The Buenos Aires Concession : the private sector serving the poor

Case Study 38754 Water and Sanitation The Buenos Aires Program Concession An international partnership to help the poor gain sustained access to improved water supply and The Private Sector Serving the Poor sanitation services This paper is part of a research and dissemination initiative which the Water and Sanitation 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 experiment with low-cost options and different levels of service, and with greater efficiency, can 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 DUVIVIER series will document best practices and show how service to THIERRY 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 contract 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 initially benefitted from a significant international experiences can drop in tariffs and an improvement in the quality and reliability 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 hefty 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.  Historical and the Rio de la Plata and has an eas- The Main Political ily tapped, ample supply of rela- tively clean raw water. Despite this,Features of Background the state-owned water utility, OSN (Obras Sanitarias de la Nacion) was the Contract providing limited and poor quality In 1989 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 real 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- was awarded to the consortium that 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 disease than the rest of the city was awarded in December 1992, because of contamination of with a takeover date of May 1993. 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's five-year investment 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 consum- 2  CONCESSION FACT FILE 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 concessionaire estimates that development of sewage treatment plants; of the 150,000 new water connec- expansion mandates for water supply from 70% coverage at the start, tions to the system each year 90,000 to 100% at the end of the concession; (60%) are to poor households, and expansion mandates for the sewerage system from 58% coverage at the that this service provision absorbs start, to 85% at the end of the concession; about 15% of investment but contrib- expansion mandates planned on a five-year basis for each of the four utes only 1% of increased revenue. geographical zones into which the concession is divided (see Table I ); By specifying precise geo- five-yearly review of the tariff regime with renegotiation permissible graphical expansion targets, the in the event of unforeseen circumstances outside the control of the contract attempted to enforce 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 SOCIO-ECONOMIC five years. INDICATORS AT THE START OF THE CONCESSION 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- Aires: around 10 million 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": (May 1993) and early improve- also helped win agreement (the head 0.25 million ments in service mainly benefitted of the Union of Argentine Sanitation Population density in poor areas: middle and upper-income Workers was part of the privatization 10,000 inhabitants per sq km households already connected to committee). 3  TABLE 1 : EXPANSION TARGETS FIXED BY THE CONTRACT % of Population Connected to Services Year 0 Year 5 Year 15 Year 30 Region Water Sewerage Water Sewerage Water Sewerage Water Sewerage % % % % % % % % Capital Federal 99 99 100 99 100 100 100 100 North Zone 69 44 88 65 95 92 100 100 West Zone 54 45 76 51 92 69 100 85 South Zone 49 21 79 40 92 77 100 100 Total Served as % of Total Population 70 58 86 66 95 83 100 85 Total Served Population (millions) 6,000 4,950 7,700 5,900 9,100 8,000 10,250 9,750 the poorly served South Zone aimed priority areas defined by each low-income areas helped to shape to increase the number of house- municipality. The low-income house- the Service Expansion Plan. holds connected to services from 49% holds without water and sewerage In addition to serving the poor to 79% for water and from 21% to connections were scattered through- through the SEP, the concessionaire 40% for sewerage (see Table 1 and out the three suburban zones, but at has developed a range of innovative Figure 1). Although it will still take the start of the concession socio-eco- arrangements which are designed to 15 years for water to reach a full nomic data was unreliable; to accelerate service provision to house- 92% of the population, the targets address the challenge of hard-to- holds in areas not included in the first underline the attempts being reach households the concessionaire five-year plan, and at the same time made to prioritize service provision engaged an NGO, IIED-AL, (Interna- to bring down connection costs for to poor households. tional Institute for Environment and low-income households. These are: To meet these targets the conces- Development - Latin America), The Participatory Water Service: sionaire developed a five-yearly Ser- whose research into housing char- a collaboration between the conces- vice Expansion Plan (SEP), based on acteristics and service demand in sionaire, who designs and supervises the works and provides training and technical assistance; the municipality, 97% which provides construction material 100% 100% and facilitates legal requirements; 57% 100% 99% and individual communities who 97% build and maintain the infrastructure 96% in lieu of connection charges. So far 87% 85% 48% around 30,000 inhabitants in 15 53% neighborhoods, who would other- 53% 61% wise not have been able to afford 53% 35% connections, have benefitted from the scheme. NGO intervention: a collaboration between NGOs, the concessionaire FIGURE 1: Buenos Aires concession area showing percentage and individual neighborhoods. For of population with connections at the start of the concession contract example, one NGO, Fondation 4  Riachuelo, was already working on internal restructuring and training to Under Argentinian law, consumers urban renewal schemes in Lanus, an facilitate their pro-poor expansion must connect to a water or sewer net- area not included in the first Service plans. Each zonal office now has a work, when it is extended to within a Expansion Plan. The concessionaire dedicated employee specifically certain distance to their premises. was approached to explore cost shar- responsible for coordinating service This means that the concessionaire ing options to expand services ear- provision to the poor. A specialist in can, in principle, install networks lier than planned and as a result an water supply for low-income areas in without consumers' consent, and agreement was reached (November developing countries funded by the without a need to determine their 1997) between the NGO, the munici- Inter American Development Bank willingness to pay for services. pality, the concessionaire, the regu- (IADB), co-ordinates all pro-poor Under the terms of the original con- lator, and the residents with costs split activities throughout the concession. tract, expansion of the secondary as follows: 54% Fondation Riachuelo, Four local NGOs, IIED-AL, Fondation network in Buenos Aires was to be 35% households and 11% conces- Riachuelo, Alma and Adeso, have financed through an "infrastructure sionaire. This collaborative approach been engaged by the concessionaire charge" on new consumers costing has benefitted an additional 5,000 to strengthen their capacity to respond US$ 415 for water and US$ 606 for inhabitants so far. to the specific needs of the poor. sewerage. This charge affected The Employment Generation This includes organizing relevant mainly low-income households liv- Unit: a collaboration between the training programs for employees, ing in the poor suburban areas and province, the concessionaire and developing a management manual was a source of resentment. The the users which employs local for services to the poor, and monitor- monthly repayments of up to US $ 48 workers for construction and is thus ing response to coverage, consump- represented about 20% of the fam- very suitable for expanding ser- tion, level of satisfaction and security. ily income of the poorest households, vices into areas of high unemploy- who, in addition, had to find the ment. The concessionaire designs Contract money for internal plumbing fixtures. and supervises the work and pro- Revisions and Despite low interest loans, extended vides appropriate training but a over a two-year period by the con- local contractor has responsibility Renegotiations cessionaire, the charges were sim- for construction. The province ply not affordable and an increasing finances the equipment and mate- number of people refused to pay Since the contract became opera- rials and labor contribution reduces them. By the end of 1996 arrears tive in May 1993, several major the cost of connections. So far, over had reached US$ 30 million, forc- changes have been implemented and 100,000 people have benefitted ing the concessionaire to suspend some of the terms of the concession from this scheme. service expansion to poor areas have been renegotiated. and leading to the renegotiation of The Tax Compensation Agreement The first revision occurred in 1994 the contract. is a financial arrangement, whereby when the concessionaire was In February 1997 Aguas Argen- the municipality waives the excava- granted a 13.4% tariff increase, tinas and the regulatory agency, tion tax normally payable to dig about half the original reduction on ETOSS, began negotiations but the trenches and the notional savings are which the contract was awarded. It process was quickly bogged down. invested by the concessionaire in had quickly become clear that the Problems were due in part to politi- expanding water connections to infrastructure was in worse shape cal pressure brought to bear on poor areas not included under the than estimated; to improve water members of the ETOSS board, many SEP. This scheme has so far enabled quality, investment plans had to be of whom were political appointees. an additional 50,000 people to speeded up and the resulting cost The regulator was bypassed and two have water access. increase triggered a contract clause federal agencies, the Public Works The concessionaire has introduced allowing for tariff adjustment. Secretariat and the Natural Resources 5  TARIFF STRUCTURE April to the end of December 1998; and (c) canceling the fines The existing tariff structure was passed on to the concessionaire. The imposed by the regulator for failure tariff structure is complicated; it is based on the type of consumer, to reach agreed investment targets. (residential, non-residential or real-estate); the service (water As a result of these changes the only or water and sewerage); and the kind of building involved average bimonthly bill for existing (location, age and size of the house, total area and type of prop- consumers increased by 19% from erty). These are then multiplied by a k factor, an adjustable figure US$ 37 to US$ 45. For new consum- fixed by the regulator and linked to an index of the operating costs ers, the majority of whom were liv- of the concessionaire. The concessionaire can change the tariff: by ing in the poorer areas, average bills negotiating an increase in k, by reclassifying consumers to more ex- decreased by 74% from US$ 61 to pensive non-residential blocks, or by proposing adjustments in build- US$16. However it is debatable ing type, size or criteria for age and location. whether even at this level the rates There are many weaknesses in the tariff system: are affordable for the poor. The tariff is not linked to consumption and there is no incentive to The renegotiation made funda- curb usage. The majority of domestic connections are unmetered; mental changes in the nature of the metering was made mandatory for non-residential customers but concession contract. Under the optional for residential connections. original contract the firm received Given the complexity of the tariff system and the lack of metering it is payment for service expansion only almost impossible for consumers to understand or monitor their bill. when the work was done; the intro- There is no explicit subsidy scheme for poor consumers. duction of SUMA meant that the The tariff structure has serious, inherent, inequities: for example, concessionaire would be paid in a consumer living in a new house in a new area will pay seven times the advance. In addition, while the rate of someone in a similar sized, but older house, in an older district, decision not to penalize the firm for regardless of consumption patterns. delayed investment may have been As tariff is linked to property characteristics and as many poor areas a recognition that the original tar- have no proper titles to their dwellings the concessionaire is often gets were ambitious, it also estab- unable to collect revenues. This creates a considerable disincentive to lished a precedent that the conces- expand services to poor areas. sionaire would not be held account- able for delays. Thus a weak and politicized regulator, combined with and Human Development Secre- improvements that were not included hard-to-achieve contractual targets tariat, reached an agreement in the original contract. This change for service expansion resulted in a directly with the concessionaire. was unpopular among middle class regulatory failure; a failure that is The renegotiation, agreed in consumers who saw their bills rise. likely to disproportionately affect the August 1997, introduced the fol- Reduced connection charges to poor by slowing down the rate of lowing main changes: US$ 120 for water or sanitation; coverage and diluting contractual Replaced the infrastructure charge repayable over five-years in interest- obligations which are the for new users with a bimonthly free installments averaging US$ 4 concessionaire's strongest incentive Universal Service and Environ- per month. for serving the poor. mental Improvement fee (SUMA) ReducedsomeofAguasArgentinas' In 1998 the concessionaire payable by all consumers, irrespec- contractual obligations by: (a) cutting requested a further 11.7% tariff tive of the date of the connection. expansion targets for the first five- increase. This caused public opposi- Part of the charge was to replace the year plan by 15% for water and 13% tion, coming as it did on top of ear- revenue loss of the concessionaire for sewerage; (b) postponing the lier increases and at a time when and part was to fund environmental completion of the first phase from economic growth was slowing. In the 6  FIGURE 2: BUENOS AIRES PRICE INCREASES concessionaire and the renegotia- tion of the contract have stimu- lated the emergence of a more 4.6% increase: vocal civil society. Municipalities are pre-concession 19.0% 1998 price is increases increase being forced to respond to the needs 3.3% above riceP start of 13.5% above 1992 of the urban poor and to address the contract increase price 26.9% complex issue of property rights. The decrease new political administration has (1990) initial price decided to encourage wider public Initial participation and for the first time in to Argentina a public hearing called by riceP the regulator was held in June 2000 of to discuss the concessionaire's new atioR five-year investment plan. A consul- tative forum, funded by the regula- tor and composed of consumer `90 `91 `92 `93 `94 `95 `96 `97 `98 organizations has now been estab- end a figure of 4.6% was agreed (see ing low-income households. This lished. Though a step in the right Figure 2). situation is now changing but direction, some people consider the affordability of the connection charge forum to be lacking in either influ- Outcomes remains an issue. ence or bite. One NGO, Interna- Increased investment has been tional Institute for Environment and dramatic. Before privatization the Development, America Latina, has Despite institutional weaknesses inefficient utility running the system commented: and problems with the original " By having a forum it seems `civil negotiations, there have been had been investing an average of society' has a seat at the table ... major benefits in service delivery and only US$ 20 million per year. This but what kind of table is it? It is water quality since the concession increased to over US$ 250 million just for appetizers because the big was granted. The drop in tariff at the between 1993-1997 when actual meal is cooked and eaten with- start of the concession has been investment was US$ 1.04 billion (less out this incomplete representative eroded by subsequent increases, than the original target of US$ 1.2 of civil society. And another cru- but after five years consumers are billion). The latest available figures cial aspect is the capacity of those paying only 3.3% more than they (July 2000) indicate that water ser- who sit at the table. They are were before the private sector vices have been extended to 1.2 mil- `convidados de piedra' (guests of operator took over (66.3% more lion poor people and sewerage ser- stone) who do not have the than they were in 1990) (see Fig- vices to 0.3 million poor people. capacity nor funds to process the ure 2). However, the gains dis- The majority of these connec- thousands of maps and papers proportionately benefit high tions (around 60%) have been they are asked to analyze and and middle-income users already funded by the concessionaire's advise on." connected at the time of the regular expansion program. The The NGO acknowledges that a concession. Infrastructure charges balance was funded through the more transparent process is begin- were initially unaffordable for the tax credit agreement and the ning but stress that fair representa- poor and these created problems innovative institutional arrange- tion and sensible capacity building during the first few years after ments described above, which mix are vital for an effective pro-poor privatization when the concession- public and private funds. consultative forum. aire made slow headway in reach- It is significant that criticism of the Improved channels of commu- 7  nication have seen the number of damentally flawed then adjustments Lessons for registered complaints increase but in tariff rates, however well inten- response time to leakages and tioned, will also be flawed. If the South Asia breakdowns has dropped, demon- tariff and incentive structure is strating greater responsiveness transferred from public to private The contract was awarded on the to consumer demands by the pri- management without any modi- basis of the highest tariff reduction, vate operator. fications it can be difficult to pro- a process which benefitted already The concession contract explicitly vide services effectively, particu- connected households in more afflu- stated that none of the government larly to the poor; reform in insti- ent areas and penalized those with- signatories assumed responsibility tutional arrangements must pre- out access by introducing costly con- for the quality or accuracy of the con- cede private sector participation. nection fees. Cost of access was not tents and the winning bidder com- The adjustments and renego- addressed in the bidding process. mented on the serious lack of infor- tiations also created some pub- The concession could have been mation. This information gap led lic disillusionment with the con- awarded based on investment plans to problems which have dogged cession. There have been accusa- within a specified tariff. As it was, the the early years of the concession tions that the concessionaire acted tariff reduction was based on unre- and led to disagreements about opportunistically from the start, alistic assumptions about the willing- issues which should have been accepting unreliable information in ness and ability of new, poor con- very clear from the start. In fact, the confident expectation that tar- sumers to pay large connection fees. low-quality and unreliable informa- iffs could be renegotiated later. In addition to the issue of affordability tion was a defining feature of the There were clear risks and lack of there was resentment at a system tender process. information in the original bid pro- which seemed unfair and unjustified The weakness of the regula- cess, problems compounded by a in placing the financial burdens of tory structure raises serious con- weak and inexperienced regulator expansion of the system on those cerns. The six-member board of subjected to constant political inter- who could least afford to pay them. ETOSS are political appointees and ference and pressure. The experience of Buenos Aires sug- there have been instances of politi- cally motivated decisions being foisted on the concessionaire. Dur- ing the renegotiation of the contract the regulatory agency was bypassed when the board became deadlocked and the central government was forced to resolve the issues. This regulatory failure has fed consumer doubts that their interests are not being protected and is likely to have disproportionately affected the poor. The inherited tariff structure is inefficient and complicated and makes it difficult for consumers to understand how they are charged. This underlines the fact that privatization without reform can have only limited benefits for poor con- sumers. If the tariff structure is fun- e Ld 8  gests that for the poor affordability dissatisfaction with the inefficient with respect to issues affecting of access is far more important than water industry were catalysts for the poor. reduction in water tariffs. The intro- change but it was political circum- The vocal opposition to the per- duction of a system favorable to stances that made the concession ceived unfairness of the heavy con- existing users and skewed against feasible. The Menem government nection charges on new consumers new connections created difficulties was able to exploit an unprecedented and the subsequent process of con- in expanding services to the poor and political consensus; a coalition of tract renegotiations has stimulated a ultimately required a renegotiation political factions representing new, and important, role for civil of the contract. Insufficient atten- middle-income voters formed the society. Wider public participation is tion has been given to the cost of core support base for Menem's being encouraged and discussion on access in South Asia, where heavy reform program in Congress. They the second expansion plan has been consumption subsidies are com- approved a water concession that much more transparent and open to mon; but connection costs are effectively benefitted people who all stakeholders. The role of civil often unaffordable for the poor. were already connected to the sys- society has emerged late in The experience in Buenos Aires tem. In South Asia it is clear that Buenos Aires; but in South Asia, underlines the need to start from a political support needs to be civil society already enjoys a secure information base. Shifting all carefully built among all stake- more influential profile, and can information risks to the bidder, as holders, including the poor