The Water and Sanitation Law and Sector Reform in Honduras Ing. Carlos Talavera W. Senior Adviser in Water, Sanitation

The Water and Sanitation Law and Sector Reform in Honduras Ing. Carlos Talavera W. Senior Adviser in Water, Sanitation and IWRM SNV Honduras October, 2006 titulo

Water and sanitation services provision • Water supply and sanitation services have been the responsibility of three principal actors: • SANAA (public sector aqueduct and sewerage company): operates 33 of the nearly 4,800 piped water systems, in thirty municipal capitals including that of the capital city, and in three urban and rural localities. titulo

Water and sanitation services provision • Municipalities: Pperate and/or are responsible for the majority of the urban systems in municipal capitals, (264). Purely private participation (San Pedro Sula) or private-public partnerships (Puerto Cortés, Choluteca and Catacamas) have recently become innovative experiences. • Water and sanitation boards: exist in the rural and peri-urban areas. Responsible for the development, operation and administration of nearly 4,500 rural water and sanitation systems in rural and marginal urban areas. titulo

Water services provision, per provider titulo

Central public sector provision (SANAA) • SANAA: created in 1961, topromote the development, execute the designs and be responsible for the operation, maintenance and administration of all new and existing water systems in the country. • Municipalities, transfered their systems to it, reflecting arguments of efficiency stemming from centralization. Exception: San Pedro Sula titulo

General Trend of public services companies: In historical practice, politicians exerted control by: • appointing (and dismissing) directors • providing public subsidies to finance investments and recover ailing companies, • defining low tariffs to preserve political popularity with the users. • This perpetrated dependence of the public utilities on the political system titulo

General Trend of public services companies: In turn companies were obliged to: • supply political favors in the form of overemployment of political activists, • keep water tariffs artificially low to ensure politicians’ popularity, and • distribute contracts on the basis of political rather than economic criteria. titulo

Politicians Appointment of directors; Operational subsidies Political favors Untendered contracts overstaffing Employees Utility company Contractors Poor service quality Artificially depressed tariffs High alternative supply costs Unconnected population Connected population Traditional ‘clientelist’ model of service management titulo

Outcomes of this service management: • weak finances reflecting operating costs above revenues and the continuous need for central government subsidy; • prices not reflecting real provision and water scarcity costs and creating the illusion that water as a social good ought to be free (or else very cheap) and encouraging wasteful use; titulo

Outcomes of this service management • lack of financial capacity to develop the systems and thus low water quality, increased losses, diminished incentives to expand services to population uncovered (particularly the poor in remote areas, with less capacity to pay), overall poor reliability of supply and perpetual dependence upon outside sources for system development financing; • sectors of the population unserved, having to rely on private provision of water at prices much higher than those served by the public utilities. titulo

Outcomes of this service management • In short, the situation is described by economists as one of a ‘low level equilibrium’ which, if managing to deliver services is characterized by serious flaws in coverage, quality, reliability and limitations for system development. • This performance partly created grounds for the sector reform promoted since the 2003 W+S sector law. titulo

Reform’s essence and its institutional context • As an outcome of the current situation, under auspices of the international financial institutions the country has started thorough reforms in the water and sanitation sector, in a quest to establish a more rational organization of the sector • A key feature of proposed reforms is the separation of the functions of policy maker, regulator and service provider titulo

Reform’s essence and its institutional context • politicians charged with making policy and giving strategic guidance, • a regulatory agency is created to ensure service provision in line with sound operational and financial guidelines, ‘insulating’ service providers from political interference and • set tariffs at levels that ought to allow the recovery of costs of operation and ‘a reasonable rate of return’ (Foster, 1999). titulo

Reform’s essence and its institutional context • In the standard prescription, actual operation of the services would be delegated to either the private sector or to a strongly corporatized public company. • Financial and administrative independence of service provider from political entities is sought as a key condition for efficiency and accountability. titulo

Policy-makers Strategic guidance • Regulatory body Price and quality control Efficient service at appropriate size Competitive tendering Employees Utility company Contractors Administrative and financial independence Connections Cost recovery tariffs Good service quality Unconnected population Connected population Reformed model of service management titulo

The 2003 Water and Sanitation Law In essence, the law: • Transfers responsibility for the administration, operation, development and maintenance of the water and sanitation systems to the municipalities, via ownership of the systems; • Does not imply municipal governments ought to operate the systems but that they will be responsible for the said operation. Effective ownership of fixed assets formerly belonging to the State is transferred to these. titulo

The 2003 Water and Sanitation Law • Creates a policy making board, the Consejo Nacional de Agua Potable y Saneamiento (CONASA) integrated by 4 ministers and 3 representative of Civil Society (water boards, municipalities, users) to formulate sector policies, strategies and national water plans; develop investment plans and coordinate financial mechanisms for sector development; develop the methodology to establish the economic value of water and create dialogue platforms with civil society. SANAA is to act as CONASA’s executive secretariat, the general manager of SANAA then partaking in CONASA’s meetings. titulo

The 2003 Water and Sanitation Law • Creates a regulatory entity, the ‘Ente Regulador de los Servicios de Agua Potable y Saneamiento (ERSAPS, headed by three directors named by the President) to establish the control mechanisms for service delivery including norms, efficiency criteria and means to assess the technical, financial, environmental and administrative performance of service providers; represent the users’ interests (quality service delivery and tariffs); act as an arbiter and conciliator; establish criteria, methods, procedures and formulae for tariff estimation. titulo

The 2003 Water and Sanitation Law • Endows municipalities with the right and responsibility to define the way in which the services are to be provided, granting preferential access rights to the water boards and communal organizations to the municipal authorization to (totally or partially) operate the services, and states that the municipal concession of the authorization to operate the service to any non communal entity will require the participation of at least 51% of the community through a local referendum. titulo

The 2003 Water and Sanitation Law • Sets principles for tariff definition including: efficient and rational service and resource use; attainment of sanitary, social and environmental objectives; reflection of the real costs of services including operating costs, integral management costs, operator’s profit margin and, ‘where it corresponds’, the investment and capital costs; in systems of > 5,000 users, costs will also include those of supervision, vigilance and advice provided by ERSAPS; establishment of coefficients that reflect socioeconomic realities of the country´s regions; titulo

The 2003 Water and Sanitation Law • Obliges operators to discriminate cost concepts in their bills and will have as a basis the measurement of real consumption; attention to poor people’s needs in the way of preferential tariffs for those households which, after socioeconomic scrutiny, are deemed economically vulnerable; municipalities are to establish tariffs for sanitation services, which will be annexed to the general service tariff; municipalities and water boards shall approve tariffs in line with regulatory principles established by ERSAPS. titulo

The 2003 Water and Sanitation Law • States that systems currently under SANAA shall be gradually transferred to the municipalities, whose conditions to take up operation will be assessed by ERSAPS. Such transfer should not take more than 5 years to complete as of the 8th of October 2003 (day the law was published). Within that period, SANAA should provide assistance to the municipalities in technical and administrative matters relating to system operation. After transfer, SANAA is to become a technical support instance for service providers and administrators, CONASA, ERSAPS, the municipalities and water boards. . titulo

Essential elements of the reform and law • Independent policy definition and regulation • Decentralization • Tariff reform • Private sector participation titulo

Policy definition and regulation Separation of policy definition, regulatory and service provision functions a strength. However: • Policy definition, a key function in sector reform, hitherto hindered by the bureaucratic nature of CONASA, the lack of adhesion to election principles (users representative) stated in the law, and the difficulty of Health authorities to realize the importance of preventive health practices focusing on water. Inasmuch as policy framework not constructed and agreed socially, difficulties in advancing with the reform process. titulo

Policy definition and regulation Key areas for policy and strategy definition need to be addressed: • Technology appropriate to the needs and realitites of the country’s population; particularly development of an autoctonous technological capabilty for greater self reliance for system development; • Thus, appropriate financial strategy for the sector. Estimated investments in the order of US $ 1.3 bn for MDG may prove unsustainable/unmanageable, if at all available. titulo

Policy definition and regulation • ‘Management models’ and socially legitimate service provision models: need a policy and strategy which clearly defines potential participation spaces not only for the classical private sector, but also for ‘social economy’ organizations (coops, communal entreprises), many of which are currently managing systems and providing the services. • Institutional strengthening and the fate of municipalities as services providers titulo

Policy definition and regulation ERSAPS has given significant steps ahead in establishing regulatory criteria; however: • Potential mismatch between central nature of the regulatory entity and decentralized provision of services is to require decentralization of regulation, potentially difficult to manage and control, for a highly atomized municipal sector • Need to focus on an integral regulation of services provision including water quality and environmental conservation, not contemplated as ERSAPS’s domain. titulo

Decentralization • Has obeyed more to the political rationale of power devolution to municipalities guiding decentralization principles overall, than to the economic logic of greater efficiency in services provision. Thus: • Potential loss of economies of scale, particularly for the smaller localities (the majority). ‘Recentralization’ via association required, part. in small municipalities. • Potential clash between communal water needs and aspiration of local politicians, if these were to still have some say in system management, which law allows. titulo

Decentralization • Potential for decentralization of corrupt practices, particularly in hiring, and in contracts concessions. • Many municipalities and majors see water systems management as specialized technically, and as a political liability. Thus, reluctance to take responsibility on board (without adequate induction) given technical weakness and potential for conflict. • Clear need to strengthen citizen participation in local policy definition, supervision and development planning of systems, which should be enabled by decentralization. titulo

Tariff reform • A clearly felt need: water systems need to ‘earn their keep’… However: • Peoples’ willingness to pay more will be strongly determined by the perception of legitimacy in service provision. This may limit ‘management models’, particularly those seen as privatized. • Particular policies need to be defined for the poor: cross subsidies? Alternative subsidy schemes? titulo

Private sector participation • The ‘big bad wolf’ coming with decentralization… (based on previous sector reform experiences). • In practice, classical MNC investment interest in Honduras potentially limited, due to economy of scale considerations (min. viable no. of connections: +/- 100 k) • Current participation of Italian MNC in San Pedro Sula, through a (40 year) concession; potentially in Tegucigalpa, if gotten through the referendum barrier. titulo

Private sector participation • Lack of interest: a blessing or a curse? Depends on scenarios of participation. • If not in direct service provision, international PSP will be sought in systems development. Need to be careful!! • Alternative so called ‘private sector’ participation modes have been attempted, with success: APC majority shareholders include market vendors’ association, three cooperatives, the commerce and industry board…Much room for innovative, socially appropriate options. titulo

The Water and Sanitation Law and Sector Reform in Honduras Ing. Carlos Talavera W. Senior Adviser in Water, Sanitation