where the municipality was making this payment to the National Institute of Natural Resources ­INRENA. In many upgraded its water harnessing mechanisms and the primary net- cases, it was necessary to make certain assumptions in terms work in order to depend less on pumping, which consumes a lot of attribution of costs shared with other activities of the munici- of electricity, amounting to around 50% of its investments. Other palities. The clearest example of this is the estimation of the cost investment percentages were: Nueva Cajamarca (21%), Sechura of printing receipts, as the Revenue Department or the Cashier (19%), Tumán (17%) and Nauta (16%). Finally, Urcos used 12% of Department of each municipality issues receipts for various other its total investment for the year 2004, while Tamshiyacu allocated charges too. In the allocation of indirect costs 10% was conside- 8% and Laredo 1%. Given that the new management model pro- red for general administration. posed by the STPP continues to place the responsibility of finan- cing of investments with the municipalities and the ownership of However the cost estimate did not include the cost of replace- the constructed systems with the municipality again, these expen- ment or depreciation of networks nor did it include the cost ses will continue to be included in the local government's budgets. of expansion of services or quality upgrades. It must also be pointed out that the number of hours of supply is very low 2.4. The high cost of inefficiency (2-6 hours in a day on an average), the quality of water distributed is not drinkable, coverage is small and only a small fraction In spite of the expenditure made by the municipalities on services, of those who have water have sewerage services. With the excep- with the exception of Sechura and Nueva Cajamarca, no separate tion of Sechura, no other municipality treats sewages. administrative unit had been set up for the provision of services. Thus it was very difficult for them to identify the costs of subsi- dizing an unstable service. As a first step, STPP worked out an 10Because the users go to the municipality to pay, the same printer is used estimate of costs, based on the minimum as stated by the munici- in collection of payment for various services or for collection of payment of other municipal charges. Thus the need to find out the hours utilized for pal officials, but they did not include depreciation of capital in the invoicing and collection for the water and sewerage service charges. 13 Table 6: Relative importance of each cost criterion per municipality. Current Inefficiency (reduced coverage, restricted continuity, non-potable water, no sewage treatment, degradation of assets) Municipality Type of Cost Sechura Nauta Urcos Nueva Cajamarca Talavera Laredo Tabalosos Tumán Tamshiyacu 1) Personnel Costs 27% 29% 67% 44% 39% 51% 48% 83% 81% - Operators, Technicians, others 21% 24% 42% 44% 39% 49% 48% 83% 71% - Managers, In-charges, Heads 6% 4% 19% 2% 0% 11% 2) Invoicing and Collection Costs 3% 2% 20% 24% 34% 4% 15% 0% 0% - Cashier 3% 2% 3% 18% 6% 4% 13% - Computers 0% 0% 0% 0% 0% 0% 0% - Printers and cartridges 0% 0% 0% 0% 0% 0% 0% - Papers 1% 0% 17% 0% 28% 0% 2% - Various office expenses (rent etc.) 5% 3) Cost of Products and materials for Maintenance of the Water and Sewage 54% 59% 6% 21% 14% 35% 27% 7% 11% services - Chlorine & other products 6% 35% 5% 12% 0% - Electricity 40% 22% 13% 19% 0% - Fuel 4% 1% 1% 1% 0% - Repair and Maintenance (Tubes) 1% 0% 7% 0% 16% 27% 7% 11% - Microbiological testing 0% 0% 0% 0% - Sanitary Registration 0% - Communication equipment 1% 1% - Computers 0% 1% - Travel and Per Diems 0% 1% 0% - Clothes 0% 0% 0% 4) Cost of Purchase of Water 0% 1% 4% 2% 3% 0% 0% 0% 0% - Annual Purchase of Water 1% 4% 2% 3% 5) Rehabilitation Costs 7% 1% 0% 0% 0% 1% 0% 1% 0% - General maintenance, repair of electrical panels, Electrical 7% 1% 1% 0% 1% pumps and valve change 6) Other costs 8% 9% 9% 9% 9% 9% 9% 9% 8% - Indirect costs (10% total previous cost) 8% 9% 9% 9% 9% 9% 9% 9% 8% 534,262 378,910 70,973 118,463 142,707 453,699 38,972 4,329 33,332 Total Costs 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: Barrantes 2005. The figures in the table 6 clearly demonstrate the relative impor- to the higher areas, which made the cost of the service higher. tance of each cost criterion considered and the estimated cost of While Tuman's reduced cost was explained by the fact that the the inefficient supply of the current services, given in the penulti- municipality did not provide the service and the expense were mate row of the table. borne by the sugar mill, though the service was very unstable. Worth noting are the costs in Tamshiyacu even without providing Costs per household vs. municipal income the service and the elevated costs in Laredo and Sechura, as water is extracted from the subsoil by electrically operated In the following table, we can observe the total annual estimated pumps. Elevated costs in Nauta too stand out, although coverage cost, as well as the cost per population and per household with is limited. Talavera was using a pumping system to pump water the service. Table 7: Costs, Per Capita Cost and Annual Cost per Household. Estimates for the Water and Sewerage Services Municipality Variables Sechura Nauta Urcos Nueva Cajamarca Talavera Laredo Tabalosos Tumán Tamshiyacu Estimate Cost for Drinking Water service 534,262 378,910 70,973 118,463 142,707 453,699 38,972 4,329 33,332 Population 25,030 36,539 16,231 32,764 22,546 41,108 13,795 30,753 19,708 Per Capita Cost 21.3 10.4 4.4 3.6 6.3 11.0 2.8 0.1 1.7 Total Households with Drinking water 4,582 1,138 1,120 2,977 1,430 5,300 1,062 4,620 0 Drinking water coverage (%) 89% 49% 80% 75% 80% 90% 60% 66% 0% Cost per household for drinking water 116.6 333.0 63.4 39.8 99.8 85.6 36.7 0.9 -- Source: CUANTO (2004), PPPL team interviews y Barrantes 2005. When we compare the income from the charges for the service Direction (DIGESA), fecal coliform traces were found in 87% of with the costs incurred by the municipality in direct administration the samples and no chlorine was found). In this situation of poor of these services, the estimates indicate that, in three munici- quality of services, limited coverage and degradation of the net- palities more money was being collected for the drinking water works the surplus was misleading. Moreover, in several cases, it supply than the total cost of the service, that is to say a supposed meant a direct transfer of the users of the water to the municipal surplus was being generated. However, in Tabalosos, chlorine budget. It is this social, technical and financial situation of the ser- was not being used; in Nueva Cajamarca the chlorination level vice in the nine towns studied, which led to the local government's was minimal (according to the reports of the National Sanitation proposal for a substantial change in the management model. 15 3. The new management model with a specialized operator The STPP was launched in October 2003, within the framework management model, a quick diagnosis and analysis of of the Organic Law of Municipalities (May 2003), the Framework the supply and demand for new operators was made. Law for Promotion of Decentralized Investment (August 2003) To deal with the lack of demand and supply and to help and the Political Constitution of the State of 1993. To design develop the new management model, the STPP identified the strategy for intervention and the elements of the new the following issues: Reason for lack of demand Elements for designing the new model Lack of knowledge on the benefits of a specialized operator and Training of authorities and municipal officials on the advantages of having a SO in the mechanisms of participation of the private sector (PSP). the Social-Private-Public Partnership. Unwillingness to increase the charges to ensure full recovery of Consultation with citizens to fix the quality and price of the services to be approved costs. by the municipality. Lack of political will to delegate a politically sensitive service to Decision making to hire a SO is shared between the municipality and civil society third parties. (public and users). The district municipalities' resistance to being subordinate to the Contracts with the SO are signed by the district municipalities in the scope of the provincial municipalities. new Organic Law of Municipalities. Perception that the cost for promotion of private sector was Offer of technical assistance, by international cooperation agencies, to municipali- elevated. ties to change the management model and development of the capacities of local professionals in order to be SOs. Reasons for lack of offer Elements for designing the new model The political decision of the Government to promote the SO and PSP The STPP is designed as an initiative of the Ministry of Housing, Construction and in small towns is not perceived. Sanitation, supported by CIDA and implemented by WSP. Signing a long term contract with a municipality is considered high risk Use of contract modalities with lesser duration (5 to 10 years) than concession and because of this is not a normal practice in Peru. strong participation from the community and/or users. The municipal authorities were unwilling to increase the fees to ensure Citizen consultations to determine the quality and price of the services, to be full recovery of costs. approved by the municipality by means of an ordinance. The absence of a culture of payment among the people would require heavy investments in sanitary education, which the municipality would Include promotion of health and hygiene, which helps in valuation of the water not want to incur. resource, led by the municipality and the local organizations. The unwillingness of the people to pay more for improved quality Sensitize and train the people on issues relating to the quality of service, its impact service. on health and its relation with the price of the service by a promotion strategy. SUNASS cannot regulate the charges and supervise the municipality- Participation of civil society in determining quality-price and in supervising the con- operator contract. tract with the Specialized Operator. The municipalities would not be able to implement a PSP or PPP pro- cess without technical assistance at the regional or central govern- Technical assistance to the STPP municipalities to help change the management ment level. model. Two firms were hired to provide this service in two groups of towns11. The municipalities did not have the financial resources to follow up on the investments for expansion and upgrade of services, which the STPP allocates financial resources for an impact study on the quality of the service operator can be asked to do. and will help the municipality to get more resources. The legal framework that regulated the provision of water and sewage Technical assistance will be offered to the municipalities to develop a stable local services in the small towns had legal vacuum and cross interpretation normative framework through ordinances that would be linked to the contracts, had to be done of the legal norms which would enjoy constitutional protection as a law, between the two parties. 11The firms hired were the Peruvian-Bolivian consortium CADUCEO-CAEM and the Austrian-American consortium TBW-INFRAMAN. The contract with the second consortium was concluded in advance by mutual agreement between the parties and its functions were taken over by the WSP consultant team. 16 Subsequently the new management model was outlined and was had varied and dissimilar results owing to the impact of the eco- defined as the new local institutional arrangement to perform the nomic and political instability in the countries. In the 90s a new main functions associated with the provision of services, which institutional arrangement was developed, which was based on the would have three key actors: the municipality, civil society and lack of investment and private funding in the public services sector specialized private, community, or mixed operators, with their and the need to reduce social and political risks, manifested in own specific roles. Private-Public Participation (PPP). Thus various contractual modalities of Private-Public Participation 3.1. From public management to the new model under the system of shared investment and management risks with a specialized operator emerged. These modalities were different in terms of the degree of responsibility of the private operator, the duration, tasks and the Given the fact that the STPP was implemented in small towns form of payment either by the authority or the user of the service. where in the majority of cases the water supply and sanitation Generically speaking there are three modalities: services are provided directly by the provincial and district munici- palities; the change in the management model posed new · Delegated management contracts, such as concession and challenges to the local governments promoting it. lease contracts. · Infrastructure building contracts, where the client is the public · Strengthen the administrative capacities of the local and authority. regional governments and as also their technical and supervisory capacities. · Technical assistance of an operator for management of the services, where the client is the public sector and specific · Develop the qualities of participation and the capacity for social competences to be developed are focused upon. management of citizens with regard to public services. · Propose public policies that promote decentralized specialized On the other hand, in local and regional segments of the popula- operator markets and their financial leverage. tion, small-scale suppliers who supplied water with similar quality · The creation and application of State resources to increase standards emerged due to private initiative, at times offering public investment in water and sanitation. the service at a lesser cost than the present service and with a greater connection with their clients and the social environment. In the 80s the fiscal and financial crisis in various countries in Latin Various studies have pointed out the benefits of the PPP model, America had an impact on the predominant institutional arran- which include major improvements in: fiscal balance in the sector, gement of investment and public management and the need for business efficiency, access to services and quality of services. reforms to promote participation of private investment in the water However certain weak points were observed in key aspects, and sanitation sector was felt. which warned of the need to make significant changes with the following being the most important: Thus various modalities for promotion of private participation such as privatization (understood as the sale of assets) and concession · Improve distribution of the benefits by designing the contracts contracts for large scale services were implemented in various accordingly. countries in the region, within the framework of the programs for · Develop social policies to protect the most vulnerable section structural adjustments and reforms. However, these modalities of the population. 17 · Improve the efficiency and efficacy of the regulatory framework. · The municipality would regulate the provision of services in the · Develop mechanisms for social communication and citizen town in a participatory manner, clearly establishing the rights and participation. the duties of the users and the specialized operator. · The public, by means of a Community Supervision Neighbor­ 3.2. The new Public-Private-Social Partnership (PPSP) hood Board, would supervise the quality of the service that the users of the service would receive. From an institutional development focus, the processes of change · The specialized operator hired by the Municipality would supply in the water and sanitation services sector can be defined as the the water and sanitation services. renewal or forging of a series of explicit social contracts or agree- ments, in which new rules are placed, accountability mechanisms With this new design the PPP models is now substituted by a are established, and new actors with specific roles are involved. PPSP model, where the substantial difference lies in the importance From this perspective, the previous social agreement in the small of social participation in the model, not only in terms of access to towns established a management model where the municipality information and decision-making but also in the social supervision was the sole entity in charge of water and sanitation services, of the service. The PPSP model has the following advantages: and all the 5 basic roles of the service were concentrated in the municipality: · Greater sustainability owing to the people's sense of ownership and commitment. · Owner of the infrastructure · Better capacity for supervision and monitoring of the quality of · Price fixer service by the user. · Service provider · Greater transparency in the mechanisms for accountability · Supervisor of the service between actors. · Regulator of the services · Better identification and opportunity for planning and execution However in this model, the municipalities failed to fulfill their assig- of investments. ned roles and this resulted in a crisis in the service, with a tenden- cy towards political patronage and political interference. To impro- · Neutralization of political interference and patronage. ve water and sanitation services and guarantee sustainability, the · Shared vision for development of the service for local STPP proposed a redistribution of roles between 3 local actors: development. the municipality, the public and a specialized operator, giving rise to a tripartite alliance, wherein: · Greater credibility and confidence in the local government and the private sector. · The municipality would continue to approve charges ­ given its legal status ­ but with the prior consent of the public and also To implement the PPSP, it was necessary to enter into a new linking it to specific quality and coverage levels. social agreement whereby the municipality and the public · The municipality would continue to own the infrastructure, but would accept and define the new rules as well as their new the public and the specialized operator would help it in its task roles. Otherwise the new management model would not have of expanding and upgrading systems. political, social or economic sustainability. In turn, the new social 18 agreement must be institutionalized as a public policy of the local The profile of the operators government, so that the undertakings of the parties and the new After analysis of the market potential of each town and the pos- guidelines for action regulation the supply of the service may sibilities for regional expansion, the following profile of potential be consolidated in the form of rules, norms and procedures. To operators was opted for in the conceptual design of the new consolidate the new institutional arrangement or the new social management model. pact there must be a consistent national strategy that establishes coherent guidelines for work, with a clear and precise financial The specialized operator would have to be a private organization policy, for the allocation of financial resources of the State. or an entity with a minority municipal participation13. The type of private organization could be any of the forms covered in the national legal frame, analyzing in each case the tax and labor rela- 3.3. The promotion of specialized operators ted advantages in the adoption of one particular legal form, as well as the practices and customs of the particular town. In Peru, there are four water and sanitation service providers: administrative boards (basically in the rural area), municipalities (in The result was that in six towns it was decided to use private the small towns), public and municipal companies (in the medium specialized operators (Sechura, Tumán, Tamshiyacu, Nauta, and big cities) and two private international operators12 (in medium Tabalosos and Nueva Cajamarca) and in three towns, specialized and big cities). To encourage the municipalities in the small towns operators with municipal participation (Talavera, Urcos and Laredo) to replace the model of direct provision of services by a model was decided upon. In these three cases a closed corporation was of delegated provision of services, it was important to take into formed, which allows organization without a board of directors and account the fact that there was no offer of specialized operators where greater executive powers are vested in the general manage- in Peru, therefore this market had to be developed. ment. However each case is different in itself. Graphic 1: Potential specialized operators profile. New management model Segment: Segment: Segment: 2001 to 10,000 inhabitants 10,001 to 20,000 inhabitants 20,001 to 30,000 inhabitants · Professionals or technical persons in · Professionals or technical persons in · Professionals or technical persons in the sector the sector the sector · User Cooperatives · Local businessmen · Consultant firms · Local traders · Consultant firms · Construction firms · NGOs · Local and regional businessmen 12An Italian-Peruvian group has a BOT contract with SEDAPAL in Lima 13Peruvian legislation establishes that the creation of a municipal company since the year 2001 for the production of drinking water and a Peruvian- should be by a law of the Congress. This is not the case for a minority muni- Argentinean group has just been awarded the contract to provide urban cipal share in a private firm. services in the Tumbes region in the year 2005. 19 sanitation sector, in terms of the management and production process. There are two consortiums from Lima (in Sechura and Tuman), two regional groups (in Nauta and Tabalosos) and three in the town itself (Laredo, Talavera and Tamshiyacu). The following tables show a summary of the profile of the new specialized operators. The profiles of AGUAS AMAZONICAS SAC hired to provide services in the town of Nueva Cajamarca, Rioja province, San Martin region14, SEDAUQ SAC (mixed priva- te-municipality) hired to provide services in the town of Urcos, Quispicanchi province, Cusco region15 and AGUAS DE TUMAN SAC hired to provide services in the town of Tuman, Chiclayo pro- Summary of the profile of new operators: vince, Lambayeque region16, were not included because the new authorities have terminated the management contracts by mutual · Average range of the initial company capital of the companies is agreement due to various reasons. between 20,000 new soles (Tamshiyacu) to 100,000 new soles (Sechura). It is important to highlight that in the case of ATALSAC and · In the case of the operators with social and/or neighborhood AGUALAR the respective municipalities are subsidizing operations associations of users with minority participation of the partially covering the workers payroll, the consumption of municipality (Talavera and Laredo), they only contribute 51% to electrical power of the wells and the rental of the office, till the social capital, while the municipality contributes 49%. such time that the companies are adequately capitalized. · The performance bond vary, ranging from around US$ 6.250 in Tamshiyacu to US$ 100.000 in Sechura. · The charges that were being levied before the transfer varied 14In June 2007 there were acts of vandalism and strong social disturbance, with attacks on the personal integrity of the SO personnel and its property between 3.50 new soles/household and 12.00 new soles / in Nueva Cajamarca. This situation resulted in a recommendation to the SO household. and the municipality to terminate the contract by mutual agreement. The municipality has shown interest in hiring a new specialized operator when · The charges levied, once the impact work is done and service the construction of the new drinking water treatment plant is finished and the public's expectation of an improvement in the service have been satisfied. quality improvements are transferred ­ taking into account an 15In January 2007 new mayors for the period 2007-2010 were elected and the new mayor decided to end the management contract as he was against the average assigned consumption of 10 m3 monthly ­ vary delegation of provision of services. The SO is negotiating the rescinding of between US$ 2,53 to US$ 4,20. Once systems are in place the contract and the withdrawal of the municipality from the shareholding to submit private initiatives to the other municipalities of the Cusco region who and micro-measurement can be done it is estimated that the are interested in improving the quality and sustainability of the services. billing will be done on the basis of the capacity for payment of 16In July 2007 the municipality and the specialized operator resolved the management contract by mutual agreement given that the new municipal the household and will also be linked to higher consumption management considered that a management contract with a specialized of drinking water. operators would be more convenient for the provision for services, given that in this way the municipality would be able to subsidize the service better · The new operators are national, regional o local level technical as in this town this service had never been charged before. The process of hiring the new specialized operator under the modality of a management and professional enterprises with experience in the water and contract is being drafted. 20 Table 8: Specialized operators profile Geographical location Department Piura San Martín Province Sechura Lamas District Sechura Tabalosos PROGESTION Consortium Name or company name of the SO (SERVIUNI SAC, AGALSER SAC and Servicios de Agua de la Amazonía PIASA Consultores S.A.). SEDALAMA SAC Private company Place of origin of the SO and its members Lima Cajamarca-Celendín domiciled in Tarapoto Private operating company Name of the legal representative Francisco Caracciollo Rojas Espinoza Walter Velásquez Lozano Initial company capital 100,000 soles 25,000 soles Performance Guarantee 100,000 American dollars 30,000 soles Date of initiation of operations in the town 3rd April 2006 1st October 2006 User population 25,741 inhabitants 8,053 inhabitants Average monthly household billing 12.00 soles 12.60 soles Geographical location Department Loreto Loreto Province Loreto Maynas District Nauta Fernando Lores Name or company name of the SO Aguas del Oriente Private Limited Aguas del Amazonas SRL Place of origin of the SO and its members Iquitos. Private Operating Company Tamshiyacu (Capital of Fernando Lores). Private Company Name of the legal representative José Antonio Soplín Ríos Germán Díaz Tangoa Initial company capital 20,000 soles 20,000 soles Performance Guarantee 50,000 soles 20,000 soles Date of initiation of operations in the town 1st September 2007 1st October 2007 User population 15,467 6,079 Average monthly household billing for drinking water 8.00 soles 11.20 soles Geographical location Department Apurímac La Libertad Province Andahuaylas Trujillo District Talavera de la Reyna Laredo Name or company name of the SO Aguas de Talavera SAC Aguas de Laredo SAC ATALSAC AGUALAR Talavera. Mixed company formed between Laredo. Mixed company, formed between the Place of origin of the SO and its members the "User's Association" (51%) and the Neighborhood Associations (51%) and the municipality (49%) municipality (49%) Name of the legal representative Natalie Marco Durand Roberto Miñano Guzmán Initial company capital 27,000 soles 30,000 soles Performance Guarantee As per evaluated inventory As per evaluated inventory Date of initiation of operations in the town 1st November 2006 1st June 2007 User population 9,023 inhabitants 28,296 inhabitants Average monthly household billing for drinking water 7.68 soles 11.3 soles society and the private sector is promoted and their roles and 3.4. The new institutional arrangement based responsibilities are aimed at determining seven main functions on on three actors who determines the quality and the price of the service, operates the services, supervises the quality of the service, authorizes the The management model is defined in the STPP as an institutional provision of the service and establishes its conditions, is the owner arrangement, which incorporates the dimension of sustainable of the infrastructure, funds improvement and expansion of the ser- development in the economic aspect, the viability of the service vices and who makes the decision for change. The following table and the social-institutional sustainability17. Therefore in this mana- shows the actors and their roles under the current model and in gement model, a new link between the local government, civil the new management model. Table 9: Peru: Roles and actors in the water and sanitation services management model 2006. Roles Current management model New model of sustainable management ¿Who determines the The municipality determines the price of The municipality proposes the quality and the price of the service quality and price of the the service without any commitment in in agreement with the community, by having consultations in every service? terms of the quality to the users. colony. ¿Who operates the The municipality within its multiple A Specialized Operator hired by the municipality. The nature and services? responsibilities and functions. origin of the Specialized Operator is defined according to the social characteristics and the scale of each town. The municipal authorities handle the ¿Who supervises the function of supervision. But they are the The community, by the municipality's delegation of the task to a quality of the service? judge and the party and therefore the Community Neighborhood Board for Supervision of the Provision of supervision becomes null and void. Water and Sanitation Services. ¿Who authorizes the · The Organic Law of Municipalities The municipality by means of a municipality-operator contract and provision of the service and empowers the local governments to the issuing of ordinances that regulate the provision of services establishes the conditions provide the services. (DS 016-2005-VIVIENDA). for the same? · The new Regulation on the Water and Sanitation Law opens up other options. · The municipality. · The municipality. ¿Who is the owner of the · Although the majority of them do not · The infrastructure is the municipality's property, and it is responsible infrastructure? have a legal physical inventory of their for its replacement, expansion and upgrade, in consultation with or assets. with the participation of the Specialized Operator. ¿Who finances The municipality, when it has the · The municipality and the users. improvement and resources to do so. Otherwise it gets · In some cases, when the socio-economic studies recommend it, expansion of the services? donations. the charges can finance a percentage of the investments. ¿Who make decisions to The municipality has the legal powers to · The municipality consults the community on any decisions regar- change? take the decision to change the model of ding changes. management. · The public decides in meetings organized in every locality. 17North, Wiliamson's concept ( ), which refers to explicit and implicit, formal or informal agreements in order to establish certain rules of play between various actors, where the norms, functions and competences accepted by all parties involved in the economic and social development processes are established. The institutional arrangement promotes commitment and political and institutional stability for development. 22 In short, the new management model, based on a new the change of the current management model. The proposal "triad", promotes efficiency, transparency and specialization analyzed by the community had the following elements: of services, on the basis of a consensual agreement or a new local "social pact"18. · Provision of services in charge of a specialized operator, hired by the municipality in a given time frame. · Supervision of the quality of the services is the responsibility 3.5. A shared decision between the municipality of Community Neighborhood Board for Supervision composed and the users by two delegates (male and female) from each sector of the small towns. After carrying out studies and technical, social and economic assessments in the 9 small towns, the proposals for the new · Quality and price (fee structure) that the specialized operator management model were designed, which were prepared with must provide and is authorized to charge, based on micro- the Municipal Councils to start with and validated in workshops measurement, when this is fully completed. with local leaders and authorities. Later the proposals were widely · Nature and origin of the specialized operator that the circulated in the towns and analyzed in meetings in each locality, municipality will hire. The specialized operator can be private where the community finally took the decision to accept or reject or mixed economy. In the second case there were various Table 10: Characteristics of the approved management models Av. Cost PPPL Micro Target Target Target Localities to LT measurement Supervision Operator Continuity S/.x m3 Water cov. Sewage Cov. Tabalosos 0.89 Yes Neigh.Council Private Regional 90% 90% 24h/d Nueva Cajamarca 0.59 Yes Neigh.Council Private Regional 85% 70% 24h/d Tamshiyacu 0.80 Yes Neigh.Council Private Regional 90% 0% 18h/d Urcos 0.50 Yes Neigh.Council Mixed Local /1 95% 66% 24h/d Sechura 0.56 Yes Neigh.Council Private National 96% 96% 24h/d Laredo 0.68 No Neigh.Council Mixed Local /2 92% 75% 24h/d Talavera 0.43 Yes Neigh.Council Mixed Local /3 95% 90% 24h/d Nauta 0.79 Yes Neigh.Council Private Regional 90% 86% 24h/d Tumán 0.87 Yes Neigh.Council Private Regional 95% 86% 24h/d 1/ Municipality with minority participation associated with strategic partner 2/ Municipality with minority participation associated with regional investors with local preference 3/ Muncipality with minority participation associated with user associations Source: technical social studies and development plans Drafted by: Self. Exchange Rate US$ 1,00 = S/. 3,00 18See: WSP: "Un Nuevo acuerdo social, para cambiar el modelo de gestión y mejorar la sostenibilidad de los servicios de agua y saneamiento en pequeñas ciuda- des". WSP.LAC, Lima July, 2007. 23 options, according to the modality of the association between of the supervisory body. The profile of the operator in the coastal the SO and the municipality. and Amazon jungle regions was direct, with a preference for local private operators, while in the highlands (Andean regions) there The neighborhood assemblies took decisions on the change was a preference for mixed operators, promoting an association in the management model, in each case comparing it with between the municipality and the local operator. the current municipal model in operation in their town. Thus in the nine towns, around 9 to 58 neighborhood meetings were held, according to the urban structure of the small town. In all 3.6. The Community Neighborhood Supervision the STPP localities that reached the consultation stage, the Board (JVS) communities approved the change in the management model. The table 10 shows the characteristics of each of them. During the consultation process held in each locality in the phase prior to promotion and implementation, the assemblies To implement the new management models the municipality were requested to select two delegates (one male and one carried out the following actions, with the technical assistance of female) to take the decision of the locality to the assembly the STPP consultants: of delegates where the final decision on the change of the management model would be taken. In case the assembly · Approve the basic municipal ordinances to establish the legal of delegates took a decision to change the management model, framework required for provision of services. the delegates would then become members, representing · Establish the Community Neighborhood Supervision Board. their town sectors, of the Community Neighborhood Board · Promote the hiring of a local or regional specialized operator. for Supervision of Public Services (JVS)19. · Transfer services to the specialized operator. Once the change was decided, the assembly of delegates pro- Consensus and agreements were reached more quickly on issues ceeded to determine the number of delegates who would form relating to the profile of the operator and the scope and functions the directive board (usually 3 or 5 members), its gender-wise distribution (majority of men or women), the directive board would be elected and its president would be selected. This procedure was followed in eight of the nine towns. Given that in Talavera the model required the creation of a specialized operator with a municipal company and a users association, it was decided to first form and consolidate the users association. The JVS were formally instated when the municipalities issued the ordinances for creation, organization and functioning of the JVS, formalizing the appointment of its first delegates and the board. 19This new organization is framed within the scope of the Organic Law of Municipalities, Law No 27972, in its articles 40 and 116 and it is explicitly stated later in the SD 016, Chapter IV. In none of the cases does it substitute the supervisory and sanctionary powers of the municipality. 24 Table 11: Various modes of consultation of users and the community Modality Advantages Disadvantages · More possibility for participation · Greater capacity for organization is required · Ease in access to vote · The consultation process takes more time Neighborhood wise · Informed voting · The specific realities of each locality are known · Democratic and participative election of the delegates of the sector is facilitated with a gender focus · Public and direct voting · All the users do not participate General Assembly of · Presence of social organizations · Strong leaders or dictatorships can distort the Representatives · Visibility of participation decision making process · Rapidity in the process · Gender focus is discriminated · Public and direct voting · Only attendees participate and these need not be representatives · Difficult to conduct and record the number of votes General Assembly when there are a large number of attendees · In the larger towns, mass assemblies cannot be conducted Regarding the nature and responsibilities of the supervisory The definition of the pricing structure was complex because of body, which after the issue of the SD 016-2005-VIVIENDA, in involvement of new concepts such as categories (domestic-non- August 2005, came to be called the "Community Neighborhood domestic), subsidies (direct or cross), flat or tiered charges, mini- Supervision Board" consensus was quick to come regarding it's mum consumption in cubic meters, among others, which were formation but there was greater discussion on its responsibilities. presented in a simple manner with numerical examples for general These discussions centered on whether to monitor of the quality of comprehension and acceptance. the services in a general manner or in a more qualified manner with a specialized technical team. Finally the first option was chosen in Functions of the Community Neighborhood Supervision order to allow access to all users without any exclusions and it was Board (JVS) agreed that the municipality would provide the technical support. As the JVS is a permanent actor in the new model, during the implementation phase it was asked to perform three basic roles: The critical issues during the debates and consultations included the definition of the type of contract and the policy for application · Provide transparency and reduce the perception of risk in the of charges. Regarding the type of contract the acceptance of the process of promotion of specialized operators. "Integral contract on right to use of property-management" was · Execution of the communication strategy, which would be unanimous, with periods that did not coincide with the electoral developed by the municipality and the specialized operator. cycle to minimize political risk to the operator, while the conces- sion contract was rejected owing to contractual difficulties and the · Execution of the health and hygiene program, which would be need for a greater capital, which the hired specialized contractor developed under the guidance of the municipality in collaboration of local origin might not have. with the health and education sectors. 25 The technical consultants trained all the members of the JVS in the interpretation and application of the ordinances and the muni- 3.7. The benefits of the new model for the cipality-operator management contracts, as well in the knowledge municipalities and use of quality indicators and management of water and sani- tation services. The methodology for training was participative. A The benefits that the new water and sanitation services manage- quick assessment of the training needs and response levels was ment model offers to the municipalities are as follows: performed given the heterogeneity of the social group. This inclu- 1. Real charges can be established for the water and sanitation ded group work, role-play and case studies. This initial training to services, based on technical and socio-economic studies, the members of the JVS will be reinforced periodically during the associated with the level of quality of the service and approved STPP's follow-up phase of the local actors, guiding them mainly by the public. in the application of the abilities acquired and an evaluation of their field performance. 2. It frees the municipal resources that were previously used to cover the costs of operation and maintenance of the systems ­subsidizing the service for those who have more and in general have access to the service­ thus allowing better focus of the municipal subsidies to the benefit of those who really need it. 3. It allows determining and clearly stating quality objectives for the service, which can be demanded of the specialized operator by the municipality and by civil society. 4. Efficiency targets that the specialized operator must achieve in the management of the services are clearly established and serve as a basis for the calculation of the charges that are levied for the service. This avoids transferring of inefficiency in the management to the users and also fixing a price for a servi- ce that is more accessible for the user. 5. It allows civil society to support the municipality by monitoring the quality of service that the users receive from the specialized operator. 26 4. The new role of the municipality, the ordinances and the specialized operator The Organic Law of Municipalities establishes that the municipa- iv. Ordinance on the System of Pricing and Charges. This lities are responsible for the regulation of the provision of public regulates the application of charges, which are agreed upon by services in their jurisdiction, for which a key step in the process the community, and fixes the maximum price for collateral services was to create the normative framework for provision of services that the specialized operator can charge. in the towns. To regulate the provision of services, the munici- palities approved four ordinances: Ordinance on Provision of There was more debate on the system of pricing and charges in Services, on the Community Neighborhood Supervision Board, the Municipal Councils, given that the municipality had to work out on Attending Claims and on the System of Pricing and Charges. a policy for cross-subsidies and this had to be done step-by-step. The main issues for debate on the pricing system were: i. Ordinance on Provision of Services. This ordinance regulates · From when will the new charges be applied? (Immediately, when the rights and duties of the specialized operator and the users the specialized operator comes in or when the services improve) of the service. This is based on the General Law on Sanitation · Who, how and for how long will a user have right to discounted Services and its bylaws and takes as a reference the regulations social charge? approved by SUNASS for municipal EPS. However it required · At what point of time will inflation adjustments be applied on the more time for approval by the Municipal Councils, due to its size charges and prices? What inflation indexes will be used for the and the technical nature of the content. adjustment? ii. Ordinance on the Community Neighborhood Supervision · Will the actual cost of the household connection be charged or Board. This ordinance creates the JVS, establishes the func- will it be one fee for all connections? If it is a fee, who will finance tions of the municipality and regulates its functioning. The func- the rest of the cost of the connection? tions were debated in workshops with the delegates from all · Will any institution be exempt from payment for the services? the sectors of the locality and the participation of the municipal (Churches, hospices or others) officials and authorities. In this way the proposal submitted to · What will be the sanctions provided for in the ordinance, for the Municipal Council was quickly approved. The key topic of infractions by users and the specialized operator? Will the discussion was the type of functions that the municipality would sanctions be dissuasive or reparatory in nature? What will be delegate to the JVS, given that this would directly affect the profile the degree of pecuniary fines? of the delegates of the locality and in the organization of the JVS, · A user who has a home-based business will pay a domestic and there could be a need for a technical office with the allocation fee or a commercial fee? of resources for its operations. · Will any specific rates be included in the billing to cover specific issues? (JVS, hygiene and health program, environmental iii. Ordinance on Attending to Claims. It establishes the pro- protection, solidarity etc.) cedures and time frames to attend to commercial and operational claims, in first and second instance. Although it is clear that the municipality has regulatory powers as a second instance, the first 4.1. The municipality and the promotion of operators instance being the specialized operator, the JVS has the function of giving its opinions on the resolutions of the municipality as its The municipalities were briefed on the profile of the operator role is that of a social supervisor of the services supply. and the documents for the tender (procedures, contract, studies 27 and ordinances) to identify potential bidders. During the promo- pants were taken into consideration at the time of sending the tion, there were various meetings with businessmen and entre- circular with the responses to the queries and the integration of preneurs (local and regional) from sectors similar to the water and the bidding terms and conditions to the process. sanitation services (contractors, project planners and suppliers), who in some cases purchased the terms and conditions docu- Third meeting. The third meeting was held, on an average, three ment of the bid. The groups that participated as bidders in the days before the date for submission of proposals. The purpose bidding process came from: was to provide technical assistance for filling up the proposal form and also to instill confidence in the bidders. · Municipal departments of the water and sanitation services · Municipal EPS from the region 4.2. Criteria and procedures for selection · Sub-contractors of the municipal EPS Considering that at the beginning of the STPP project in Peru · Administrative boards of the rural water and sanitation services there were no experiences of having specialized operators From the time of the announcement till the receipt of proposals, in the water and sanitation services sector, it was decided to an average of three meetings were held with potential bidders. establish certain minimum criteria to start the process of selection of bidders, such as: First meeting. On the first three days after the announcement · They must be familiar with the provision of public services. was made. The purpose of the meeting was to make the public interested in the purchase of the bidding terms and conditions. · They must have a minimum financial capability to cover the Attendance to the meeting was free and by personal invitation, working capital requirement and small short term credits. with the participation of the Community Neighborhood Supervision Board to provide social support to the process and reduce the social perception of risk with regard to the change. Second meeting. This was held three days before the deadline for formulation of any queries. The purpose was to explain the content of the tender documents. This was done with the people who had purchased the bidding terms and condi- tions as well as invitees (potential bidders), keeping in mind that buying the terms and conditions does not necessarily suppose that they have read them or understood them in their entirety. The issues dealt with were: i) Explanation of the business plan ii) Definition of the requisites to participate in the bid iii) Explanation of the selection procedure iv) Explanation of the contract and its annexes. The queries made by the partici- 28 · They must be persons with moral solvency who comply the 4.3. The charges and the poorest section requisite of origin (local or regional depending on the case). In the case of two or more bidders satisfying the selection The following diagram shows the elements of the conventional criteria, it was concluded that the only factor of competence charges that include the cost of improvement and expansion must be the percentage of the turnover or collection that they of systems that, compared with the STPP charges based would offer to contribute to the Investment Fund, as this is only on operation and maintenance costs and infrastructure more transparent and easy to apply locally. It was also observed replacement costs, and compared with the capacity levels and that the time frame for the bidders to prepare their proposals willingness of the people to pay, makes the creation of an must be taken into account and also the time frame demanded investment fund possible. by them to establish ties between technicians and entrepreneurial. Graphic 2: Conventional Charge Cost of improvement STPP Charge and expansion People's capacity and willingnes to pay Contribution to the Investment Fund Cost of Cost of replacement of replacement of infrastructure infrastructure Cost of Cost of operation operation maintenance maintenance and and administration administration 29 Additional resources to meet the requirements for systems fluctuates between 40 new soles in the rural Amazon jungle improvement and expansion will be funded through municipal and 55 new soles in its urban area. resources, donations, transfers and by the new users. · In order to prioritize the following will be kept in mind: households with at least one child between 6 to 12 years, Criteria for eligibility to discounted social charges: with persons older than 70 years of age, with disabled Direct subsidy to the poorest persons or persons with serious illness requiring long term Access to sufficient, safe, acceptable, accessible and treatment and chronic illnesses; high levels of economic affordable water for life is a recognized human right that applies dependency; with 4 or more persons for each employed to all human groups without exclusion. But it is the poorest that member or no employed members. have the most unstable conditions of access, which pay for the most expensive services, as they are not covered by the supply · Households whose basic needs aren't met: network. This leads to an inverse relation between price and · Improvised housing in a place that is not meant for human capacity for payment, which is in detriment of their productive inhabitation. capacity and their welfare. · Pile housings: population in households with more than 3, 4 members per room. Thus in the pilot project, efficient management of services · Homes without hygiene services. and attention to the poorest was a special challenge for the · Households without any comfort index (they do not have: municipality, the specialized operator and the JVS, as it electricity, television, radio, furniture, gas stove, motorcycles, proposed a new way of approaching the issue by jointly cell phones, nor have they got any credits). deciding on the criteria, ensuring the sustainability of the operating entity and at the same time guaranteeing the human right to drinking water for the poorest of families. This was to ensure identification of the "poor user" by taking into consideration economic and social variables. The definition makes a comparison between the actual living conditions of the people and those conditions that place them above or below the poverty line. In this framework, the criteria to identify the poorest of families would be as follows: · Single-parent household or homes where one of the parents is unable to work. · Households whose total expense is below the value of a basic food basket or an extreme poverty line. Based on socio- economical studies done in the towns in the extreme poverty group, the per capita cost or the monthly expense per person 30 Social cases is the case, this difference will be compensated by contributions On the other hand the proposal also identified those termed as from the municipality, directly subsidizing the poor. "social cases" which included users in a situation of vulnerability (destruction due to fire or earthquakes). Although these cases do The municipality (1), the JVS (2) and the specialized operator (1) not necessarily fulfill the abovementioned criteria, they may still will set up an evaluation committee, who will receive applications be levied a "social charge for water" in view of their situation, for for social charges for water. The evaluation committee will study a given period of time. Orphanages, free dining halls, `glass of the applications and will decide on the eligibility, based on the cri- milk' and `wawawasi' schemes, whenever they are able to prove teria defined. their inability to pay are also eligible. In the STPP these criteria were validated in the JVS meetings, in the presence of officials Once the municipality receives the recommendations of the and specialized operators in the towns of Tabalosos, Nauta and committee, it approves them by a Municipal Resolution and sends Tamshiyacu. the list of beneficiaries to the specialized operator, indicating the minimum cubic meters that this family can get under the discoun- Procedure to identify users who are eligible ted social water charges, which can range between eight to twel- for the discounted social charge for water ve cubic meters, depending on the area. Once these quantities The municipality, the JVS and the specialized operator jointly are exhausted, in areas where there is micro-measurement, the decide on the number of users who are eligible for the discounted user will have to pay the difference. The beneficiary will sign social charge for water, which will be at 50% of the value of the a sworn declaration that the data submitted to the evaluation normal charges for the service. The specialized operator will make committee is true. If the data submitted is false, he will immedia- a prior calculation to prevent the number or percentage of users tely lose the benefit. Later the specialized operator will assign the resulting in an imbalance in terms of its administration and if such benefit according to the official list of the municipality. 31 5. Characteristics of the contracts of the new specialized operator The STPP designed a single contract format under the generic fixed by taking into account the average long term cost with and denomination "management contract" to transfer different risks without investment, it was decided to set up an Investment Fund, to the specialized operator according to the circumstances. After which would be managed by the municipality and the operator, evaluating the situation of the services in the towns and their under the supervision of the JVS, which would be created by the demand for investments, the financial capacities of the munici- contribution of a percentage of the turnover of the operator. palities, the availability of non-refundable resources for the sector and the financial possibilities of the potential operators and on Additional resources to meet the requirement for improvement and the other hand given the risk perception of the potential opera- expansion would be funded by municipal resources, donations, tors and the lack of experience in municipality in terms of long transfers and by the new users. term contracts, it was concluded that it would not be appropriate In general terms, the municipality-specialized operator contracts to demand that the future operators should assume the risk of will have duration of 7 to 10 years. The contract guarantees investment in replacement, improvement and expansion works. were established taking into account the financial capacity to be Thus it was decided that the following risks would be transferred demanded of the potential operators, the instruments utilized in to the operator: the town and permitted by the Peruvian Civil Code and keeping in · Operation and maintenance risk mind the requirement to have insurance policies for the vulnerable assets and third-party damages. In some cases a transition period · Commercial risk of 120 days was agreed upon, during which the operator would · Working capital and minor investment risk gradually take charge of all the functions related to provision of It was established that the risk perception of potential operators the services. This system was designed to help the specialized and the lack of municipal experience in the administration of very operator till the completion of at least two cycles of supply-billing- long duration contracts would make it impossible to ask them collection and this was proposed in the case of the following to assume the risk of investment in replacements, upgrades ombined situations: and expansion works. Considering that the average charge was · The infrastructure works to guarantee a perceptible improvement in the quality standards in the provision of service had not been completed. · Towns where people had a long tradition of free supply of service, managed by production cooperatives. · There was no process for recovery of the municipality's receivable account. · The municipality was subsidizing at least 70% of the cost of the service. · In cases of operators whose shareholder composition was on a social basis, with a need to raise the capacity for professional management of services. 32 · The technical capabilities of the operator had been given What was most difficult in designing the contract was the preference over its financial capability at the time of selection. establishment of a system of contract guarantees, which would make sense at the local level (given the objective profile of the 5.1. Legal basis of the Municipality-SO contracts SO) and the cost of maintenance of which would not have a significant impact on the charges that the users would pay. The management contracts signed between the municipalities and the specialized operators are based on the following legal Even if the initial tendency is to resort to the mechanism of surety instruments: bonds and insurance policies for Performance Bond, the local · Political Constitution of the State reality shows that local and regional professionals, technical persons and businessmen do not follow this practice as the size · Organic Law of Municipalities of the local market for 2.001 to 20.000 inhabitants is not large · Framework law on promotion of decentralized investment enough to attract the attention of those contract firms, which · General Law on Sanitation Services and its bylaws could provide these guarantees. This resulted in the establishment · Civil Code in effect of other types of guarantees provided for in the Civil Code in effect, which although not immediately realizable, do have 5.2. Contract guarantees the required dissuasive character. The amounts of the guarantees also had to be fixed according The law establishes the need for guarantees for the public assets that are handed over to the private sector. In a private investment to the local reality, overcoming the natural tendency to fix promotion process, the following guarantees are normally provided: the same on the basis of the value of the systems handed over for the operation of services. When the value of a house · Bid bond located in the main square of the town does not exceed · Performance Bond with the contract 10,000 soles and the annual turnover for the service does · Guarantee on the state of conservation and integrity of the not exceed 200,000 soles, it does not make sense to provide assets handed over a Performance Bond of the contract, which is greater than · Guarantee of third-party damages 10,000 soles. These guarantees are normally provided in the form of a surety The purpose of the Performance Bond of the contract is to bond or insurance policies, which supposes that the bidders have access to these instruments. cover the working capital needs in the eventuality that the municipality would have to temporarily take on the responsibility In the STPP, the contract guarantees were established taking into of provision of service, in case of a possible defection by consideration the financial capacity that could be demanded of the specialized operator, as it does not have the budgetary the potential operators, the instruments normally used in the town resources for the same. In these cases, to safeguard the and permitted by the Peruvian Civil Code and keeping in mind the continuity of the service, it is expected that the guarantee would requirement to have insurance policies for vulnerable assets and be immediately realizable (converted into cash to cover third-party damages. the expenses linked to the provision of the service). Given that 33 the use of collateral was being allowed, one had to then consider With this the entry, the barriers that were identified in the process a mechanism to provide for these contingency resources. With of the first bid in Tamshiyacu and Tabalosos were overcome. this objective ­ among others ­ the existence of an Investment Fund was designed, which was created from a percentage of One issue that merits special attention is the time frame given to the turnover of the specialized operator. It was expected to have bidders to prepare their offers as in general the time frame is not sufficient resources to cover these contingencies from the second governed by the drafting or physical obtaining of documents, but year of the management contract onwards. the time taken to make alliances with the technical persons and financiers. 5.3. Adapting selection criteria to local conditions 5.4. Rights of the specialized operator In the Tamshiyacu and Tabalosos towns, in spite of having sold a considerable number of tender documents for the selection pro- The rights of the specialized operators are provided for in the cess of the SO, the processes had to be declared as deserted. following instruments: This situation forced WSP staff to evaluate the technical assis- 1. Management Contract where their legal, technical, administrati- tance given to these towns. It was found that there were certain ve and economic rights are established, with regard to the barriers in terms of access, which were making the participation provision of services, the manner and mechanisms for of potential bidders impossible, as per the defined profile. readjustment of charges and prices and indemnities in case of unilateral resolution of the contract without any specific For the second announcement, the following modification of reasons established in the contracts. criteria was recommended to the technical consultancy firms: 2. Ordinance on provision of services, which is an integral part · Reduce the amount of the guarantee of Bid bond and of the management contract, and where the rights and duties Performance Bond of contract. of the specialized operator and of the users in terms of the · Substitute the competence factor related to the technical service are established. proposals for improvement of service by general and technical solvency of the team presented by the bidder in the water and 3. Ordinance on charges and pricing, which is an integral part sanitation sector. of the management contract, where the economic conditions for provision of services and collateral services are established. · Consider the economic factor of contribution to the Investment Fund as a defining competence factor, once the minimum 4. Development plan of the services, which is an integral part required levels of administrative and technical solvency are met. of the management contract and where the investment · Award a margin of preference to the local bidder, allocating commitments of the municipalities are established and additional points to it in the evaluation of proposals. the quality, coverage and management objectives that are the exclusive responsibility of the specialized operator and · Modify the process of opening and evaluation of offers, those that are subject to investment by the municipality considering a method of two envelopes, the first with the are established. technical and economic details of the bidders and the second with the economic offer. 34 Table 12: Characteristics of the management contract between the Sechura municipality and the specialized operator "PROGESTION" Size of the town Provincial Municipality of Sechura. Capital City: Sechura. · Estimate Population: 27,000 inhabitants. · Number of connections: 5,000. · Average monthly invoicing of 12.00 soles, only water. · Average monthly billing of 5.60 soles, water and sewerage. Name of the operator PROGESTION Consortium, constituted by the companies SERVIUNI SAC, AGALSER SAC and PIASA Consultores SA. Represented by Francisco Caraciolo R. Date of signing of the contract with · It was signed on the 26th of November 2005. the municipality and duration · For ten years, after transfer of services to the SO Date of initiation of operations 5th April 2006 of the SO Object of the contract The municipality transfers the use and enjoyment of the movable and immovable assets that on the whole form the infrastructure of the system of provision of water and sewage services of the city of Sechura and the fishing villages in the Sechura-Parachique stretch. Operator's initial contribution to S/. 100, 000 (One hundred thousand soles) the social capital Investment, expansion and This will be constituted by 10.2% of the monthly turnover without VAT (Value Added Tax) emergency fund The SO will make a quarterly contribution, which will be managed by the municipality. The use of the fund in emergency cases will be authorized by the municipality. Economic system of the contract The income collected monthly will be used for: · Payment of the payroll of all the workers. · Provisions and reserves. · Costs and expenses of the production, storage and distribution systems of the drinking water and sewage services. · General administrative and maintenance costs and expenses · Payment of taxes, contributions and fees. · Payment of guarantees that the SO must provide to the municipality. · Amortization of credits by way of investments and expenses. · The Operator is not authorized to obtain credits by offering the transferred assets as guarantee. Obligations of the specialized · Provide services in an efficient manner, based on the charges approved by the operator municipality. · Submit the annual Operation Plan to the municipality. · Make investments, under the municipality's supervision for the expansion and upgrade of systems. · Upon termination of the contract, return all the transferred assets, with the new investments and upgrades to the municipality. 35 6. The creation of a market for specialized operators As known, a market is the place where offer meets demand Given this scenario, the urban towns that did not come and a transaction is produced. A market does not exist when under a municipal EPS (more than 75% of the small towns) there is no offer or demand, or if the transaction is not executed and which did not incorporate an EPS, had an informal due to its high cost. When the Small Town Pilot Project ­STPP provision of water and sanitation services. The cost of this proposed a change in the municipal management model of the informality was that the majority of them did not have access water and sanitation services, to one where the management to the resources of FONAVI22 to expand its services and that the would be delegated to third parties, one issue had to be dealt charges were maintained at levels way below recovery of costs. with­ there was no demand for this service in the municipalities With respect to the legislation, which promoted participation of and there was no offer from the private sector. This absence of the private sector, in the Supreme Decree No. 059-96-PCM that demand and offer, that is to say the non-existence of a market, approved the "Single Revised Text of the Norms with the status presented the challenge of inducing and promoting the creation of a law that regulates the concession to the private sector of of the said market. public infrastructure works and public services"; indicated for the first time that the municipalities had the powers to award For this an analysis was made of the lack of demand and offer the concession of its public services; but prior to this the Law and the guidelines for new models of management of water and 26338 had established that the provincial municipality was sanitation services were established, wherein the risks perceived entitled to the right to exploitation, therefore a district municipality by local governments and local investors were addressed. This would have to coordinate with the provincial authority, if it process was described in the previous points. decided to give the public services of its town in franchise. 6.1. Factors that influenced the lack of demand Recently in the year 2003, the new Organic Law of Municipalities was promulgated (Law 27972), which approved In the General Law on Sanitation Services, Law 26338, it is the responsibility of the municipalities in the provision of public stated that in the urban area the provision of services is the services, but without differentiating between provincial and responsibility of supplier entities (in a broad sense), which may district level, and in this year itself the Framework Law for be public, private or mixed entities20. In turn, the Supreme Promotion of Decentralized Investment (Law 28059) was Decree Nº 09-1995-PRES, which regulated the abovementioned approved, indicating that the municipalities can establish any law, indicates that the provision of services in the urban area21 modality of participation of the private sector. Finally in the is through public, private or mixed Service Provider Entities year 2005 the Supreme Decree Nº 016-2005-VIVIENDA (EPS), thus limiting the broad concept of supplier entity as clarified that in small towns the provision of water and stated in the Law. sanitation service can be under a Specialized Operator, defined as a private organization, hired by a municipality under any form of contract allowed by the law. 20According to the Law on Business Activities of the State, a mixed company is one wherein the State has the power to decide; if its share is minority then it is not considered a mixed company but a private company with State par- ticipation. 21The Supreme Decree No. 015-95-PRES establishes that the urban area 22National Housing Fund, which during the 90s was the main source of finan- includes towns with more than 2000 inhabitants. cing for extension of coverage of sanitation services in the urban area. 36 · Perception that the cost of promotion of private investment was very high given the comparison with the Proinversion expenses23. 6.2. Factors that influenced the lack of supply When the legal norms make possible the participation of the private sector in public services, in general the private initiative evaluates the possibilities of creating demand. But in the previous decade, there were no such favorable conditions, because: · In the period 1996-2003 there was no political decision of the Government to promote PSP in sanitation in the small towns. · For those interested in being specialized operators, international In short, it can be said that in spite of the fact that since the technical cooperation could be obtained on account of year 1994, in which the General Law on Sanitation Services promotion of PSP and PPP, but they considered that signing a was promulgated and the participation of private organizations long-term contract with a municipality was high risk, given the in the provision of water and sanitation services is now legally absence of this practice in Peru. viable, this did not happen because of the following factors: · They were of the opinion that the municipal authorities would · Confusing legal framework with respect to the possibilities of never fix the charges at the level of full recover of costs, as the the small town municipalities to hire specialized operators, increase in charges would be politically unpopular. which was recently clarified in the provisions issued in the · Absence of a culture of payment in the people would require year 2003 and 2005. high investments in sanitary education and they were of the · Lack of information and/or knowledge of local governments opinion that the municipality would not support them in this about the benefits and the mechanisms of participation of process. private operators or other alternate management models. · Unwillingness of the people to pay more for improved quality of · Unwillingness of the municipal authorities to raise the charges service, given their ignorance of the service quality factor and/or to a level, which allows full recovery of costs. a sense of resignation about the poor service that they receive · Absence of information on the advantages of delegating a public but do not pay for. service that is politically sensitive to third parties, by means of a · The fact that SUNASS is an entity located in Lima would make contract. it impossible for it to regulate the charges and supervise the · Lack of information and confidence on the part of the district contract between the municipality and the operator. municipalities to be subordinate to provincial municipalities (for the award) of an issue that they considered to be 23Central Government Agency in charge of promoting participation of the priva- exclusively local. te sector in the State companies and projects. 37 · The municipalities cannot execute a PSP or PPP process under a system that is different from the one applicable to without the support and technical assistance of a certain level medium-sized and big cities. This provides a solid legal backing by the regional or central government, given the costs in to the institutional arrangement of the STPP. promotion of the participation of the private sector. · A validated version of the reference manual of the processes · The municipalities did not have the financial resources to of change of the management model of the water and sanitation support investments in expansion and improvement of services services in small towns that contains the guidelines to support and since it did not have the support of the Central Government, these processes. This is in the draft stage and would be of they would not be able to get resources. help in the replication of the process in other municipalities, · The legal framework that regulated the provision of water with the technical assistance of entities associated with the and sewage services in small towns had normative gaps and STPP, which make use of local consultants. it was necessary to make cross interpretation of the legal · A set of lessons and experiences shared with the project norms, which increased the risk of operations vis-à-vis the "National Rural Sanitation Program" (PRONASAR)24 and banks and insurance companies. an International Seminar with the authorities in the sector, held in the beginning of February 2007, in Lima, in which the 6.3. The success of the STPP and its scaling up experiences contributing to the promotion of the market of specialized operators were identified. For a market to exist, it is not enough if there is demand and supply. It is in fact necessary that a transaction must take It is expected that with these documents that summarize place and this will only occur if the costs of the transaction are the achievements and challenges for changing the model of reasonable in terms of the scale of operation that is going to management of services; with a single policy for the sector and be carried out. a single financial policy, which is defined as the tool to support the process of change, by the central government, this change From this perspective, the STPP has been a success, because as in the management model can be replicated on a large scale a pilot project it has made contributions to the knowledge in this and a consolidated market of Specialized Operators of water and sector on the promotion and hiring of Specialized Operators, in an sanitation services for small towns in Peru can be created. environment where never before had such a process, based on Public-Private-Social Partnerships, been attempted. The success 6.4. Entrepreneurs and pioneers in the learning is a result of a process in which studies have been done and instruments developed, which were subsequently vali- The STPP in Peru has created an initial group of specialized dated. Therefore it can be stated today that the cost of the tran- operators for water and sanitation services for small towns, saction is within the reach of any municipality, with the support of a development NGO, since now we have the: · Supreme Decree No. 016-2005-VIVIENDA, which substantially 24See: WSP: "Servicios sostenibles con nuevos modelos de gestión para modifies the regulation of the General Law of Sanitation Services las pequeñas ciudades del Perú. Memoria del Taller PRONASAR-STPP", Ministry of Housing, Construction and Sanitation; WSP LAC, Lima January and in which the provision of services in small towns is regulated, 2007, 78 pages. 38 which is formed by six private operators (Tamshiyacu, Nauta, It is expected that these specialized operators, trained by the Nueva Cajamarca, Tabalosos, Sechura and Tuman) and three STPP, can in the medium term, expand their operations to other mixed operators with municipal participation (Urcos, Talavera small towns, considering that the Peruvian legislation allows and Laredo). The new SOs are: submission of private initiatives and that the modifications to the regulation on the General Law on Sanitation Services state that · AGUAS DEL AMAZONAS SAC hired to provide services in the the supply of services in small towns should be done mainly by town of Tamshiyacu, Maynas province, Loreto region. specialized operators. · AGUAS DEL ORIENTE SAC hired to provide services in the In those cases in which the public decided to have a specialized town of Nauta, Loreto province, Loreto region. operator with municipal participation, to allow the initiation of · SEDALAMA SAC hired to provide services in Tabalosos town, local participation, a business format was established with the Lamas province, San Martin region. participation of potential local shareholders. In three towns it was decided that the specialized operators would have municipal · AGUAS AMAZONICAS SAC hired to provide services in Nueva participation (Talavera, Urcos and Laredo), by creating a Closed Cajamarca town, Rioja province, San Martin region25. Corporation (SAC). However the three cases are different from each other on account of the following: · ATALSAC (mixed community-municipality) hired to provide services in Talavera town, Andahuaylas province, Apurimac region. · In Talavera the operating entity was constituted by forming a company between the Association of Users of the town (51% · SEDAUQ SAC (mixed private-municipality) hired to provide of the shares of the SO) and the municipality (49% of the services in the town of Urcos, Quispicanchi province, Cusco shares of the SO). region26. · PROGESTION SAC hired to provide services in Sechura town, Sechura province, Piura region. · AGUAS DE TUMAN SAC hired to provide services in Tuman town, Chiclayo province, Lambayeque27. · AGUALAR SAC (mixed community-municipality) hired to provide services in Laredo town, Trujillo province, La Libertad region. 25See footnote Nº 14. 26See footnote Nº 15. 27See footnote Nº 16. 39 · In Urcos, the operating company is the result of an association between a strategic partner who is familiar with the water and sanitation services (75%) and the municipality (25%), with the strategic partner taking on the commitment to offer 20% of its shares to civil society organizations of the town, after the first year of operations. · In Laredo, the operating company has been established as a share capital company, where the municipality has a 49% of the shares and neighborhood associations have a 51% share. Since there is no strategic partner linked to the provision of services, in Laredo, the capital of the operating company is considerably greater than in the other two cases. 40 7. Difficulties in the STPP pilot project processes There were various types of difficulties that were faced in the opposition groups resulted in the postponement, on three the implementation of the STPP with regard to the member occasions, of the selection process of the Specialized Operator in municipalities in the project and also the intervention process Laredo. with the two technical assistance firms. The problems can be summarized in the following groups: pertaining to the supply of However, political interference could not be overcome in two operators, political and social in nature, communication related towns, which led to them withdrawing. Santiago in the Ica and regarding expectations in terms of infrastructure and transfer region and Ayabaca in the Piura region withdrew after 8 months of services. of intervention. In these towns the political opposition groups mobilized some grass-root organizations creating an environment 7.1. Lack of a specialized operator market of social hostility more against the mayor than against the Project as such. But the final decision was the withdrawal One of the main problems was the pioneering nature of the of the municipalities from the Project. On the other hand the creation of a market of specialized operators with local and or municipalities of San Jerónimo and Saylla withdrew because they regional characteristics. The absence of local operating companies had an undertaking with an NGO, for more financial support for or professionals interested in entering the operator market was other activities in their town. one of the initial limitations of the project. This situation became more complicated when in some towns the change in model was However the most difficult test in this process occurred during accepted but at the same time it was demanded that the operator the process of national and regional elections held in 2006 and hired should be local or regional. This limitation was overcome subsequently the taking over of the new municipal management. by an induction strategy, according to the conditions of each Thus those who had actually implemented the process for town, with actions for promotion by the municipality and a direct selection and hiring of specialized operators moved from office. communication strategy with the parties interested in becoming operators. 7.2. Political and social problems These were the most challenging problems, especially in the first year, given that in the majority of the people there was a strong sentiment of rejection of "privatization". Political opposition groups in the 11 initial small towns took advantage of this situation to challenge the mayors and the municipal councils. The project developed a special strategy for communication and promotion to explain to the users the differences between "privatization" and the hiring of a specialized operator to make the services more professional, guaranteeing that the ownership of the assets would be maintained with the local government. The activity of 41 This change in authority in the beginning of 2007 directly affected · Less information was given to the public to avoid public the processes in the towns of Urcos (Cusco), Nueva Cajamarca fatigue, loss of credibility, owing to delays in the beginning (San Martin) and in Tuman (Lambayeque). In these three cases, of the impact work. the new municipal authorities were not aware of the process · The importance of communication in the bidding process had resulted in the signing of the contracts with the operating was underestimated, assuming that it was unnecessary to companies. In the case of Urcos the STPP ended its intervention communicate this phase to the public, given its complexity. because of a decision by the new mayor and in the other two cases a phase of re-negotiation has been started with these · Adequate information flow was not strengthened and neither authorities in order to maintain the agreements and local legal was the confidence of the municipality and civil society in the stability, along with social peace, although it has been with potential operators strengthened. mixed results. 7.4. Problems with expectations in terms 7.3. Problems in terms of Communications of infrastructure There were initial difficulties in conveying the messages on the Normally water and sanitation projects tend to be associated new management model, given the complex elements and with infrastructure works. This is a very deep-rooted perception conceptual content of the management model and the various at various levels of society and public administration. Thus it options for change in the promotion and communication strategy was difficult in the beginning of the project to communicate for operators. There were also other difficulties faced, which led the conceptual message of the proposal, emphasizing that to the initial bid notifications in Tamshiyacu and Tabalosos being the objective of the project was to improve management, declared as deserted, in the first quarter of 2005. This weakness administration or in the best of cases contribute to professionalism in communication was because: in the operation, maintenance and replacement of services. And that only after this would it be helped with the implementation of an "impact study" to improve services. However this in no way meant an immediate solution to the crisis faced by the service. To overcome this expectation in terms of infrastructure, an intense effort was made at communication and it was finally ensured that the majority of the population understood the STPP project and then accepted it, participating in a democratic manner in the selection of the model that was best suited to their economic and social reality. However the socio-economic and technical diagnostics, the development plans of the services, warned that in some towns only investment in the impact study on which the project was based, was not enough improve the services substantially and that it was important to help the municipalities identify other financial 42 sources to complete this process. This was supported During this period, the municipality and the specialized operator by carrying out pre-investment studies in the towns of Laredo, had to agree on, prepare and execute actions on the following Tuman, Tabalosos and Tamshiyacu, besides supporting the issues, which were particularly difficult: Regional Government of Loreto in studies in Nauta. The results · The transfer of human resources of the municipality to the of these actions must be implemented in the years to come, with specialized operator's payroll. the support of the specialized operator hired in each locality. · The updating of the network map of the drinking water distribution systems and collection of wastewater. 7.5. The transfer process · The valued inventory of the assets that would be transferred to the specialized operator for administration and keeping. After signing the management contracts between the · The approval of accounts receivables of the municipality would municipalities and the specialized operators, the process of be sent to the specialized operator for recovery. transfer of services was initiated, this took three to six months, depending on the characteristics of each town. In some cases · Transfer of rights, licenses and permits of the municipality linked they had to wait for the impact study to be finished before starting to the provision of water and sanitation services. because of the impossibility of improving the quality of service · Cleaning and updating of the user census of the municipality and without it or the absence of the service without it (Tamshiyacu) In if any the record of users. other places such as Nueva Cajamarca and Sechura, the transfer · Physical-legal formalization of the assets owned by the was done in lesser time. municipality and resolution of pending legal matters. Table 13: Summary of the problems identified in the STPP and its solutions Lack of a Specialized · Local government ordinances, establishing the rules of play to improve management Operator market. of the services. · Direct invitation to potential interested parties at the local, regional and national level. · Continuous follow-up after purchase of terms and conditions of the bid till the announcement of the winner of the bid. Problems that were political · Flexibility in the intervention strategy and allowing the local actors to take the final and social in nature decision. · Accept the option of returning to previous phases, to strengthen the agreements. Problems related to · Ensure a permanent communication strategy, in the various phases of intervention. communications · The local municipality must head the communication strategy by means of a committee formed along with local actors. · Answer all questions and queries posed by the public. Problems with expectations · Strengthen the communication strategy to spread awareness about the objectives in terms of infrastructure of the project: improve management. · Support local governments with pre-investment and investment studies in order to get financial resources to improve infrastructure. 43 Lessons learned 1. The promotion of the new operators and model of rules, which would help sustain the process and define the management of water and sanitation services requires a appropriate profile of the operator for each town. permanent information and communication strategy for the Given the legal gaps that existed when the project started, on public and/or users of the service. Prior to starting the process, issues relating to the hiring of an operator, the 9 municipalities during it and in the subsequent stages, there should be a laid down four ordinances to clarify the rules of the process: continuous flow of information to the public. Ordinance on Provision of Services, on the Community · The existence of a good level of prior information to the public Neighborhood Supervision Board, Attention to Claims and on and local leaders on the STPP allowed smooth transition to the Pricing System. the phase of promotion and empowerment, as well as greater Given that the ordinance on the provision of services and the interest, expectations and commitment on the part of the ordinance on attention to claims refer to the rights and duties of social actors involved in taking the project forward. the users and the service providers, the governing body should · The main strength of the process of promotion is that promulgate the required norm, which would standardize these it was anchored to political will and transparency of the rights and duties. local government, the strength of the local communication diffusion committee, with high degree of participation of civil 3. The benefits of the new model for the municipalities are: society and the formation of a local endogenous core of social leaders and public opinion. · Real charges associated to the quality levels of the service and approved by the public are fixed. · The general informative-communicative-educative and participative methodology in the elaboration of information · It frees municipal resources allowing greater focus on the and diffusion materials is an effective instrument to discuss municipal subsidies for those who really need it. and analyze new conceptual and comprehension related · It allows the establishment and specification of service challenges in the decision to change the management quality objectives, which can be demanded of the model. specialized operator. · The actions for information-communication of the progress · Efficiency objectives are fixed and specified, thus avoiding of the STPP to civil society and social organizations through the transferring of the results of inefficient management to the communication strategy guaranteed sustainability of the the users and keeping the charges for the service more social process and helped avoid reversals or distortions due accessible to the users. to political interference. · It allows civil society to support the municipality in monitoring · A strategy is required to link the municipality and local private the quality of service. sector based on the diagnosis of its real capacities and its perception of the possibility of investment in the local water 4. The change in the model of management of the small town and sanitation sector. services can be done with a strong element of social promotion and participation. The commitment of the municipality, of the 2. The hiring of specialized operators for services in the small users and the specialized operator can form the basis for a towns should be based on the adoption of clear and simple new institutional arrangement that defines a medium-term 44 work strategy to improve services, increase investments and 10. The bidders must be supported during the entire process, so guarantee sustainability of services. that they can adequately evaluate the risks and cash flows of Social participation in the process of selection of the each operation. The processes must have adequate time for specialized operator brings transparency in the process and the technical aspect to be combined with the financial aspect reduces the perceived risk of potential bidders vis-à-vis long- of the proposal. term contracts with the municipalities. 11. The national market in small towns can allow operators to 5. The hiring of a specialized operators in small towns does not assume the risk of operation and maintenance of systems, the require a minimum market scale. It will be the social, economic commercial risk and the risk of working capital investments. and technical characteristics of each town that will determine It is difficult for the moment for them to take on the risk of the type of specialized operator who will provide the service of investments owing to the absence of suitable long term credits this essential commodity. in the national financial market and the impact on the returns on their investments. 6. With due training on issues of quality of service and its associated costs, people can take appropriate decisions in 12. The capacity for payment of the people in small towns is such their own interest, which may involve an increase in charges till that they cannot be burdened with charges for extension of arriving at a charge that allows full recovery of costs associated coverage of services. Hence this must be the responsibility of with the quality objectives of the service. the municipalities with the help of transfers from the central and regional government. 7. In small towns the poorest section can be taken care of by levying charges that are in keeping with their economic 13. The creation of a market for specialized operators in the capacity. This can be done by hiring specialized operators small towns of Peru, has tremendous potential today if who are suited to the scale of operations, who do not disturb the Central Government give technical assistance to the the local labor market and on the basis of a consistent socio- municipalities to conduct the processes, the local governments economic study. have appropriate information and know the advantages of hiring specialized operators, the Central Government offers 8. To have a successful selection process for specialized incentives for extension of coverage, with the participation operators the terms and conditions of the tender and the of specialized operators and the users have access to management contract must be designed to make sense in information and are invited to take part in participative the local context, without creating insurmountable barriers for processes to take decisions on quality-price for the service access in terms of the profile of the operator. and also commit to support the sustainability of their services. 9. It is important to promote, among the bidders, the presence of at least one person who has been associated with the supply of water and sanitation services in an EPS, JASS or municipality. This helps the bidder evaluate the risks in the operation with greater awareness of the reasons, especially in order to overcome the fear of non-payment. 45 Water and Sanitation Program Latin America and the Caribbean Region World Bank Office, Lima. Alvarez Calderón Nº 185, San Isidro, Lima 27, Perú Phone: (511) 615-0685 Fax: (511) 615-0689 E-mail: wsplac@worldbank.org Website: http://www.wsp.org