The Buenos Aires concession - the private sector serving the poor

Case Studya23 23722 January 2001 Water and B Sanitation The Buenos Aires Program An international concession partnership to help the poor gain sustained access to improved water supply and sanitation services This paper is part of a research - and dissemination initiative which the Water and Sanitation t Program-South Asia (WSP-SA) is carrying out into private sector participation and the poor in the urban water sector. Proposals to involve the private sector in water supply and sanitation sometimes raise fears that the poor will be priced out through higher tariffs and costly connection fees or overlooked because they live in hard-to-reach locations. The reality is that the private sector has the capacity and the interest to serve the poor, is willing to jt.-.+z-ofJ5 ) experiment with low-cost options # ~n - and different levels of service, . - - and with greater efficiency, can h I r benefit all consumers. There are examples of this in other parts of the world but not as yet in any of the countries of South Asia. This , - series will document best practices and show how service to the poor can be addressed by the skillful design of private sector contracts; by strengthening Summary the regulatory system and making sure it protects the In May 1993, a 30-year concession cont-act was awarded to a private company to operate the interests of the poor; and by water and sewerage services in Buenos Aires. At the time, tariffs barely covered the costs of the creating partnerships between inefficient utility running the system, and water had been made artificially scarce by poor civil society, local authorities and management, despite an abundant and easily tapped source. The concession attracted three bidders private operators. who offered lower tariffs and annual investments of US$ 240 million over the first five years; The series also analyzes annual investment over the previous decade had been only US$ 10 million. lessons learnt and explores how Those consumers who were already connected to the system initiially benefitted from a significant international experiences can drop in tariffs and an improvement in the quality and reliohility of service. Expansion targets set by be adapted to this region. geographical area, with poor areas prioritized, has resulted in large numbers of new households being connected. However, affordability for the poor has been a serious concern, and it appears that the benefits have accrued largely to the middle-class consumers already connected at the time of contract award. An unpopular decision to pass the cost of system expansion on to new consumers ; .. ' ."::. . in the form of a hehy infrastructure charge was one of the issues leading to early contract renegotiations. Regulation has been weak and ineffective, and this has led to some erosion of public confidence in the process. The Buenos Aires concession demonstrates the importance of effective regulation in maintaining transparency and public trust, and in an understanding of the impact of concession design, pricing policy and regulatory decisions on the poor. W A T E R & SANITATION  Historical and the Rio de la Plata and has an eas- The M ain ioy tapped, ample supply of rela- Political tively clean raw water. Despite this, Features of Background the state-owned water utility, OSN the Contract (Obras San itarias de la Nacion) was providing limited and poor quality In 1 989 Argentina was on the service and, with very low levels of Preference was given to a conces- verge of bankruptcy, with a rapidly investment, was unable to expand sion format over a management or deteriorating economy and spiraling connections to the rapidly growing, lease contract because the govern- hyperinflation. The newly elected poorer, areas of the city. Revenues ment wanted the private investor to government of Carlos Menem was had shrunk, partly because of a take responsibility for the mas- able to take advantage of a rare declining tariff in reol terms, and sive investments needed to expand political consensus on the need for the network had deteriorated due the system. Selling the assets could reform and to introduce wide rang- to poor maintenance. Water had have posed legal problems and the ing economic measures, including become artificially scarce due to concession arrangement has the the restructuring and privatization of mismanagement and poor policy advantage of keeping ownership of inefficient public utilities, of which the and losses were estimated at 45% fixed assets in the public domain. water industry was one. In Decem- of the total volume supplied. Only The number of likely bidders was ber 1992 a 30-year concession con- 70% of the population were con- limited by pre-qualification tract for water and sanitation provi- nected to the water system and 58% requirements that operators had sion in the Buenos Aires metropoli- to the sewerage system. The short- experience in operating very large- tan area was awarded to a private fall was concentrated almost exclu- scale systems. However the bid was sector consortium who assumed sively in the poorer, suburban competitive, with three consortia responsibility for operations in May areas, where only 55% of the 5.6 passing the technical pre-qualifica- 1993; it remains the largest con- million inhabitants had water con- tion stage. The 30-year concession cession in the world given to a nections and 35% sewerage con- wasawardedtotheconsortiumthat single operator. nections. By contrast almost all the offered the largest tariff reduction. Buenos Aires is situated beside three million people in the city cen- The winner was Aguas Argentinas, ter were connected to the munici- headed by Lyonnaise des Eaux; they pal system. Of the 30% of the proposed a tariff reduction of population without connections, 26.9%, their nearest competitors most relied on well water. They suf- offered a reduction of 26.1% and fered higher rates of water-borne the third bidder 10.1%. The contract 9 s - I disease than the rest of the city was awarded in December 1992, because of contamination of with a takeover date of May 1993. A- + F^GENTN groundwater by untreated indus- An independent regulatory trial waste and raw sewerage seep- agency ETOSS (Ente Tripartite de ing from cesspools of households Obras de Servicios de Sanea-miento) that were not connected to the was created in May 1993 to enforce sewer system. OSN did not cover compliance with the terms of the con- operating costs for three of the five cession contract, monitor the years leading up to privatization concessionaire'sfive-yearinvestment I/ X , / and the utility was widely regarded plans, determine tariff provisions and as unresponsive to customer com- investigate customer complaints. The plaints with a backlog of breaks agency was partly financed by a sur- awaiting repair. charge of 2.7% levied on the consum- 2  Addressing Contract obligations specify: the Needs guaranteed standards for water quality, continuity of service, water of the Poor pressure and flow; targets for metering (only 1 % of connections were metered at the start of the concession), loss reduction and network rehabilitation; the concessine eater thac of the 150,000 new water connec- development of sewage treatment plants; t expansion mandates for water supply from 70% coverage at the start, t6ons tte stem hehoyear, expansion ~~~~~~~~~~~~~(60%) are to poor househiolds, and to 100% at the end of the concession; t expansion mandates for the sewerage system from 58% coverage at the at this sevesion bsorbs about 15% of investment but contrib- start, to 85% at the end of the concession; expansion mandates planned on a five-year basis for each of the four u y 1%eofyincrease revu geographical zones into which the concession is divided (see Table !); By specifying precise geo- five-yearly review of the tariff regime with renegotiation permissible contract attempted to enforce in the event of unforeseen circumstances outside the control of the concessionaire; service provision to areas of low employee contracts to be negotiated with the unions (the workforce coverage, which are largely poor had been reduced by 1,600 immediately prior to privatization); neighborhoods. For example, the investments of about US$ 4 billion over the life of the contract with first five-year expansion targets for a significant proportion, US$ 1.2 billion, being disbursed in the first five years. ers' bills. ETOSS was staffed mainly the network. The new clients, by former employees of OSN who mainly the suburban poor, were ex- Population of Greater Buenos were poorly qualified for the respon- pected to pay for much of the sec- peoule sibility of tariff setting and had no ondary expansion network through people experience of regulating a com- a so-called infrastructure charge; Poverty line: average monthly mercial venture. In addition, the it was assumed that the poor could income US$ 500 contract was drafted in a manner afford this charge since the con- Number of poor: 2 million that allowed undue intervention by cession required the concession- Average monthly income below ETOSS in the operational decisions aire to provide financing assistance US$ 240: 0.8 million of the concessionaire, including at 12% interest for two years. This Three types of dwellings for small details like maintaining proved a serious misjudgment and the poor: valves and hydrants. affordability of access remains a Group housing societies: To raise confidence among contentious issue. 1.5 million potential bidders for the conces- Labor opposition to reform was Poor quality public housing sion, tariffs had been increased by reduced by the promise of shares in units (relocation colonies): 25% in February 1991 and a fur- Aguas Argentina and a volunteer 0.25 million ther 29% in April 1991. The sub- departure scheme. The close involve- sequent tariff reduction of 26.9% ment of union officials in the process Slums or "Villas miserias