Argentina - Water Supply and Sewerage Sector Note

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No: 12810 AR ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE August 2, 1994 60L1E CUU Country Department I FILE COPY Environment and Urban Development Division Latin America and the Caribbean Region CONFIDENTIAL Report No: 12810 AR Type: SEC - ii - CURRENCY EQUIVALENTS Currency Unit - Peso EXCHANGE RATE A$1 = US$1 ABBREVIATIONS AND ACRONYMS AA - Argentine Water (Aguas Argentinas) AIDIS - Interamerican Association of Sanitary Engineering (Asociaci6n Interamericana de Ingeniera Sanitaria) CELA - Center for Economic and Legislation Administration (Centro de Economia y Legislaci6n Administrativa) COFAPYS - Federal Council for Water Supply and Sewerage (Consejo Federal de Agua Potable y Saneamiento) COFES - Federal Council of Agencies for Sanitary Services (Consejo Federal de Entidades de Servicios Sanitarios) TASWS - Tripartite Agency for Sanitary Services (Ente Tripartito de Obras y Servicios Sanitarios) FENTOS - National Workers Federation for Water and Sewerage (Federaci6n Nacional de Trabajadores de Agua y Saneamiento) FIEL - Latin American Research Foundation (Fundaci6n Investigaciones Econ6micas Latinoamericanas) IDB - Interamerican Development Bank INDEC - National Institute for Statistics and Census (Instituto Nacional de Estadisticas y Censos) OSN - National Sanitary Works (Obras Sanitartas de la Naci6n) MSP - Ministry of Public Health (Ministerio de Salud Ptiblica) MOSP - Ministry of Economy, Public Works and Services (Ministerio de Economia y Obras y Servicios PiTblicos) PAHO - Pan American Health Organization SNAP - National Service for Rural Potable Water (Servicio Nacional de Agua Potable Rural) SRH - Secretariat for Hydraulic Resources (Secretaria de Recursos Hidricos) SRNAH - Secretariat for Natural Resources and Human Environment (Secretaria de Recursos Naturales y Ambiente Humano) UNICEF - United Nations Children's Fund (Fondo de las Naciones Unidas para la Infancia) - iii - TABLE OF CONTENTS Page No. SUMMARY AND RECOMMENDATIONS ......................v- x 1. SECTOR SETTING AND RECENT EVOLUTION ................. 1 Origin, Scope and Objectives of the Study .................... 1 Geography and Water Resources .......................... Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 H ealth Indicators ........a................. ... .....3 M acroeconomic Setting ................................3 Sector Institutions ....................................5 Sector Policies .................................. .. .8 Water Supply and Sewerage Service Coverage .................. 9 Quality of Service and Environmental Considerations ............. 10 W ater Pollution Control ............................... 11 Sector Investment and Financing ......................... 12 Utility M anagement ................................. 13 M anpower Aspects .................................. 14 2. ISSUES FACING SECTOR DEVELOPMENT ................... 17 Roles of Central and Provincial Governments .................. 17 Resource M obilization ................................ 17 Private Sector Participation ............................. 20 Regulatory Requirements and Options ...................... 24 Incentives to Improve Water Companies' Performance ............ 27 Human Resources Development .......................... 28 Pollution and Water Resources Management Issues .............. 29 3. ELEMENTS OF A SECTOR STRATEGY ..................... 30 Redefining Government Roles ........................... 30 Improving ResourceMobilization ......................... 32 Attracting the PrivateSector ............................ 35 Regulatory Framework ............................... 39 Technical Assistance and Training ........................ 42 Management of Water Pollution .......................... 44 4. PRIORITY ACTIONS .................................. 45 - iv - ANNEXES Page No. A. Urban and Rural Population 1980, 1991, and 2000 ........... 48 B. Morbidity and Mortality from Diseases Associated with Water and Sanitation, 1990 ....................... 49 C. Indicators of Total Mortality and Infant Mortality by Province, 1992 ............................... 50 D. Sector Institutions According to their Functions, 1992.... .. ... .. ... .. .. ... 51 E. Sector Institutions by Province ........................ 52 F. Population with Water Supply House Connections, 1980 and 1991 . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . 55 G. Population Connected to Public Sewerage, 1980 andl991 ........... 56 H. Water Supply and Sewerage Service Levels in Latin America, 1990-1992 ......................... 57 I. Sector Investment by Province, 1987-1992 ................ 58 J. Simplified Operating Situation, 1992 .................... 59 K. Number of Water Systems by Operational Entity ........ . 61 L. Total Number and Distribution of Sector Staff by Entity, 1992 ................................. 62 M. Number and Distribution of Sector Staff related to Water House Connections,1992 ..................... 63 N. COFAPYS' Legal Framework ........................ 64 0. Contractual Arrangements for Private Water Supply ........... 65 P. Proposed ActionPlan ............................. 66 MAP (IBRD No. 25587) This report is based on the findings of a mission that visited Argentina in July and October 1993. The mission members included: Mr. Luis Chang (Mission Leader and Senior Water Specialist); Mr. Klas Ringskog (Principal Water Specialist); Ms. Augusta Dianderas (Senior Utility Management Specialist); Mr. Manuel Mariflo (Waste Water Treatment Specialist); and Ms. Ana Maria Eigen (Statistics, Consultant). Mr. Guillermo Yepes (Water and Sanitation Advisor) and Bernardo Gomez (Senior Financial Analyst) served as peer reviewers. Ms. Kazuko Uchimura (Sr. Project Officer) and Mr. Herman Nissenbaum (Consultant) reviewed the final report. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE SUMMARY 1. The World Bank's 1987 water supply and sewerage report painted a picture of disarray in the sector. The more recent assessment showed that little has improved since then, and that the present situation is somewhat worse, particularly with respect to the quality and reliability of services in this field. 2. The 1991 census showed that residents of about 72% of urban centers and rural townships had piped water connections, and 38% were connected to sewerage systems. This left some 9.1 million inhabitants without safe water and 20.2 million without sewerage services. Argentina thus ranks 14th among 20 major Latin American and Caribbean countries in access to piped water, and 15th in sewer connections. These figures contrast unfavorably with past coverage in the country which was a pioneer in modem sanitation in the region. 3. The quality of sector services has deteriorated, in fact become precarious. Inadequate maintenance of works and significant losses within distribution systems have made the water supply highly unreliable. Much of the population draws water from contaminated wells and pollution is now a pressing problem. It is estimated that less than 5% of collected sewage is now treated. Unsurprisingly therefore, Argentina's recent infant mortality rate has been substantially greater than in comparable countries. In view of these conditions, the Government requested the Bank to analyze the sector's problems and prospects, whose findings are contained in this report. 4. The Bank missions found that sector investments had sharply declined beginning in 1981-85. These hampered the needed expansion of service coverage and rehabilitation of antiquated sector infrastructure. However, even greater damage was caused by water company inefficiencies, mismanagement and failures to generate operational surpluses. As a result, the future cost of supplying potable water and providing for the safe collection and disposal of waste water will almost certainly rise dramatically. Therefore, a key task is to rebuild the capital stock and services which have become seriously run down. 5. Unfortunately, the framework of water and sewerage organizations needed to manage this process has frayed and the new building blocks are not yet in place. There has been an erosion of the central agencies which had planned, provided services and managed sector investments, resulting from the devolution of Obras Sanitarias de la - vi - Nacion 's responsibilities to the provinces and the abolition of the entity serving rural communities. COFAPYS has not played a meaningful role in replacing them and appears unlikely to ever do so. The Federal Government also has not yet fully adapted itself to the implications of these changes and Argentina's widespread privatization. Consequently, there is a void in the development of sector policies, standards and priorities. 6. Meanwhile, there has been a commendable decentralizing of public services to the lowest government levels that can finance, administer and monitor their progress. But, sadly, what has occurred in the actual process leaves much to be desired. The provinces are receiving rising levels of Federal fiscal transfers, for which they must undertake increasing responsibilities. These funds reward poor fiscal management and distort resource allocation. Their distribution also tends to favor sparsely populated areas, which have relatively small proportions of those who most suffer from sector deficiencies. These conditions worsen the already poor match between the provinces' obligations and their capacities to mobilize adequate funds. 7. Service agencies have become unduly accustomed to receiving operational subsidies and grants for investment financing. They do not even cover their out-of- pocket operating expenditure with operating revenues, let alone generate savings. In addition, they have not reflected full service costs in customer charges. So local authorities have to upgrade services while simultaneously reversing the water entities' poor performance. 8. In order to restore more adequate supply and quality by the year 2000, recent studies have calculated that annual investment would have to range between US$480-750 million. These levels are about average for Latin America (as percentages of GNP), and are at the low end of the range for higher middle-income countries worldwide. However they would entail huge increases over current spending-levels, and there are slim prospects for their realization. 9. The Bank's findings consequently show that much needs to be done to improve water and sewerage quality and coverage, particularly since over a fourth of investment requirements are judged urgent for essential rehabilitation. But the hard fact is that the traditional Federal revenue stream for these activities has permanently ebbed, without which the provincial governments can not expect to sustain their heavy budget support. Thus, there are major uncertainties regarding the source of funds needed to put the systems back in shape. 10. The provincial authorities have been exploring alternative solutions to this problem, and are moving strongly to private concession arrangements. Argentina now has an encouraging investment climate and there are reasonable prospects of a favorable regulatory regime. Nevertheless, it is doubtful that much private capital will be - vii - available for outright purchases, let alone to finance a large part of the investment bill. 11. The present government has signalled its firm commitment to favor private sector participation in sectors where the public sector has no competitive advantage. One of the first privatized public water utilities was Buenos Aires. The concession was successfully prepared, bid and contracted during the course of the 1990-93. In fact, the 30-year concession represents the largest concession in the world with its nine million inhabitants. Over the concession period, the concessionaire is committed to extending water and sewerage coverage and will guarantee the quality of water supplied and introduce sewage treatment. The successful concession in Buenos Aires has prompted a surge of interest in private sector participation in a series of provinces and municipalities such as Mendoza, Misiones, Santa F6, Formosa, and Tucumdn. Similarly, the province of Corrientes had already contracted in 1990 with a private consortium for the provision of potable water as well as sewerage and sewage treatment in the ten major urban towns. 12. Given the externalities associated with the provision of water services, and their natural monopoly characteristics, governments have an important role to play when engaging the private sector. Governments should establish policies and regulations in several areas: water quality and service standards, access of services to the poor, environmental protection, management of water resources and water tariffs. One of the objectives of regulating the water sector is to protect the consumers from private monopolistic behavior and ensure that they reap the benefits of efficiency improvements. Another is to create an environment which promotes commercial viability and attracts private sector participation. 13. For the future therefore, the main sources of sector investment will have to be the water companies' cash flow, private equity and borrowing. To this end, the government authorities will have to impel sector entities to become as self-sustaining as possible. They will have to concentrate most on rationalizing pricing and containing costs in order to improve internal cash generation, while also moving towards competing for capital market funds. 14. Tariff increases for these purposes will need to be quite substantial. Efficiency gains should also be vigorously pursued for interim benefits (as well as to ease pressures on rate hikes), while tariff administration should be shored up. Local governments thus should review current pricing, define needed remedial policies, and help sector entities as needed with tariff rate analysis and setting. Also, they should ensure the following policies: (a) all services should be priced in accordance with true costs, save only for waste water treatment and storm water drainage-type functions; (b) water and sanitation operators should be authorized to exact high penalties and to cut off services to public and private consumers for overdue payments; (c) government treasuries should not assume liabilities such as debt service; (d) governments should only subsidize the - viii - indigent, and in accordance with transparent rules; and (e) other government aid should be tied to measures designed to promote company financial improvements. 15. These approaches represent drastically different directions, and will therefore require strong incentives to stimulate water companies to instill the implied greater discipline. For one, provincial governments might dismantle the current budget transfers to the companies over the next 3-4 years. In their stead, conditional grants could be introduced with rigorous eligibility qualifications, governed by annual performance targets. They should progressively decline under clear "graduation" criteria. There could also be time-bound matching grants to companies that agree to undertake high-priority investments while meeting even more demanding conditions. 16. The above recommendations could pose a sound future approach towards righting the sector's main deficiencies. But until the eventual rewards of applying this approach emerge, sector management will need serious improvement and some immediate financing must be raised to catch up with the investment backlog. Similarly, greater private sector participation cannot be expected in and of itself to solve the many sector problems. Flood control and pollution, for example, cannot be readily charged for on the basis of use. For these and other reasons, large segments of the needed services will have to stay in the public sector. The underlying concept for the future thus is that of a new division of labor between public and private partners. 17. Given these conditions, this report recommends a future strategy based on these principles: (a) Furthering the implementation of sector development on a decentralized basis; (b) The central government retaining only a general policy formulation function, and concentrating mainly on promoting an effective enabling environment and proper incentives for efficiency gains; (c) Promoting private sector participation in the sector, as appropriate to pursue improvements in efficiency, in conjunction with strengthening of regulatory functions and the more commercial orientation of public utilities; (d) Mobilization of financial resources through greater revenue generation by public utilities and increased private sector financing; (e) Gradual diminishment of grants and subsidies to utilities, together with their being conditioned to timebound gains in discipline and in financial, institutional and operational efficiency; and - ix - (f) Central government help to the provinces (particularly the weakest) for achieving institutional objectives. 18. Concerted actions need to be taken in order to see this strategy applied in practice. All of the governments concerned therefore should undertake measures for realization of the following goals (on which there are recommendations in the designated parts of this report): (a) Creation of an enabling institutional and regulatory framework (ref. paras. 2.1-2.4, 2.21-2.31, 3.2-3.7, 3.10. 3.12, 3.41-3.50); (b) Establishment of investment financing mechanisms (ref.paras. 3.8-3.9, 3.20-3.22); (c) Promotion of private sector participation (ref. paras. 2.15-2.20, 3.23- 3.40); (d) Strengthening of water companies' management, finances and operations (ref. paras. 2.32-2.35, 3.11); (e) Upgrading resource mobilization by sector companies to move towards greater self-sustaining finances (ref. paras. 2.9-2.14, 3.13-3.22); and (f) Putting in place effective machinery for water resource management and pollution control (ref. paras. 2.37-2.40, 3.55). 19. Progress towards these goals will not be easy. This puts a premium on the mobilization of special efforts to plan and carry out the required sector reforms. Some interim actions are needed until these efforts can be fully mobilized, particularly the following priority steps: (a) The Federal Government should prepare an indicative plan for sector development and supporting policies. It should design and implement a program for ending sector subsidies within the next three years. Further, it should initiate technical assistance and training particularly for expediting institutional improvements and creating a critical mass of managerial talent (ref. paras. 3.51-3.54). (b) Provincial governments should designate the water companies which are close to being privatizable, those which need major rehabilitation first, and those which are the most remote. They should then direct preparatory work to accomplish privatization-type actions, e.g. creation of regulatory agency, (ref. paras. 3.39-3.40). These authorities also - x - should develop incentives for the water and sewerage companies' improved financial and operational performance. (c) Water companies should be confronted with clear and revised incentives for performance and management, and preferably separated from direct local government control, judged by past performance. With technical help, companies need to prepare reliable financial statements and service performance audits as prerequisites for internal reform programs, private sector involvement, or federal assistance. ARGENTINA WATER SECTOR REPORT I: SECTOR SETTING AND RECENT EVOLUTION Origin, Scope and Objectives of the Study 1.1 In response to the request of the Argentine Government, Bank missions visited Argentina in July and October 1993 to review conditions in the water supply and sewerage sector. This is the mission's report. Most of the issues and recommendations contained in the report have been discussed preliminarily with Government officials. The study originated from the Government's desire for an analysis of the sector's problems and prospects. This work is intended to highlight some of the major issues of the sector and to outline possible approaches to address them. It should be noted that this review did not deal with rural water and sanitation. Nor does it provide comprehensive coverage of water pollution and management issues. These will rather be covered in greater detail in the assessment of Argentina's overall environmental conditions and requirements, which is planned for late 1994. The missions' findings were constrained by the relatively limited reliable information available in the absence of any central agency at federal and provincial levels monitoring the sector. A contributing factor was the fragmentation and diversity of sector agencies. This report is mainly based thus on 1991 national census data and information provided by various local institutions and authorities, together with the findings of UNICEF Geography and Water Resources 1.2 Argentina, South America's second largest country, is divided into 23 provinces consisting of four distinct geographic regions, covering about 2,800,000 ki2. The Andean region, roughly one-quarter of the country, is low and deeply glaciated in the south and high and dry in the northwest near the Bolivian Altiplano. The Northern and Mesopotamian region accounts for 580,000 km' and is covered by the forests of the Chaco and the rolling lands between the Parand and Uruguay Rivers. The Pampa region is 650,000 lan2 of rich, flat plains south of the Chaco, east of the Andes and north of the Rio Colorado, and consists of the "Humid Pampa" eastern zone and the western "Dry Pampa." The arid, wind-swept plateau of the Patagonia region south of the Rio Colorado constitutes the remainder. 1.3 The climate ranges from subtropical in the north to subarctic in the south. Rainfall varies from abundant rains along the coasts to little or none in Patagonia and the Dry Pampa. Average annual precipitation ranges from 79 mm in Buenos Aires to 11 mm in Patagonia. The climatic differences coincide with variations in the country's geography, producing an uneven distribution of water resources. Some areas have periodic flooding while others are subject to prolonged droughts, posing important difficulties for water and sewerage services. 1. "Necesidades de Abertura en los servicios de Agua Potable y Saneaniento en la Argentina." -2- 1.4 Argentina's single most important geographic feature is the Rio de la Plata basin formed by the confluence of the Parand and Uruguay Rivers, whose combined flow is about 29,000 m3 per second. These take in one-quarter of the waters of South America. The Parand receives its affluent from the Paraguay, Salado del Norte and the Iguazii Rivers. The Uruguay River borders on Argentina, Brazil and Uruguay, splitting into numerous tributaries. The Rio de la Plata basin covers more than a third of Argentina and is populated by about 79% of its inhabitants. Of the basin's flow, estimated total withdrawals in the year 2000 for domestic/public and industrial uses on the Argentine side will reach 120 and 160 ml per second, respectively. However water resources and population are sometimes mismatched within the Plata basin with cities such as Mendoza and Tucumdn having large populations but little water. The quality of raw water is generally good for domestic and industrial uses, but is declining due to increased water pollution resulting from inadequate disposal of urban and industrial wastes. In some instances, erosion is increasing with subsequent higher treatment costs and shorter lifetimes of reservoirs. Other noteworthy rivers are in Patagonia, the Colorado, Negro, Chubut, and Santa Cruz, and the rivers in basins without discharges: the Dulce, Primero, Segundo, and Quinto Rivers. 1.5 Groundwater reserves, on which vast areas depend, are substantial but have not been fully studied. They have been over-exploited in some regions, aggravating water scarcity and resulting in saline intrusion and other types of contamination of aquifers, especially in the Dry Pampa and Patagonia. Groundwater in certain parts of the former contains high levels of fluoride and arsenic. Supplying water and sewage disposal in these regions is particularly challenging as water tables are falling in some places. Pbpulation 1.6 Argentina's population reached 32.6 million in 1991, 87% of whom were urban, 3% rural concentrated and 10% rural dispersed. The urban population is defined as those living in communities with more than 2,000 inhabitants, and the rural concentrated population includes communities with 150 to 2,000 inhabitants. Population density in 1991 was one inhabitant per 11.9 km2, the third lowest in Latin America. Population per square kilometer of agricultural land was the smallest in the region. Based on the 1980 and 1991 censuses, Argentina has the third lowest population growth rate in Latin America. The population is expected to reach 37 million by the year 2000, assuming a 1.4% annual growth rate. By then, urban inhabitants are projected to reach about 33 million; the rural concentrated should stabilize at about 1 million; and the rural dispersed population is expected to decrease by 8% to 3 million (see Table 1.1). Significantly, although most Argentines live in the four largest provinces and the Buenos Aires Municipality, population growth rates in past decades have been higher in the other provinces. (Provincial population figures are shown in Annex A.). -3- Health Indicators 1.7 Life expectancy at birth in 1990 was 75 years for women and 68 years for men, on average 72 years (up from 70 years in 1984). These levels are three years above the average for upper-middle income countries. Argentina's infant mortality rate of 25.7 per 1000 live births in 1989 was three times higher than in industrialized countries, and substantially higher than in reasonably comparable nations, Chile (16 per 1000 live births) and Costa Rica (17 per 1000 live births). Outside of Latin America, there are significantly lower infant mortality rates in Greece and Korea, which are roughly comparable to Argentina. Within the country, Thcuman registered the highest infant mortality at 29 per 1000 live births while Tierra del Fuego posted the lowest rate, 10 per 1000 live births. Table 1.1: Population 1980, 1991 & 2000 (millions) Urban Rural Concentrated Rural Dispersed Total 1980 Population 23.16 1.08 3.57 27.81 Percentage 83.3% 3.9% 12.8% 100.0% 1991 Population 28.32 1.01 3.26 32.59 Percentage 86.9% 3.1% 10.0% 100.0% 2000 Population 33.00 1.00 3.00 37.00 Percentage . 89.2% 2.7% 8.1% 100.0% Source: 1980 and 1990 census and analysis by Instituto Nacional de Estadisticas y Censos (INDEC) and mission estimates. 1.8 During 1990, cases of morbidity and mortality associated with water-borne diseases continued to be reported though on a declining trend. -Unsafe water and unsanitary conditions contributed to a resurgence of cholera during the early 1990s. Intestinal diseases caused by water-borne microbes claimed the lives of about 1,000 people and accounted for 54,774 cases of diarrheic disease in 1990. Sixty percent of those reported to be suffering from intestinal diseases during 1991 and 1992 were - under the age of four. (Further health statistics are provided in Annexes B and C.). Macroeconomic Setting 1.9 The future pattern of water and sewerage development will be significantly shaped by recent momentous trends, which included: (a) The progressive deterioration of Federal Government capacity to the point of it being unable to perform essential functions effectively and equitably. This erosion broke the population's historic support for the state as the provider and guarantor of services. It substantially increased sentiment in favor of disposing, and otherwise reducing the primacy, of government entities. These changes facilitated the -4- reduction of the public sector's scope and impact, together with the fostering of greater private sector growth. (b) The equally widespread appreciation that Argentina's long, recurrent economic instability required fundamental changes from past national policy and management. As a result, the population came to agree that there was no hope for sustainable economic recovery or favorable living prospects for the poor without public sector reform. This sentiment in turn created the backing for the administration's reduction of subsidies, public credit, etc., as well as its movement towards more market-oriented instruments and greater resource mobilization by public service providers. (c) Comparable national recognition that investment in infrastructure has long been too low, and its effective maintenance equally neglected. As a result, local producers' competitiveness has been impaired and the development of numerous provinces set back correspondingly. This appreciation has created demands for reconstruction of the key deteriorated public assets needed to support modem private enterprise. It also has underscored the weaknesses of institutions responsible for service delivery. (d) The movement of political power and resources away from the Greater Buenos Aires center, sparked by resurgent federalist and new decentralization sentiments. These trends go back many years but have gathered increased momentum more recently. Consequently, the provinces have become more important within the economy (they spent half of total public expenditure in 1993, and are now the main providers of core public services). (e) The changes in the management and ownership of Argentina's infrastructure, sparked by widespread privatization at the national level. These have opened opportunities for increasing private investments, as have parallel liberalization of several aspects of Argentina's economy. In the process, with the additional boost of impressive macro-economic reforms, potential investors have been encouraged about the investment climate. 1.10 These forces have had, and are likely to continue to have, profound effects. For one, sizable provincial investment increases are needed to rebuild the seriously run down sector capital stock. However the provinces have had persistent financial troubles and have been curtailing capital expenditures.. Provincial governments' deficits were the major contributors to overall public sector fiscal problems throughout the 1980s, and they have failed to match Federal financial improvements. Provincial investments constituted less than 15% of their spending in 1990. And even with increased revenues since then, their capital expenditures have continued to decline to 11% of the total. Moreover, there are poor prospects for reversing -5 - these trends with the Federal Government decentralizing additional expenditure responsibilities to the provinces. 1.11 The provinces' fiscal deficit fell from 1.6% of GDP to 0.3% from 1990 to 1992, but is estimated to have doubled last year (to about US$1.3-1.5 billion). And the initial improvement stemmed largely from Federal resource transfers. In this connection, Government policies over the past several years have produced a structural change in central/provincial relations. The "pactos fiscal y federal" made for basic changes in intergovernmental. assignments of responsibilities and in the provincial tax base (the latter still awaits full legislative ratification). The 1992 pact provided for central government responsibility for provincial social security systems, whose deficit totalled almost half of the total public deficit two years ago. In addition, "Pacto Federal" provides additional fiscal relief by sustaining through 1995 the provinces' assurance of continuing large shares of the most important federal taxes. However, their distribution tends to favor sparsely populated provinces, which have relatively small proportions of Argentine households with unsatisfied basic needs. Further, these fixed transfers provide little incentive for efficient spending. Similarly, the discretionary transfers (furnishing some 8% of provincial proceeds) mainly reward poor fiscal performers and distort resource allocation. This reinforcement of perverse behavior is harmful since the provinces' recent fiscal deterioration stems from excessive personnel expenditures and limited revenue increases. 1.12 Neither of these transfer arrangements thus offer much promise of relief for incremental demands for water and sewerage services. Consequently, the provinces face a major resource mobilization challenge to meet these requirements, which is one element of the provincial fiscal adjustments that the Federal Government is promoting. 1.13 Another effect of the aforementioned national changes is that, with few exceptions, each province also will have to considerably upgrade its public agencies responsible for the decentralized water operations, and to encourage greater private sector competition. Moreover, future management of sector responsibilities, with the changing role of government concerning Argentina's infrastructure, will now have to be more attuned to planning and regulation than the previous engineering and financial emphases. The latter cannot be overlooked because the Federal actions to decentralize as much as possible infrastructural services have given the provinces a host of operational problems. Moreover, these need to be accompanied by the prompt introduction of new sector regulatory oversight agencies. Provincial arrangements for setting environmental standards and enforcing them have to enter into the new machinery too. Sector Institutions (see Annex D) 1.14 Under Argentina's constitution, the responsibility for water supply and sanitation rests with the provinces. However, the country's services were long highly centralized in planning and administration, beginning with the Obras Sanitarias de la Nacion (OSN), the major sector agency since 1912. Another central -6- agency, Servicio Nacional de Agua Potable Rural (SNAP), was established to handle service delivery in rural communities in 1966. 1.15 The sector organization was fundamentally amended in 1980 when the responsibility for services was devolved to the provinces, giving local authorities far reaching powers and full accountability to their citizens. This was part of their assumption of responsibilities for delivering a wide array of previously federal public services, which was linked to the provinces beginning to receive much greater funds under new revenue-sharing arrangements. The change was also motivated by growing dissatisfaction with OSN, whose role since then has been limited to the Buenos Aires metropolitan area. The last major change in the sector organization occurred in 1988 when the Government eliminated SNAP and established the Consejo Federal de Agua Potable y Saneamiento (COFAPYS). There was also a small innovation the following year--a harbinger of things to come--when a Buenos Aires users' cooperative won a concession for building and running a sewer system. 1.16 COFAPYS' creation was stimulated by the authorities' belief that the sector had been stagnant and overcentralized. They also felt that there had been a loss of policy and development focus. To remedy these, the Government's strategy was to rely fundamentally on provincial companies to advance sector development through expansion of service coverage, improved operational efficiency, and attainment of greater financial self-sufficiency. COFAPYS was authorized to mobilize and channel international resources to these companies in such a way as to advance the aforementioned changes. Unfortunately, COFAPYS has not met this goal. It was slow to become operational and still had not established clear internal procedures at the time of the Bank's review. There was a succession of presidents, none of whom was able to provide a clear sense of purpose or to establish anything concrete. COFAPYS also had difficulties in attracting and retaining suitable staff. 1.17 Probably COFAPYS' greatest weakness has been its inability to establish the desired relationship with provincial companies. In part this was because COFAPYS lacks the expertise and professionalism to persuade the provincial authorities to undertake the costs of its services. Many of the provinces, moreover, had been long accustomed to receiving operational subsidies and investment funds on a basis quite different from the conditions which COFAPYS sought to introduce. Further, they were ill prepared for the 1980 sector devolution and its effects have caused some continuing disorder. They were, therefore, unreceptive to collaborating in the reform agenda which COFAPYS was intended to put into effect. COFAPYS consequently, without any great authority or effective demand for its funds, is unlikely to perform any major sector role. Its problems indicate that it will be difficult for a federal agency to impose financial or other discipline in the sector, especially with just a lending instrument. 1.18 Nor is there much prospect that any Federal entity will provide any major policy directing or operational function in the water and sewerage field either, now that its power has been surrendered. The Secretariat of Hydraulic Resources (SRH), along with other sectoral agencies of the ex-Ministry of Public Services and Works, progressively saw their capacities to provide policy guidance and services largely -7- eroded, akin to OSN's decline. Further, the public administration was still heavily oriented along interventionist and market-regulating lines until the new authorities recently started redressing these views. these irends reflect the sharp diminution in the role of the federal institutions formerly in control of the sector. 1.19 There remain, however, some central government surveillance functions and involvement in water supply and sewerage activities. The Economy Ministry's Treasury Secretariat governs national fiscal policy, budget controls, external borrowing etc., which set limits on sector activities. Its on-going dedication to curbing the fiscal deficit has set rigorous parameters. The same Ministry's Economic Programming Secretariat meanwhile has recently undertaken initiatives to improve national public investment planning and programming. Its emerging authority to fix development priorities and govern the composition of capital investments in the national budget could have important implications. In addition, the Secretariat for Economic Reform of the Provinces (SAREP) in the Interior Ministry has been encouraging the adoption of provincial financial and investment programs for promoting fiscal adjustments at that level. SAREP has been targeting measures for improvements in local resource mobilization and the efficiency of expenditures. 1.20 The provinces' water entities are now mainly providing Comite Interjurisdicional services directly within their del Rio Colorado jurisdictions, in some case with In 1977 the provinces of Buenos Aires, Mendoza, delegations to municipalities. Neuqu6, Rio Negro and La Pampa adopted the Unified The provincial companies differ Program for Flows Distribution and Irrigated Areas from one jurisdiction Promotion in the Colorado River. To manage the Program and allocate the resources, an inter-institutional to another. Some are organized commission (COIRCO) was created as a decentralized as public enterprises with varying institution. The Program is the result of almost 20 years degrees of autonomy while others of negotiations between these provinces (the first conference of the Colorado River was held in 1956) and are dependencies of provincial is based in an Integrated Development Plan for the governments with little Colorado River, prepared by the MIT for the Secretaria independence. Some de Estdo de Recursos Hidricos in 1972. The Program municipalities manage their own has its major emphasis in the development of irrigated areas, hydroelectric generation and regulation of the services and others function Colorado flows. It contemplates a total irrigated area of through cooperatives. Further, 760,000 ha., 8 dams with a combined capacity of hm' some provincial entities (e.g., and possible inter-basin water transfers. Water quality Direcci6n de Hidraulica de la considerations are limited to salinity control. Provincia de Buenos Aires, Direccion General de Agrohidrologia e Hidraulica de la Provincia de Santa Fe) carry responsibilities for river basin management and water rights administration. There are problems though. The previous governing federal institutional framework has been in flux following privatizations and reorganizations. Similarly, it is unclear who will assume the planning and regulatory aspects of management of water between hydroelectric generation and irrigation uses. The multipurpose national agencies who administered these (AyEE and Hidronor) have been privatized. -8- 1.21 Perhaps the most notable innovation in sector organization has been the introduction of private concessions, stemming from the Government's ambitious program of privatization of state-monopolized functions. In the water and sanitation sector, OSN led the way in 1993 by awarding a 30-year concession for the Greater Buenos Aires system to a consortium of international and local companies headed by a major French operator. Over the concession period, the "Aguas Argentinas" operator is obligated to extend service coverage, guarantee water quality and introduce sewage treatment. Its investment program could approximate US$4 billion over the 30 years. Another important private water concession was awarded in the province of Corrientes which in 1991 contracted a private consortium for the provision of water supply, sewerage and sewage treatment services in its major urban towns. The Corrientes and Buenos Aires initiatives have generated a surge of interest in private sector participation. 1.22 In addition, an independent regulatory authority has also been newly created to assume OSN's related responsibilities in the case of Buenos Aires. The Tripartite Agency for Sanitary Works and Services (TASWS) is primarily charged with oversight of concession contracts from the standpoint of service quality, public rights, tariffs, etc. (ref. para. 2.28). 1.23 Also, there have been organizational changes concerning the protection of Argentina's environment, which bear directly on water supply and sewerage functions and conditions. After several somewhat fruitless attempts, the Government in 1991 established a Secretariat of Natural Resources and Human Environment (SRNAH). Its mandate includes coordinating environmental issues among federal agencies and helping to strengthen enforcement of federal rules. However, the direct responsibility for environmental protection is mainly in the hands of the provinces (ref.Annex E), who have been creating regulatory agencies (as have several municipalities). Sector Policies 1.24 The initial development of the water supply and sewerage sector was long guided, particularly during Argentina's rapid growth periods, by an ambitious outlook. The nation's officials aspired to--and became--pioneers of modern sanitation in Latin America. Their consistent theme was maximizing service coverage by pressing to increase supply capacity. In the process unfortunately, installed water production and distribution facilities were often designed to meet overestimated demands. Further, as long as the real cost of capital was low, the authorities opted for building large scale infrastructure rather than systems which were more responsive to demand. In the event though, these approaches were frequently thwarted by deteriorating economic conditions. It has never, at the same time, been sector policy to orient investment financing and tariff policy to reflect the economic cost of services, users' capacity to pay, and the utilities' self-financing capacities. Similarly, when the services were transferred to the provinces, there were no financial policies introduced to guide financing of new works or operations and maintenance costs. Often, the larger, more complicated types of works were not -9- undertaken because investment and financing plans extended no farther than annual budgets. 1.25 More recent statements on sector planning have put priority on: (a) Table 1.2: Water and Sewerage rehabilitating and replacing deteriorated % Served in Provinces infrastructure; (b) opening water services Water Sewerage in new urban areas; and (c) promoting Provinces % Served % Served water conservation and utility Greater Buenos Aires strengthening. COFAPYS' creation was Federal Capital plus 70 51 founded on declared new policies and 13 municipalities* emphases, including increasing private Remaming 6 35 28 sector and beneficiaries' participation in Bunires Buenos Aires 67 38 the provision of services, expanding local Province** administrative responsibilities, and Catamarca 81 22 improving local sector companies' C6rdoba 84 18 autonomy, efficiency and financial Corrientes 75 37 viability. However, these intentions have Chaco 69 18 had little effect. Presently, there is no Chubut 98 53 agency responsible for broad policy Entre Rios 90 42 formulation and guiding incentives and Formosa 67 25 financing (ref. para. 2.1). Jujuy 88 44 La Pampa 76 37 Water Supply and Sewerage Service La Rioja 87 23 Coverage Mendata 90 47 Misiones 49 10 1.26 About 72% of population in urban Neuqu6n 91 36 centers and rural townships are supplied Rio Negro 87 37 with piped water connections (see Annex Salta 83 50 F). Some 38% are connected to a San Juan 96 15 sewerage system, according to the 1991 San Luis 90 32 census and data from provincial entities Santa Cruz 85 44 (ref Annex G and Table 1.2). Out of the Santa F6 74 30 32.6 million total population, this leaves Santiago del Estem 77 21 about 9.1 million inhabitants without safe 'llcumAn 73 29 water and 20.2 million without sewerage Tierra del Fuego 86 73 services. The bulk of the population not Average 72 38 served by a public water system uses shallow wells, as in Buenos Aires, Mar Source: 1991 Census with water coverage del Plata, Tucumin and many other cities. partially verified by mission estimates. *Represents the coverage area of the private A comparison of these levels with those water concession. of other countries shows Argentina 14th **Represents the total of Buenos Aires among the 20 major nations in the Latin Province less Greater Buenos Aires. America and Caribbean region with respect to access to piped water, and 15th in terms of sewer connections (ref. Annex H). The 1991 figures also show that 62% of the population were not connected to a sewerage system, with about 47% having access to other means of services. Requirements for sewerage services are - 10 - increasing due to the growing density of urban areas where on-site sanitation can no longer serve. Further, there is considerable variety in provincial needs for these services. Provinces such as Misiones, San Juan, Chaco, and Cordoba have less than 20% of its population served with a sewerage system, while seven other provinces excluding Greater Buenos Aires cover at least 40% (ref. Table 1.2). 1.27 Service levels for 1991 show a modest growth in piped water supply and sewerage services of 7% and 8% respectively over 1980. However, a large part of this resulted from increases in connections to existing water distribution and sewage collection systems without commensurate expansion in capacity. The resultant over- loading of present capacity has diminished the quality of service for the rest of the population. Quality of Service and Environmental Considerations 1.28 Over the past decade, the quality of water supply and sanitation services is deemed to have deteriorated and become more precarious. This is attributed to the generally inadequate supply of chemicals at the treatment works and the lack of water quality monitoring programs and laboratories. Water pressure is below standards and houses have had to install booster pumps. A good part of the water systems, including water treatment plants and large water mains, are more than 60 years old and need replacement. Maintenance is generally poor and there are significant losses throughout distribution systems. On average, the unaccounted water in the urban water systems is estimated at over 50%. 1.29 Furthermore, a large segment of the population still draw water from shallow, unprotected wells. Water extracted from shallow groundwater is often contaminated by septic tank effluents and poses health risks, evidenced by increased nitrate/nitrite levels. The concentration of nitrates in ground water in some areas of Buenos Aires has already reached dangerous levels. Many wells in those areas exceed World Health Organization (WHO) standards of 10 mgil (milligrams per liter) of nitrate/nitrite. Some have levels more than double the WHO standards. Arsenic concentrations in the Pampa, which should be no more than 0.05 mg/l, are routinely exceeded in some wells. Moreover, the Pampa also suffers from saline intrusions. 1.30 Water pollution is becoming a pressing problem in such areas as the Riachuelo and Matanzas rivers in the capital, San Roque, San Martin de los Andes and Nahuel Huapi lakes in Cordoba, Neuqu6n and Rio Negro, respectively, the main river of 'Icumin, and irrigation channels in Mendoza. Industrial discharges account for a substantial part of the pollution load and represent the main cause of resource deterioration in some instances. Indiscriminate raw sewage discharges also pose dangers of even greater deterioration in water quality and more costly water treatment, eutrophication of surface waters and disruption of ecological cycles with often unpredictable--but almost always harmful--consequences. Public opinion is becoming aware of the situation, with a consequent increase in the authorities' concerns about the problem. Hence, there have been increased resource allocations to mitigate water pollution. - 11 - 1.31 There is very limited data on wastewater treatment, but it is Wastewater Treatment clear that water supply has received most of sector investment. Mendoza, Tucumin and Neuqudn provincial The best estimates are that less capitals have constructed wastewater treatment 5% plants to treat part of their collected sewage. Mendoza has two treatment plants that treat its now receive some type of waste waters: an anaerobic-facultative lagoon and treatment. In the past, OSN and an conventional primary treatment plant. the provincial water companies had TucumAn has a conventional primary treatment planned substantial wastewater plant constructed in 1978 which is expected to be treatment investments. However, expanded and upgraded to secondary treatment these projects have been made levels. Neuqu6n has two secondary wastewater treatment plants, one in the industrial sector and without a comprehensive analysis one for the city, inaugurated in 1991. This is of the problems or an assessment planned to be expanded to treat all collected of the degrees of treatment needed municipal wastewater. to optimize the available financial resources. For example, some wastewater discharges in several provincial capitals either already receive secondary treatment or treatment plants are pending construction by concessionaires in privatized cases (see text box). Yet environmental quality objectives have not been formulated for the privatized water entities and those formulated are not enforceable. 1.32 Wastewater treatment plants have generally been planned or built without adequate consideration of the capabilities of the companies who would ultimately operate and maintain them. Construction of secondary treatment capacity is capital and energy-intensive. Yet it has often been undertaken without sufficient consideration of the absorptive capacity of the receiving waters or evaluation of their expected operation and maintenance expenses. These have led to unsuitable treatment plant designs. Water Pollution Control 1.33 As in the case of water resource management, Federal regulations concerning water pollution only apply in the nation's capital with enforcement responsibilities divided between regulatory commissions and the SRNAH. Several provinces, (Mendoza, Thcumin, Buenos Aires and San Juan) have issued their own effluent standards governing municipal sewers and surface waters, modelled after OSN's criteria. However, these often lack the necessary legal framework or the means to enforce them. They are nominally the tasks of the provincial water companies or the institutions in charge of the environment, which seldom possess the necessary technical or financial means for enforcement. 1.34 Originally, OSN was charged with controlling wastewater discharges (per Organic Law 13577 of 1949, Article 31, 32 and 34, and Decrees 2125/80 and 674/89). It was mainly oriented towards controlling the pollution of OSN water supply sources and protecting its infrastructure. In 1992, this responsibility was transferred to the SRNAH, and direct control through the Direcci6n de Control de la Contaminaci6n Hidrica with the assistance of the Instituto Nacional de Ciencias - 12 - y Thcnica Hidricas (INCYTH). However, as Cuotas de Resarcimiento por noted above, SRNAH Contaminaci6n only has authority within Decree 2125/80 introduced fees for the pollution load of an the federal capital, which industrial discharge between a permitted concentration and a limits the effectiveness maximum allowed discharge, above which penalties were envisaged. The fee was calculated so that it would increase and application of these gradually until in 10 years it reached the equivalent cost of treating regulations. A special the discharge thus acting as an incentive for polluter to introduce case seems to be that of pollution control measures. Transitional waivers of up to two the province of Buenos years were available to those industries that planned such investments. Because of the limited application of the Decree, it Aires. In this area, Law was later modified by Decree 674/89 which substantially reduced 5 965 / 5 8 regarding the discharge fee and introduced a "temporarily tolerated limit" protection of the above which fines would apply, growing with repetitive violations e and water until the third one that would lead to the closure of the industry. atmosphereoand te This latter Decree also has a very limited application. bodies prohibited the discharge of pollutants from private and public sources and dispersed responsibilities among municipal, provincial and federal institutions. Water pollution regulations of most other provinces, however, only refer to discharges by private industries. They do not include the water companies, which paradoxically are empowered with the control and enforcement of water pollution--yet are themselves significant polluters. 1.35 No province is known to have adopted environmental quality objectives for its surface waters. Further, instruments such as pollution discharge fees are rarely imposed, although they were introduced by OSN in 1980 through the stipulation of "las Cuotas de Resarcimiento por Contaminaci6n" (the fees for pollution correction) for industrial discharges (see text box). Also, most monitoring networks for water quality and quantity operate poorly, if at all, making it difficult to evaluate the effectiveness of the water treatment actions. These difficulties will be reviewed in the environmental assessment referred to in para. 1.1. Sector Investment and Financing 1.36 Past Bank studies estimated that annual sector investment averaged some US$160 million (in 1992 prices) over the 1971-75 period, rose to some US$225 million per annum over the 1976-80 period, and fell sharply to US$75 million per annum during 1981-85. Data on investments in 1987-92 is particularly uncertain. But it appears that annual investments during this period (in 1992 prices) have not exceeded a level of US$70 million, even less than in 1981-85. (Table 1.3 summarizes the available information. Since most of the larger provinces are included in the table, the addition of the remaining provinces' investment levels would not change the trend.) 1.37 The precipitous decline to around US$75 million per annum during 1981-85, and possibly through the rest of the 1980s, hampered expansion of service coverage and rehabilitation of the antiquated infrastructure. Further, more recent investment projects usually involved simple extensions. of either water supply or, more frequently, sewerage networks. Such investments have often been driven by the - 13 - financing arranged by urban groups that manage to contract medium-term bank financing for extending sewerage service. Practically no investments have been reported for larger system components such as water intake, water transmission, potable water treatment plants, potable water storage, or for large sewage interceptors or sewage treatment plants for the increased population that was connected to the systems. Table 1.3: Sector Investments for Select Provinces (Average 1992 US$ millions) Provinces 1987 1988 1989 1990 1991 1992 Tot. Federal Capital plus 13 municipalities' 36.4 16.5 27.6 8.1 10.9 12.5 112.0 Buenos Aires Pmvince n.a n.a n.a 9.5 10.5 10.0 30.0 C6tdoba 9.9 9.9 29.8 19.9 19.9 9.9 99.3 Cornentes n.a n.a 0.4 4.2 10.1 1.2 15.9 Jujuy n.a n.a n.a n.a 1 5 3.7 5.2 Mendaza n.a 1.8 1 6 3.5 8.6 5.6 21.1 Misiones n.a n.a n.a n.a 2.5 10.4 12 9 Neuqu6n na 3.1 1.6 15 0 15.0 16.8 51.5 Salta n.a n.a n.a n.a n.a 2.2 2.2 San Juan n.a n.a 0.2 0.2 2.1 1.2 3.6 Santa F6 23.9 15.3 6.9 4.7 11.8 3.5 66.0 Ticuman n.a n.a n.a n.a 1.0 1.4 2.4 Total 70.2 46.7 68.0 65.0 93.9 78.4 422.2 Source: Data supplied by the provincial entities. * Investments made by Obras Samtanas de la Naci6n (OSN). n.a = no data available. 1.38 This investment dearth is attributed to the country's economic recession of the 1980s, the hyperinflation and the external debt crisis. However, the most intractable obstacle to sector development has been the vicious circle of operational inefficiencies, financial mismanagement and inability to generate operational surpluses that have prevented many water companies from mobilizing sufficient resources. Utility Management 1.39 There is significant scope for improving the management and operations of water and sewerage systems. The utilities' administrators are confined to resolving day-to-day crises. Neither have they defined long term objectives and carried out adequate planning. Their historic focus has been on engineering matters. Generally too, their departments work on a compartmentalized basis with insufficient coordination. - 14 - 1.40 The utilities lack effective financial and tariff policies, which makes for uneconomic operations. Their tariff structures generally are based on unmetered service, and vary with particular geographic areas, types of property locations and land prices. Average water production levels now are frequently as high as 600 liters per capita per day (lcd). Assuming that unaccounted water is 50%, the net consumption without metering is close to a high 300 lcd, which deters serving other consumers or conserving investments. The approximated unaccounted water is due to deficiencies in the estimates of water produced and commercial losses, related to consumer register deficiencies and to inadequate meter reading. As a result, consumers' waste is increasing with the flat rate-based charges discouraging conservation. This also deprives the utilities of significant revenues and increases their operational costs unnecessarily. The companies also lack adequate consumption data with which to guide -distribution system operations and properly plan system expansion. 1.41 Further, financial systems tend to be unintegrated with other utility activities. Bills are produced without sufficient surveillance. Their collection is inefficient and account receivables are very high compared to other utilities. Utilities do not have adequate management information machinery. Basic information on billing, maintenance needs is not routinely produced, and there are no monitoring indicators with which to assess performance. In other areas, the reports are not result-oriented and of little value for decision-making. There is a lack of modem data processing equipment as well. Manpower Aspects 1.42 In 1992, personnel costs represented 44 percent of system operational costs, excluding depreciation (see Annexes J and K), compared to about 30 percent in comparable sector utilities. Salary levels are especially low for professional levels, which reportedly make it difficult for water companies to attract competent staff. Similarly, there are indications of the lack of proper staff capable of managing a public service rather than constructing works. Conversely, it is reported that overstaffing is a general problem. 1.43 Total sector staff numbers about 35,000 distributed among provincial and municipal organizations, cooperatives and private sector concessionaires (See Annex L). The quality of these data is poor but estimates made by the 1987 Bank sector study provide a baseline. It calculated that sector personnel have increased at an annual average about 4.0% rate while the population served in water and sewerage coverage increased about 2.0% and 0.6% respectively p.a.. The composition of the 1986 staff, according to the last survey, is shown below: Distribution of Staff by Level Level Number Percent Professionals 3,330 13% Technicians 2,900 11% Administrators 5,200 20% Workers 56% Total 25,900 100% - 15 - Within the nation, this distribution varies considerably but there has been a common trend to increase the number of workers and administrative staff. Conversely, the number of professionals and technicians is estimated to have not varied significantly over the past six years (ref. Annex M). 1.44 The staff productivity index (SPI) which measures total staff per thousand water connections, has decreased from 8.4 in 1986 to about 5.0 in 1992. This improvement in staff productivity has been achieved mainly through the 50% staff downsizing in the Greater Buenos Aires water system, in the wake of its change in management under a private concession. Nation-wide, there is enormous variation from province to province, ranging from 1.7 to 34.4, as demonstrated in Table 1.4. Part of these variations can be explained by the number of water systems attended by a single provincial water agency (the larger the number and dispersion of systems, the higher the personnel requirements). However, the wide ranging variations are considered to reflect the general overstaffing of many water agencies. Thble 1.4: Staff Productivity by Province Water Connections Staff per Thousand Provinces Staff (Thousand) Water Connections LOW Federal Capital plus 13 4,020 2,300 1.7 municipalities C6rdoba 1,366 418 3.3 Tierra del Fuego 62 17 3.6 San Luis 219 52 4.2 Corrientes 476 111 4.3 Buenos Aires Province 3,105 705 4.4 San Juan 417 94 4.5 Mendaa 1,143 248 4.6 Chubut 378 80 4.7 MEDIUM Rio Negro 598 105 5.7 Entre Rios 1,093 188 5.8 Santa F6 2,631 435 6.0 Salta 967 140 6.9 Jujuy 603 85 7.1 Chaco 759 97 7.8 Misiones 318 39 8.2 La Pampa 416 48 87 Formosa 458 50 9.2 Santiago del Estero 700 73 9.6 La Rioja 400 39 10.3 HIGH Neuqu6n 584 46 12.7 Tllcumin 2,347 164 14.3 Santa Cruz 1,088 36 30.2 Catamarca 1,722 50 34.4 Tbtal 25,870 5,619 4.6 Source: Figures as reported by the provincial entities to COFES in 1993, except Buenos Aires Province from 1993 AIDIS Report. Note: "Staff" represents all staff working at Provincial, Municipal, Cooperative, and/or Private Concessionaue levels. - 16 - 1.45 Argentina's overall index of 4.6 staff per thousand connections is in the mid- range of a sample of other countries, e.g., Uruguay, 9.0; Turkey, 4.5; Chile, 3.9; US, 2.9; Canada, 2.0. Private water companies in France and Spain however have 1-2 staff per thousand. - 17 - II: ISSUES FACING SECTOR DEVELOPMENT Roles of Central and Provincial Governments 2.1 The central government has not yet fully adapted itself to the sector's decentralization and other new circumstances. This has created a void in the definition of sector development policies, priorities, standards and incentives. It has also obstructed the required investment planning and rebuilding of investment financing mechanisms. The Federal Government's role - therefore needs to be clearly redefined and stronger efforts made to discharge it. The federal authorities should turn more decisively from direct operations and investment financing to facilitating and regulating overall sector development, and providing a better enabling policy environment. 2.2 The equivalent long term provincial government responsibilities also need to be refocused, mainly on implementation and oversight of sector activities. These authorities' main task for some time to come should be facilitating the emergence of more independent, autonomous service entities (which experience has shown are the best models for water and sewerage operations). This is needed because the potential benefits of the devolution of sector responsibilities in the 1980s have not materialized very far. Also, experience shows that direct management of water companies by government administrative departments--which is quite common in Argentina--has been the worst possible option. Consequently, the challenge at hand is to accelerate the reforms of sector institutional structures. 2.3 There are also other important provincial government requirements to be met. One is the proper exercise of regulatory functions (ref. paras. 2.21-2.31). And some attention needs to be given to reducing the provinces' fiscal burdens represented by their increasing transfers to municipalities. This is contributing substantially to provincial financial difficulties which limits their capacities to help advance sector development. This appears to need more concerted fiscal controls, such as Mendoza Province installed in 1990. 2.4 There may also be a need for the provinces to clarify some gray areas. Waste water treatment for metropolitan areas fully contained within one province may be a responsibility entirely devolved to that province--but not to any one of the municipalities within the metropolitan area. This also appears to apply to solid waste collection and treatment. Moreover, as noted in para. 1.20, some elements of the former federal-controlled system no longer have the organizational base they once enjoyed. Resource Mobilization 2.5 Argentina must mobilize large financial resources to improve its water and waste water standards, protect its people's health and preserve its natural resources. The country faces a volatile combination of growing water demands for competing uses, deteriorating water quality and the consequences of - 18 - inadequate past provisions for sewage collection and treatment. In all probability, the costs of furnishing water, and collecting and disposal of sewage will soon rise quite sharply. Sizeable investments thus will need to be made for the foreseeable future in: (a) rehabilitation and/or replacement of the present facilities to overcome the backlog of deferred maintenance and inefficiencies; (b) demand management measures; (c) service coverage expansion (particularly sewage collection and treatment, and water reuse); and (d) institutional development and upgrading. 2.6 As noted in paragraph 1.36, there are no reliable figures on recent investment levels. However, estimates of what transpired in the 1980s imply investments of about US$3.00 per capita. By comparison, a commonly quoted estimate for required investment to supply potable water in Argentina is US$250 per capita, and another US$350 for sewerage and sewage disposal. The implied annual depreciation allowance would amount to about US$18 (assuming an average depreciation rate of 3 % per annum), or six times the current investment rate. This simple calculation would indicate that Argentina has been disinvesting in the water and sanitation field. One must also take into account that a good part of the existing works is more than 60 years old, fully depreciated and badly in need of replacement. 2.7 The amount of investment needed depends largely on the goals for water and sewerage coverage. UNICEF's 1994 report calculated that US$3.3 billion would be needed in order to obtain water coverage for 85% of the population and sewerage coverage by year 2000. This figure would rise to US$4.5 billion for the coverage to increase to 90% for water and 60% for sewerage. COFAPYS estimated that US$5.3 billion investments would expand coverage to 90% for water and 90% for sewerage by 2000. Among these forecasts, the per capita costs range from US$120 to US$220 for water and US$230 to US$300 for sanitation. If these investments were to begin this year, the amounts needed range from US$478 million per annum for the lower coverage scenario, to US$640 million for the medium coverage scenario, and US$753 million for the higher coverage scenario. These investments are equivalent in 1991 prices to between 0.47% and 0.75% of Argentina's GNP, which are about average when compared with other Latin American countries and elsewhere. Water and waste water investment generally range between 0.6% and 1.5% of GDP for higher middle-income countries. Nor are such requirements particularly large for a country the size of Argentina. But these sums would represent a seven to eight-fold increase over current levels. 2.8 In addition, the provinces' difficult financial conditions depicted in paras. 1.10-1.11 mean that sector investment funding will now have to proceed along very different lines than in the past. Up until 1980, investment resources came mainly from budgetary transfers via OSN. This system with investment costs not recovered from tariffs, was not sustainable. More recently, the local companies have depended instead on provincial budgets complemented by some ad hoc financing sources, along with the continuation of previous OSN tariffs (adjusted for inflation). Further, no national sector financing agency has developed, partly as a result of COFAPYS' lack of experience. - 19 - 2.9 For the future, the main sources of investment funds normally would and--should--be the water companies' cash flow, private equity and some borrowing. In principle, their operational savings should be leveraged with appropriate borrowing to achieve the lowest possible unit costs of consumption. But to even approach investments on the aforementioned scale would entail dramatically improved financial performance by the companies. The available information indicates that they, under their current management, would be hard pressed to mobilize very considerable added revenues in the future. They are also largely unable to become sufficient credit-worthy anytime soon, thus barring their competing for funds in any selective capital market. 2.10 In the medium to long-term, the sector companies should come to rely increasingly on Argentina's financial markets for their financing need. Well managed utilities, public or private, have a steady revenue base, and should be able to obtain long-term loans at competitive rates from commercial banks. They could also tap the securities markets by issuing equity or bonds offering attractive investor opportunities, e.g., Brazilian water companies drew on worker pension funds under the PLANASA scheme to finance investments. After all, utility revenue bonds customarily offer a maturity, yield and risk profile that well matches the liabilities of pension funds and other institutional investors. For now though, the domestic financial market is unlikely to be very interested in responding to the sector's resource needs. Nor can it now perform this function efficiently. Intermediation costs include high spreads and maturities for new loans are rarely more than short term. The banks moreover have little experience in appraising local risk, and are unable to provide the lumpy amounts and long maturities associated with infrastructure investment. 2.11 The principal remaining resource might be private capital, assuming reasonable predictability of the regulatory regime and active promotion. In the near-term though, it is unlikely that such capital will be provided in sums sufficient to cover any large proportion of the investment bill. As discussed below, private participation in the sector is growing but the firms involved have so far not provided large amounts of their funds. The Buenos Aires concessionaire reportedly has so far committed only some 12% of the monies called for in the first 5-year investment program segment. Its Corrientes counterpart relied on operational savings for its sole investments, and has not proceeded with the pledged investments either. 2.12 Therefore, the essential fact is that the central government revenue stream for water and sanitation projects has ebbed, with. no prospects of any reversal. Nor can the provincial governments be expected to sustain their past heavy budget subsidies. They must consequently establish and enforce a clear cost recovery policy to finance much larger sector investments without severely burdening government finances. 2.13 Putting this principle into effect though clearly will be difficult. Government supervisory agencies, given the history of subsidization, may be reluctant to raise tariffs by the amounts necessary. Argentine rate payers, many of whom experience economic and social difficulties, would resist the tariff - 20 - hikes which would be required to generate the sums needed. And it is true that the full costs of publicly-provided water services are seldom recovered from beneficiaries around the world (although some countries are moving aggressively in this direction). Most large water systems, as well as all waste treatment, flood control, drainage and most irrigation, are subsidized to some extent. 2.14 Yet numerous countries' experiences with private, municipal and local government systems alike point to many cases of self-sustaining water supply schemes (at least with respect to operating costs). Some of these systems have existed for decades (even centuries). Moreover, significant user payments are scarcely new in Argentina, where private firms successfully ran water systems in the 1800s in Buenos Aires, Rosario, La Plata and other cities. At the same time though, even reviewing these precedents may not adequately make the case for a fuller cost recovery policy. If this is so, it also bears noting that confronting service beneficiaries with their costs can help bring public pressure to bear on improving water agencies' performance. Private Sector Participation 2.15 Private water utilities have long operated successfully in several US states. In the 1980s, Britain converted its state-owned enterprises into stock companies, transferring full ownership to private investors and limiting the public sector's role to standard-setting and regulation. In France and Spain, local governments own the infrastructure and a growing number have opted to delegate operations to private firms. Similar arrangements are spreading in Italy, and are being adopted in East Asia and Africa. Municipally-owned German utilities farm out a large share of their work. 2.16 There is now widespread interest in enhancing private sector participation around the world in view of the appreciation of public sector management's generally disappointing record. Save for a few countries with quite strong public service traditions (e.g., Germany, Switzerland), public water utilities have performed poorly in service reliability, productivity, financial management, customer satisfaction and the selection and implementation of investment projects. Their weaknesses were compounded moreover by the effects of the 1980s' external debt crisis, relatively high global interest rates and the attendant inadequate investments and infrastructure maintenance. 2.17 Developments in Argentina have highlighted concession arrangements to private firms. Under the impetus of the present administration's thrust towards privatization of public infrastructure and services, OSN in 1993 awarded a 30- year concession to a consortium of international and local companies led by a major French water operator. The arrangement chosen was based on the French model in which the concessionaire assumes responsibilities for operating, maintaining and investing in fixed assets, which remain the property of the public sector over the contract period. The "Aguas Argentinas" contractor assumed all commercial and most financial risks. It is committed to extending service coverage for water supply and sewerage, guaranteeing the quality of water supplied, and introducing sewage treatment, with some prospects of - 21 - investments approximating US$4 billion. Another important private water concession was in the province of Corrientes which successfully contracted with a private consortium for the provision of water supply, sewerage and sewage treatment services in the major urban towns three years ago. More concessions are being developed in such provinces and municipalities as Santa F, Balcarcel, Formosa, Mendoza, Cordoba, Salta, Posadas, Santiago del Estero, San Martin de los Andes and 'llicumdn. This approach appears to be the emerging model for private participation arrangements, with little likelihood that existing large- scale water and sanitation facilities will be sold to the private sector in the very near future. 2.18 For other provinces and municipalities interested in attracting private sector participation, experience indicates that the crucial element will be the adequacy of the policy environment. They accordingly might be interested in the pertinent views of the private firms who bid for the provision of sector services in Caracas, Lima, Mexico City, Valparaiso, Buenos Aires and Corrientes (ref. para. 3.29) 2.19 Experience has shown that private participation can serve as a catalyst to pursue better cost recovery and create a framework in which autonomy and accountability are credible. Studies on worldwide water and sewerage services have made it increasingly clear that these operations are rarely efficient when run by public sector entities. The tendencies of governments to interfere, the hidden subsidies, and institutional constraints are well documented. However, because of the externalities from water use and some public good characteristics for water, the government will still need to subsidize water consumption for the poor, design and enforce water quality laws and regulations, and fund certain investments such as flood control and reduction of soil erosion and siltation. 2.20 A broad range of private participation options is available, varying in scope and the extent of responsibilities and risks assumed by the firms and the contracting authorities. These are described below with some examples depicted in Annex 0. (a) Under a service contract, a utility hires a private firm to carry out specific tasks while retaining full responsibility and risk for service provision. This is especially advisable for large peak activities (e.g. studies, engineering designs, construction) or when the in-house level of work is too small to reach an efficient scale of operations. But this approach can also apply to relatively routine, recurrent activities, which often can be provided at lower cost under competitive contracts. Several water agencies (EMOS in Santiago, SEDAPAL in Lima, SABESP in Sao Paulo) contract with private firms to read meters, collect bills, and to maintain private connections, distribution networks and treatment facilities. In Mexico City, four private groups engaged in a first phase in getting basic system information, are expected to expand into commercial activities, maintenance and rehabilitation. Care needs to be taken - 22 - in separating functions to ensure that core activities, e.g., production, treatment and distribution, continue subject to effective coordination and control. Service contract compensation is similar to that for consulting services, i.e., time- based, lump sum, percentage, cost-plus, or fixed-fee. The risk to the contractor to full concession would be to high, and the private firm's responsibility is limited to the part of the system that it operates. (b) A management contract is a service contract which a utility uses to employ a private firm to manage services, e.g., covering all operation and maintenance functions. The contract should specify whether the firm is responsible for large repairs and replacements of the system. The private firm is remunerated from customer charges which the utility fixes. The contracting authority retains most operational and commercial risks, a key disadvantage. This can be mitigated by having the contracted firm share in the risks under some form of performance incentives. Unfortunately however, this can leave the way clear for government interference in day-to-day decisions or actions that affect productivity or quality. The firm also faces other risks, e.g. getting paid on time, the insurance it can obtain usually solely covers the foreign currency part of scheduled payments. Another possible shortcoming of these arrangements is that, if fixed fee compensation is provided, the incentives to increase efficiency are reduced. (c) A lease contract arrangement calls for a private firm to take over fuller responsibilities and to collect user charges, all in return for some of the revenues. The province or municipality is still the sole owner, and remains responsible for system expansion, asset replacement and all financial risk. Unlike a management contract, the financial risk for operation and maintenance is borne entirely by the firm, i.e., customers are its clients. The contractor bears all the commercial risks and has to market his services effectively in order to earn a profit. The private firm receives existing facilities and must ensure only the management of the service. It must finance only the working capital and renewal of expenses for short economic life components. The private firm does not participate in financing the basic infrastructure and facilities. The firm's contract usually include provisions for price revisions for inflation-type protection, as well as for compensation for injurious government actions. These contracts, generally for 20-30 years, are superior to other forms of divestiture of government assets. That is because usually no legislation is required for these transfers since the utility retains de jure ownership. This arrangement thus can yield many of the benefits of privatization without the common - 23 - complexities of involving the financial markets or having to obtain legislative approval. (d) Concession arrangements combine leasing provisions with added contractor responsibilities. Usually, a private enterprise assumes responsibility for operating, maintaining and investing in fixed assets, which remain public property and must be returned in good condition at the end of the contract period. Typically, a firm finances, builds (or rehabilitates) and runs a new facility. It usually then is responsible for operation and maintenance expenses as well as capital financing, thereby assuming full commercial and financial risks. The firm is directly paid for services by consumers. The cities of Paris and Cannes in France and Sydney in Australia are typical concession agreements. Buenos Aires and Corrientes examples, as well as most of the other privatization cases in Latin American (e.g., Valparaiso, Puerto Vallarta, Monterrey, Lima), are typical concession arrangements. The agreement between the public agency and the concessionaire often sets an investment program to meet certain service demands. (e) "BOT". Under an alternative concession arrangement, the new facility which the contractor built subsequently reverts to public authority ownership (called the "build-own-transfer"--BOT scheme). These have commonly been used for toll facilities and treatment plants, for example sewage treatment plants in Mexico. Generally, such contracts do not involve the concessionaire taking commercial risks. However, these arrangements are often more expensive to put into effect than other concession forms because of the complexity of the contracts and payment schemes. Foreign firms may desire risk premiums to participate also. (f) "Reverse BOT". In view of these complications, another option calls for initial public sector financing, followed by private enterprise construction and operation, leading to ultimate full private enterprise acquisition of the plant through annual fee payments. This technique is called "reverse BOT." It has the advantages of lower risks, smaller construction and insurance costs, lower product price and more efficient operations. (g) Full private ownership, resulting from the sale of all utility shares to private investors (the model in England and Wales), is also possible. It is very dependent though on rigorous conditions, including the absence of popular opposition to selling government assets. Potential purchasers might also be fearful of the lack of regulatory experience, uncertainty regarding sector institutional arrangements, the capital market's weaknesses and the limited prospects of joining with Argentine companies with solid sector experience. - 24 - (h) Further, a province or municipality can enter into a joint venture company with a private firm. This approach may be attractive when it is not feasible to pass full responsibility for the operation to a private firm, or when the private partner can readily raise bonds or issue notes. The joint company most often will have a service franchise in a leasing or other concession structure. Examples in Spain entail the creation of a "private agency" by a municipality and a private operator, granted a concession for day- to-day tasks. The municipality retains ownership and ultimate responsibility for the service. The leasing/concession approach, as used now in France and Spain, select their private partner on the basis of public bidding. There is a risk that the local government may face conflict of interest problems if it is simultaneously regulator and owner, while also being a key shareholder. On these grounds, the benefits that municipalities might seek (e.g., revenue-sharing, retaining some controls) could be more clearly obtained under a concession/lease deal with a fully private operator. Regulatory Requirements and Options 2.21 Consideration of private participation schemes frequently raises concerns about the risks of private concessionaires exploiting their monopolistic positions. The worry is that they might be tempted, for example, to charge excessive tariffs without improving service. There is therefore the fear of exchanging a poorly-run public monopoly for an equally inefficient, rent-seeking private monopoly. These risks are increased, moreover, when the private consortium is dominated by construction interests, as frequently is true because of the inherent business opportunities. These concerns illustrate that water's special characteristics make it undesirable to rely on unregulated markets to deliver it efficiently or allocate it equitably. 2.22 Simultaneously, as noted above, the creation of a satisfactory regulatory environment is one of the main prerequisites for the necessarily private-led recovery of Argentina's water and sewerage sector. It is fundamental for giving company owners/managers reasonable expectations about future ground rules. These are key to their decisions on investing and performing to standards. These assurances are particularly needed because of Argentina's lack of a strong track record in regulating public utilities. 2.23 Bank research has indicated that the lack of appropriate regulatory and related institutional frameworks has been central to the absence of reliable sector operations in many parts of Latin America. Many governments have been recognizing the need for policy changes. But these alone are meaningless without the institutional changes to implement and sustain them. 2.24 Unfortunately, many government organizational structures have not separated responsibilities for providing services from regulating actions pertaining to the services. Some water agencies are charged with enforcing - 25 - water quality standards on their own services. Owners of major water facilities are often the sole judges of the safety and adequacy of the maintenance of their facilities. And regulatory environmental protection activities are sometimes incorporated into the functions of water using agencies. Therefore, Government entities should clearly separate service from regulatory functions. Operating agencies should be charged with compliance with requirements but their enforcement should be discharged separately. This is one of the most important principles of effective management and quality assurance. It applies to water rights, safety of structures, water quality and use, business and financial integrity and customer participation. Regulatory units should report to senior government levels independent of the entities which they regulate. 2.25 Another important regulatory principle is that local government should regulate--but not excessively manage--water and sewerage companies. As the latter enjoy natural monopoly positions, their autonomy of management naturally cannot be unrestricted. The local governments which own their assets have the ultimate service responsibilities. So they must be free to hire (and fire) company managers, set their policies and retain power over such matters as tariffs. But governments should exercise their controls in a restrained manner while delegating to professional managers the responsibility for running their enterprises. 2.26 It would be helpful if the relationship between elected officials and the water company was made formal and transparent, e.g., through a written contract. Sector agencies have relatively stable targets (service improvement and expansion, productivity, financial, etc.). Conversely, elected officials have much shorter time frames, which lend themselves to pressures for occasional expedient actions. Formalized relationships therefore can help maintain stable and a suitably "arms-length" distance in the oversight of the water companies. 2.27 Similarly, there should be requirements for public disclosure and community participation in. order to make sector entities more responsive to users and less subject to capture by interest groups. Consumer representatives might sit on company boards. In the US, public utilities are required to open their books to the public and to defend major decisions at public hearings. It might also be useful for the Federal Government's monitoring system to publish annually key indicators of utility performance (which consumers can compare). 2.28 However, there may be concern that too open a receptivity towards community involvement will prove costly when tariff increases are needed. Municipal bodies around the world often reject such requests and thereby jeopardize utilities' finances. Therefore, safeguards need to be put in place that can help "depoliticize" the approval process somewhat. One might be to provide for automatic inflation indexing of tariffs. Another approach would be to approve performance contracts based on multi-year business plans, within which sector companies are fully authorized to take financial decisions. There is already a model of this technique in the greater Buenos Aires area concession arrangements. The concession contract stipulates rate making provisions, specifically the use of 14 operating cost components to calculate a cost index by - 26 - which tariffs can be raised. Every five years, the regulatory agency adjusts the index to account for new investment and its effects on operating costs. Local governments alternatively might delegate the authority to approve tariffs to utility commissions, composed by a few knowledgeable professionals employed for extended fixed terms. These commissions could also provide a forum for public hearings and rulings on customer complaints with the sector company. 2.29 At the same time though, there may be somewhat less grounds for concern in Argentina than some other countries. Generally, before assuming commercial risk, new managers or owners must be confident that tariffs can be collected. They generally also worry about potential political risk to the tariff increases that might accompany privatization or other measures aimed at performance improvements. However, in the Greater Buenos Aires case, officials discussing possible concession and like arrangements were able to provide a reasonable historical record of tariff payment (with a collection rate of about 80% of those actually billed). This record, together with a clear authorization of the contractor to disconnect non-payers, gave prospective operators confidence that they would be protected. Argentina's successful privatization programs in other sectors provided additional reassurance. 2.30 The history of other recent events in Argentina is also quite pertinent. Recently, the Federal Government took impressive initiatives in restructuring, privatization and other activities to improve the state enterprises. However, these measures ran far ahead of the institutions recognized to be needed for overseeing businesses, especially those with a good deal of monopoly power. Consequently, the initial operations of the largest privatized companies occurred in a situation in which critical regulatory responsibilities were not in place or properly executed. Their absence was untimely when decisions were taken on licensing, pricing, technical and accounting standards, and performance monitoring. Thus, these new agencies remained at early stages of organizational development on regulatory matters for some time, and experienced major difficulties in implementing their procedures. The results showed that an earlier buildup of regulatory actions would have been beneficial for the effective functioning of the reformed enterprises. It likewise might have minimized the initial poor showing of the regulatory agencies themselves. At the same time though, it is arguable whether waiting for the regulatory institutions to be in place might have jeopardized the privatization process, and deprived consumers of service improvements. 2.31 The "concept" of regulation is at an early stage of development in Argentina now. The processes by which it will be carried out are still being defined and will inevitably evolve over time. It requires capacity-building to fulfill its functions at the level of expertise and efficiency required to confront the private operator. Different sector regulatory agencies continue to be established without uniform consistent principles, resulting in uneven progress in their implementation, organization, design and procedures. So the Federal Government needs to monitor developments in this area in order "to learn by doing," and to move early on to define a uniform code or similar instrument. Private participation in the water sector is likely to be better regulated through - 27 - well define contractual arrangements between the concessionaire and the agency awarding the concession. It is also recommended to have a strong consumers representation in the entity regulating the concession, and be possibly administratively organized outside of the govermnent sector. Incentives to Improve Water Companies Performance 2.32 The provinces, with the Federal Government's pressure to straighten out their finances, are no longer in a position to bail out their loss-making water agencies. At a time when the local authorities face many conflicting resource demands, this change puts them in a double bind. That is because water and sewerage entities, besides losing their past resource mainstay, traditionally have not reflected the cost of providing services in customer charges. This has resulted in significantly subsidized tariffs which also can no longer be sustained. 2.33 The effects are evident in the water entities' poor performance. As a result of inadequate pricing and poor commercial practices, these operators do not even cover out-of-pocket operating expenditure with operating revenues. They fall far short as well of financing long-term investments with operating surpluses supplemented with credit. As shown in Table 2.1, their net income (both on an accrual or cash basis) on average is negative. Although there are exceptions-Jujuy, Salta, and Santa F-most provinces incur operating deficits before debt service, both on an accrual and cash basis. For them also, long- term investment is the exception rather than the rule. They need therefore to change their ways so as to plan investments based on their financial viability and the timely availability of funds. 'Table 2.1: Simplified Operating Situation, 1992 2' (average 1992 US$ millions) Income Expenditures Net Income Provinces Total Collec- Collec- Ibrson- Other Total Accrual Cash Income tions tions % nel Costs Costs ' Basis Basis Buenos Aires Province 73.4 56.0 76 30.9 42.5 73.4 0.0 -17.4 C6rdoba 57.4 42.9 75 32.9 75.7 108.6 -51.2 -65.7 Chubut (Madryn only) 3.4 3.0 89 3.0 1.4 4.4 -1.0 -1.4 Jujuy 16.8 13.4 80 5.6 2.9 8.5 8.3 4.9 Mendoza 50.3 29.5 59 17.8 23.5 41.3 9.0 -11.8 Misiones 4,8 4.0 84 2.6 2.2 4.8 0.0 -0.8 Neuqu6n 9.2 5.2 56 n.a. n.a. 5.8 3.4 -0.6 Salta 25.7 15.4 60 5.6 2.9 8.5 17.2 6.9 San Juan 15.5 10.4 67 7.5 2.2 9.7 5.8 0.7 Santa F6 49.8 47.9 96 22.8 23.1 45.9 3.9 2.0 Thcum n 20.6 13.5 66 18.8 2.4 21.2 -0.6 -7.7 Total 326.9 241.1 74 147.5 178.7 332.2 -5.3 -91.0 Soure: Based on data collected from field visits a/ Only 11 provinces had data available. h/ Equals total operating costs excluding depreciation and revaluation of assets. - 28 - 2.34 The companies' figures indicate inadequate cost recovery practices, a continuing general practice. The problems are exactly the same as noted over past years: failure to meter, bill and collect for consumption. Consolidated collections are 74% of operating revenue where the norm should be 95% or better (see table 2.1). Only in some provinces such as Catamarca, Cordoba, .Jujuy, Misiones, Rio Negro, Santa Fd has a start even been made to install and read meters. In the remainder, a consumer without a meter has little or no incentive to economize on water consumption since the cost of marginal quantities consumed is zero. As a consequence, one operator estimates that there is 3.5 times more water consumption per user in Buenos Aires than in Santiago (Chile), where all consumers are metered. 2.35 Therefore, there is a need for significant reforms of water companies' performance and their operating environment. These entities previously have had very little interest in striving for financial self-sufficiency because of this easy access to non-conditional resource transfers. What incentives accordingly should be offered to induce those companies to change their ways? Some suggestions are offered in paras. 3.18-3.22. Human Resources Development 2.36 Presently, the sector has no strategy for human resources development. Whatever staff training that has been attempted has been ad hoc. This combined with high staff turnover in management levels have lowered productivity. In general salary levels are low and the resulting practice of staff working two jobs has further decreased productivity. To improve this situation, there needs to be a strategy and program to develop human resources within the context of broader institutional and financial policy reforms (ref.para.3.54). The training operation can only be successful with an accompanying assurance of a long-term career, job stability, and promotion and hiring on the basis of capacity and knowledge. A national training program should be formulated on the basis of: (a) an inventory of available staff and study of the demand for training; (b) a suitable strategy and capable authority to oversee its implementation; and (c) identifying the suppliers of training within and outside Argentina. Experiences from the neighboring countries could be adapted under the auspices of the Pan-American Health Organization (PAHO), following the successful experiences in Brazil, where the PLANASA program was implemented. Pollution and Water Resources Management Issues 2.37 As mentioned in Chapter 1, water pollution is beginning to affect the availability of resources in some ' regions. It is increasingly concerning policymakers especially after the cholera outbreak in northern Argentina. Given the growing water scarcity, its deteriorating quality, underinvestment in sewage collection, treatment, and reuse of water, and competing demands for available water resources, it is clear that the future supply of potable water and providing for the environmentally safe collection and disposal of waste water will pose two - 29 - challenging issues. 2.38 The first is financing since Water Resource Management these requirements are expected to be large and pollution control does not There is a growing interest in readily lend itself to private Argentina in adopting water resources concessions. There is no established management systems based on river mechanism to meet the large demand basins. Initial steps have already been for financial resources to cover taken in this direction, as exemplified by: (a) reorganization of agencies pollution control investments. The repnil fo war rsucs sector should have a structure that management in Mendoza (this passes a substantial portion of the province has a tradition of innovative costs to users and polluters, as well approaches to water resources as provides resources to augment management because of water scarcity internally generated funds sufficient problems); (b) creation of river basin to undertake these investments. The commissions (e.g., Colorado river); second issue is the need for a new and (c) work being carried out by the institutional approach that would National Institute for Hydraulic bring together different groups of Science and Technology in this area. water users for coordination of activities and agreement on reasonable standards of treatment. It should also involve regulatory enforcement in the light of the externalities and spillover effects involved in pollution control. 2.39 The Federal Government will need to remain the main source of funds for these needs. In the process, it will give the central authorities the opportunity (and leverage) for promoting institutional development in the provinces for addressing water pollution control problems. 2.40 An integrated, comprehensive approach to water pollution control does not currently exist. With the exception of Mendoza, management of water resources is not undertaken in the river basin context and quality considerations are not taken into account in the process of designing investments in pollution abatement and sewage treatment. In all the provincial capitals visited by the Bank mission, there were regulations that waste water discharges must receive secondary treatment. However, environmental quality objectives had not been formulated in many cases, and the authorities had no capacity to control' other pollution sources that may have had a greater impact on the quality of the receiving rivers. (See text box) on water resource management.) - 30 - III: Elements of a Sector Strategy 3.1 In the face of the difficult issues discussed in Chapter II, what should be the elements of a strategy directed at their solution? The Bank mission's recommendations on these problems are outlined below, with a priority list summarized in Chapter IV. These are based on the view that future sector strategy should follow the principles listed below: (a) Furthering the implementation of sector development on a decentralized basis; (b) The central government retaining only general policy formulation functions, and concentrating mainly on promoting an effective enabling environment and proper incentives for efficiency gains; (c) Promoting private sector participation in the sector, as appropriate to pursue improvements in efficiency, in conjunction with strengthening of regulatory functions and the more commercial orientation of public utilities; (d) Mobilization of financial resources through greater revenue generation by public utilities and increased private sector financing; (e) Gradual diminution of grants and subsidies to utilities, together with their being conditioned to timebound gains in discipline and in financial, institutional and operational efficiency; and (f) Central government help to the provinces (particularly the weakest) for achieving institutional objectives. Redefining Government Roles 3.2 In recharting its function, the Federal Government should stress the change to strengthening its role as overall policy maker and market regulator. For their part, local authorities should set their sights on implementing the actual development programs, beginning with their planning and encompassing the range from their financing through to their operations. 3.3 Federal tasks should include the preparation of indicative development plans and global investment targets, as well as shaping incentives and other support mechanisms for mobilizing investment funds. Federal authorities also they should monitor sector performance to determine, for example, whether service coverage targets are being met and if technical and quality standards are being maintained. A central facility would permit the updating and sharing of information between different area agencies on service quality, cost, pricing, investment and financing needs. - 31 - 3.4 On the regulatory front, the federal authorities should define overall guidelines, while the provinces/municipalities set the framework for local control. There may be a need though for federal intervention into water and waste water pricing in instances of market power abuses and discriminatory pricing. But this should not entail direct federal tariff approvals, which experience in many countries shows tends to reduce local accountability. Rather, the central authorities' function should be limited to ex-post investigation and backstopping. 3.5 Further, the constitution provides for concurrent federal-Provincial responsibilities for water resource management. The central authorities control water rights on the navigable rivers and lakes with interprovincial or international commerce. Therefore, they have an interest in supervising water sharing, preferably less by direct management than by seeing that there are coherent controls and incentives. The Federal Government consequently might promote the achievement of comprehensive interprovince rights agreements on all shared water bodies for purposes of resource planning and long-term management. These agreements should also apply to real-time operations under floods, droughts and pollution spills. 3.6 While these proposals are mainly intended to help give directions for the long term, some measures are recommended for the more immediate future. These appear necessary for the success of the transition in the sector's organizational changes. The Federal Government with provincial representatives might carry out a comprehensive review of the water resource institutions, including legislation, policies, functions and organization of government and the participation of the public and beneficiaries. In the process it could be useful to identify the shortfalls of the sector transfer to the provinces in order to identify the needs for remedial actions. Both during such a review and afterwards, the provincial governments would benefit from considerable technical assistance to help expand the present institutional capacity (ref. para. 3.52 (c)). 3.7 In addition, it would be desirable early on to change COFAPYS' role. There would be less general need for such public sector specialized financial intermediaries if there are greater strides in capital market development, improved finances of water companies and more private sector participation. In anticipation of (and perhaps to help speed) these developments, one course of action would be to liquidate COFAPYS promptly. Another approach might be to alter COFAPYS' mandate so that it becomes a technical assistance agency that could work for the Federal sector agency in providing consulting and training services to local companies. Given current experience, however, this would probably entail serious re-engineering of COFAPYS (ref. Annex N). 3.8 At the same time, there remains strong justification for some continuing federal investment role in advancing sector development. Notwithstanding the continuing need to lighten the burden on the Treasury, there are good grounds for government intervention in reducing severe water pollution. The costs of doing so involve massive finances because the expenses of sewerage and waste - 32 - water treatment facilities are much higher than for providing drinking water. And there is a segment of the sector that can never be expected to become fully financially self-sufficient. 3.9 On this account, the Federal Government, in parallel with strengthening the domestic capital market, should consider the creation of a timebound program to help water companies access medium-and long-term finance while establishing their creditworthiness. If the Government is interested in mobilizing resources from international funding sources for this purpose, this approach could channel external finance to numerous local entities. Without it, probably only a few of the larger provinces or municipalities could possibly gain such access. In establishing such a program, it would be important to avoid replicating COFAPYS experience (ref. para. 1.16-1.17 and 3.7). 3.10 Preferably at the provincial--but if need be, federal--level, the authorities should consider establishing a permanent water use planning unit. It should be coordinated with the overall economic planning agency in recognition of water's use in agriculture and industry as well as supplying energy, apart from its essentiality for human survival and the environment. The unit should document policies on water allocations and uses, and offer advice to policymakers and legislators on the consequences of proposed actions (or lack thereof). 3.11 Provincial governments should see that local water service entities are independent with professional management, programming, budgeting, financing and public accountability. To further help improve their performance, the functions of irrigation, drainage etc. should be turned over to other agencies. Additional changes also should be undertaken to ensure that the concerned local governments eliminate any direct managerial roles, and instead meet their responsibilities through representatives on the water companies' boards or oversight bodies. 3.12 While recasting local sector utilities, the authorities may continue to see considerable advantages in having a single service entity handle both investments and operations. However, this may cause difficulties during any sweeping institutional changes (or if the country environment becomes considered risky). Therefore, and especially to attract private involvement in operations, the latter may have to be separated from investment responsibilities. The City of Paris did this. It has a 70% interest in a mixed enterprise responsible for production and treatment, while the distribution network is divided and operated under contracts by two private firms. Each of these has a 14% interest in the production company, and their presence on its board links investment decisions with operational and commercial considerations. Similarly in Guinea, a state enterprise owns and invests in sector assets while a mixed enterprise handles operations under a lease contract. Improving Resource Mobilization 3.13 The analysis of the sector's needs and prospects (ref. paras. 2.5-2.8) showed that there are quite limited, actually severely constrained funds available - 33 - for restoring adequate services in Argentina. Therefore, provincial and municipal authorities will have to depend over the long term on the sector entities becoming self-sustaining. At the same time, for the transitional period ahead, sector resource management should focus on obtaining long-term financing to catch up with the investment backlog. 3.14 Sector entities need to reshape completely their financial behavior so as to obtain more commercial operations and efficient management. The areas which require the most pressing improvements are the rationalization of pricing and containment of costs to improve internal cash generation. 3.15 Tariff increases for these purposes will thus need to be quite substantial. Of course, they will have to be introduced gradually in line with affordability. As a consequence, efficiency gains should be vigorously pursued in order to ease pressures on rate hikes (and service standards and technologies kept to affordable levels). Moreover, tariff implementation has to be shored up, including steps towards general metering and stronger collection enforcement. 3.16 Provincial and municipal governments should therefore consider establishing task forces to review current pricing issues in their individual circumstances, defining pricing policies, and providing any assistance needed on tariff rate analysis and rate setting. They also should enunciate and carry out the following policies: (a) All services provided should be paid in accordance with their true costs. The only exceptions should be for services such as waste water treatment (to be recovered from polluter charges and resource fees), and storm water drainage (chargeable to property taxes). (b) Water and sanitation operators should have explicit legal authority to charge high penalties and to cut off services to public and private consumers for overdue payments. (c) Government treasuries should not assume liabilities such as debt service. (d) Governments should reimburse subsidies or free services provided to low-income customers, which should be means- tested, transparent and used sparingly. (e) Other government help will be tied to measures designed to promote improved financial performance, especially internal cash generation. 3.17 For cost containment purposes, the authorities should initially concentrate on curbing the present high levels of water losses in the system. From 1989 to 1991, Jerusalem reduced its water use per capita by 14% through saving - 34 - devices, leak detection and repair and better irrigation in its parks. The provincial authorities should therefore start thorough investigations of the most likely loss causes, including detailed assessments of commercial practices, meter installation and maintenance. There also should be examination of the possibilities of reducing energy and chemicals consumption, which are prominent in utilities' costs. So too should opportunities for substituting new lost-cost technologies for systems of automation, water and waste water treatment. When Mexico City replaced 350,000 toilets with more efficient models, it saved enough water to meet the household needs of 250,000 residents. 3.18 Appropriate fiscal incentives should be provided in order to stimulate water companies to promptly instill this greater financial discipline. To this end, the provincial governments might dismantle the current budget transfers to the companies over the next 3-4 years. In their stead, conditional grants could be introduced with rigorous eligibility qualifications. They could be confined to entities that pledge to install meters, raise their billing and collection rates, spend more on maintenance, introduce proper bookkeeping. These grants might be governed by annual performance contracts obligating the companies to meet predetermined targets, which over time should make them more financially self- reliant and creditworthy. These targets should be based on the results of financial assessments of the water companies, which consider tariff structures and levels. 3.19 The levels of these conditional grants should progressively decline under clear "graduation" criteria, and limited to three years. Exceptions might solely be made for systems with major externalities or social impact, e.g., service to the most needy or waste disposal. 3.20 The Federal Government likewise might provide time-bound matching grants to companies that agree to undertake high-priority investments, while meeting even more demanding financial and technical conditions. These federal grants might be considered for financing supplementary to "coparticipaci6n" funds. Here as well, eligibility and "graduation" criteria should be clearly defined, e.g., high quality projects only with transparent competitive processes. The investments selected should be confined to affordable facilities consistent with their benefits; construction of a type and quality resulting in affordable maintenance; and activities in which the beneficiaries invest and the utilities take full responsibility for their rehabilitation. Other eligible investments should include research, development and adoption of technologies to conserve water sources already tapped. So too should the rehabilitation of existing systems since the engineering and environmental costs of developing new ones can be 2-3 times the cost of current supplies. 3.21 The matching grants, guarantees or other forms of financial support should also be held open to provincial governments that devise innovative schemes that improve internal resource mobilization in the long run. These should mainly be in the form of seed support, perhaps limited guarantees, for -35 - good pioneering experiments. One possibility might be for the Federal Government to open a provincial credit line, initially funded from "coparticipation" proceeds. The line could be used to guarantee water companies' commercial loans or underwriting municipal bond issues supporting sector investments. These could be designed so that the assets could be sold to financial institutions. These guarantees could aim at helping local sector companies establish credit ratings, local banks advance in financing local infrastructure, and a secondary market for provincial or municipal debt become established. 3.22 Some precautions need to be taken. The guarantees should be restricted to cover only a part of the funds required and of the risks, which portion would be progressively reduced. They likewise should only be extended for an initial "sunset" period (when the capital markets are unwilling to take all the risks). It also would be unwise to establish a new or use a state-owned financial institution for administering the credit line because of possible complications for the financial sector. Also, experiences with other credit-channeling mechanisms in Argentina have indicated that there would be better prospects of success with a sound, well supervised private bank. Federal officials, particularly the Ministry of Economy and Public Services, might collaborate to approve the volume of guarantees to be offered and the eligibility criteria for sector companies bidding for them. As an alternative, there could be an adaptation of Colombia's "Financiera de Desarrollo Territorial" (FINDETER), an autonomous unit of the Finance Ministry which operates as a discount agency to banks that make project loans to municipalities. FINDETER's funding stems not from government budget appropriations but rather bonds, recycling its loans and foreign credits. Attracting the Private Sector 3.23 Government authorities who set out to secure private participation would be well advised to first decide precisely what they wish to achieve. To this end, it might be worthwhile for them to choose among the following objectives, and to rank them in the order of their relative importance for the government's needs and interests: -- improved operating efficiencies and cost reductions; -- modernization of the service; -- rehabilitation of the existing infrastructure; and -- mobilization of private capital for new investment. 3.24 Those primarily seeking efficiency gains in an existing system which do not require major investment might best consider service or management contracts, or leasing. A first round of service contracts could help set the basis for broader schemes, and quickly introduce better managerial and/or commercial practices. Those mainly interested in investment finance should consider a "BOT" if it is for a discrete facility (e.g., treatment plant), a concession for more comprehensive investment and rehabilitation purposes, or perhaps a sale of shares. Alternatively, a well designed concession could provide powerful - 36 - incentives for operational improvements while also providing financing. And a management contract with a reputable operator might ease access to external finance because of the confidence which its involvement might add to perceptions of the company's prospects. 3.25 Alternatively, this self-assessment might lead to a conclusion that private ownership would be the most desirable change. If so, the authorities will need to decide among the various full privatization techniques (auction, tender, restitution, negotiated sale, public offering, vouchers), and to proceed with the requisite processes. However, even after concerted promotional efforts, there may be no private enterprise attracted to prospective ownership. This is often true because water and sewerage tend to be treated as "social sectors" with little regard to cost recovery and other sound policies, as well as the irreversible nature of investments in this field. Private ownership also can carry high costs that may undermine many of the benefits it entails. But should full privatization be ruled out, the authorities should bear in mind that private sources can still be tapped. There remain the attractions of lucrative incentives (tax benefits and the rights to use facilities) and potentially profitable investment opportunities which could be exploited in joint venture-type schemes (ref. para. 2.20) 3.26 In considering the applicability of joint ventures and other private sector arrangements, there are several characteristics of Argentina which bear noting. One is the wide array of consumer cooperatives for public services, reflecting the traditional links to historically strong European cooperative movements. These number in the thousands (and are frequently financially more powerful than the municipalities where they operate). There already reportedly are successful water cooperatives operating in cities with more than 150,000 inhabitants. Thus the cooperatives might well form a base for collaborating with private sector expertise in mobilizing private capital, managerial capacity, "grassroots" support et al for providing better sector services. 3.27 Another consideration is that many Argentine provinces and municipalities have small populations, apparently ruling out commercially profitable services. However this may in fact indicate possible scope for special cross-jurisdictional arrangements permitting private sector participation. Special districts or regional associations for particular services could permit significant economies of scale, as exist in France's water supply and sanitation setup. These have had a significant impact in enlisting private firms and opening access to private capital markets in that country. Elsewhere in European areas with small numbers of customers as well, municipalities have merged and two-level management systems and inter-municipal associations established for service delivery. Alternatively in large populated areas, governments should consider promoting the entry of different providers in order to obtain the benefits of competition. Experience in other Argentine sectors (e.g., telecommunications) has provided useful examples of splitting geographic service areas between separate providers for this purpose. 3.28 In addition, the Bank in 1993 compared the attempts of Caracas and Buenos Aires (both large municipal sector systems) to arrange concessions. It - 37 - found some advantages in the latter case that might usefully be copied in other Argentine cities. The analysis found that Buenos Aires fared better on several counts, which contributed to Caracas' failure to obtain a responsive bid. One was better technical preparation. Argentina's team devoted considerable effort to developing the background documentation sought by the concessionaire. The second was the combination of the strong, political commitment of the Federal Government, its previous experience in privatizing many state enterprises, and the perception of relatively less country risk. Another significant difference was Buenos Aires' higher tariff. At the equivalent of $.04/m3, Caracas' average tariff represented only a fraction of operating costs while Buenos Aires' average charge ($.40/m3) covered all operating and maintenance costs. 3.29 Also, government authorities might design their approaches in line with the views of the firms which competed for the provision of sector services in Caracas, Corrientes, Mexico City, Valparaiso, Buenos Aires, and Lima. They picked the following as the most important aspects of regulatory environments: (a) that all terms and conditions of regulation be specified in the contracts, leaving open little discretionary power, and that these cover price, quantity and quality; (b) credible procedures for the fair resolution of disagreement; (c) precise specification of technical objectives; (d) tariff policies supporting cost recovery for services, with adequate adjustment provisions concerning changes in cost and inflation, as well as in exchange rates; (e) evidence of area consumers' willingness to pay tariffs reflecting service costs, and provisions for adequate protection against non-payers; (f) authorization for long-term investments foreseen under the envisaged type of concession; (g) sufficiently large expected profits and contract size to warrant the bidding costs, plus elimination of unnecessary administrative requirements which make the bidding process expensive; and (h) education of affected consumers and securing of labor support. 3.30 Incidentally, the foreign investors in Buenos Aires' "Aguas Argentinas" concession said that, apart from the aforementioned factors, they were favorably impressed by the trustworthiness and quality of the bidding process, the reasonableness of the expansion targets, and the adequacy of the existing tariff levels. Further, general experience has shown that it would be beneficial for government authorities to use reputable outside advisors throughout the process; to allow local and foreign banks financing investments to review and comment on the process; and to minimize bidding costs for small contracts. 3.31 Risk Management. Officials engaged in mobilizing private sector participation should also prepare themselves for managing the related "risks, " particularly those perceived by the private investors. (Others related to "consumer welfare" concerns are discussed in para.2.21). The most formidable one ("country risk") is that Argentina might change its sector policies to the concessionaire's detriment or that a worsened macroeconomic and/or political situation could wipe out potential financial returns. Close by, there is the "convertibility risk," i.e. the possibility that it might become difficult or impossible to exchange domestic Argentine currency for foreign currency. A third is the "commercial risk" that pertains to the technical aspects associated - 38 - with construction and operation of the system and the more financial-type concerns, e.g., the market, business environment and regulatory practices. 3.32 These risks have been reduced considerably by the Menem Administration's forceful policies that, among other things, have produced continuing macroeconomic stability and provided for convertibility of the Argentine peso on par with the US$. These can be usefully reinforced by expressions of strong political commitment for private enterprise's role in the sector, and constructive policies, especially on tariff levels and dealing with staff reductions. 3.33 Further, as the aforementioned "Aguas Argentinas" case showed, it is feasible to lessen the commercial risks through the careful preparation of the bidding and the subsequent contracting with the winning consortium. The authorities, therefore, can usefully help finance the preparation of fundamental information, including basic engineering studies to ascertain costs, among other portions of the required data base. There are in addition the documentation for private firms' bidding and the subsequent tasks of bid evaluation and contracting. This work requires significant time and labor, especially the mapping of the customer base, inventory of the facilities, calculation of operating costs, preparation of bidding documents and sample contracts, etc. 3.34 From observations of present circumstances, there seems to be a widespread belief in Argentina that the private sector will invest substantial amounts of capital in system improvements and expansion. This appears to be overly optimistic, in comparison with the increasingly favorable prospects for concessional arrangements. Because of poor, unreliable information and unsound tariff policies, Argentina's water supply and sewerage sector is considered too risky by numerous private firms for committing large amounts of their own funds or to mobilize funds on the capital markets for investments. 3.35 Other concerns originate from the many water and sewerage facilities, as well as their operating entities, which have deteriorated to the point of requiring at least some initial rehabilitation. In these cases, it would be extremely difficult to attract private companies to purchase existing assets "as is". Unfortunately in these instances, some of the provinces exploring private management possibilities seem reluctant to invest in the rehabilitation, for fear that doing so prior to contracting might result in additional indebtedness for the public sector without any compensation. The opposite should be true, however. 3.36 A good case can be argued for financing the physical repairs and rehabilitation of water utilities that will subsequently be contracted out. One of its most potent points is that potentially interested firms, as a practical matter, have shown relatively little interest in the nominal value of the physical assets. Their focus is much more on the potential stream of revenues. Admittedly, there are no easy formulas for calculating precisely how much additional investment would improve the cost of obtaining private capital or contracting a given concessionaire. But in general, before entering into these, it would be - 39 - good business to ensure that the assets are as attractive and potentially profitable as possible so as to realize a higher price. Sante Fe, Formosa, Misiones, and other provinces are applying this strategy by undertaking badly needed sewerage works even while trying to find a concessionaire. 3.37 In addition, there are the possibilities of using guarantee schemes to help lessen risks. Where there are defective infrastructure and operating systems caused by past neglect, potential private partners may well be concerned about the responsibility for the continuing maintenance of the facilities. In such cases, governments could offer to guarantee full operation and maintenance- (O&M) funding at a level capable of sustaining full service. Following a principle often used in bond financing, the scheme provides that the first call on any revenues produced by the concession is to fund O&M fully, with the further assurance that the owner must compensate for any shortfall. 3.38 There also may need to be inducements offered to surplus staff to leave sector agencies and an equal need to train those staying on. These requirements also could readily become pre-requisites of privatization transactions. 3.39 In conclusion, experience has indicated that the application of these approaches varies considerably by country and market, with the solution to individual cases dependent on local conditions and the nature of the enterprise to be reformed. As a start, (perhaps with federal assistance), provincial authorities would be well advised to define what measures to take after first deciding which of their water and sewerage entities: -- are sufficiently close to being capable of privatization so as to proceed with this aim in mind; -- would need major rehabilitation before, or in tandem with, privatization, and therefore should be concentrated on this prerequisite; or -- will need to stay for the time being in the public sector because of financial or other constraints. 3.40 Once these priorities are settled, the local authorities can proceed with their initiatives in attracting private sector participation. While these should remain local responsibilities, national sector officials can help. There is scope for their: (a) providing models and advice to interested provincial and municipal agencies; (b) furnishing consultative review of proposed contracts; and (c) in designing financial assistance and the tax regime for the sector, avoiding provisions that discriminate against private alternatives. Regulatory Framework 3.41 Particularly considering the externalities associated with water supply and sewerage and their natural monopoly characteristics, Argentina needs to have - 40 - well established policies on key matters and enforce them well. These concern water quality and service standards, access of low-income population to services, management of water resources and environmental protection, apart from financial policies affecting investment decisions and government sector investment. 3.42 Especially after the sector decentralization, there needs to be a clear delineation of responsibilities in this area. Since externalities and equity effects usually cut across geographic jurisdictions, it may be best to establish at the central level the setting of environmental and health-related standards, as well as objectives for support to the needy. On the other hand, authorities at the local level should set service standards, as well as the policies for and rules governing investment planning and operations. 3.43 Within the provincial or municipal institutional structures, there should be some form of independent regulatory framework for these operations. To ensure its adequacy, the government authorities should see that there are decrees or laws providing for: (a) the appointment of authorities or agencies responsible for rule-making, tariff-setting, and quality control; (b) procedures governing the issuances of concessions, licensing, and other aspects of service provision; and (c) limited and transparent fiscal support for the company and clear rules for the regulatory entity. 3.44 In many countries, regulation is carried out by government departments who may be subject to direct political interference. In others, political officials establish broad principles and set goals while an independent entity makes more detailed rules and procedures for their enforcement. The advantages attributed to independent regulation are that it tends to be more transparent, professional and driven more by economic and technical considerations rather than political factors. On these accounts, the recent widespread public sector reforms throughout Latin America have been characterized by common efforts to maximize functional independence for new regulatory bodies. A Bank review' of power sector changes in Argentina, Chile, Colombia, Costa Rica, Jamaica and Peru noted the considerable attention given to the selection process for regulators, high-level professional staff support, adequate compensation, autonomous budget authority and competition in hiring consultants. However, the review also found that the results thus far are uncertain as to their autonomy and effectiveness. 3.45 The choices in this area are not always straightforward. Therefore, the authorities might wish to consider alternative approaches. The French system of water resource management, often considered a model, has no independent regulatory bodies. Its national water laws establish specific quality objectives and pollution control regulations. Within this framework, municipalities exercise their regulatory functions through operational contracts with private firms. The French example shows that it is possible to have private firms 1. "Reforms and Private Participation in the Power Sector of Selected Latin American and Caribbean and Industrialimd Countries, " March 1994 - 41 - competing both among themselves and government-managed utilities, generally at the end of contract periods. A less successful option--regulation carried out entirely by non-autonomous central government departments--is in force in Cote d'Ivoire and Guinea. There is little competition in either of these two and, while service quality in the former is very good, costs are high. In addition, a hybrid arrangement has existed in Chile since 1990. In that year, the Superintendency of Sanitary Services, an independent central agency, was set up to establish and enforce service standards, review tariff proposals and approve investment plans for urban systems. However the Ministry of Economy makes final tariff decisions. 3.46 Further, particularly with numerous privatization cases, more attention is now being given to questions of arbitrating client-concessionaire disputes. This is illustrated by the Argentine Congress' consideration of possible new laws in this area. In addition there have long been judicial procedures in many countries for enforcement of anti-competitive market behavior. However, in Argentina as elsewhere, the judicial system's functioning has been considered arduous and excessively time-consuming, and the laws have lent themselves to arbitrary interpretations. 3.47 These cases present grounds for considerable diversity in the way different governments organize regulatory responsibilities. With regard though to private participation in the sector, the mission concludes that this would best be regulated through well defined contractual arrangements between the concessionaire and the agency awarding the concession. Its other main conclusion is that there needs to be strong user representation within the regulatory structure, preferably outside of the public's government involvement. 3.48 Under these circumstances, the Federal Government should provide guidelines on such matters as frameworks of local regulatory arrangements, accounting and disclosure standards, methods and criteria for setting and updating tariffs, competitive processes for franchising services, and model contracts and tender documents for private sector involvement. The central authorities also could usefully advice on the form of regulatory policy, on which there are choices to be made. There is the "command-and-control" type under which the regulator dictates operation and performance standards and enforces them,e.g., tight controls on water purification, prohibitions on uses of chemicals, provisions for mandatory inspections. A common variant is the fixing of rate of return requirements, which solely entails setting prices to generate a predetermined exact financial return for the producer. 3.49 But there are also more flexible methods. Under "incentive regulation," the regulated firm makes the decisions, not the oversight body. With "price caps", the firm is free to set its own prices provided these do not exceed a predetermined level on average. Another approach is to set minimum quality standards, supplemented by "potential regulation, " namely, no restrictions are placed on the firm's actions unless its performance is judged to be unsatisfactory. A third calls for "reactive" policies under which the service provider proposes actions and the regulator says yes or no. - 42 - 3.50 These choices are complex and much will depend on institutional capacity, e.g., can regulators realistically apply the penalties? And experience in Argentina shows that regulatory policies that once served important purposes sometimes persist when they are no longer needed. They may even be maintained because they favor special interests that press regulators to keep these controls in place. On all these accounts, Federal Government guidance to the provinces and municipalities on regulatory policy would be important. In the first instance, it might be focused on helping local authorities sort out which purposes should be paramount, e.g.: -- assuring the quality of water and related services; -- securing these at reasonable costs; -- ensuring reasonable but not exorbitant financial returns to providers; -- keeping consumers informed or involved in sector policies; -- limiting and means-testing any and all subsidies to the poor 'Ibchnical Assistance and Training 3.51 This review has indicated that the sector changes initiated in the 1980s are still to be fully implemented. Furthermore, this Government's fundamental macroeconomic and public sector reforms have posed additional needs for substantial institutional and policy revisions. To their credit, numerous government and sector officials have already taken initiatives, and some have made considerable progress in this direction. But much more work is needed to sort out the altered relationships which the aforementioned changes necessitate. And some completely new instruments, policies and ways of managing water and sewerage activities have to be introduced, in tandem with greater provisions for consumer representation in these activities. 3.52 It is, of course, for the Government of Argentina (at all levels) to identify and select the future steps to be taken which best fit the country's development aims and strategies. This document seeks mainly to suggest various actions which should be considered for these purposes. Among them, the mission concluded that there are certain measures which warrant priority attention--in particular, expediting institutional improvements and creating a critical mass of managerial talent. It consequently recommends that the Government obtain technical assistance in order to help implement the following actions promptly and properly: (a) Comprehensive review of and mapping out new organizational responsibilities for sector management, regulation and operations (ref. para. 3.6). (b) Establishing a transitional instrument to help provincial and local water companies obtain long-term credit and establish their creditworthiness (ref. paras. 3.21-3.22). - 43 - (c) Opening at the Federal level an entity to develop and coordinate capacity-building activities for local governments and non- privatized sector agencies, especially regarding utility business management, tariff-setting and other resource mobilization, operations and investment planning (ref. paras. 3.3, 3.7, 3.11). (d) Strengthening Federal Government's guidance on utility regulation (ref. paras. 3.48-3.50). The same agency should also focus more future effort on providing advice to interested government on options for private sector participation, guidelines for its entry and on privatization-type processes, and facilitating contacts with private operators and investors (ref. paras.3.24, 3.31, 3.33, 3.39). (e) Preparation of serious financial assessments for all companies, so as to be able to judge what kinds of reforms are needed, what future financial options exist, and how the government can help. (f) Establishing suitable financing sources and organizational arrangements for the environmentally safe collection and disposal of waste water. (g) Revising COFAPYS' role if it is not to be terminated (ref. para. 3.7). (h) Undertaking the preparation of pre-investment studies to identify priority and affordable development projects, with emphasis on rehabilitating current systems and obtaining higher operational efficiency. 3.53 In addition, Argentina is well known to have excellent sector engineers and first class academic institutions providing training in sanitation, hydrology and related areas. However, some of these appear to be unfamiliar with the latest developments and innovations abroad. In addition, the reforms of the country's water and waste water sector (which this report does not profess to have encompassed) are bringing with them the emergence of more corporate- type managerial responsibilities, increasing the demand for skills which were considered less pressing in the past. These changes will necessitate professionals skilled in modem utility management and administration, integrated water resources management (especially of areas dealing with economic, financial and social aspects), regulatory disciplines and investment planning and programming--unlike the past stress on technical disciplines. 3.54 Some of this expertise should come under concession and contractual arrangements, which will bring foreign competence (that should be linked to explicit provisions for transfer of technology). However, this will not suffice. It will need to be augmented by substantial restructuring and deepening of present national education policy and curricula, and retraining of domestic sector personnel. Specialized external technical assistance should be obtained to help -44- broaden the academic curricula for engineers, as well as to help design incentives for mobilizing professionals with the requisite skills. The training developed should cover both private and public utilities staff. Management of Water Pbllution 3.55 Even with increased private participation, the Federal Government will need to continue to play a dominant policy and regulatory role in water resources management, including pollution control. The water resources management issues extend beyond the confines of the water and sanitation industry and touch on activities in other sectors of the economy. Making recommendations on institutional arrangements for water resources management in Argentina falls outside the terms of reference of this sector review. However, given that the problems associated with water pollution are central to policy formulation in the water and sanitation sector, it is worthwhile to emphasize the importance of clarifying the division of responsibilities between different levels of government and strengthening institutions that are responsible for managing water resources and controlling water pollution. - 45 - IV: PRIORITY ACTIONS 4.1 The Federal, provincial and municipal governments need to undertake some immediate actions in order to implement the strategy set out in Chapter III for realization of the following long-term goals: (a) creation of an enabling institutional and regulatory framework; (b) establishment of mechanisms for investment financing; (c) promotion of private sector participation; (d) strengthening of water companies' management, finances and operations; (e) upgrading resource mobilization by sector companies to move towards greater self-sustaining finances; and (f) putting in place effective machinery for water resource management and pollution control. 4.2 It will not be easy to organize for, let alone advance, progress towards these ends. Central control no longer exists. There are bleaker prospects for continued large flows of subsidies, which fueled past many sector developments. These handicaps put a premium on decentralized efforts to plan and carry out the reform agenda. However, some interim actions may be needed until these efforts can be fully mobilized. For example, the Federal Government could charge one of the Ministry of Economy secretariats--or convene a small executive secretariat staffed with highly qualified officials--to prepare plans and work programs in each of the six action areas listed above. 4.3 In the light of these constraints, it is recommended that the following priority actions be promptly taken: -- Design and implementation of a program for ending sector subsidies within the next three years accompanied by mandatory financial assessments of water companies, -- Systematic designation by each province of which companies (a) are close to being privatizable, (b) need major rehabilitation first, and (c) are the most remote, followed by the direction of suitable preparatory work to utilize the private sector. -- Initiating the recommended technical assistance and training programs (ref. paras. 3.53-3.54) to upgrade the sector's technical capacity. - 46 - Development of incentives for the provinces to strengthen financial and operational performance of sector entities, including specific indicative targets for improvement in collections, metering. and pricing. Preparation of an indicative plan for sector development and supporting policies for long-term investment, whether by the public or private sector. - 47 - ANNEXES Page No. A. Urban and Rural Population 1980, 1991, and 2000 ......... 48 B. Morbidity and Mortality from Diseases Associated with Water and Sanitation, 1990.....................49 C. Indicators of Total Mortality and Infant Mortality by Province, 1992 .............................50 D. Sector Institutions According to their Functions, 1992 ..........................51 E. Sector Institutions by Province ...................... 52 F. Population with Water Supply House Connections, 1980 and 991 ...............................55 G. Population Connected to Public Sewerage, 1980 and 991 ...............................56 H. Water Supply and Sewerage Service Levels in Latin America, 1990-1992.......................57 I. Sector Investment by Province, 1987-1992 ............... 58 J. Simplified Operating Situation, 1992 .................. 59 K. Number of Water Systems by Operational Entity ........... 61 L. Total Number and Distribution of Sector Staff by Entity, 1992 ...............................62 M. Number and Distribution of Sector Staff related to Water House Connections, 1992 . . . . . . . . . . . . . . . . . . . 63 N. COFAPYS' Legal Framework ......................64 0. Contractual Arrangements for Private Water Supply ......... 65 P. Proposed ActionPlan ...........................66 -48- ANNEX A ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Urban and Rural Population 1980, 1991, and 2000 a (Millions) 1980 1991 Provinces Rural Rural Rural Rural Urban Concentrated Dispersed Total Urban Concentrated Disbursed Total Greater Buenos Aires Federal Capital plus 13 7.95 - - 7.95 8.58 - - 8.58 municipalities* Remaining 6 1.80 - - 1.80 2.33 - - 2.33 municipalities Buenos Aires Province** 3.49 0.20 0.53 4.22 3.94 0.21 0.48 4.63 Catamarca 0.11 0.09 - 0.20 0.18 0.08 - 0.26 C6rdoba 1.90 0.13 0.33 2.36 2.36 0.10 0.30 2.76 Corrientes 0.42 0.03 0.20 0.65 0.59 0.03 0.18 0.80 Chaco 0.42 0.02 0.25 0.69 0.59 0.01 0.23 0.83 Chubut 0.20 0.02 0.03 0.25 0.31 0.01 0.03 0.35 Entre Rios 0.61 0.05 0.23 0.89 0.79 0.02 0.21 1.02 Formosa 0.16 0.02 0.11 0.29 0.28 0.02 0.10 0.40 Jujuy 0.29 0.04 0.07 0.40 0.42 0.03 0.06 0.51 La Pampa 0.13 0.03 0.04 0.20 0.19 0.03 0.04 0.26 La Rioja 0.10 0.04 0.02 0.16 0.17 0.04 0.02 0.23 Mendoza 0.82 0.03 0.33 1.18 1.10 0.01 0.30 1.41 Misiones 0.29 0.02 0.27 0.58 0.50 0.04 0.24 0.78 Neuqilen 0.17 0.02 0.04 0.23 0.34 0.01 0.04 0.39 Rio Negro 0.27 0.03 0.05 0.35 0.40 0.06 0.05 0.51 Salta 0.47 0.04 0.14 0.65 0.68 0.05 0.13 0.86 San Juan 0.33 0.02 0.11 0.46 0.43 0.01 0.10 0.54 San Luis 0.15 0.02 0.04 0.21 0.23 0.01 0.04 0.28 Santa Cruz 0.09 0.01 - 0.10 0.15 0.02 - 0.17 Santa F6 1.99 0.15 0.29 2.43 2.40 0.15 0.26 2.81 Santiago del Estem 0.30 0.03 0.25 0.58 0.41 0.03 0.23 0.67 TlicumAn 0.68 0.04 0.24 0.96 0.88 0.04 0.22 1.14 Tierra del Fuego 0.02 - - 0.02 0.07 0.00 - ERR Total Country 23.16 1.08 3.57 27.81 28.32 1.01 3.26 ERR Percentage 83.3% 3.9% 12.8% 100.0% ERR ERR ERR ERR Source: 1980 and 1991 census and analysis by Instituto Nacional de Estadistica y Censo (INDEC) and mission estimates. a/ The population is expected to teach 37 million by the year 2000, at an annual growth rate of 1.4%. By the same year, the urban population should reach about 33 million, the rural concentrated should stabilize at about I million, and the rural dispersed population is expected to decrease by 8%, falling to 3 million. *Federal Capital plus 13 municipalities represents the coverage area of the private water concession. **Represents the total of Buenos Aires Province less Greater Buenos Aires. Urban population is defined as those residing in communities above 2000 inhabitants. Rural concentrated population is defined as those residing in communities between 150 and 2000 inhabitants. -49- ANNEX B ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Morbidity and Mortality from Diseases Associated with Water and Sanitation, 1990 Not Age Total Morbidity Total Disease-Age Group 0 - 1 1 -4 5 - 19 20 - 64 65 Specific Cases Mortality Typhoid Fever and 2 22 102 139 8 1 274 8 Paratyphoid Fever Shigellosis 91 87 57 28 9 1 273 3 Amoebiasis 46 4 24 35 4 - 113 - Diarrheic Diseases 19,868 13,130 6,607 10,652 4,239 278 54,774 982 Cholera* - - - - - 1,519 1,519 15 Source: Direcci6n de Estadisticas, Ministerio de Salud y Acci6n Social, Buenos Aires *Cholera figures correspond to years 1991-1992. -50- ANNEX C ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Indicators of Total Mortality and Infant Mortality by Province, 1992 (in Thousands) General Deceased Infant Morbidity less than 1 Mortality Provinces Population Live Births Deceases Rate al Year Old Rate b/ Total 33,101 704 268 8.1 15 21.6 Federal Capital 2,901 78 45 15.4 1.3 17.3 Buenos Aires Province 13,108 216 103 7.8 4.8 22.5 Catamarca 240 7 2 6.9 0.2 26.7 C6rdoba 2,839 55 23 8.2 1.0 18.7 Corrientes 774 18 4 5.6 0.5 28.5 Chaco 861 25 5 6.3 0.8 33.2 Chubut 349 9 2 5.7 0.2 18.5 Entre Rios 1,034 24 8 8.0 0.5 21.8 Formosa 372 11 2 5.8 0.4 32.6 Jujuy 532 13 3 5.5 0.4 33.2 La Pampa 245 6 2 7.8 0.1 20.7 La Rioja 199 7 1 6.4 0.2 23.0 Mendoza 1,444 32 10 6.9 0.7 22.7 Misiones 762 25 5 6.6 0.7 26.4 Neuqu6n 655 11 2 5.1 0.2 18.2 Rio Negro 493 19 3 5.4 0.3 14.1 Salta 872 21 5 5.4 0.6 29.6 San Juan 547 13 3 6.4 0.3 23.3 San Luis 255 7 2 7.5 0.1 20.7 Santa Cruz 158 4 0.8 4.8 0.08 18.7 Santa F6 2,850 61 26 9.0 1.3 20.6 Santiago del Estero 653 12 4 5.6 0.3 22.3 Ibcumdn 1,178 28 8 6.5 0.8 29.0 Tierra del Fuego, Antartida y 79 2 0.2 2.3 0.02 10.0 Islas del Atl. Sur Source: Pan American Health Organization (PAHO), Buenos Aires; Boletn Programa Nacional de Estadisticas de Salud, No. 67, Julio 1993, Ministerio de Salud y Accidn Social a/ Per thousand of total population b/ Per thousand live births Infant mortality rate is expressed as the number of deceased children less than 1 year old per thousand of live births. -51- ANNEX D ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Sector Institutions According to their Functions, 1992 Rural Dispersed Water Function - Area Urban Water Supply and Sewerage Rural Concentrated Water Supply Supply and Sanitation Macroplannug to determne sectoral investments Largely Absent Largely Absent Largely Absent Sector planning to pnoritized sectoral investments Largely Absent Largely Absent Largely Absent Financial resource mobilization Largely Absent Largely Absent Largely Absent Regulatory performance control Largely Absent Largely Absent Largely Absent Tariff policies and setting Largely Absent CoFAPyS Largely Absent Project identification Largely Absent CoFAPyS Ministry of Health Division of Environmental Health Project preparation Largely Absent CoFAPyS Ministry of Health Division of Environmental Health Project selection Provincial water supply and sewerage entities CoFAPyS Ministry of Health Division of under provincial Government control Environmental Health Project construction Private contractors Private contractors and communities Ministry of Health Division of Environmental Health and Communities Operations and maintenance 1) Provincial water and sewerage entities 1) Provincial water and sewerage entities Communities 2) Community cooperatives 2) Community cooperatives 3) Municipalities 4) Private concessionaies Source: Mission data. -52- ANNEX E ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Sector Institutions by Province Operating Entity Type of Entry Federal Capital plus 13 municipalities Ente Tripartito de Obras y Servicios Sanitarios (ETOSS) Regulatory Agency Aguas Argentinas, SA Private Concessionaire Provincia de Buenos Aires Administraci6n General de Obras Sanitarias de la Provincia (AGOSBA) Provincial Government Agency Municipalities Municipal Gevernment Agencies Cooperatives Municipal concessions Catamarca Administraci6n General de Obras Sanitarias Catamarca (AGOSC) Provincial Government Agency Cooperatives Municipal Concessions C6rdoba La Empresa Provincial de Obras Sanitarias (EPOS) se estA integrando a la actual Direcci6n Provincial de Agua y Saneamiento (DIPAS) Provincial Government Agency Municipalities Municipal Government Agencies Cooperatives Municipal Concessions Corrientes Obras Sanitarias de Corientes, SA Regulatory Agency Aguas de Corrientes Private Concessions for 10 Municipalities Cooperatives Municipal Concession Chaco Servicio de Agua y Mantenimiento Empresa del Estado Provincia Chaco (SAMEEP) Provincial Government Agency Municipalilties Municipal government Agencies Cooperatives Municipal Concessions Chubut Direcci6n de Obras Sanitarias y Gas Chubut Regulatory Agency Cooperatives Municipal Concession Entre Rios Direcci6n General de Obras Sanitarias de Provincial Department Entre Rios (OSER) Munilcipalities Municipal Government Agencies Cooperatives and Government Councils Municipal Concessions - - 53 - ANNEX E ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Sector Institutions by Province Operating Entity Type of Entry Formosa Administraci6n General de Obras Sanitarias Formosa (AGOSF) Provincial Government Agency Cooperatives Municipal Concession Jujuy Direcci6n Provincial de Agua Potable y Saneamiento de Jujuy Provincial Government Agency Cooperatives Municipal Concessions La Pampa Administraci6n Provincial de Agua de la Pampa Provincial Regulatory Agency (APA) (this entity provides no service) Municipalities Municipal Government Agency Cooperatives Municipal Concessions La Rioja Empresa Provincial de Obras Sanitarias La Rioja (EPOSLAR) Provincial Government Enterprise Cooperatives Municipal Concessions Mendoza Obras Sanitarias de Mendoza Sociedad del Provincial Government Enterprise Estado (OSM) Municipalities Municipal Government Agency Cooperatives Municipal concessions Misiones Administraci6n Provincial de Obras Sanitarias Misiones (APOS) Provincial Government Agency Municipalities Municipal Government Agency Cooperatives Municipal Concessions Neuquin Ente Provincial de Agua y Saneamiento de Neuquen (EPAS) Provincial Government Agency Cooperatives Municipal Concessions Rio Negro Direcci6n Provincial de Aguas de Rio Negro (DPA) Provincial Government Agency Municipalilties Municipal Government Agency Cooperatives Municipal Concession -54- ANNEX E ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Sector Institutions by Province Operating Entity Type of Entry Salta Administraci6n General de Agua y Saneamiento Salta (AGAS) Provincial Government Agency Municipalities Municipal Agency Cooperatives Municipal Concessions San Juan Obras Sanitarias Sociedad del Estado de San Juan (OSSE) Provincial Government Enterprise Cooperatives Municipal Concessions San Luis Empresa Provincial de Infraestructura Hidrica San Luis (EPIH) Provincial Government Enterprise Municipalities Municipal Government Agency Cooperatives Municipal Concessions Santa Cruz Servicios Pdblicos Sociedad del Estado Santa Cruz (SPSE) Provincial Government Enterprise Santa Fe Direcci6n Provincial de Obras Sanitarias Santa Fe (DIPOS) Provincial Government Agency Municipalities Municipal Government Agency Cooperatives Municipal Concessions Santiago del Estero Direcci6n Provincial de obras Sanitarias Santiago del Estero (DIPOS) Provincial Government Agency Cooperatives Municipal Concessions Tierra del Fuego Direcci6n Provincial de Obras Sanitarias Tierra del Fuego (DIPOS) Provincial Government Agnecy Tucum,in Direcci6n Provincial de Obras Sanitarias Tucumdn (DIPOS) Provincial Government Agency Municipalities Municipal Government Agency Cooperatives Municipal concessions Source: Information as reported by provinces. - 55 - ANNEX F ARGENTINA WATER SUPPLY AND SEWERAGE SECIOR NOTE Population with Water Supply House Connections, 1980 and 1991 (Population in Thousands) 1980 1991 Urban & With House Percentage Urban & Rural With House Percent Provinces Rural Connections Served Concentrated Connections Served Concentrated Greater Buenos Aires Federal Capital plus 13 municipalities* 7,953 5,150 65 8,581 6,005 70 Remaining 6 municipalities 1,813 580 32 2,331 817 35 Buenos Aires Province** 3,492 2,190 63 4,152 2,786 67 Catamarca 200 130 65 260 211 81 C6rdoba 2,230 1,580 71 2,460 2,057 84 Corrientes 450 300 67 620 464 75 Chaco 440 220 50 600 413 69 Chubut 220 200 91 320 314 98 Entre Rios 660 530 80 810 727 90 Formosa 180 110 61 300 202 67 Jujuy 330 260 79 450 398 88 La Pampa 160 79 44 220 168 76 La Rioja 140 120 86 210 182 87 Mendoza 850 731 86 1,110 1,004 90 Misiones 310 120 39 540 264 49 Neuqudn 190 170 89 350 320 91 Rio Negro 300 240 80 460 400 87 Salta 510 410 80 730 604 83 San Juan 350 330 94 440 421 96 San Luis 170 140 82 240 217 90 Santa Cruz 100 90 90 170 144 85 Santa Fe 2,140 1,330 62 2,550 1,875 74 Santiago del Estero 330 230 70 440 339 77 Tucumn 720 640 89 920 674 73 Tierra del Fuego 20 16 80 70 60 86 Total 24,258 15,887 65 29,334 21,066 72 Source: 1991 Census with water coverage partially verified by mission estimates *Federal Capital plus 13 municipalities represents the coverage area of the private water concession. **Represents the total of Buenos Aires Province less Greater Buenos Aires. -56- ANNEX G ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Population Connected to Public Sewerage, 1980 and 1991 (Population in Thousands) 1980 1991 Urban & Rural With Sewerage Percentage Urban & Rural With Sewerage Percentage Provinces Concentrated Connections Served Concentrated Connections Served Greater Buenos Aires Federal Capital plus 13 municipalities 7,953 4,136 52 8,581 4,400 51 Remainmng 6 municipalities 1,813 326 18 2,331 650 28 Buenos Aires Province 3,492 248 7 4,152 1,598 38 Catamarca 200 27 14 260 57 22 C6rdoba 2,230 21011 9 2,460 447 18 Corrientes 450 94 21 620 227 37 Chaco 440 42 10 600 106 18 Chubut 220 78 35 320 170 53 Entre Rios 660 194 29 810 344 42 Formosa 180 26 14 300 75 25 Jujuy 330 120" 36 450 197 44 La Pampa 160 29 18 220 81 37 La Rioja 140 17 12 210 48 23 Mendoza 850 357 a 42 1,110 523 47 Misiones 310 17 5 540 56 10 Neuqu6n 190 49 26 350 127 36 Rio Negro 300 69 23 460 169 37 Salta 510 280 a 55 730 366 50 San Juan 350 54 15 440 64 15 San Luis 170 35 21 240 77 32 Santa Cruz 100 28 28 170 74 44 Santa Fd 2,140 555 26 2,550 765 30 Santiago del Estero 330 56 17 440 92 21 Tucumin 720 166 23 920 267 29 Tierra del Fuego 20 12 60 70 51 73 Total 24,258 7,225 30 29,334 11,031 38 Source- 1991 Census with water coverage partially verified by mission estimates. * Federal Capital plus 13 municipalities represtns the coverage area of the private water concession. ** Represents the total of Buenos Aires Province less Greater Buenos Aires. a/ Based on data from field visit, not on the 1980 census. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Water Supply and Sewerage Service Levels in Latin America, 1990-1992 Urban Population Rural Population Total Population Piped Water With With Safe Piped Water With Per Capita GNP Country Millions Inside Dwelling Sewerage Milliois Water Millions Inside Dwelling Sewerage 1991 Dollars b' Argentina 28.30 72% 38% 4.27 17% 32.60 65% 33% 3,965c' Bolivia 3.45 58% 37% 3.45 44% 6.90 44% 19% 650 Brazil 114.76 86% 46% 36.24 61% 151.00 79% 34% 2,940 Chile 10.67 98% 81% 2.03 75% 12.70 94% 68% 2,160 Colombia 21.42 87% 72% 9.18 24% 30.60 66% 51% 1,260 Costa Rica 1.50 100% 92% 1.50 84% 3.00 98%, 97% 1,850 Dominican Republic" 4.35 46% 40% 2.82 45% 7.17 46% 24% 940 Ecuador 5.08 65% 44% 5.72 44% 10.80 54% 21% 1,000 El Salvador 2.43 88% 60% 2.97 11% 5.40 46% 27% 1,080 Guatemala a 3.50 78% 60% 5.70 43% 9.20 56% 23% 930 Haiti 1.30 70% 0% 4.00 5% 5.30 20% 0% 370 Honduras 2.11 80% 54% 2.77 48% 4.88 62% 23% 580 Jamaica 1.32 95% 44% 1.08 46% 2.40 73% 24% 1,380 Mexico 55.50 80% 63% 24.10 20% 79.60 70% 49% 3,030 Nicaragua 2.21 78% 54% 1.48 18% 3.69 54% 32% 460 Paraguay 1.65 42% 25% 2.47 10% 4.12 23% 10% 1,270 Peru 15.40 73% 60% 6.60 22% 22.00 58% 44% 1,070 Trinidad and Tobago 0.76 100% 33% 0.54 95% 1.30 98% 19% 3,670 Uruguay 2.64 95% 14% 0.46 65% 3.10 91% 54% 2,840 Venezuela 17.03 67% 55% 3.22 66% 20.25 62% 46% 2,730 Total 295.38 81% 53% 120.60 40% 415.98 70% 39% Source: World Bank Reports a/ Data taken from "The International Drinking Water Supply and Sanitation Decade" World Health Organization, 1992. b/ "World Development Report 1993"De c/ New adjusted figure. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Sector Investment by Province, 1987-1992 (Millions of US$ - in average 1992 prices) 1987-1992 Investment Investment Investment Investment Investment Investment Thtal Provinces 1987 1988 1989 1990 1991 1992 Investment Federal Capital plus 13 municipalities 36.4 16.5 27.6 8.1 10.9 12.5 112.0 Buenos Aires Province n.a n.a n.a 9.5 10.5 10.0 30.0 Catamarca n.a n.a n.a n.a n a n.a n.a Cordoba 9.9 9.9 29.8 19.9 19.9 9.9 99.3 Corrientes n.a n.a 0.4 4.2 10.1 1.2 15.9 Chaco n.a n.a n.a n.a n.a n.a n.a Chubut n.a n.a n.a n.a n.a n.a n.a Entre Rios n.a n.a n.a n.a n.a n.a n.a Formosa n.a n.a n.a n.a n.a n.a n.a Jujuy n.a n.a n.a n.a 1.5 3.7 5.2 La Pampa n.a n.a n.a n.a n.a n.a n.a oo La Rioja n.a n.a n.a n.a n.a n.a n.a Mendoza n.a 1.8 1.6 3.5 8.6 5.6 21.1 Misiones n.a n.a n.a n.a 2.5 10.4 12.9 Neuqu6n n.a 3.1 1.6 15.0 15.0 16.8 51.5 Rio Negro n.a n.a n.a n.a n.a n.a n.a Salta n.a n.a n.a n.a n.a 2.2 2.2 San Juan n.a n.a 0.2 0.2 2.1 1.2 3.6 San Luis n.a n.a n.a n.a n.a n.a n.a Santa Cruz n.a n.a n.a n.a n.a n.a 0.1 Santa F6 '23.9 5.3 6.9 4.7 11.8 3.5 66.0 Santiago del Estero n.a n.a n.a n.a n a n.a n.a Tcumin n.a n.a n.a n.a 1.0 1.4 2.4 Tierra del Fuego n.a n.a n.a n.a n.a n.a n.a Ibtal 70.2 46.7 68.0 65.0 93.9 78.4 422.2 Source: Data supplied by the provincial entities. * Investments made by Obras Sanitarias de la Nacion (OSN). n.a. = no data available. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Simplified Operating Situation, 1992 (Million of US$ - in average 1992 prices) Income Expenditures Net Income Other Total Collections Other Total Accrual Cash Basis Provinces Billings Income Income Collections Percentage Personnel Costs Costs b Basis Federal Capital plus 13 municipalities n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Buenos Aires Province 62.5 10.9 73.4 56.0 76 30.9 42.5 73 4 0 0 -17.4 Catamarca n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C6rdoba 57.4 0.0 57.4 42.9 75 32.9 75.7 108 6 -51 2 -65.7 Corrientes 23.5 n.a 23.5 17.6 75 n.a n a. n a. n.a. n.a. Chaco n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Chubut (Madryn only) 3.3 0.1 3.4 3.0 89 3.0 1.4 4.4 -1.0 -1.4 Entre Rios n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. Formosa 6.2 n.a 6.2 2.2 35 n.a. n.a. n.a. n.a. n.a. Jujuy 16.8 n.a 16.8 13.4 80 5.6 2.9 8.5 8.3 4.9 La Pampa n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. La Rioja n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. U Mendoza 32.3 18.0 50.3 29.5 59 17.8 23.5 41.3 9.0 -11.8 Misiones 4.8 0.0 4.8 4.0 84 2.6 2.2 '4.8 0.0 -0.8 Neuqu6n 9.2 n.a 9.2 5.2 56 n.a. n.a. 5.8 3.4 -0.6 Rio Negro 12.9 n.a 12.9 8.4 65 n.a. n.a. n.a. n a. n.a. Salta 25.7 n.a 25.7 15.4 60 5.6 2.9 8.5 17.2 6.9 San Juan 15.5 0.0 15.5 10.4 67 7.5 2.2 9.7 5.8 0.7 San Luis n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. Santa Cruz n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Santa F 49.8 0.0 49.8 47.9 96 22.8 23.1 45.9 3.9 2.0 Santiago del Estero n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n a. n.a. 'Ibcumfn 20.6 n.a 20.6 13.5 66 18.8 2.4 21.2 -0.6 -7.7 Tierra del Fuego n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Total 340.4 29.0 369.4 269.2 73 147.5 178.7 332.2 -5.3 -91.0 Source: Provincial entities. a/ Based on data from field visit. b/ Total operating costs excluding depreciation and revaluation of assets. n.a. = no data available. -60- ANNEX J Notes on Financial Data 1. Financial data are as a rule difficult to interpret. Part of the reason is simply that water supply and sewerage services are organized as different enterprises. Often they form part of municipal or provincial departments and respond to antiquated public sector accounting conventions rather than respond to the requirements of modem commercial accounting. The paucity of readily available meaningful commercial data has negative implications for making financial projections, for budgeting and for cost control. This lack of information also hinders private participation because it increases risks, extends preparatory work for privatization, and creates additional associated costs, etc. 2. None of these agencies operate on a commercial basis or have financial statements as autonomous enterprises have. All financial data available are in the form of budgetary information. On the revenue side, the information on billing and collection for services rendered is kept in a commercial department. On the expense side, the budget normally separates personnel, goods and services related to operation and maintenance. Generally these expenses do not include administrative expenses. Very often capital expenses are also shown separated into studies, engineering and water and sewerage works. Accounting and auditing are inadequate to ensure reliability of the information and managerial accountability. 3. The quality of existing operational commercial information is very poor. Financial projections as well as estimates of water consumption and demand are based on rough calculations. Maintenance is known to be very inadequate but little is known about the actual conditions of the assets or requirements for rehabilitation and new investments. There is usually no inventory of assets. For those companies functioning as budgeted departments of provincial government, the task to obtain detailed information becomes practically impossible and final figures are best estimates. Operating accounting system are at best directed towards financial accounting and very few incorporate elements of cost, managerial, or budget accounting. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR NOTE Number of Water Systems by Operational Entity Entity Provincial Municipal Cooperative Private a Other bl Totals Provinces Urban Rural Urban Rural Urban Rural Urban Urban Rural Urban Rural Federal Capital plus 13 municipalities n.a. n.a. n.a. n.a. n.a. n.a. 14 n.a. n.a. 14 0 Buenos Aires Province 55 n.a. 77 n.a. n.a. 121 n.a. n.a. n.a. 132 121 Catamarca 1 106 0 0 0 0 n.a. 0 77 1 183 C6rdoba 13 48 36 83 55 64 n.a. 0 103 104 298 Corrientes n.a. n.a. n.a. 2 36 3 10 n.a. n.a. 46 5 Chaco 56 n.a. n.a. n.a. n.a. 12 n.a. n.a. 15 56 27 Chubut n.a. n.a. n.a. n.a. 5 n.a. n.a. n.a. n.a. 5 0 Entre Rios n.a. 34 27 n.a. n.a. 75 n.a. n.a. n.a. 27 109 Formosa 2 5 0 0 6 36 n.a. 0 0 8 41 Jujuy 14 52 0 10 3 10 n.a. 3 16 20 88 La Pampa 0 0 5 40 14 11 n.a. 0 0 19 51 La Rioja n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Mendoza 26 20 7 6 8 20 n.a. 11 65 52 111 Misiones 4 0 2 0 39 0 n.a. 2 0 47 0 Neuqu6n 4 3 9 20 1 1 n.a. 2 1 16 25 Rio Negro 15 16 4 2 7 4 n.a. 0 18 26 40 Salta 26 12 4 42 1 0 n.a. 5 3 36 57 San Juan n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. San Luis n.a. n.a. 3 n.a. n.a. 26 n.a. n.a. n.a. 3 26 Santa Cruz 20 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 20 0 Santa F6 21 10 n.a. n.a. 81 11 n.a. n.a. n.a. 102 21 Santiago del Estero 7 n.a. 3 n.a. 18 n.a. n.a. n.a. 27 28 27 Thcumin 2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2 0 Tierra del Fuego 20 100 8 11 2 13 n.a. 10 17 40 141 Ibtal 286 406 185 216 276 407 24 33 342 804 1371 Source: COFES a/ Private concessions: Aguas Argentinas for the Federal Capital plus 13 municipalities of Greater Buenos Aires; Aguas de Corrientes for 10 urban municipalities. b/ Users Associations. n.a. = not applicable. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR N(YTE Total Number and Distribution of Sector Staff by Entity, 1992 Distribution of Staff by Entity Total Staff Provincial Municipal Cooperative Private Concessionaire Provinces Number % Number % Number % Number % Number % Federal Capital plus 13 municipalities 2.3 4,050 100 30 a' 1 0 . 0 0 0 4,020 99 Buenos Aires Province 6,949 100 3,105 45 3,082 44 762 11 0 0 Catamarca 1,842 100 1,722 93 0 0 120 7 0 0 C6nloba 3,958 100 1,366 35 690 17 1,902 48 0 0 Corrientes 551 100 19 " 3 0 0 75 14 457 83 Chaco 870 100 760 87 62 7 48 6 0 0 Chubut 1,2 378 100 0 0 0 0 378 100 0 0 Entre Rios 1,093 100 82 8 860 79 151 14 0 0 Formosa 657 100 458 70 0 0 199 30 0 0 Jujuy 831 100 603 73 0 0 228 27 0 0 La Pampa 416 100 116 28 187 45 113 27 0 0 La Rioja 2 400 100 400 100 0 0 0 0 0 0 Mendoza 1,239 100 1,143 92 0 0 96 8 0 0 Misiones 594 100 318 54 24 4 252 42 0 0 Neuqu6n 2 602 100 584 97 0 0 18 3 0 0 Rio Negro 802 100 598 75 30 4 174 22 0 0 Salta 1,027 100 967 94 42 4 18 2 0 0 San Juan 735 100 417 57 0 0 318 43 0 0 San Luis 219 100 52 24 100 46 67 31 0 0 Santa Cruz 2.3 1,088 100 1,088 100 0 0 0 0 0 0 Santa F6 3,531 100 1,711 48 920 26 900 25 0 0 Santiago del Estero 814 100 700 86 0 0 114 14 0 0 Ticumin 2,347 100 2,347 100 0 0 0 0 0 0 Tierra del Fuegog 2 62 100 62 100 0 0 0 0 0 0 Ttal 35,055 100 18,648 53 5,997 17 5,933 17 4,477 13 Source: Figures as reported by the Provincial entities to COFES in 1993, except Buenos Aires Province, and 1993 AIDIS Report. 1. Provincial Regulatory Agency. 2. No municipalities. 3. No cooperatives. a/ Regulatory Agency of Concession. ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR STUDY Number and Distribution of Sector Staff Related to Water House Connections, 1991 Distribution of Staff by Level Water House Ibtal Staff Tbtal Staff Professionals Technicians Administrative Workers Connecnons Per Thousand Provinces Number % Number % Number % Number % Number % (Thousand) Water Connections Federal Capital plus 13 municipalities 4,020 100 281 7 201 5 724 18 2,814 70 2.300 1 7 Buenos Aires Province 3,105 100 559 18 404 13 621 20 1,521 49 705 4.4 Catamarca 1,722 100 224 13 103 6 241 14 1,154 67 50 34.4 Cordoba 1,366 100 219 16 232 17 355 26 560 41 418 3.3 Corrientes 476 100 71 15 24 5 148 31 233 49 111 43 Chaco 759 100 76 10 30 4 144 19 509 67 97 78 Chubut 378 100 26 7 27 7 23 6 302 80 80 4.7 Entre Rfos 1,093 100 164 15 164 15 142 13 623 57 188 5.8 Formosa 458 100 101 22 27 6 82 18 248 54 50 92 Jujuy 603 100 48 8 90 15 115 19 350 58 85 7.1 La Pampa 416 100 67 16 29 7 96 23 224 54 48 8.7 La Rioja 400 100 52 13 64 16 92 23 192 48 39 10.3 Mendoza 1,143 100 102 9 103 9 389 34 549 48 248 4.6 Misiones 318 100 48 15 45 14 73 23 152 48 39 8.2 Neuqudn 584 100 58 10 41 7 117 20 368 63 46 12.7 Rio Negro 598 100 60 10 60 10 149 25 329 55 105 5.7 Salta 967 100 58 6 135 14 145 15 629 65 140 6 9 San Juan 417 100 58 14 58 14 96 23 205 49 94 4.5 San Luis 219 100 28 13 22 10 70 32 99 45 52 4.2 Santa Cruz 1,088 100 261 24 33 3 141 13 653 60 36 30.2 Santa Fe 2,631 100 552 21 316 12 658 25 1,105 42 435 6.0 Santiago del Estero 700 100 98 14 105 15 98 14 399 57 73 9.6 TucumAn 2,347 100 118 5 563 24 469 20 1,197 51 164 14.3 Tierra del Fuego 62 100 13 21 11 18 10 16 28 45 17 3.6 Total 25,870 100 3,342 13 2,887 11 5,198 20 14,443 56 5,6195496 Source: Figures as reported by the provincial entities to COFES in 1993, except Buenos Aires Province, and 1993 AIDIS Report Note: The column "Total Staff" represents all staff working at Provincial, Municipal, Cooperative, and/or Private Concessionaite levels related to the water house connections found in the column "Water House Connections". -64- ANNEX N ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR STUDY COFAPYS' LEGAL FRAMEWORK 1. The Consejo Federal de Agua Potable y Saneamiento (COFAPYS) was created as an autonomous entity, attached to the Ministry of Economy through the Secretariat of Public Works, pursuant to Law 23615 of September 27, 1988. 2. COFAPYS purpose is to promote, encourage, supervise, finance and administer the provision of public water supply and sewerage systems for the whole Republic (art.2 of Law 23615). 3. To achieve the above-mentioned targets, article 3 of Law 23615 attributes COFAPYS autonomy to carry-out the following actions: (a) to establish its own policies and laws, in accordance with general sectoral guidelines fixed by the Central Government; (b) to coordinate, manage and supervise all actions directed towards obtaining financial resources from both national and international agents; (c) to administer, manage and supervise funds allocated to execute projects in the water and sanitation sector of the Republic; (d) to sign technical and financial cooperation agreements with provincial, national and international organizations; (e) to lend and grant funds in accordance with the above-mentioned agreements; (f) to sign internal agreements with the provinces, municipalities and communities for the development of plans and programs under its competence; (g) to promote community participation in the elaboration of projects and construction of water supply and sewerage systems; and (h) to promote development of human resources for the sector. -65 - ANNEX 0 ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR STUDY Contractual Arrangements for Private Water Supply Contract Application Incentives Examples Service Meter reading, Permits completion - A public water company, billing and among multiple EMOS, in Santiago, Chile, collection, and providers, each encouraged employees to leave maintenance of with short and the company in 1977 and private specific contracts compete for service contracts connections for tasks previously performed internally-resulting in large productivity gains Management Operation and Contract renewed Electricity and Water maintenance of every one to three Company of Guinea-Bissau the water supply years, and (EAGB); contract awarded to system or major remuneration Electricit6 de France, with subsystem based on physical about 75 percent of the parameters, such remuneration guaranteed and a as volume of water possible additional 25 percent produced and based on performance improvements in collection rates Lease Extended Contract bidding, Water supply in Guinea owned operational with contract by state enterprise (SONEG) contact duration about ten and leased to operating years; provider company (SEEG) from 1989 assumes for ten years; achieved large operational risk increase in bill collection Concession All features of Contract bidding, C6te d'Ivoire's urban water the lease contract, with contract supply concession went to plus financing of period up to thirty SODECI, a,consortium of some fixed assets years; provider Ivorian and French companies; assumes SODECI receives no operating operational and subsidies and all investments investment risk are self-financed Source: Triche 1993. -66- ANNEX P ARGENTINA WATER SUPPLY AND SEWERAGE SECTOR STUDY PROPOSED ACTION PLAN 1. The Federal Government needs to ensure that all sectoral activities are conducted in a coordinated way. Policy decisions and actions in all areas should be consistent with the sectoral objectives and with the macroeconomic policies of the Government. These actions should be properly reflected in the federal and provincial investment, legislative and institutional programs. Presently there is no agency in the Government to play this coordinating role. The government should in the Bank's view consider the creation of a Federal Water Supply and Sewerage Commission "FWSSC" or a similar body possibly reporting to the Ministry of Economics (Economic Programming Secretariat). The main responsibilities of this FWSSC would be to: (a) prepare indicative plans for sector development and formulate sector policies at national level including service levels and recommended standards; (b) maintain aggregate information on sector development and monitor sector evolution and performance; (c) propose fiscal incentives to promote sector development and financing policies for the sector; (d) organize the technical assistance programs required by the sector with particular emphasis on improvements in efficiency, management of water systems and commercial efficiency; (e) advise the Federal Government in all matters related to sector development and operations; The FWSSC would have a small technical or executive secretariat staffed with highly qualified officials to undertake the work of the Commission. 2. Given the urgent need to arrest further deterioration of the sector, the Government should give priority to: (i) promotion of projects to facilitate concessioning or other forms of private sector participation; (ii) projects that involve rationalization of consumption through metered consumption, rehabilitation of systems and control of water losses (physical and commercial); (iii) projects aimed to the improvement of operational and commercial administration of the water companies that are not concessioned; (iv) technical assistance and training of sector staff in management of systems and commercial operations; (v) preparation of a five year indicative sector development plan including service coverage and annual investment targets; and, (vi) development of fiscal incentives for the provinces to embark in projects of the nature -67- ANNEX P described. The technical assistance on commercial operations and systems management most likely would have to be external given the lack of tradition and shortage of skills in Argentina in these areas. 3. The Bank should start preparing a series of water and sewerage provincial projects (FY 96 and 98) to support the proposed Government objectives. The recent experience with COFAPYS, however, indicates that in its present form it is an ineffective vehicle for efficient project implementation. It seems more appropriate to use a model similar to the one for the ongoing Provincial Development, Municipal Development or Flood Emergency projects. Under these Models the federal Government guarantees the loans and keeps a supervisory and coordinating role of the operations but the Bank deals through Project agreements and sub-loan agreements with the provinces in matters related to project implementation. In addition to the preparation of the provincial projects, the Bank could consider developing a TA project (FY 95) that will help the GOA in: (a) setting the FWSSC; (b) preparing the first indicative sector plan; (c) establishing a training program for the water sector; (d) setting a national TA program for the provinces in utility management and operations particularly commercial management (metering, billing, collections, customer accounting, water losses control, etc.); and, (e) designing appropriate fiscal incentives to promote sector development. 4. In the short term the Bank would meanwhile use funds available in the existing loans (Provincial Development - Ln 3280-AR and Municipal Development - Ln 2920-AR and Water Supply II - Ln 3281-AR) for the preparation of the new projects. Funds from these loans would be used also for: (a) preparation and implementation of private sector participation projects; (b) rehabilitation of works in preparation for private sector entrance; and (c) assistance to systems (including those owned and operated by cooperatives) willing to implement highly cost effective improvements in the managerial or commercial areas of the operation. 5. The findings of this sector study suggest that a wider participation of the private sector in the form of concessions is desirable to increase operating efficiency and in order to attract long-term financing so as to expand water and sewerage services. The higher productivity of private concessionaires has already been demonstrated in the cases of Buenos Aires and Corrientes. In the case of Buenos Aires staff productivity was roughly doubled as a result of the concession. At the same time, investment efficiency would appear to have risen since the concessionaire is now undertaking a very large number of small investments to improve system reliability. The higher efficiency should permit financial surpluses to be invested in the rehabilitation and some urgently needed expansion of the existing systems. 6. However, for medium to large investments it will be difficult for the private concessionaires to obtain the necessary financing requirements from the capital markets, at least at this initial stage. Experiences both in the Buenos Aires and Coi-rientes concessions evidence these difficulties. As a consequence, it seems appropriate that before or during future concessions that provinces -68- ANNEX P finance those essential and urgent works. This will permit immediate service improvements and facilitate the necessary tariff increases to make the concession attractive to the private sector. IBRO25587 化 FEBRUARY 1 994