Entrepreneurs inTo all, my sincere thanks and appreciation Tova Maria Solo Washington, April 2003 acknowledgments competitive rather than exploitative. Most offer services of a good

Independent WaterEntrepreneurs inLatin AmericaThe otherprivate sectorin water services

by Tova Maria Solo

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

Report written by Tova Maria Solo – The World Bank

For further information please contact:Energy and Water Department (EWD)OrExternal Affairs Unit (LCREA)The World Bank, 1818 H St., Washington, D.C. 20433Tels (202) 473-2710 / 473-7229Email: [email protected]

Designed by Fabiola Perez-AlbelaPrinted in Peru by BiblosLima, May 2003

2

The findings, interpretations and conclusions expressed inthis report are entirely those of the author and should notbe attributed in any manner to the World Bank, itsDepartments or to its affiliated organizations, or tomembers of its Board of Executive Directors or thecountries they represent. The World Bank does notguarantee the accuracy of the data included in this publicationor accept responsability for any consequence of their use.

The material in this publication is owned by the WorldBank's Department of Finance, Private Sector andInfrastructure, Latin American Region, and the Energy andWater Department. Dissemination of this work isencouraged. For questions about this report includingpermission to reprint portions or information aboutordering more copies, please contact the Department ofFinance, Private Sector and Infrastructure, Latin AmericanRegion by email at the addresses below.

3

This publication summarizes the findings of research carried out by the World Bank Water and Sanitation Program (WSP) in 1999, thenunder the direction of Brian Grover and Bruce Gross, who provided both moral and financial support for our endeavors. The Fieldresearch was carried out by consultants Carmen Arevalo, Luis Brusco, Fernando Troyano and Juan Nunura, all of whom contributedwith excellent reports, well beyond their terms of reference. Field research was partially financed by Danish Consultant Trust Funds, bythe GTZ and the WSP. Special appreciation should be expressed for GTZ’s support and collaboration which led to the production of twovideos 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 Programin the Colombian Planning Ministry, Luis Fernando Arboleda and his deputy, Luis Fernando Ulloa, now general manager of the watercompanies 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, waskidnapped in 2000 and is supposed dead. Among the “aguatero” community we must mention Silvio Melgarejo, President of CAPA inParaguay, 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 andKatia Nemes participated in missions and meetings, Alex Bakalian, first put us in touch with the Aguateros of Paraguay, MenahemLibhaber, whose contacts in Colombia were wonderfully helpful. Guillermo Yepes, Lee Travers, Omar Razzaz, and Vincent Gouarnereviewed the various papers which resulted from the research. Their comments are gratefully acknowledged. Vivien Foster, MarianneFay, 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, Beatriz Schippner, with help fromJorge Serraino and Arlene Shaffer of the World Bank in Washington and consultant Suzanne Snell who found the right words for the text. PeterLoach as team assistant kept us on track and organized throughout. To all, my sincere thanks and appreciation

Tova Maria SoloWashington, April 2003

acknowledgments

competitive rather than exploitative. Most offer services of a goodquality at a price that may be comparable to or lower than thatoffered by the public utility. Furthermore, they typically operatewithout external funding – making their own investments ininfrastructure; often operate at lower cost – despite the lack ofpublic subsidies; and respond quickly to demand - readily adaptingtheir services to meet consumers needs.

This report outlines the findings of the six-country study ofsmall scale providers in Latin America carried out by the Waterand Sanitation Program. The lessons, drawn from Paraguay, Argen-tina, Colombia, Guatemala, Peru and Bolivia, not only highlight theimportant role that small scale service providers play in the deliveryof services to underserved, primarily poor, households in urbanareas, but also underscore the need for policy makers in allcountries to “look with a fresh view at all water providers who areinvesting and active in their cities” and establish a conducive policyand regulatory framework that enables households to obtainaccess to water and sanitation services from any actor that is ableand willing to meet their needs.

Coming at a time when the sector is facing up to thechallenge of meeting the Millennium Development Goals, thisreport is a useful reminder that sector practitioners should remainopen and receptive to options that enable us to increase access towater supply services to all consumers. Working with small scaleproviders may enable us to reach coverage targets faster andmore effectively than we would do if we ignored or stifled them.However, in doing so, we should take care to ensure that theactions we take serve only to improve access and affordability tothe poor households that we aim to assist.

Jamal SaghirDirector, Energy and Water

Chair, Water and Sanitation Sector Board

It is now widely accepted that Small Scale Providers of watersupply and sanitation services play an important role in extendingaccess to unserved, mainly poor, urban households outside thereach of public utilities in many developing countries. Although thescale and magnitude of the small scale service market varies fromcountry to country and city to city, recent studies indicate thatsmall scale providers serve about 25% of the urban population inLatin America and East Asia, and 50% of the urban population inAfrica. Estimates are as high as 80% for sanitation in urban Africa,and demand for these types of services is growing in excess of 3%per year on average.

Small scale providers come in many shapes and sizes. Theyrange from independent borehole fed networks serving as manyas 14,000 households to mobile water tankers serving individualhouseholds and institutions. Many have been around for severaldecades, and some for at least 70 years. However, it was not until1998, that small scale providers began to gain internationalrecognition as key players in the water and sanitation sector. Untilthen they were considered a transitory and temporaryphenomenon to be ignored rather than supported, as they rancounter to the monopoly service provision model , preferred anddesired by many Governments.

The results of a study of the aguateros in Asuncion andCiudad del Este in Paraguay, carried out in 1998 by the Water andSanitation Program and published here for the first time, foundthat one third of all water connections serving up to half a millionpersons had been made in these two cities over the 20 yearperiod preceding the study. These connections had beenprovided by between 350 and 600 independent aguateros at acost of roughly USD 250 per household, and offered water at aprice consistently below the charges levied by the public watercompany. The study concluded that rather than shun small scaleproviders, efforts should be focused on learning how best toencourage and support these private sector investments in theprovision of water and sanitation services

These findings led to a series of regional studies on smallscale providers in Africa, Latin America and Asia that share thefollowing lessons: small scale providers are neither trivial nortransitory, and contrary to popular thinking, are more often

foreword

4

5

Engineers and historians are increasingly interested in theevolution of water delivery systems and the provision of waterand sanitation services. However, only a few users have everquestioned how our public services (water, energy,communications, garbage collection and the like) were managed,let alone wondered about how things might have been differentin the past, until privatization began to take hold in the early1990’s. In Latin America privatization of many services met withincreasing public resistance leading to a special note of angst inthe political dialogue. In most South American countries there aredeep rooted convictions that reserve water resources to thepublic domain, and against the notion that water services shouldbe financially viable and that it could be a profit-making business.However, there are plenty of good experiences in private sectorparticipation in water utility services, from France that hasdelegated water services to private companies since the 19th

century, England that have auctioned off its water utilities in theearly 90’s, and private sector participation in water utility servicesLatin America, which provide services to more than 60 millionthroughout the region, including many small and medium sizeproviders.

Many policy makers, even specialists in water services, donot realize the extent of private involvement in “public” servicedelivery today. We have always known of the private watertruckers working in the shanty-towns or “marginal” communities,when the municipal company is not able to meet the explosivedemand of cities. Truckers respond in a costly but timely mannerto the demand of those poorest segments of the population thatdo not have access to the service or of those that while having aconnection have unreliable provision. But we know little aboutother forms of private provision of water services, which, as itturns out, are almost as many and as varied as the locales wherethey have evolved. This publication, “Independent WaterEntrepreneurs in Latin America – The Other Private Sector inWater Services” goes beyond the first study conducted by theWater and Sanitation Program in 1998, which documented theexperience of the Aguateros in Paraguay; and offers a first view ofsmall scale independent providers working in water provision insix different Latin American countries: Argentina, Bolivia, Colom-bia, Guatemala, Paraguay and Peru.

In the cities reviewed, private providers turn out to reachapproximately 25% of the local populations, suggesting that theprivate sector remains key to provision of water. Sewagecollection, treatment and disposal, however, remains a muchbigger challenge for small providers given the implicit economiesof scale and lower willingness to pay for the investments. Even thisshort review reveals not only the importance of the small scaleprivate providers, but also their ingenuity. In analyzing their survivalstrategies, it identifies the benefits of competition and free entry,and the costs of operating on the margin of the law. The lessonswhich the small scale private providers have learned over theyears have formed their present operating patterns. These localentrepreneurs appear then to be an important stakeholder thatneed to be involved to meet the challenges of serving theadditional 120 million urban dwellers that need to have adequateaccess to sustainable water supply services by 2015, in order toreduce by half the current coverage deficits established by theMillennium Development Goal for water in Latin Americancountries. In this time when partnerships need to be made toreach the development goals and fight poverty, more than isolatingor ignoring the small local private sector, they should berecognized as a key player in sector dialogue, and‘in revisingtechnical and service quality standards. Its strategies to reach themost difficult segments of the water supply market without explicitgovernment subsidies provides a good example for those riskaverse public and private companies that are reluctant toparticipate in those less favorable segments of the market. One ofthe main messages of this publication is one of hope as itdemonstrate that even the poor are not only willing to pay but areactually paying for water services when the service is provided tothem, even in a less than optimal way.

Abel MejiaWater Sector Manager,

Department of Finance, Private Sector and Infrastructure,Latin American and the Caribbean

table of contents1- Introduction2- Services offered and business models

Location and OriginsCooperatives: A Hybrid FormEvolution: From carts and trucks to Fixed NetworksService performance and priceFinancial self-relianceInnovation and responsiveness to customer

3- Market RoleA large market shareA competitive MarketConstraints to Expansion: The Legal and Regulatory Environment

4- Constraints and StrategiesBusiness Constraints

Legal limboThreat of infrastructure expropriationTariff restrictionsService area restrictionsTechnical and operating standardsCompeting with subsidized utilities

Strategies to Reduce and Mitigate RiskLimiting investmentBuying cover

5- Next Steps and New Roles6- ConclusionTABLES

Table 1. Independent water providers in six Latin American citiesTable 2. Competition examples and strategiesTable 3. Risks faced by IPs in LA

BOXESWith Aguateros, No Wait for Water in ParaguayWhat is the Best Size for a Water System?Regulations for Independent Operators in Colombia“We will benefit from regulation if we are recognized as legitimate actors”

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22

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111925

16182429

page

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8

Since colonial times, private entrepreneurs haveprovided water to Latin American cities. While manysought permission from government authorities toproduce and distribute water, most operated withoutan exclusive franchise, and without any subsidy orcredit support from government. They grew until awave of nationalization in the mid-twentieth centuryleft almost all of the Latin American water companiesin the hands of government. Some of the originalindependent providers survived (Aguas de Mariscal inGuatemala is over 70 years old), but many moresince then have grown up in business niches alongsidethe public companies.

In the 1990’s, private participation in waterservices made the headlines again as governments,frustrated with the poor service and financial perfor-mance of their public-sector utilities, opted to bring inprivate operators, generally under long-termconcession contracts (only Chile has gone for a fulldivestiture model as in the UK). This new wave oflarge, often international private providers operateunder detailed government regulation, with anexclusive license to provide services in theirconcession areas. They differ from the smallerhomegrown, independent providers who operatewith limited government oversight with nogovernment support and who must compete forcustomers. This group is the focus of this study.

The Water and Sanitation Program (WSP)began collecting information globally about the role ofsmall private providers in 1998. Small providers areactive in many market segments, but they have aparticularly large market share in the slum and peri-urban areas that are under-served or left out by officialutilities. The Program’s objective in exploring this

theme, derived from its mission to help the poor gainaccess to improved services, is to understand the roleof independent providers alongside formal utilities.Ultimately, WSP is interested in policy options which,by creating space for the competitive energy andcreativity of small enterprise, would offer moreresponsive services to the poor.

As part of this program, field studies ofindependent water providers in six Latin Americancountries were carried out by local consultants. Timeconstraints precluded consideration of independentsanitation providers. The six countries reflect a broadspectrum of hydrological, economic, and legalenvironments. In particular, a wide variety ofregulatory frameworks is represented. In Argentinaand Paraguay, the law is ambiguous with respect tothe status of independent water providers. In Colom-bia and Peru, the constitution encourages privatesector participation in water provision, but detailedregulations create obstacles to their operations. InGuatemala, there are few legal limits on independentproviders’ participation in the water sector. Bolivia ishighly regulated, but allows user cooperatives.

In each city, ten to twenty independent waterproviders were selected for a rapid survey of theservices they provided and key performance and priceindicators. Similar indicators were obtained for themunicipal utility. Five to ten independent providerswere then interviewed in depth, but it was notpossible to gather detailed financial statements orconduct user surveys. Independent providersidentified during these surveys came to a workshopheld in Cartagena, Colombia, in February 1999.

This report summarizes the findings of the sixcountry studies, enriched by presentations and

1. Introduction

9

discussions at the 1999 workshop. Based on thepartial evidence available, the reports attempts toanswer the following questions about theindependent providers:- How important are the services they supply?- How effective and efficient are the services?- What obstacles do they face in seeking to scale

up their activities or to upgrade their service?- What are their strategies for competing in the

market and coping with business and regulatoryrisk?

- what policies would be likely to improve theirperformance and benefit the consumers theyserve?The data obtained in this exercise are not com-

plete or always verifiable enough to draw firm policyconclusions. However, several observations can bemade that suggest the value of more in-depth studyand policy work on the role of small-scale in specificcountry cases.

The most striking finding of this review, whichmakes aggregate conclusions difficult to reach but alsomakes the topic more exciting, is the sheer diversityof the services, market niches and business modelsdeveloped by small water entrepreneurs. Perhaps themost useful classification that can be made for policypurposes, is that between mobile providers (mostlytanker trucks) and fixed networks (piped delivery).Network operators have substantially lower costs andprices per cubic meter sold. They offer greaterconvenience and service quality to their clients, but, astheir business model involves “sunk costs” ofinfrastructure, they are much more exposed toexpropriation and regulatory risks. Indeed, networkoperators do not occur at all in cities. Some cities do

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru

not offer the right hydrologycal conditions. In others,like Lima, government regulation actively discouragesthe independent provision of water by networks.Mobile operators offer higher-cost, low-volumeservice but can do so in higher-risk environments,wherever someone is willing to buy water, and even ifthis demand is only seasonal. Interestingly, manynetwork operators started as mobile operators, theninvested in fixed facilities – when they hadaccumulated enough cash, and felt they did not risk anexpropriation of this sunk investment.

But even within each of these two sub-groups,major differences exist. A mobile provider mayoperate its own water source, buy from a third-partyprivate source, or retail water purchased in bulk (orsometimes stolen) from the trunk utility. Truckersmay serve households directly, deliver water to acommunity storage tank, or even supply a local fixednetwork serving a group of standpipes or houseconnections. Private well or source operators canserve tankers, but also offer top up service to theofficial utility in drought periods. And many smalloperators are also active in “value-added water”businesses (bottled, bagged, filtered, flavored waters,and ice). This diversity shows the acumen andresponsiveness of small entrepreneurs who live fromwhat they sell. After all, they go broke if they do notoffer services that people want or if they misread theirbusiness environment.

A second observation concerns the largeaggregate scale of activity of small providers. Even incities where the public utility has a relatively highcoverage, they serve a substantial market share ofurban households, not only in low-income and otherareas where the municipal utility is slow to extend its

Independent Water Entrepreneurs in Latin America

network, but also in a wide variety of niche marketsthat coexist with and complement utility services.

Third, in the cities sampled, we did not getconfirmation of the popular cliché (frequentlymentioned in engineering studies and masterplans)according to which all independent operators charge ahuge multiple of the public utility’s price. Truckedwater is more expensive than piped, but in oursample it sells at 4-10 times the public networks’ unitprice – not the 20-150 times often mentioned in theliterature. More interestingly, small network operatorsin several cities compete favorably on price with themain utility, even though they get no subsidies.Apparently economics of scale may not be asessential to water service industry as often thought.This suggests that government policy might usefullyconsider creating a space for small operators,especially in cities with large coverage backlogs.

And fourth, government policy does matter.The presence of private network operators, and theirwillingness to invest in improved infrastructure, variessharply across cities (lots in Guatemala City andAsuncion, almost none in Lima) — in a way thatseems related less to consumer demand (the mainutility’s coverage gaps) than to the government’s

10

enforcement of exclusive utility licenses and otherregulatory constraints. It also varies over time in thesame cities. A peri-urban “aguatero” may not feelthreatened by an exclusive license held by a sleepy,cash-strapped municipal utility with a track record ofslow expansion. But the same aguatero will stopinvesting, or will attempt to recover its investmentfaster from up-front connection charges, if the samelicense is transferred to a private concessionaire whohas hard contractual coverage targets and the meansand incentives to expand rapidly.

Serving the poor is a huge challenge, in LatinAmerican cities as in other developing countries. Thispaper suggests that small entreprise can and will be apart of the solution, and that different governmentpolicies can promote or hinder the scale and quality oftheir response. Further work is needed to designspecific policies or projects that tap the energy ofsmall providers, but one conclusion is likely to stand:governments, advisors, investors and aid agencieswho are looking at water utility reforms in developingcountries would be well-inspired to look at this “otherprivate sector”, and to think twice before adoptingreform proposals that ignore or stifle its potentialcontribution.

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru

HouseholdsServed by IPs

(% of pop.)

38,200(15–20%)

50,000(30%)

52,500(20–25%)

>78,500(>32%)

26–30%

10%

30%

100%

Independent providers

Type(average number of

connections where available)

- Cooperatives (3%)(78-1,150)

- Networks (10%)(500)

- Truckers (2%)

- Small networks(400; up to 2,000)

- Truckers- Carters- Small networks

(up to 14,000)

- Truckers- Community systems- Private networks

(up to 15,000)

- Truckers

- Private networks(condominial)

- Community systems(200)

- Cooperatives (100%)(1,000 – 100,000)

Average Price ($US/m3)

IPs Utility

0.42 0.540.231.25 -2.50

0.30-0.40 0.40

5.50 – 6.40 0.55

0.54

2.70–4.500.33-0.58 0.420.42

2.40 0.28

0.21

0.34 to 1.20monthly rate(unlimitedconsumption)

0.25-0.55 n.a.

City/Country

(total city population)

Cordoba, Argentina(((((1,200,000)

Asunción, Paraguay(((((~1,000,000)

Barranquilla, Colombia(~1,200,000)

Guatemala City(((((> 2,000,000)

Lima, Peru(((((5,200,000)

Ica, Peru

Cuzco, Peru

Santa Cruz, Bolivia(((((1,000,000)

11


Table 1. Independent waterproviders in six LatinAmerican cities

12

Independent providers in Latin America run a wide

range of product and service lines, of ownership

patterns and of size. An individual with a push cart,

selling water by the glass, bag, or gallon, can reach

between one and two hundred people daily; a trucker

who carries water house to house can generally serve

between 70 and 350 households, or between 400

and 1500 people each day. The more complex

providers operate network systems that generally

serve anywhere from a hundred to several thousand

households on a sustained basis, although such

companies were found starting up with as few as 10

customers. The average independent network in

Asuncion counts about 1,000 customers.

Some independent providers distribute utility-

produced water, but others get water from private

sources, usually on the city’soutskirts. Private water

producers with deep wells, dams, and sometimes

treatment plants both sell to secondary distributors

and maintain private networks and, in some cases, run

their own distribution companies. In Lima, where the

law forbids private water production within the muni-

cipal perimeter, over 60 private wells on the city limits

provide water to the independent tank truckers—and

to Lima’s official water company too when official

sources run dry.

Every city study also revealed an independent

“value-added” water treatment industry: processed

water products, such as filtered and chlorinated

(“purified”) water, soda, ice, and flavored waters, are

being produced in bags and bottles, and marketed and

distributed locally – competing partly with utility water,

and partly with the soft-drinks industry.

Where do small private providers comefrom?Many independent providers had their beginnings onthe outer fringes of the city; in settlements notconnected to the main service networks. Wells, damsand reservoirs are generally outside of the central cityas producers look for sources of better quality waterand for areas where they are unfettered by legalrestrictions. In Cordoba or Guatemala where smallnetworks, or aguateros, have operated for over 30years, they remain in what is now mid-city, with therest of the city sprawled around them, although theybegan as peri-urban service companies. In Lima, thetankers or the communities who buy their water havedeveloped small distribution systems in the outlyingslums, but during the summer months they reappearin the well-to-do downtown neighborhoods, whenthe municipal water service becomes unreliable.

While low-income residents proved the mainstaple of the independent providers, other marketniches are also important. These include middle-classhousing developments whose developers found itsimpler to build self-contained water and sanitationsystems, clusters of vacation homes at the beachwhose owners preferred a small self-contained watersystem to paying for miles of water mains, industrialparks that must have a reliable supply of high-qualitywater in a city where municipal utilities cannot providethis service, and families of all income levels in citieswhere the public utility provides intermittent orunreliable service. Many middle-income urbanhouseholds in Guatemala city have dualconnections—one from the municipal utility andanother from an independent network.

2. Services offered and operating characteristics

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru

Independent network systems exist in all thecities studied, though they play a greater role in somecities than in others. While the oldest on record,Aguas de Mariscal in Guatemala, was founded 70years ago, others (Santa Cruz and Cordoba) go back50 and 30 years. These network systems showfundamental differences in their ownership andmanagement patterns, and, coincidentally, in theirorigin. Ownership may be by individuals or byshareholders (cooperatives and condominiums).Most network systems emerged from one of thefollowing beginnings:• Real estate developers who installed water and

sanitation systems in order to sell off lots andstayed to manage the systems, or sold them toindependent operators (a model well known inthe USA);

• Providers to industrial parks who find a privatesource more reliable and cheaper, in particularfor high-quality water;

• “Mobile” distributors who evolved into networkproviders;

Two other types of small providers, who may notstrictly qualify as “small” or “independent”, are includedin the study: new contract operators in smallColombian towns, and user cooperatives.

In recent years, Colombia has seen a growingnumber of small local firms or individuals (often witha consulting engineering or construction background)take over the operations of municipal water assets insmall towns. This occurred after several of the regio-nal companies formerly in charge of these serviceswent into deep disarray in the 90s, after beingweaned from government fiscal support as a result of

the country’s decentralization reforms. Most of thesenew operators have lease or service contractsgranted by the local governments, and their waterrates are regulated, so they would not strictly meetour definition of “independent” operators (eventhough the contracts and local regulatory capacities areoften weak, and leave these operators exposed tosignificant business and government risks). However,we included these “mini-concessionaire” in the studyas an emerging type of small private providers, ofcurrent interest to several Latin Americangovernments looking for ways in which the privatesector could help them address the service backlogand weak public management of services in smalltowns.

The cooperatives in Bolivia and Argentina areanother hybrid form – between a regulated publicutility and a self-governing user “club”. Legally, thecooperatives maintain an independent status andmake their own investment decisions without a gov-ernment mandate of universal service, and without anexclusive right to serve the areas where they operateor restrictions in expanding this area. However, theyare recognized and endorsed by law, their rates andservice standards are regulated by a formula, and themost established cooperatives have become over theyears quasi-official.

Generally obligated to meet performancestandards and to pay corporate and extraction taxes,cooperatives can raise investment capital by sellingshares, in a way that private for-profit operatorscannot. Noted for their management stability,particularly in comparison with some municipalutilities, the Argentine cooperatives offer otherservices besides water provision, such as electricity,sanitation, even health and funeral insurance, to entirecities. In both countries the larger cooperatives havebecome established and can even get nationalgovernment grants or guarantees for multi-lateralloans. We found cases, however, of smallercooperatives, threatened by recent concession lawswhich oblige members to connect to a privatizedmunicipal company. Cooperatives have a difficult timecompeting with concessions, since their tariffregulations generally in Argentina do not provide forrecovery of investment costs. In Bolivia, wherecooperatives are the sole supplier for several major

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14

cities, cooperatives seek out and compete for newmarkets. New cooperatives in peri-urban areas areparticularly entrepreneurial, and compete actively witheach other to recruit members at the boundary oftheir service areas.

Evolution from Mobile Trucks to FixedNetworksThough both network and mobile providers arepresent in most of the cities studied, operators ofnetwork systems appear to be replacing the tanktruckers and carters in some cities. Tank trucks remainthe mainstay of the independent providers in Lima andin Barranquilla and still figure to a certain extent inCordoba and Guatemala City. Distribution by truckhas been fading in Cordoba, Argentina, except forspecialized industrial needs, while in Asunción and inSanta Cruz it has disappeared altogether, in favor ofsmall networks. An intermediate arrangement exist inLima’s squatter settlements: water truckers maintainand supply large holding tanks that rely on gravity todistribute water to several standpipes, and employresidents to control a network of hoses running intoeach house and to collect payments. This system wasactually introduced by international donors in thehopes that communities would manage the waterdistribution, but it gave way to “mini- concessions”with truckers who offered the best price. Truckershave gladly used the holding tanks, increasing theirown revenues and service quality. They have notinvested in new water tanks, however, because ofregulations which transfer all infrastructure assets tothe public company. The trend suggests, nonetheless,that when a mildly favorable regulatory environment,can lead independent providers to invest in deliverysystems which involve greater sunk costs and risks,but provide larger volumes of water at a better priceto their clients.

Performance and pricePerformance indicators gathered in this survey suggestthat small network providers – even of a modestscale – compare favorably with municipal utilities interms of unaccounted-for water, productivity(employees per connection), and operating ratios.The independent providers also show extremely lowrates of customer non-payment, perhaps because

they can be flexible in dealing with late payers. Somedifferences do appear between the profit-makingoperators and the not-for-profit cooperatives: watercooperatives in Argentina show a somewhat widermargin for non-payment than the entrepreneurialoperations.

Trucked water is always more expensive thanpiped – as utilities who have to provide emergencydrought services know well. Even so, this survey didnot observe the very high price multiples (20 to 150times) mentioned in studies of water vendors in Af-rica or Asia.

Independent network operators routinely un-dersell the official suppliers when they are in competi-tion. Their capital costs per connection are also gen-erally lower. In Cordoba, Argentina, independentoperators kept their costs down for many years tocompete with the subsidized public water utility, charg-ing as little for connections and tariffs as a third of thesubsidized water prices of the municipal utility. Nowthat a private concession has taken over and subsidieshave been discontinued, independent providers pricesrun up to 70 percent less than those charged by theconcession. In Paraguay and Guatemala the aguateroscompete favorably on price, despite the subsidiesreceived by the state-run utilities in each country. Andthe aguateros in Paraguay, Colombia, Guatemala andArgentina pay corporate taxes, which the state com-panies and concessions do not.

Technological innovationThe independent providers’ low costs and pricesstem in large part from their development and use ofinnovative, low-cost technologies. The simple well-drilling techniques and plastic hosing used by theaguateros of Paraguay has reduced the installationcost of a small water network to about $250 perperson served. In contrast, most utility companies arelegally bound to apply rigid engineering standards, andfew encourage research into cheaper methods.Tariffs of concessioned utilities in Latin America areoften based in «cost-plus», leaving few creatingincentives to save capital or to control operating costs.Where governments subsidize connections and/orwater rates in low-income areas, as in Buenos Aires,Santiago de Chile, and throughout Colombia, thesubsidy reduces the operator’s incentive to explorelower-cost options.

15

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru


Small Scale Economies vs. Economies of ScaleIt is frequently assumed that large scale monopoly companies are justified in the water sector becauseof economies of scale. That is, investment cost/connection costs go down as the size of a water productionand distribution operation goes up. The fact that independent operators working on a small scale havebeen able to undersell the large scale companies calls this assumption into question, at least as an ironclad rule. But it has not been easy to carry out a real cost comparison of large and small operations inthe six cities reviewed in Latin America. Independent operators tend to be frightened about revealingtheir costs and earnings, while public operators and their concessions simply do not have access tosuch figures. (Many investment costs, in particular those subsidized by national governments, havebeen forgotten and others are inextricably combined with investments in other works – sanitation, treeplanting even zoos.)

One case, however, has been documented in Paraguay, thanks to a proposal elaborated by engineersfor CORPOSANA, the municipal water works for Asunción, to secure international financing. These arebase construction costs (no financing charges included) which, in this case, were subject to analysisby international development banks for implementation between 1992 and 2000 and are adjusted to1997 dollars. The comparators in this case are based on two independent operators costs in 1997,analyzed for the same year, and connection charges (presumably base costs, plus finance charges andprofit).

CORPOSANA Etapa 1 - $ 1810.81 37,000 $ 387.20Etapa 2 - $ 2800.00 25,000 $ 193.6

Aguateros Sample 1 - $183.7 300 $ 224.00Sample 2 - $272,45 300 $ 300.00

Connection Cost Number of connections Connection(total cost/#users) 1992-1999 (est.) Charges

average size of project

Cost information from CORPOSANA is based on a report by then CORPOSANA President, Ing. Hugo Ruiz,while Aguatero information is based on a study done by CAPA – the Association of Independent WaterProviders of Paraguay.

Although their charges are similar, the large scale projects run ten to twenty times the cost of thesmall scale projects. The dramatic cost differential in this case can be traced largely to technologiesused and to the source of the water. CORPOSANA relies on surface water intakes some fifteen milesoutside of Asunción (and as the map on page 17 shows, crossing Asunción itself takes another 25kilometers). To cover these distances CORPOSANA requires hefty piping (minimum ten inches indiameter) and powerful pumping stations. The aguateros in contrast can get away with a small diameterflexible hosing because they do not run much more than five miles from any one well source. The wellwater quality is also superior to the river water and does not require any additional investments incostly treatment plants.

The aguateros estimate that they have installed some 50,000 connections in Asunción over thepast fifteen years for an investment of around US$ 20 million in over 400 small scale systems. Incontrast, CORPOSANA’s $137 million investment proposed to reach 62,000 new connections in thesame time frame. Granted, Asunción, like many of Paraguay’s and Argentina’s delta cities, enjoys aprivileged position with abundant and high quality ground water. However, it clearly demonstrates onecase in which the sum of many small scale operations proves more economical than the large scale“economies”.

FinancingFor the independent providers capital financing comeshard. Most invest in infrastructure without recourse tothe public funding or soft loans that sustain the munici-pal utilities. They rely for the most part on personalloans (often secured by mortgaging theentrepreneurs’ home) high-interest short-termcommercial credits or, where permitted, up-frontcontributions from customers (as in condominial andcooperative operations). A stunning example comesfrom Asuncion, Paraguay where 400 aguateros haveinvested over US$30 million to provide service to75,000 households, and have recovered bothoperating and investment costs fully. Few public watercompanies in Latin America can claim to have beenself-financing to such a degree.

Responsivess to user demandPoor and untenured neighborhoods in Latin Americaare sprawling faster than the municipal utilities can reachthem. In areas where residents do not have registeredtitle, municipal utilities and concessionaires are generallynot authorized to connect residents, and they have fewincentives to do so. In contrast, truckers and watercarriers move into new settlements as soon as theyappear. Sophisticated network operators like theaguateros try to set up delivery systems in advance ofpopulation growth. Staking a claim in a developing areagives a competitive edge. The small operators’ busi-ness appears to be unaffected by households’ tenurestatus, family income, or the community’s size: inclose contact with the community, they seem to bemore effective in tailoring services to local needs andresources, and in getting paid.

16

With Aguateros, No Wait for Waterin ParaguayWaiting for a water hook-up is unheard of in Asuncion, anatypical situation in Latin America, thanks to ManuelLombardo and other aguateros throughout Paraguay. Ma-nuel is a young engineer from a family of Paraguayanaguateros. Three years ago he had saved up the equivalentof US$15,000, enough to start his own aguatería. He lookedfor a place that had a few homes but a promising location.When he bought a lot, sunk his well and laid his pumphouse he had ten customers, not enough to pay back hisinvestment. But the news of his aguatería traveled fastand more families moved into the area. By the end of hisfirst year, 45 families were connected, enough to meethis loan payments, and his goal of 100 customers in five years began to look quite realistic. His pipingruns around five kilometers, but his well and pump house have capacity sufficient for another ten. ButManuel didn’t count on two other aguateros’ spotting the same settlement and sinking wells close athand. Since he has had competition, he has become more aggressive about seeking out new customers.He is now offering easier payment terms and longer payoff periods to bring in more customers.

17


Asuncion City

In this map of Asuncion the light orangearea shows where the public companyplans to extend new services. The dark

orange lines are major trunk lines,existing and projected, which carry

water from a treatment plant andreservoir 15 miles outside of thecenter of Asuncion. As the detail

shows, there are many aguaterosoperating where the company already

works, and where it plans to extendservices. Customers thus have a choicebetween public and private services or,

(as seen in the example of JS Painu)communal services subsidized by the

National Health Service.

This detail of an area of 35 squarekilometers shows more than 50

aguaterías in existence. Most overlapanother aguatero’s territory and there

are few households which can notchoose between at least three

aguateros.

Market ShareIn all of the cities studied, independent providers arethe primary water suppliers for a significant percentageof the population. But they also supplement the waterneeds of other users who find the public servicedeficient. Far from being a transient phenomenon,the independent providers have been around for along time. The first network water systems in LatinAmerica were built at the end of the 19th century byprivate entrepreneurs and our six city review turnedup businesses which averaged 30 years of service,and one 70 years old. They serve households at allincome levels, as well as industrial customers. At thetop of the scale is Santa Cruz, Bolivia, wherecooperatives are the only suppliers, and no municipalutility, public or private, has ever been established.This situation is repeated in several other Bolivian andArgentine cities. In the latter country, independentcooperatives and condominiums also cover 100percent of the populations’ water and sanitation needs

in a third of the nation’s cities. At the lower end,private providers account for somewhere between10 and 15 percent of water service in Cordoba,Argentina.

Efficient sizeThe minimum size of a water supply system requiredto maintain an efficient network operation was foundin this review to be smaller than often assumed.Independent operators have developed ways to re-duce their initial network costs and to sustain small-scale operations that offer water delivered to thehome and/or household connections at often lowerprices than the large-scale operations of the municipalutilities. At least in the cities studied, scale does notseem to be a huge factor in operator efficiency –except when government regulation imposes fixedoverheads that can be recouped only with a certainscale, as in Colombia.

What is the Best Size for a “Water System”? Aguatero Silvio Melgarejo from Asuncion has three different network systems and a total of 2,700households as customers. But he wishes he could go back to 1,000 clients. He didn’t make as muchmoney then, but he knew each of his clients and worked directly with them, with no middle manager.He thinks that a diversified 1,000-client operation offering sanitation and garbage collection servicesin addition to water could earn the same profit as he now does with 2,700 clients, but with a smallerarea and client group.In Colombia, Jorge Uribe president and principal stockholder of CONHYDRA faces a different problem.His water company has 14,000 connections in eight different cities. It’s large and unwieldy, but it isthe smallest size which Uribe can make effective, given the legal requirement for every public serviceenterprise to have its own accounting and planning departments in house, prepare formal businessplans and rates submissions etc. CONHYDRA would be better off smaller, but it couldn’t afford to paythe required staff and meet the costs of regulation with fewer clients.

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3. Market Role

A Dynamic and Competitive MarketWater provision as developed by the independentproviders presents not only a wide range of operatorsand products but also one that is constantly evolving.The handcarter saves to buy one truck, and thenanother. The water trucker looks for opportunities tosupply a small network or start up his own. Smallnetwork providers expand services as fast as they cangenerate profits to plow back into their business.

While competition can be assumed to existamong mobile water distributors (absent “watermafias” or other cartel practices), networks are oftenthought to have natural monopoly characteristics.

However, the study found numerous cases ofoverlapping networks, and of competition for indivi-dual customers at the edges of small networks.When providers extend their networks into the sameterritories, as in Asunción, Paraguay, they compete toget families from the same neighborhood to hook upto their systems. In Guatemala, families are frequentlyhooked up to more than one network – providersthen compete directly in the product market. Sincethe study did not include a household or user survey,it offers no explanation of why households chose tohave two connections, only the fact that it is afrequent occurrence where systems overlap.

Client/Customer choice

Choice of product and of providerCustomers chose particular seller for one-off or recurrent purchase of water. In Peruand Guatemala, longer contracts withguaranteed supply — and purchase.

Choice of Service (Guatemala)Customers connected to more than oneservice provider, decide which to draw from.

Choice of provider (Asuncion)Customers can chose or switch providers.

Choice of providerCustomers can chose between providersat outset or can switch from one toanother provider; overlapping networksprovide options for change.

Choice of management/ yardstickcompetitionCustomers/shareholders in cooperativesystems pressure management to matchperformance or price of another systemnearby.

Business strategy

Lock customers into longer supplycontracts.

Create distinctive products.

Create customer loyalty through perso-nal attention.

First in: Set high connection fees todiscourage clients from switching to newproviders, and to avoid losing investmentif they do.

New entrant: Cut connection costs so thatfamilies can switch server easily.

Lower connection fees to win new cus-tomers.

Spread fixed costs by increasing marketsize.

Create customer loyalty.

Acquire less efficient systems.


Table 2. Types of competition andsmall provider strategies

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru

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Examples

Mobile distributors selling in the samearea

LimaBarranquillaGuatemala City

Overlapping networks

Guatemala CityAsuncion

Contiguous networks(competition at edges of networks)

Santa CruzAsuncionCordoba

Networks operating in proximity

Guatemala CitySanta CruzCordoba

Cordoba, Argentina, offers another case wherefamilies on the borders of private network systemscan choose between the private independentoperator and the municipal utility. In general, theindependent operators charge between a third andtwo thirds less than the municipal providers, althoughtheir water suffers from occasional “funny taste”resulting from sulfur deposits. There is evidence thatfamilies are using the independent operators’ waterfor washing and toilet-flushing, but turn on the munici-pal water tap for drinking.

Independent operators in Cordoba, and peri-urban cooperatives in Santa Cruz, compete for newclients in “unclaimed” areas, or at the edges ofcontiguous networks. In Colombian and Peruviancities, where the independent networks are scattered,competitive pressure is indirect. Providers feel theneed to improve their services, whenever informationabout better service or lower prices can reach theircustomers. Cooperatives in the suburbs of SantaCruz, for example, appear to be engaged in an openwar for new customers and management takeovers.Operators on the city’s periphery are rushing toimprove service (increasing the hours and pressure)before their shareholders sell out to othercooperatives.

Consumer benefits from competition betweenindependent providers show up in the prices theycharge. A detailed look at 28 aguaterias from Para-guay showed that connection fees range from US$87.00 to US$350.00 – and the fees are lowest

where aguateros overlap with other aguateros.Interestingly enough, they increase somewhat wherethe competitors are CORPOSANA and SENASA, thepublic utilities, presumably because the aguaterostrade on their reputation for higher quality service andcan charge higher rates accordingly. The watertruckers of Guatemala follow a similar pattern,charging prices that increase as distance from the citycenter increases and as the competition diminishes.Their prices are four times as high at the fringe as incity center, suggesting that transport costs are not theonly factor in setting prices.

Price-fixingPrice-fixingPrice-fixingPrice-fixingPrice-fixing did not seem to be a pervasive issue inour sample. However, the Barranquilla case studyrevealed attempts by producers and distributors ofpurified water in bottles to organize a cartel and to setprices. While the bottled water suppliers have nevermanaged to form an agreement (among 140producers, a few always have remained on theoutside and cut prices below the levels agreed on),the tank truck distributors, who are supplied andcontracted by the official company and are thus anextension of the monopoly utility, maintain a singleprice and operate in assigned sales territories. Thisprice, set by the public authorities probably with theintention of protecting customers, is the highest in oursample – it is in fact as high as the price of muchhigher-quality bottled water in the same city,suggesting again that competition is often moreeffective than regulation in lowering customer prices.

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21


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The independent providers face a difficultenvironment for investment and businessdevelopment. They operate in legal limbo and facepricing and other regulations that were designed withlarger, monopolistic water providers in mind.Increasingly, they face outright expropriation. Inresponse, they find ways to reduce their risks.

Business Constraints

Legal limbo In all six countries studied, theregulatory frameworks dealing with water productionand distribution were conceived for large monopolyproviders, whether public utilities or privateconcessions. With the exception of the cooperatives,which are regulated to protect shareholders, none ofthe countries studied has a regulatory framework thatacknowledges the existence of, much lessencourages, independent providers in the water sec-tor. In the Latin American context, where municipalutilities enjoy official mandates and recognition, theindependent providers are left in a kind of limbo:neither completely legal, nor explicitly illegal. Theirinvisibility under the law leaves them at a cleardisadvantage, for example, when dealing withdeadbeat customers or unauthorized taps, becausethe local police cannot come to their defense. Theindependent providers thus find themselves underpressure to do favors for the local police in return forundefined protection.

Unfair monopoly practices Consumer protectionlaws, antitrust legislation, and regulations against “dum-ping” or price-fixing and other monopolistic practicesare a rarity in Latin America in any sector, and the

water sector is no exception; water industryregulations in Latin America offer little recourse towater users or to the cooperatives as businesses.They have no grounds to complain of unfaircompetition when a municipal utility offers water at nocharge or gives financial assistance to consumers. Theindependent providers of Guatemala City relate howthe municipal utility, EMPAGUA, provided water freeto families who agreed to block independentproviders’ attempts to run pipes down their streetsand connect to families on opposite curbsides. TheParaguayan providers cite a similar case in which thepublic company effectively engages in “dumping”,charging prices below the cost of provision (in thiscase an estimated 10 percent of operating andinvestment costs) in an attempt to run theindependent providers out of the area.

Of all the difficulties they face in doing businessin such an uncertain and unprotected environment,the following specific ones came up most frequentlyin discussions with independent operators as thosewhich most threaten their security and limit theiroptions: lack of secure ownership of infrastructurethey have built, pricing regulations, restriction ofservice areas, and inappropriate technical andoperating standards. They also feel that the utilities’recourse to subsidies and external financing createsan uneven playing field, where the utilities andconcessions do not face the same discipline of havingto recover costs in the marketplace as they do.

Threat of infrastructure expropriation In most ofSouth America, the state reserves the ownership andsovereign right to use of ground or surface water andmay also legally claim ownership of all production and

4. Constraints and Strategies

(piped) distribution equipment in metropolitan areas.While the likelihood of confiscation or expropriationvaries from country to country, and while individualwells are generally tolerated, the threat is enough todiscourage investing in infrastructure. In Lima, theofficial provider takes over any privately financedinfrastructure in neighborhoods where it extends itsservices. In Paraguay, the threat of expropriationroused the aguateros to form an association to lobbyagainst passage of a proposed new law. Independentoperators in Colombia point out that government’sownership of water supply networks not onlydiscourages new investment, but also increasesinsecurity in the face of political change.

Tariff restrictions Prices are regulated in three of thesix countries studied. In Bolivia regulators set tariffs foreach individual provider based on performance criteriaand business plans, while in Colombia and Argentinaprofit margins of 14 and 25 percent respectively arepermitted but only on operating costs (comparable toor less than returns on simple bank time deposits orother safe market investments in these countries).Such tariff restrictions, which are meant to protectconsumers, also appear to limit new entries and/orinvestment in new services. The fact that bottledwater prices are not restricted, probably becausebottled water is felt to be a luxury good, may alsoexplain why over 140 producers crowd the bottledwater industry in Barranquilla while only a handful ofprivate networks are operating. To raise capital toreplace or build new equipment, independentoperators must find new customers to payconnection fees up front. They cannot raise funds topay off debt through tariffs, making it virtually

impossible for the operator to invest in ways toimprove service. At the same time, the tariff regimesactually discourage the provider from reducing costs,since lower costs will lead to lower profits.

Service area restrictions The regulatoryframeworks in Latin America spell out clearly whatservices public operators are to provide and where.In designating a service area, the state also establishesa utility’s exclusive rights to sell network water, and itfrequently obligates consumers to hook up to theofficial provider. Whenever the official companyredefines its sphere of operation, the independentoperators may be displaced. When public utilities areprivatized, the contracts generally give exclusivity tothe concessionaires, even when independentoperators already have invested in and are serving anarea. This is the case in Cordoba, Argentina, and is athreat to the aguateros in Asuncion. In Paraguay andColombia, recent proposals would establish zonesfor private operators and cooperatives. Regulatoryframeworks in Colombia have already created apatchwork of independently regulated monopolies.This transformation of unregulated independentoperators into regulated mini-concessions limits thepossibilities for growth and for competition for clients,activities in which they have been highly successful,and place them at the mercy of regulatory authoritiesrather than their success with customers.

Technical and operating standards In the name ofpublic health and safety, water services are subject inmost countries to highly detailed quality andengineering standards. These standards are notalways strictly necessary for health and can raise tariff

23

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru


levels above the levels affordable to low-incomegroups. To give a commonplace example, regulationsin most countries require that piping be built of “dura-ble” material—cement or, in special cases, PVC. Theflexible hosing which has served the aguateros ofParaguay so well is not allowed. Independentproviders cannot keep up with new regulations thatapply U.S. EPA standards to drinking water in someLatin American cities. The tariff regulations make noprovision to cover investment in new treatment plantsand they have no access to long-term financing.

Other regulations, even more remote fromuser needs, specify organizational charts or planning,management and information systems. They areprotested by the large monopolies but can put thesmaller organizations out of business. In Colombia,independent providers under a certain size have notbeen able to survive costs imposed by regulations,and in some cases they simply went underground forfear of being caught out of compliance withregulations.

Subsidization of utilities’ capital costs Regulationsof the municipal utilities vary but most allow onlyoperating costs to be covered from customerrevenues. Connection charges cover the investmentin tertiary networks and meters, but investment in

Regulations for Independent Operators in ColombiaColombia’s constitution of 1991 and subsequent water sector legislation is meant to encourage privateparticipation in the sector and to ensure business-like management of water utilities. However, becausethe issue of scale as a barrier to entry was never considered by the drafters of the law, some of therequirements are onerous, especially for independent operators. A Permanent Regulatory Commissionmonitors “public service enterprises” (EPSs) and sets the conditions which they must meet to stay inbusiness. Among other requirements, all EPSs must••••• have an accounting department which employs at least one full-time professional accountant (to

justify the salary of a full-time accountant, operators need a minimum of 14,000 clients);••••• present the Regulatory Commission with an annual business development plan with specific goals

and methods for achieving these goals;••••• present a roster of employees for review of professional qualifications by the Regulatory Commission;••••• organize and support a customers’ association that elects a permanent representative to the EPS’

board of directors.The plethora of controls (of which the above are but a sample) is characteristic of a monopoly framework.It has no antitrust provisions that might protect consumers or producers from monopolistic practices.Independent providers are more stifled than stimulated.

production, new dams, treatment plants and othermajor works is generally financed throughpartnerships with national government and/orexternal loans. It is thus rare for major capitalinvestments of utilities to be recovered through waterrates, although new concessions should in principlefollow more of a private sector pattern in the future.While these regulations do not bear directly on theindependent providers, they make for an unevenplaying field. The independent providers cannot counton such subsidies or soft loans. They must recovertheir investments fully or go broke.

Strategies to Reduce RiskIndependent water providers in Latin America havedevised a range of strategies for coping with theconstraints they face. These include cutting costs andprices and improving services, which improve service,but also bribing officials to renew contracts andoperational permits, which harms provider perfor-mance.

Table 3 summarizes the risks most frequentlymentioned by operators interviewed and the survivalstrategies they were observed to have adopted. Themost common survival strategy to reduce risks is torecover investment costs fast (typically in less than

24

Strategies in italics are considered harmful to competitive markets and to service improvement.

25

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru


three years). Loading investment costs into aconnection fee or a share price (as do thecooperatives and condominiums) can protectentrepreneurs from a certain amount of loss, but italso encourages providers to favor investments inhigh-income areas and reduce extensions to poorneighborhoods. In the case of mobile providers,reducing risk means limiting investment in fixedinfrastructure.

While the truckers of Lima could increase theirproductivity considerably by investing in holding tanksand neighborhood piped networks, they prefer to

invest in additional trucks. A new truck cannot increaserevenues as much as a holding tank and network, butit will not expose the owner to a loss if the holdingtank is expropriated by the state.

Operators also diversify their investments,opening up new market areas or developing newproduct lines such as flavored waters, soda and ice.The service cooperatives of Argentina have longoffered a multiplicity products from electricity tofunerals, and some aguateros in Asuncion areconsidering getting into the sewer business.

Risk

Changes in Regulationsor Large-scale privatizationLeading to:- loss of operating rights- confiscation- new technical standards- new bureaucratic costs

Confiscation/Expropriation ofassets (infrastructure)

Price Controls Applied- limit earnings and invest-

ments

Loss of Contract

Survival Strategies

Association and Lobbying

Limit investments to a short term recovery strategy,or to “recoverable” infrastructure (e.g. trucks)

Form “partnership” with large scale or public companyEvade controlsBribe officials

Invest short termAssociation and lobbying

Look for support from international organizationsPurchase infrastructure

Associate with Public Company(share losses and investments)

Manipulate cost information (creative accounting)

Limit investmentsAssociation to lobby higher level government forstabilityAttempt to purchase infrastructureBribe officials

Examples

Asuncion

Asuncion, Lima, Cordoba,through-out Colombia

Barranquilla,Cordoba

Santa CruzAsuncion

throughoutColombia

Barranquilla

Cordoba

throughoutColombia

Table 3. Risks faced by independentwater providers inLatin America

Limiting investment An extreme example oflimiting investment has occurred recently in the face ofextreme risk faced by Paraguay’s aguateros.Legislation passed in January 2000 introduces aregulatory system designed to permit privatemanagement of the municipal utility, CORPOSANA. Italso calls for confiscation of the aguateros’ operationsand replacement of open entry and private ownershipwith a system of management permits renewable ona maximum two year basis with approval by theregulator. Faced with the possible loss of their jobsand investments estimated at over US$30 million, theaguateros of Paraguay did organize and attempted tolobby against the law, but were unsuccessful. Theyalso stopped investing in their networks, once thenew regulatory system began threatening to becomea reality.

Buying cover A second common survival tactic isthat of “buying cover.” At its worst this implies outrightbribery. Independent operators are usually not in aposition to make hefty bribes to municipal utilityofficials or highly placed municipal officials. Theoperators who admitted to this particular risk-avertingstrategy generally dealt with petty functionaries whocontrolled paperwork or billing for municipal water.But another form of “buying cover”, perhaps in the

grey area, involves seeking a mixed partnership,sometimes with reputable NGOs, sometimes withthe municipal utility. Such bailouts by public funds, orby international NGOs, may provide stability to oneparticular group but cannot make for sustainable andexpanding services.

Barranquilla offers an example of a partnershipthat ensured the survival of such an independentwater operation. A private developer, Aguas Metro-politanas, stumbled on an abundance of high-qualityground water in the late 1980s in an area ofBarranquilla beyond the reach of the municipal utility.Within two years of its initiation, when it had grown toserve some 14,000 households, Aguas Metropolita-nas sold half its shares to the city. The aqueduct nowserves an estimated 30,000 households, of whomonly half are paying customers. But operating in thered does not affect the owners of Aguas Metropolita-nas. The municipality’s purchase paid off the initialinvestment and the municipality makes up thecompany’s losses through budgetary transfers (theoriginal owner also made money by selling real estatein the area). Aguas Metropolitanas has few remainingincentives to improve delivery or to expand, andservice has declined for the past six years, since notechnical adjustments have been made.

26

27


Service during 24 hours



Service during 4 hours 3 times a week

No service

Rationed service

References:

Metropolitan Areaof BarranquillaAqueducts Coverage

The results of the country surveys of independent water providers and of the February 1999 congress whichbrought them together for the first time point towards a vision of a new kind of business environment for waterprovision in Latin America, one which gives all providers incentives to improve the quality and coverage ofservices while keeping prices competitive. In this kind of environment, government becomes an enabler ratherthan an operator. The right balance between large and small companies, municipal utilities and independentproviders, is determined by customers and market forces, rather than by predetermined assignment of rolesand exclusive privileges. International donors and financers, national and local governments, and the independentproviders themselves are all stakeholders in this environment, and all have new roles to learn.

International donors, financiers, and developers could benefit from looking carefully at what theindependent providers are doing before undertaking major investments in the water sector. Where exclusivity isassigned to concessions, this can spell the end of investment by the existing local private providers. Independentproviders could even be viewed as potential clients, rather than interlopers. Donors could speed the pace oftechnological exchange by supporting the creation of networks and associations that bring these providerstogether, with each other, with their counterparts in other countries and regions, and with manufacturers ofrelated goods and services. The better pump, the portable water purifier, the best drilling techniques, the newsoftware for billing clients that are discovered and used in one city may not be known in the next city or country.

National and local governments could review their statutes and regulations with an eye to opening thedoors to independent providers, enabling competition, and ensuring that all providers’ investments are securebefore the law. They might rethink the tradition of competition only by contract, which gives monopoly powersof water production and distribution to a single company, and consider finding ways to subsidize low-incomeusers directly rather than through tariff structures or operating subsidies. And there are clear roles forgovernment in preventing price setting, cartels, and other monopolistic practices, mediating disputes amongproviders and between providers and consumers, and monitoring water quality and service quality andsanctioning providers who violate their contracts with their customers.

The independent providers themselves also need to begin networking to make themselves known andrespected, developing their strength through association and business training and using it to lobby and defendtheir rights while resisting the temptation to create cartels, set new entry barriers, fix prices, or restrict serviceareas.

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5. Next Steps: New Roles


29

ArgentinaBolivia

ColombiaGuatemala

ParaguayPeru

«We will benefit from regulation if we arerecognized as legitimate actors»—The Independent Providers Speak OutIn February 1999, a group of 29 independentproviders from Argentina, Colombia, Guate-mala, Peru, and Bolivia met for three days inCartagena to discuss their commonexperience and the constraints they face.Although they were critical of currentregulations, this did not mean they wereagainst regulation. On the contrary, therewas concern with the lack of guidelines forthe water sector. Not only was there a sensethat effective regulation is needed but thatthey would benefit from it as long asregulators recognize them as legitimateactors. They would like to see commonstandards based on performance andoutcomes instead of processes or inputs. Theytrust their capacity to be competitive, as longas competition is based on economicefficiency rather than political clout. In theirmind, the goals of regulation should be toimprove service efficiency, guarantee waterquality, and protect the investments of alloperators — large and small.

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That the independent operators assure a steady supply of water to a significant percentage of Latin America’surban population may not come as a surprise to many who have frequented the slums of the developing world.But their diversity, creativity and advantages in reaching niche groups have perhaps not been fully appreciated inthe past. Nor, perhaps, has the potential which open entry and competition for customers can offer the watersector—and the water user. The independent providers are important, with continuing niches, even in citieswhere the utility provides good coverage. Their success in building and operating small networks challenges thebelief that fixed water networks are a natural monopoly. Competition for customers is active and it works, but itwould work better in a business environment which enabled competition rather than surrounding it withuncertainty and inappropriate regulation. The independent providers of water present a clear challenge to publicauthorities and policy makers:- how to develop appropriate policies, which build on the positive aspects of this private sector while

safeguarding the public health and well-being;- how to regulate “even playing fields” so that the virtues of a competitive market system can improve water

services;- how to open possibilities for multiple providers, and how to assure that effective and efficient servers are

not put at risk by regulatory systems.

As a start to answer these questions, policy makers should be encouraged to look with a fresh view at manywater providers who are investing and active in their cities.

6. Conclusion

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Documents

Entrepreneurs inTo all, my sincere thanks and appreciation Tova Maria Solo Washington, April 2003 acknowledgments competitive rather than exploitative. Most offer services of a good