;independdent Water Entrepreneurs in ____ Iir Latin,,A:mr'' a A R The other, priv at sec'tor in wa ter servicsC Tova Maria Solo 26382 April 2003 iK _ tii v~~~~~ i S7~~~~~~~ MependenD Water The o by Tova Maria S:oo Department of Finance, Private Sector and Infrastructure Latin American Region, The World Bank and Energy and Water Department Private Sector Development and Infrastructure The World Bank The findings, interpretaions and conclusions expressed in this report are entirely those of the author and should not be attnbuted in any manner to the World Bank, its Departments or to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication or accept responsability for any consequence of their use The material in this publication is owned by the World Bank's Department of Finance, Pnvate Sector and Infrastructure, Latin American Region, and the Energy and Water Department. Dissemination of this work is encouraged. For questions about this report including permission to reprint portions or information about ordering more copies, please contact the Department of Finance, Private Sector and Infrastructure, Latin American Region by email at the addresses below Report written by Tova Maria Solo - The World Bank For further information please contact. Energy and Water Department (EWD) Or External Affairs Unit (LCREA) The World Bank, 1818 H St, Washington, D.C. 20433 Tels (202) 473-2710 / 473-7229 Email: whelpdesk@worlbank,org Designed by Fabiola Perez-AJbela Pnnted in Peru by Biblos Lima, May 2003 2 acknowledgments This publication summarizes the findings of research carried out by the World Bank Water and Sanitation Program (WSP) in 1 999, then under the direction of Brian Grover and Bruce Gross, who provided both moral and financial support for our endeavors. The Field research was carried out by consultants Carmen Arevalo, Luis Brusco, Fernando Troyano and Juan Nunura, all of whom contributed with excellent reports, well beyond their terms of reference. Field research was partially financed by Danish Consultant Trust Funds, by the GTZ and the WSP Special appreciation should be expressed for GTZ's support and collaboration which led to the production of two videos on small scale water producers in Latin America. Unfortunately it is not possible to list all of those who gave their time and shared their experiences and knowledge to our team. However, of those who stand out in particular, we must acknowledge the support and enthusiasm of the Director of the Water Program in the Colombian Planning Ministry. Luis Fernando Arboleda and his deputy, Luis Fernando Ulloa, now general manager of the water companies of Barranquilla and Soledad respectively, Jorge Triana and Mauricio Lopez of ACODAL, and above all, of Fernando Araujo, Minister of Development for Colombia who put in place a policy to develop small scale water producers Fernando, I regret to add, was kidnapped in 2000 and is supposed dead. Among the "aguatero" community we must mention Silvio Melgarejo, President of CAPA in Paraguay, Jorge Uribe, of CONHYDRA, Colombia; Chihala Ghassam, President of the Cooperative of el Carmen, Cochabamba, Bolivia, a few of many whose work inspired a re-evaluation of the private water sector in Latin America Among the many World Bank colleagues whose help and interest spurred us on we mention Chantal Reliquet, Maria Paniagua and Katia Nemes participated in missions and meetings, Alex Bakalian, first put us in touch with the Aguateros of Paraguay, Menahem Libhaber, whose contacts in Colombia were wonderfully helpful. Guillermo Yepes, Lee Travers, Omar Razzaz, and Vincent Gouarne reviewed the various papers which resulted from the research Their comments are gratefully acknowledged. Vivien Foster, Mananne Fay, Jonathan Halperin and Jack Stein gave the final push to publish, clearly worthy of a thankful mention. Besides this, the publication would not have been possible without the WSP publications team in Lima, Peru, Beatnz Schippner, with help from Jorge Serraino and Arlene Shaffer of the World Bank in Washington and consultant Suzanne Snell who found the right words for the text. Peter Loach as team assistant kept us on track and organized throughout. To all, my sincere thanks and appreciation Tova Maria Solo Washington, April 2003 3 It is now widely accepted that Small Scale Providers of water competitive rather than exploitative. Most offer services of a good supply and sanitation services play an important role in extending quality at a price that may be comparable to or lower than that access to unserved, mainly poor, urban households outside the offered by the public utility. Furthermore, they typically operate reach of public utilities in many developing countries. Although the without external funding - making their own investments in scale and magnitude of the small scale service market varies from infrastructure, often operate at lower cost - despite the lack of country to country and city to city, recent studies indicate that public subsidies; and respond quickly to demand - readily adapting small scale providers serve about 25% of the urban population in their services to meet consumers needs. Latin Anerica and East Asia, and 50% of the urban population in This report outlines the findings of the six-country study of Africa Estimates are as high as 80% for sanitation in urban Africa, small scale providers in Latin America carried out by the Water and demand for these types of services is growing in excess of 3% and Sanitation Program. The lessons, drawn from Paraguay, Argen- per year on average tina, Colombia, Guatemala, Peru and Bolivia, not only highlight the Small scale providers come in many shapes and sizes. They important role that small scale service providers play in the delivery range from independent borehole fed networks serving as many of services to underserved, primarily poor, households in urban as 14,000 households to mobile water tankers serving individual areas, but also underscore the need for policy makers in all households and institutions Many have been around for several countries to "look with a fresh view at all water providers who are decades, and some for at least 70 years. However, it was not until investing and active in their cities" and establish a conducive policy 1998, that small scale providers began to gain international and regulatory framework that enables households to obtain recognition as key players in the water and sanitation sector. Until access to water and sanitation services from any actor that is able then they were considered a transitory and temporary and willing to meet their needs. phenomenon to be ignored rather than supported, as they ran Coming at a time when the sector is facing up to the counter to the monopoly service provision model , preferred and challenge of meeting the Millennium Development Goals, this desired by many Governments. report is a useful reminder that sector practitioners should remain The resuits of a study of the aguateros in Asuncion and open and receptive to options that enable us to increase access to Ciudad del Este in Paraguay, carried out in 1998 by the Water and water supply services to all consumers. Working with small scale Saniation Program and published here for the first time, found providers may enable us to reach coverage targets faster and that one third of all water connections serving up to half a million more effectively than we would do if we ignored or stifled them. persons had been made in these two cities over the 20 year However, in doing so, we should take care to ensure that the period preceding the study. These connections had been actions we take serve only to improve access and affordability to provided by between 350 and 600 independent aguateros at a the poor households that we aim to assist. cost of roughly USD 250 per household, and offered water at a price consistently below the charges levied by the public water company The study concluded that rather than shun small scale providers, efforts should be focused on learning how best to encourage and support these private sector investments in the provision of water and sanitation services These findings led to a series of regional studies on small scale providers in Africa, Latin America and Asia that share the Jamal Saghir following lessons: small scale providers are neither trivial nor Director, Energy and Water transitory, and contrary to popular thinking, are more often Chair, Water and Sanitation Sector Board 4 Engineers and historians are increasingly interested in the In the cities reviewed, private providers turn out to reach evolution of water delivery systems and the provision of water approximately 25% of the local populations, suggesting that the and sanitation services. However, only a few users have ever private sector remains key to provision of water. Sewage questioned how our public services (water, energy, collection, treatment and disposal, however, remains a much communications, garbage collection and the like) were managed, bigger challenge for small providers given the implicit economies let alone wondered about how things might have been different of scale and lower willingness to pay for the investments. Even this in the past, until privatization began to take hold in the eary short review reveals not only the importance of the small scale 1990's. In Latin America privatization of many services met with private providers, but also their ingenuity. In analyzing their survival increasing public resistance leading to a special note of angst in strategies, it identifies the benefits of competition and free entry, the political dialogue. In most South American countries there are and the costs of operating on the margin of the law. The lessons deep rooted convictions that reserve water resources to the which the small scale private providers have learned over the public domain, and against the notion that water services should years have formed their present operating patterns. These local be financially viable and that it could be a profit-making business. entrepreneurs appear then to be an important stakeholder that However, there are plenty of good experiences in private sector need to be involved to meet the challenges of serving the participation in water utility services, from France that has additional 120 million urban dwellers that need to have adequate delegated water services to private companies since the 191 access to sustainable water supply services by 201 5, in order to century, England that have auctioned off its water utilities in the reduce by half the current coverage deficits established by the early 90's, and private sector participation in water utility services Millennium Development Goal for water in Latin American Latin Amenca, which provide services to more than 60 million countries. In this time when partnerships need to be made to throughout the region, including many small and medium size reach the development goals and fight poverty, more than isolating providers. or ignoring the small local private sector, they should be Many policy makers, even specialists in water services, do recognized as a key player in sector dialogue, and'in revising not realize the extent of private involvement in "public" service technical and service quality standards Its strategies to reach the delivery today. We have always known of the private water most difficult segments of the water supply market without explicit truckers working in the shanty-towns or "marginal" communities, government subsidies provides a good example for those nsk when the municipal company is not able to meet the explosive averse public and private companies that are reluctant to demand of cities. Truckers respond in a costly but timely manner participate in those less favorable segments of the market. One of to the demand of those poorest segments of the population that the main messages of this publication is one of hope as it do not have access to the service or of those that while having a demonstrate that even the poor are not only willing to pay but are connection have unreliable provision. But we know little about actually paying for water services when the service is provided to other forms of private provision of water services, which, as it them, even in a less than optimal way. turns out, are almost as many and as varied as the locales where they have evolved. This publication, "Independent Water Entrepreneurs in Latin America - The Other Private Sector in Water Services" goes beyond the first study conducted by the Water and Sanitation Program in 1998, which documented the experience of the Aguateros in Paraguay; and offers a first view of Abel Meiia small scale independent providers working in water provision in Water Sector Manager, six different Latin American countries: Argentina, Bolivia, Colom- Department of Finance, Private Sector and Infrastructure, bia, Guatemala, Paraguay and Peru. Latin Amencan and the Canbbean 5 y ~~~~~~~~~~~~~~~~~~~~~~~~~4, l L}' ; a 4 s $^s, , \ ,4 \ * 4 C HTivs wb Ii I+X~~is > 1 P---=W B % l l l}8t+*8g~~~~~~~~~~~~"c- 'SI'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I ji ^ s jite b wSrra;;ft t, tstW w 5; i's I,~~~~~~~~~~~~~~~~~~~~~~~4 It~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 47~~~% 1- Introduction L 2- Services offered and business models Location and Origins Cooperatives: A Hybrid Form Evolution: From carts and trucks to Fixed Networks Service performance and price Financial self-reliance Innovation and responsiveness to customer 3- Market Role 003 A large market share A competitive Market Constraints to Expansion: The Legal and Regulatory Environment 4- Constraints and Strategies Business Constraints Legallhmbo Threat of nfrastnucture exproprlation Tariffrestrlctons Service area restrictions Technlcaland operatingstandards Competimg with subsidized utilitles Strategies to Reduce and Mitigate Risk Lfrnitlngli7vestment Buylng cover 5- Next Steps and New Roles 6- Conclusion TABLES Table I. Independent water providers in six Latin American cities 0 0 Table 2. Competition examples and strategies OD Table 3. Risks faced by IPs in LA BOXES With Aguateros, No Wait for Water in Paraguay 0i What is the Best Size for a Water System? 0:3 Regulations for Independent Operators in Colombia 2 "We will benefit from regulation if we are recognized as legitimate actors" Since colonial times, private entrepreneurs have theme, derived from its mission to help the poor gain provided water to Latin American cities. While many access to improved services, is to understand the role sought permission from government authorities to of independent providers alongside formal utilities. produce and distribute water, most operated without Ufimately, WSP is interested in policy options which, an exclusive franchise, and without any subsidy or by creating space for the competitive energy and credit support from government They grew until a creativity of small enterprise, would offer more wave of nationalization in the mid-twentieth century responsive services to the poor. left almost all of the Latin American water companies As part of this program, field studies of in the hands of government. Some of the original independent water providers in six Latin American independent providers survived (Aguas de Mariscal in countries were carried out by local consultants. Time Guatemala is over 70 years old), but many more constraints precluded consideration of independent since then have grown up in business niches alongside sanitation providers. The six countries reflect a broad the public companies. spectrum of hydrological, economic, and legal In the 1990's, private participation in water environments. In particular, a wide variety of services made the headlines again as governments, regulatory frameworks is represented. In Argentina frustrated with the poor service and financial perfor- and Paraguay, the law is ambiguous with respect to mance of their public-sector utilities, opted to bring in the status of independent water providers. In Colom- private operators, generally under long-term bia and Peru, the constitution encourages private concession contracts (only Chile has gone for a full sector participation in water provision, but detailed divestiture model as in the UK). This new wave of regulations create obstacles to their operations. In large, often international private providers operate Guatemala, there are few legal limits on independent under detailed government regulation, with an providers' participation in the water sector. Bolivia is exclusive license to provide services in their highly regulated, but allows user cooperatives. concession areas. They differ from the smaller In each city, ten totwenty independent water homegrown, independent providers who operate providers were selected for a rapid survey of the with limited government oversight with no services they provided and key performance and price government support and who must compete for indicators. Similar indicators were obtained for the customers. This group is the focus of this study. municipal utility. Five to ten independent providers The Water and Sanitation Program (WSP) were then interviewed in depth, but it was not began collecting information globally about the role of possible to gather detailed financial statements or small private providers in 1998. Small providers are conduct user surveys. Independent providers active in many market segments, but they have a identified during these surveys came to a workshop particularly large market share in the slum and peri- held in Cartagena, Colombia, in February 1999. urban areas that are under-served or left out by official This report summarizes the findings of the six utilities. The Program's objective in exploring this country studies, enriched by presentations and 8 Independent Water Entrepreneurs in Latin America S~~~~~~~~~~~~~ discussions at the 1999 workshop. Based on the not offer the right hydrologycal condlitions. In others. partial evidence available, the reports attempts to like Lima, government regulation actively discourages answer the following questions about the the independent provision of water by networks. independent providers: Mobile operators offer higher-cost, low-volume - How important are the services they supply? service but can do so in higher-risk environments, - How effective and efficient are the services? wherever someone is willing to buy water, and even if - What obstacles do they face in seeking to scale this demand is only seasonal. Interestingly, many up their activities or to upgrade their service? network operators started as mobile oper-ators, then - What are their strategies for competing in the invested in fixed facilities -when they had market and coping with business and regulatory accumulated enough cash, and felt they did not risk an risk? expropriation of this sunk investment. - what policies would be likely to improve their But even within each of these two sub-groups, performance and benefit the consumers they major differences exist. A mobile provider may serve? operate its own warter source, buy from a third-party The data obtained in this exercise are not com- private source, or retail water purchased in bulk (or plete or always verifiable enough to draw firm policy sometimes stolen) from the trunk utility. Truckers conclusions. However, several observations can be may ser-ve households directly, deliver water to a made that suggest the value of more in-depth s-tudy community storage tank, or even supply a local fixed and p6ilicy work on the role of small-scale in specific network serving a group of standpipes or house country cases. connections. Private well or source operators can The most striking finding of this review, which serve tankers, but also offer top up service to the makes aggregate conclusions difficult to reach but also official utility in drought periods. And many small makes the topic more exciting, is the sheer diversity operators are also active in "value-added water' of the services, market niches and business models businesses (bottled, bagged, filtered, flavored waters, developed by small water entrepreneurs. Perhaps the and ice). This diversity shows the acumen and most useful classification that can be made for policy responsiveness of small entrepreneurs who live from purposes, is that between mobile providers (mostly what they sell. After all, they go broke if they do not tanker trucks) and fixed networks (piped delivery), offer services that people want or if they misread their Argentina Network operator-s have substantially lower costs and business environment. Bolivia prices per cubic meter sold. They offer greater A second observation concerns the large C l m i convenience and service quality to their clients, but, as aggregate scale of activity of small providers. Even inCoo bi their business model involves "sunk costs" of cities where the public utility has a relatively high Guatemala infrastructure, they are much more exposed to coverage, they serve a substantial market share of Par gay expropriation and regulatory risks. Indeed, network urban households, not only in low-income and other Peru operators do not occur at all in cities. Some cities do areas where the municipal util'ity is slow to extend its 1X s _s~~~~~~~~~~~~~~~~~~~~~~~~~~~ network, but also in a wide variety of niche markets enforcement of exclusive utility licenses and other that coexist with and complement utility services. regulatory constraints. It also varies over time in the Third, in the cities sampled, we did not get same cities. A pen-urban "aguatero" may not feel confirmation of the popular cliche (frequently threatened by an exclusive license held by a sleepy, mentioned in engineering studies and masterplans) cash-strapped municipal utility with a track record of according to which all independent operators charge a slow expansion. But the same aguatero will stop huge multiple of the public utility's price. Trucked investing, or will attempt to recover its investment water is more expensive than piped, but in our faster from up-front connection charges, if the same sample it sells at 4-10 times the public networks unit license is transferred to a private concessionaire who price - not the 20-150 times often mentioned in the has hard contractual coverage targets and the means literature. More interestingly, small network operators and incentives to expand rapidly. in several cities compete favorably on price with the Servingthe poor is a huge challenge, in Latin main utility, even though they get no subsidies, American cities as in other developing countries. This paper suggests that small entreprise can and will be a Apparently economics of scale may not be as essential to water service industry as often thought. part of the solution, and that different government policies can promote or hinder the scale and quality of This suggests that govemment policy might usefully terrsos.Frhrwr snee odsg consier ceatig a pace or sall peraors,their response. Further work is needed to design consider creating a space for small operators,seiipocesrpoltshatpteengyf especially in cities with large coverage backlogs. seii oiiso rjcsta a h nryo small providers, but one conclusion is likely to stand: And fourth, government policy does matter govemments, advisors, investors and aid agencies The presence of prvate network operators, and their who are looking at water utility reforms in developing willingness to invest in improved infrastructure, varies countries would be well-inspired to look at this "other sharply across cities (lots in Guatemala City and private sector", and to think twice before adopting Asuncion, almost none in Lima) -in a way that reform proposals that ignore or stifle its potential seems related less to consumer demand (the main contribution. utility's coverage gaps) than to the govemment's 10 Independent Water Entrepreneurs in Latin America City/Country Households Independent providers 1 Average Price ($US/m3) Served by IPs I . _ (total caty population) Type IPs Utility (% of pop.) (average number of connections where available) 1, ________________!_ - -- - - -- - -- Cordoba, Argentina 38,200 - Cooperatives (3%) 1j 0.42 0.54 (1,200,000) (15-20%) (78-1,150) ! 0.23 - Networks (10%) I 1.25 -2 50 (500) - Truckers (2%) ii Asunci6n, Paraguay 50,000 , - Small networks 11 0.30-040 0 40 1,000000) (30%) (400; up to 2,000) Barranquilla, Colombia 52,500 - Truckers 5.50 - 6.40 0.55 (1.200,000) (20-25%) - Carters -Small networks 1 0 54 (up to 14,000) Guatemala City >78,500 r. -Truckers Ij 2 70-4 50 (> 2,000,000) (>32%) , - Community systems 0.33-0.58 0.42 - Private networks 0.42 (up to 15,000) ,i Lima, Peru 26-30% - Truckers 2.40 0.28 (5,200,000) Ica, Peru 10% - Private networks 0.21 (condominial) Cuzco, Peru 30% - Communrty systems 0.34 to 1 20 (200) I monthly rate (unlimited consumpton) Santa Cruz, Bolivia 100% - Cooperatives (I100%) i 0 25-0.55 n.a. (1,000,000) 1 (1,000 - 100.000) 1 ,1~ ~ ~ ~~~~~1 Independent providers in Latin America run a wide Where do small private providers come range of product and service lines, of ownership from? patterns and of size. An individual with a push cart, Many independent providers had their beginnings on selling water by the glass, bag, or gallon, can reach the outer fringes of the city; in settlements not between one and two hundred people daily; a trucker connected to the main service networks. Wells, dams who carnes water house to house can generally serve and reservoirs are generally outside of the central city between 70 and 350 households, or between 400 as producers look for sources of better quality water and 1500 people each day. The more complex and for areas where they are unfettered by legal providers operate network systems that generally restrictions. In Cordoba or Guatemala where small serve anywhere from a hundred to several thousand networks, or aguateros, have operated for over 30 households on a sustained basis, although such years, they remain in what is now mid-city, with the companies were found starting up with as few as I10 rest of the city sprawled around them, although they customers. The average independent network in began as peri-urban service companies. In Lima, the Asuncion counts about 1,000 customers. tankers or the communities who buy their water have Some ind n pdeveloped small distribution systems in the outlying Someindpenent rovder ditribte tilty- slums, but during the summer months they reappear produced water, but others get water from private in the wloo w w ne hoods, wen sources, usually on the city'soutskirts. Private water the municipal water service becomes unreliable. producers with deep wells, dams, and sometimes While low-income residents proved the main treatment plants both sell to secondary distributors sta le independent provir the mare and maintain private networks and, in some cases, run niche are important These icue midde- their own distribution companies. In Lima, where the hos developments whose devlope fudd it law forbids private water production within the muni- hosimpler to build sel-contained water and sanitation cipal perimeter, over 60 private wells on the city limits systems, clusters of vacation homes at the beach provide water to the independent tank truckers-and whose owners preferred a small self-contained water to Lima's official water company too when official system to paying for miles of water mains, industrial sources run dry. parks that must have a reliable supply of high-quality Every city study also revealed an independent water in a city where municipal utilities cannot provide "value-added" watertreatment industry: processed this service, and families of all income levels in cities water products, such as filtered and chlorinated where the public utility provides intermittent or ("purified") water, soda, ice, and flavored waters, are unreliable service. Many middle-income urban being produced in bags and bottles, and marketed and households in Guatemala city have dual distributed locally - competing partly with utility water, connections-one from the municipal utility and and partly with the soft-drinks industry. another from an independent network. 12 Independent Water Entrepreneurs in Latin America the country's decentralization reforms. Most of these new operators have lease or service contracts granted by the local governments, and their water '-. rates are regulated, so they would not strictly meet our definition of "independent" operators (even though the contracts and local regulatory capacities are - - \ ;WE often weak, and leave these operators exposed to r \ ;'Ji.Sgii significant business and govemment risks). However, we included these "mini-concessionaire" in the study as an emerging type of small private providers, of current interest to several Latin American governments looking for ways in which the private Independent network systems exist in all the sector could help them address the service backlog cities studied, though they play a greater role in some and weak public management of services in small cities than in others. While the oldest on record, towns. Aguas de Mariscal in Guatemala, was founded 70 The cooperatives in Bolivia and Argentina are years ago, others (Santa Cruz and Cordoba) go back another hybrid form - between a regulated public 50 and 30 years. These network systems show utility and a self-governing user "club". Legally, the fundamental differences in their ownership and cooperatives maintain an independent status and management patterns, and, coincidentally, in their make their own investment decisions without a gov- origin. Ownership may be by individuals or by ernment mandate of universal service, and without an shareholders (cooperatives and condominiums). exclusive right to serve the areas where they operate Most network systems emerged from one of the or restrictions in expanding this area. However, they following beginnings: are recognized and endorsed by law, their rates and * Real estate developers who installed water and service standards are regulated by a formula, and the sanitation systems in order to sell off lots and most established cooperatives have become over the stayed to manage the systems, or sold them to years quasi-official. independent operators (a model well known in Generally obligated to meet performance the USA); standards and to pay corporate and extraction taxes, * Providers to industrial parks who find a prvate cooperatives can raise investment capital by selling source more reliable and cheaper, in particular shares, in a way that private for-profit operators for high-quality water; cannot. Noted for their management stability, * "Mobile" distributors who evolved into network particularly in comparison with some municipal providers; utilities, the Argentine cooperatives offer other services besides water provision, such as electricity, Two other types of small providers, who may not sanitation, even health and funeral insurance, to entire strictly qualify as "small" or "independent", are included cities. In both countries the larger cooperatives have in the study: new contract operators in small become established and can even get national Colombian towns, and user cooperatives. government grants or guarantees for multi-lateral In recent years, Colombia has seen a growing loans. We found cases, however, of smaller i] r tip.c number of small local firms or individuals (often with cooperatives, threatened by recent concession laws . ' . a consulting engineering or construction background) which oblige members to connect to a privatized r take over the operations of municipal water assets in municipal company. Cooperatives have a difficult time small towns. This occurred after several of the regio- competing with concessions, since their tariff Gi . I C nal companies formerly in charge of these services regulations generally in Argentina do not provide for v .r went into deep disarray in the 90s, after being recovery of investment costs. In Bolivia, where weaned from government fiscal support as a result of cooperatives are the sole supplier for several major cities, cooperatives seek out and compete for new they can be flexible in dealing with late payers. Some markets. New cooperatives in per-urban areas are differences do appear between the profit-making particularly entrepreneurial, and compete actively with operators and the not-for-profit cooperatives: water each other to recruit members at the boundary of cooperatives in Argentina show a somewhat wider their service areas. margin for non-payment than the entrepreneurial operations. Evolution from Mobile Trucks to Fixed Trucked water is always more expensive than Networks piped - as utilities who have to provide emergency Though both network and mobile providers are drought services know well. Even so, this survey did present in most of the cities studied, operators of not observe the very high price multiples (20 to 150 network systems appear to be replacing the tank times) mentioned in studies of water vendors in Af- truckers and carters in some cities. Tank trucks remain rica or Asia. the mainstay of the independent providers in Lima and Independent network operators routinely un- in Barranquilla and still figure to a certain extent in dcl:r e11 rch official suppliers when they are in competi- Cordoba and Guatemala City. Distribution by truck tion. Their capital costs per connection are also gen- has been fading in Cordoba, Argentina, except for erally lower In Cordoba, Argentina, independent specialized industrial needs, while in Asunci6n and in operators kept their costs down for many years to Santa Cruz it has disappeared altogether, in favor of compete with the subsidized public water utility, charg- small networks. An intermediate arrangement exist in ing as little for connections and tariffs as a third of the Lima's squatter settlements: water truckers maintain subsidized water prices of the municipal utility. Now and supply large holding tanks that rely on gravity to that a private concession has taken over and subsidies distribute water to several standpipes, and employ have been discontinued, independent providers prices residents to control a network of hoses running into run up to 70 percent less than those charged by the concession. In Paraguay and Guatemala the aguateros each house and to collect payments. This system was actually introduced by international donors in the compete favorably on price, despite the subsidies received by the state-run utilities in each country. And hopes that communities would manage the water the aguateros in Paraguay, Colombia, Guatemala and distribution, but it gave way to "mini- concessions" with truckers who offered the best price. Truckers Argentina pay corporate taxes, which the state com- have gladly used the holding tanks, Increasing their panies and concessions do not. own revenues and service quality. They have not invested in new water tanks, however, because of Technologncaltinnovion The Independent providers' low costs and prices regulations which transfer all infrastructure assets to stem in large part from their development and use of the public company. The trend suggests, nonetheless, innovative, low-cost technologies. The simple well- that when a mildly favorable regulatory environment, drilling techniques and plastic hosing used by the can lead independent providers to invest in delivery aguateros of Paraguay has reduced the installation systems which involve greater sunk costs and risks, cost of a small water network to about $250 per but provide larger volumes of water at a better price person served. In contrast, most utility companies are to their clients. legally bound to apply rigid engineering standards, and few encourage research into cheaper methods. Performance and price Tariffs of concessioned utilities in Latin America are Performance indicators gathered in this survey suggest often based in <(cost-plus)), leaving few creating that small network providers - even of a modest incentives to save capital or to control operating costs. scale - compare favorably with municipal utilities in Where governments subsidize connections and/or terms of unaccounted-for water, productivity water rates in low-income areas, as in Buenos Aires, (employees per connection), and operating ratios Santiago de Chile, and throughout Colombia, the The independent providers also show extremely low subsidy reduces the operator's incentive to explore rates of customer non-payment, perhaps because lower-cost options. 14 0 00 F X e< S 0 .D (- 0 c9M b, s 3 -E X m p t So ( bg (S9 & @OSM70 a % 'ae Min Mg3l t 2 M S o T S g S Smtw 2z- M 9M aI57 ~X w EOeaaB S 1 -S9 vSS a~~~~~~fmg a F _ - . ' Bk t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 / . . C... c" - 21. The independent providers face a difficult water sector is no exception; water industry environment for investment and business regulations in Latin America offer little recourse to development. They operate in legal limbo and face water users or to the cooperatives as businesses. pricing and other regulations that were designed with They have no grounds to complain of unfair larger, monopolistic water providers in mind. competition when a municipal utility offers water at no Increasingly, they face outright expropriation. In charge or gives financial assistance to consumers. The response, they find ways to reduce their risks. independent providers of Guatemala City relate how the municipal utility, EMPAGUA, provided water free Business Constraints to families who agreed to block independent providers' attempts to run pipes down their streets Legal limbo In all six countries studied, the and connect to families on opposite curbsides. The regulatory frameworks dealing with water production Paraguayan providers cite a similar case in which the and distribution were conceived for large monopoly public company effectively engages in "dumping", providers, whether public utilities or private charging prces below the cost of provision (in this concessions. With the exception of the cooperatives, case an estimated 10 percent of operating and which are regulated to protect shareholders, none of investment costs) in an attempt to run the the countries studied has a regulatory framework that independent providers out of the area. acknowledges the existence of, much less Of all the difficulties they face in doing business encourages, independent providers in the water sec- in such an uncertain and unprotected environment, tor. In the Latin American context, where municipal the following specific ones came up most frequently utilities enjoy official mandates and recognition, the in discussions with independent operators as those independent providers are left in a kind of limbo: which most threaten their security and limit their neither completely legal, nor explicitly illegal. Their options: lack of secure ownership of infrastructure invisibility under the law leaves them at a clear they have built, pricng regulations, restriction of disadvantage, for example, when dealing with service areas, and inappropriate technical and deadbeat customers or unauthorized taps, because operating standards. They also feel that the utilities' the local police cannot come to their defense. The recourse to subsidies and external financing creates independent providers thus find themselves under an uneven playing field, where the utilities and pressure to do favors for the local police in return for concessions do not face the same discipline of having undefined protection. to recover costs in the marketplace as they do. Unfair monopoly practices Consumer protection Threat of infrastructure expropriation In most of laws, antitrust legislation, and regulations against "dum- South America, the state reserves the ownership and ping" or price-fixing and other monopolistic practices sovereign right to use of ground or surface water and are a rarity in Latin America in any sector, and the may also legally claim ownership of all production and 22 Independent Water Entrepreneurs in Latin America (piped) distribution equipment in metropolitan areas. impossible for the operator to invest in ways to While the likelihood of confiscation or expropriation improve service. At the same time, the tariff regimes varies from country to country, and while individual actually discourage the provider from reducing costs, wells are generally tolerated, the threat is enough to since lower costs will lead to lower profits. discourage investing in infrastructure. In Lima, the official provider takes over any privately financed S r rstcis The regulatory infrastructure in neighborhoods where it extends its frameworks in Latin America spell out clearly what services. In Paraguay, the threat of expropriation services public operators are to provide and where. roused the aguaterosto form an association to lobby In designating a service area, the state also establishes against passage of a proposed new law. Independent a _ld,Iit"s exclusive rights to sell network water, and it operators in Colombia point out that government's frequently obligates consumers to hook up to the ownership of water supply networks not only official provider. Whenever the official company discourages new investment, but also increases redefines its sphere of operation, the independent insecurity in the face of political change. operators may be displaced. When public utilities are privatized, the contracts generally give exclusivity to LTariffrestrictions Prices are regulated in three of the the concessionaires, even when independent six countries studied. In Bolivia regulators set tariffs for operators already have invested in and are serving an each individual provider based on performance criteria area. This is the case in Cordoba, Argentina, and is a and business plans, while in Colombia and Argentina threat to the aguateros in Asuncion. In Paraguay and profit margins of 14 and 25 percent respectively are Colombia, recent proposals would establish zones permitted but only on operating costs (comparable to for private operators and cooperatives. Regulatory or less than returns on simple bank time deposits or frameworks in Colombia have already created a other safe market investments in these countries). patchwork of independently regulated monopolies. Such tariff restrictions, which are meant to protect This transformation of unregulated independent consumers, also appear to limit new entries and/or operators into regulated mini-concessions limits the investment in new services. The fact that bottled possibilities for growth and for competition for clients, water prices are not restricted, probably because activities in which they have been highly successful, bottled water is felt to be a luxury good, may also and place them at the mercy of regulatory authorities Argentina explain why over 140 producers crowd the bottled rather than their success with customers. Bolivia water industry in Barranquilla while only a handful of private networks are operating. To raise capital to Technical and perating standardJ In the name of Colombia replace or build new equipment, independent public health and safety, water services are subject in GLuatefmal la operators must find new customers to pay most countries to highly detailed quality and Paraguay connection fees up front. They cannot raise funds to engineering standards. These standards are not pay off debt through tariffs, making it virtually always strictly necessary for health and can raise tariff Peru levels above the levels affordable to low-income production, new dams, treatment plants and other groups. To give a commonplace example, regulations major works is generally financed through in most countries require that piping be built of "dura- partnerships with national government and/or ble" material-cement or, in special cases, PVC. The extemal loans. It is thus rare for major capital flexible hosing which has served the aguateros of investments of utilities to be recovered through water Paraguay so well is not allowed. Independent rates, although new concessions should in principle providers cannot keep up with new regulations that follow more of a private sector pattern in the future. apply U.S. EPA standards to drinking water in some While these regulations do not bear directly on the Latin American cities. The tariff regulations make no independent providers, they make for an uneven provision to cover investment in new treatment plants playing field. The independent providers cannot count and they have no access to long-term financing. on such subsidies or soft loans. They must recover Other regulations, even more remote from their investments fully or go broke. user needs, specify organizational charts or planning, management and information systems. They are Strategies to Reduce Risk protested by the large monopolies but can put the Independent water providers in Latin America have smaller organizations out of business. In Colombia, devised a range of strategies for coping with the independent providers under a certain size have not constraints they face. These include cutting costs and been able to survive costs imposed by regulations, pnces and improving services, which improve service, and in some cases they simply went underground for but also bribing officials to renew contracts and fear of being caught out of compliance with operational permits, which harms provider perfor- regulations. mance. Subsidization of utilities' capital costs I Regulations Table 3 summarizes the risks most frequently of the municipal utilities vary but most allow only mentioned by operators interviewed and the survival operating costs to be covered from customer strategies they were observed to have adopted. The revenues. Connection charges cover the investment most common survival strategy to reduce risks is to in tertiary networks and meters, but investment in recover investment costs fast (typically in less than *lw931li1v1TXt!1995 d fI111/7rJV3UfMIIF1,WdiCL1 SILAU1 ti3M I 1;;4;1 si dnd to onsuie busincess-likn manap-maent of water utitities. Hnowev-- -^;m:l;:linFq rii b irrSWfeTSi opor,ttirst. A Permanent RegtuLatory '_nIm.; 'CaL "public setvice enLet srises"' (EPSs) aito IL, t.u0 '.Iw fl WLmy i M=11 * l_0J !i9!Rz'1tLF , all F:PSS Must *ilFI s U 1 1: it employs at least onie full-ti:me professionial adCA': 'aii` 14,0900r --|-- wt-.vS,sf,f.'i vR3 ~ annual business development plan wvith sn.- _______t;g" dLnlls iliv '..*St' 4goe.s; -ha qh Ift(C CW-m --=Sffifie>X-W X1~~~~~ .r. L C ! ie di t.S < _ m~.113 nusovisio vs iL~at might prsotts-t C cU ismcrs -.iwunEiig UF; = _ .s