Privatizating and Regulating Water and Sanitation: Argentina’s experience

1. Privatizating and Regulating Water and Sanitation: Argentina’s experience Antonio Estache The World Bank Economic Institute The World Bank

2. Overview • The initial conditions • The market structure and the limits to competition • Concessions and new private projects: 1984-1997 • Degrees of private sector participation • Regulatory Issues involved • A Leading Indicator of Issues and Options: Argentina • The Challenges

3. The Initial Conditions • poor service in terms of • quality (low pressure, interrupt, huge losses --40 to 60% >>20%, labor productivity--10-20empl./1000conn>>2-3...) • coverage(rich connect. pay <, poor less connect. pay >) • 1 bn: w/o safe water, 2bn: no sanit., 4bn: no sew treatmt • no client orientation in contact with users: • no metering • poor bill collection habits (35% of cost recovery) • political interference with tariff and clientelism • fiscal constraint => no gvt financg of expans. • environtal/health problems bcse no invest. in sanitation

4. Market Structure: few competitive options • not much competition in the market (water resource mkts, water vending, coops options) • not much room for grids (high transport costs), ==> lots of local monopolies • competition for the market is best way out: hence the search for concessioning and BOTs • benchmark/yardstick competition (UK,Chile, Brazil)

5. Degrees of Private Sector Participation

6. What drives the choice of the right model • political commitment • sequencing possible as a signalling game • relative importance of various goals (employ., fiscal) • economic • search for efficiency • fiscal constraints • investment needs • social • % of poor who need the service • availability of options for financing needs • ===> increasingly: Concessions and BOTs

7. Concessions and BOTs in Water and Sanitation (estimates for 1984-1997)

8. Regulatory challenges • monopoly means need to regulate somehow • only 5 or 6 private players in the world • 2 French, 2/3 UK, 1 Spanish (+ a bunch of construction firms) • bidding for the monopoly means the government must chose between objectives quite explicitly (fiscal, static efficiency, dynamic efficiency) • large users may have option to pull out from customer base of monopolistic provider

9. Regulate for what? • to protect consumers’ interest: meaning • residential: poor and rich • connected and unconnected • special clients: farmers and other large users • to protect investors’ interest: meaning • political risks: renegotiation happens a lot in particular in a sector in which asset value is hard to assess and water buys votes • regulatory risk: skills influence the risk level and hence the cost of capital • commercial risk: high in poor regions • promote efficiency/competition

10. Regulate what? • Prices • static efficiency (min costs) • dynamic efficiency (investment needs and timing) • price cap vs rate of return • Quality • adjustment variable to cut costs • Compliance with Service Obligations • the needs of the poor are not cheap • neither are the environmental needs • Respect of Concessionaire’s Rights • it’s a business: costs should be recovered somehow

11. What’s so hard about regulating water? (1) • regulator needs to set price to allow fitm to recover ex ante the efficient costs of providing the service • so regulator need costs data to establish allowable revenue • regulator is poorly informed about cost • never ran a private business • no knowledge of state of the assets • regulator is poorly informed about demand and hence investment needs • has no clue what the demand elasticity with respect to price since price where never free to adjust

12. What’s so hard about regulating water?(2) • decide on the frequency of revisions of prices to ensure effective use of information without introducing regulatory uncertainty • too frequent: avoids excess profits but little incentive to cut cost or invest • too infrequent: allows excess profits but gives up on efficiency and runs the risk of political backclash

13. Gvt Commitment to Manage Risks • Design transition periods explicitly (from mngt to concession as in Mexico City or Trinidad) • Organize transparent bidding procedures • Use transition to generate information • Give explicit and or temporary subsidies if needed (Guinea) • Give guarantees if needed • Pick the right regulatory regime (ror vs. p. cap) and institutions to manage risk and uncertainty • Clear and transparent renegotiation rules

14. Case Study: Lessons from Argentina • 1990: decentralization of responsibility for water and sanitation services to the provinces; many coops involved in the business • First Concession: Corrientes (1991) • Second Concession: Metropolitan Buenos Aires (1993), the largest in the world • 4 more since... and a few more in the pipeline • The ultimate crisis: Tucuman • Many difference, all quite instructive

15. Concession in Corrientes • 522,000 users, 10 main cities, many poor • coverage before: water 59%, sewerage: 30% • 30 year concession awarded for lowest tariff • uniform tariff with price cap with pass through for wage increases and scheduled increases in cap • obligations: achieve 100% water covereage in 15 years, 75% sewerage; all metered within 5 years • regulator is an administrator appointed by Governor within Ministry of Public Works (changed 5 times between 91-97) • outcome: looks good but ... de facto management contract: no one lends to invest in risky deal

16. Concession in Tucuman (1) • March 93: privatization law goes through • December 93: regulatory framework goes through • February 94: pre-qualification decided • August 94: technical and economic offers received • winner is for 94% increase in water tariff over current level • revised to 67.9% within 6 month with less obligations • + 6% to fund regulator + tax incrses =>103% tot. increase • May 95: Contract signed for • $385 investment, 15%max non-payment, 25% water loss • increase in water coverage from 70% to 100% after 8 years and from 30% to 100% by year 13 in sewerage • August 95: Trsfer to Concesnre (end dry season) • October 95: New governor elected

17. Concession in Tucuman (2) • Jan. 96: hot summer, water shortages,users don’t pay • March 96: renegotiation starts with commisions incl. politicians, unions, consumers, press and regulator • June 97: bill formalizes saying that: cut service areas from 120 to 40 locations, less investment, monitoring of performance targets rather than financial indicators, payment plans, 5 years tax exemption, subsdzed rate (flat 5$) for low income users at cost of 2.3mUS$.year for 15% of population....and tariff reduction of 20.6% • July 97: concessionaire rejects it • December 97: concessionaire wants out • Currently: International Arbitration and dramatic increase in sector and country risk

18. Concession in Buenos Aires (1) • usual problems (technical and commercial losses, rationing and huge rehab and investment needs, poor pricing, no metering, ) • multiple gvt actors (Loca, province, national) + unions + Congress • huge concession area: population of 9 million, including 1.8 poor (10% of served area, 40% of expansion area) • used two consultants to diagnose, propose various solutions, recommend selection strategy and help implementation

19. Concession in Buenos Aires (2)Performance targets built in the contract

20. Concession in Buenos Aires (3)Achievements (dec 96 vs. may 93) • water production (4.6 mm cubic m): + 38% • water customers (7.5mn): + 23% • wastewater customers (5.7mn) + 15% • length of water network (13600 m) + 24% • length of wastewater network (8000m) + 11% • number of water connections (1.5 mn) + 15% • number of waste water connec.(0.8mn) +17% • percentage losses (31%) -50% • delays in repair: from 15 days to 29 hours • unpaid bills: from 20% to 5% for an average bill of $13.5/month (vs. 48$ in Sao Paulo)

21. Concession in Buenos Aires (4)The Troubles • problems in service expansion • disagreement between concesionnaire and gvt/regul. • infrastructure charge is unaffordable by poor • tariff needed becomes a political issue • changes in environmental goals • new standards and concessionaire is lagging • uncoordinated gvt views • weak regulatory regime and institutions • incomplete and unclear • no renegotiation rules or arbitration rules • weak political regulatory agency • capacity limitations to assess technically the issues

22. Concession in Buenos Aires (5)Privatization, the poor and expansion needs • new adapted and negotiated solution with local communities (participation, explicit and targeted subsidies--to avoid games by concessionaire--, may be stuck with uniform subsidy if unable to administer targeted one) • revision of speed of expansion plan • revision of speed of recovery of investment costs (originally a charge of $ 438/month for24 month...unaffordable for most poor) • use of three part tariff (fixed+ variable+ expansion) • some degree of cross-subsidies allowed

23. Overall Lessons from Argentina’s Experience • concessionaire needs to be asked to deliver quickly but in sustainable realistic political conditions • auction process should require bidders to match explicitly investments and costs to prices and outputs: make sure to match the implications of rights and obligations with the the time profile of prices • contracts should specificy output performance targets rather than processes • contracts should specify reporting requirements and identify a framework within which changes and renegotiation can be assessed • the regulator must have independence from political pressure and recruit the right staff