64693 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Edited by Luis A. Andres, David Sislen, and Philippe Marin THE WORLD BANK COLOMBIA THE WORLD BANK COLOMBIA Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Copyright © 2010 by The International Bank for Reconstruction and Development / The World Bank. 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Internet: www.worldbank.org.mx All Rights Reserved Printing and Manufactured in Colombia / 2010 First Printing: September, 2010 The �ndings, interpretations, and conclusions expressed in this book are entirely those of the authors and should not be attributed in any manner to the World Bank, to its af�liated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The World Bank – Bogota, Colombia Edition: Luis A. Andres, David Sislen and Philippe Marin Co edition: Public-Private Infrastructure Advisory Facility (PPIAF) Cover and Design: Marcela Godoy Photo Cover: Scott Wallace. The World Bank Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector / edited by Luis A. Andres, David Sislen and Philippe Marin. – Bogota, Colombia, 2010. 250 p. : 95 il. 363.610921/S77/1990-2006 1. Colombia - Water Supply and Sanitation – Economic aspects – 1990-2006. -- 2. Colombia – Water supply – Government policy – 1990-2006. – Colombia – Sanitation - Economic aspects – 1990-2006. – 3. Colombia – Sanitation – Government policy – 1990-2006 – I. Andres, Luis A., ed. -- II. Sislen, David, ed. -- III. Marin, Philippe, ed. -- IV. Public-Private Infrastructure Advisory Facility. – V. The World Bank The publication of this report has been made possible by a grant from the Public-Private Infrastructure Advisory Facility (PPIAF), a �nancial aid sponsored by various donors to assist developing countries to improve the quality of infrastructure through partnerships between the private and public sector (More information on http://www.ppiaf.org). Acronyms ACUAs Departmental Water Companies under INSFOPAL ACUACAR Aguas de Cartagena S.A. E.S.P. ACUAMarta Acueductos y Alcantarillados de Santa Marta S.A. ADU Aguas de Uraba AGBAR Sociedad General de Aguas de Barcelona, S.A. CAF Andean Development Corporation Corporación Andina de Fomento CAR Regional Autonomous Corporations Corporaciones Autónomas Regionales CONPES National Economic and Social Policy Council Consejo Nacional de Política Económica y Social CRA Commission for the Regulation of Water Supply and Sanitation Comisión de Regulación de Agua Potable y Saneamiento Básico DNP National Planning Department Departamento Nacional de Planeación EAAB Bogota Water and Sewer Company Empresa de Acueducto y Alcantarillado de Bogotá EMAS Empresa Metropolitana de Aseo S.A. E.S.P, Manizales EMPO Municipal Water Companies under INSFOPAL EMPOMarta Empresa de Obras Sanitarias de Santa Marta S.A., formerly ACUAMarta EPD Local Public Service Companies Empresas Públicas Distritales EPMB Public Municipal Companies of Baranquilla Empresas Públicas Municipales de Barranquilla ESP Public Service Company Empresa de Servicio Público FINDETER Regional Development Financial Institution Financiera de Desarrollo Territorial FNR National Royalties Fund Fondo Nacional de Regalías IANC Unaccounted For Water Index �ndice de Agua No Contabilizada IADB Inter-American Development Bank INSFOPAL Municipal Development Institute Instituto de Fomento Municipal LYSA Lyonnaise des Eaux Services Associés MAVDT Ministry of Environment, Housing and Territorial Development Ministerio de Ambiente, Vivienda y Desarrollo Territorial MHCP Ministry of Finance and Public Credit Ministerio de Hacienda y Crédito Público PGN Public Prosecutor’s Of�ce Procuración General de la Nación PME Corporate Modernization Program Programa de Modernización Empresarial POMCA Watershed Administration and Management Plans Planes de Ordenamiento de Manejo de Cuencas Hidrográ�cas PSMV Sanitation and Wastewater Discharge Management Plans Plan de Saneamiento y Manejo de Vertimientos PSP Private Sector Participation SAAM Sociedad de Acueducto y Alcantarillado de Montería SGP General Revenue-Sharing System Sistema General de Participaciones SO Specialized Operator SOE State-Owned Enterprise SSPD Superintendency of Residential Public Services Superintendencia de Servicios Públicos Domiciliarios WSS Water Supply and Sanitation Acknowledgments The principal editors for this report were Luis Alberto Andres, David Sislen, and Philippe Marin. The main authors for Chapter 2, on the water and sanitation sector in Co- lombia, were Julio Miguel Silva Salamanca and Javier Rozo. The main author for Chapter 3, which includes speci�c case studies, was Alejandro Valencia. The main authors for Chapter 4, providing analysis of private sector par- ticipation in the water and sanitation sector, were Luis Alberto Andres and Bar- bara Cunha. Authorities from a wide range of institutions within the government of Colombia – especially the National Planning Department (DNP), the Commission for the Regulation of Water (CRA), the Superintendency of Residential Public Ser- vices (SSPD), and the Vice Ministry for Water and Sanitation – contributed their time and provided key information during the preparation of this study. The team would also like to acknowledge the efforts of Menahem Libhaber, without whom Colombia’s Corporate Modernization Program (PME) would not have been a success. Additional recognition is due to Maria Claudia Pachon for her work on private sector participation contracting methodologies. Valuable support for the editing and preparation of the �nal document was received from Anamaria Aristizabal, Camila Rodriguez Hernandez, and Hal- liday Hart. The majority of this report was supported through grant funds provided by the Public-Private Infrastructure Advisory Facility (PPIAF), without whose �nan- cial contribution this publication would not have been possible. Table of Contents ontenido general Executive Summary 15 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia 21 1.1. Background and Context of the Sector Reforms 24 1.2. The Sector’s New Institutional Model 28 1.2.1. Overview of Reforms 28 1.2.2. Institutional Organization of the Sector, Regulation, and Control 33 1.2.3. Development of Regulation within the Framework of the Reforms 38 1.2.4. Sector Financing within the Framework of the Reforms 43 1.2.5. Supply and Demand Subsidies in Colombia 48 1.3. Institutional Organization of the Sector and Participation of the Private Sector 52 1.3.1. Evolution of Private Sector Participation in Colombia’s Water Services and Sanitation Sector 57 1.3.2. Mechanisms for Partnership with the Private Sector 60 1.4. The MAVDT’s Corporate Modernization Program (PME) 64 1.4.1. Financing and Functioning of the PME 65 1.4.2. Results of the PME 67 1.4.3. Lessons Learned from the PME 72 1.5. Conclusion: Sector Achievements and Challenges 75 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 77 2.1. Cartagena de Indias 81 2.1.1. Most Relevant Contractual Aspects 83 2.1.2. Condition of the Infrastructure 84 2.1.3. Changes in Service Delivery 85 2.1.4. Service Characteristics 86 2.1.5. Investments 89 2.1.6. Evolution of Tariffs 90 2.1.7. Financial Performance 91 2.1.8. Lessons Learned 92 2.2. CONHYDRA S.A. E.S.P. 93 2.2.1. The Beginning of Private Operation in Antioquia 93 2.2.2. Condition of the Infrastructure 97 2.2.3. The Investments and their Impact 100 2.2.4. Management Aspects 104 2.2.5. Tariffs and Subsidies 106 2.2.6. Financial Performance 107 2.2.7. Lessons Learned 109 2.3. Palmira 110 2.3.1. The Business Model 110 2.3.2. Investments and Their Impact 114 2.3.3. Management Issues Arising from the Business Model 117 2.3.4. Financial Performance 119 2.3.5. Lessons Learned 120 2.4. Santa Marta 122 2.4.1. Most Relevant Contractual Issues 125 2.4.2. Condition of the Infrastructure 125 2.4.3. Service Characteristics 127 2.4.4. Evolution of Tariffs 130 2.4.5. Financial Performance 131 2.4.6. Lessons Learned 132 2.5. The Atlántico Department 133 2.5.1. Most Relevant Contractual Aspects 136 2.5.2. Condition of the Infrastructure 138 2.5.3. Service Characteristics 143 2.5.4. Evolution of Tariffs 145 2.5.5. Financial Performance 146 2.5.6. Lessons Learned 147 2.6. Aguas de Manizales S.A. E.S.P. 149 2.6.1. The Reform Process: Optimizing Good Management 149 2.6.2. Condition of the Infrastructure 152 2.6.3. Service Quality 157 2.6.4. Labor Component 157 2.6.5. Evolution of Tariffs 159 2.6.6. Financial Performance 159 2.6.7. Lessons Learned 161 2.7. PROACTIVA Aguas de Montería S.A. E.S.P. 163 2.7.1. The Transformation Process 163 2.7.2. Most Relevant Contractual Aspects 164 2.7.3. Service Quality 165 2.7.4. Commercial Management 167 2.7.5. Financial Performance 170 2.7.6. Lessons Learned 171 2.8. SERAQA S.A. E.S.P. 172 2.8.1. Private Participation as a Solution to the Lack of Supply in Tunja 172 2.8.2. Condition of the Infrastructure 173 2.8.3. Investments and Their Impact 175 2.8.4. Evolution of Tariffs 178 2.8.5. Financial Performance 180 2.8.6. Lessons Learned 180 3. Assessing the Effect of Private Participation in Water Supply and Sanitation 183 3.1. Literature Review 188 3.2. Empirical Approach 191 3.2.1. Methodology 191 3.2.2. Data and Variable Choice 195 3.3. Results 200 3.3.1. Mean and Median Analysis 200 3.3.2. Econometric Analysis 217 3.4. Additional Considerations 225 3.5. Final Remarks of this Chapter 227 Appendix 229 References 243 List of Tables Table 1. Coverage in 1993 25 Table 2. Institutional Responsibility for the Application of the Tariff Methodology 36 Table 3. Evolution of the Regulatory Framework 39 Table 4. Annual Resources for Investment in WSS in Colombia by Source – 2007 44 Table 5. Subsidy Schemes in Some Latin American Countries 50 Table 6. Providers According to Legal Status and Size of Municipality 2006 53 Table 7. National and Foreign Private Business Groups: Participation in the Urban Market and Distribution by Size of Municipality 55 Table 8. Processes Structured with PME Support 69 Table 9. Participation of Selected Bidders in Competitions for the PME Market 73 Table 10. Capital Structure of ACUACAR S.A. E.S.P. (year 1994) 83 Table 11. Structure of ACUACAR S.A. E.S.P.’s stock capital 83 Table 12. Management Indicators of the Water and Sanitation Service in Cartagena 86 Table 13. Selected Contractual Clauses for the Municipalities Operated by CONHYDRA 95 Table 14. List of Systems Currently Operated by CONHYDRA 96 Table 15. Investments According to Source in the Municipalities of Marinila and Santa Fe de Antioquia (in millions of pesos) 100 Table 16. Evolution of the Shareholding Interests in ACUAVIVA 111 Table 17. Operating Indicators in Palmira (2007) 114 Table 18. Capital stock composition of MetroAgua S.A. E.S.P. (year 2000) 125 Table 19. Evolution of the Sanitation Service Coverage in Santa Marta 126 Table 20. Management indicators of the water supply and sanitation service in Santa Marta 128 Table 21. Population of the municipalities operated by TRIPLE A de Barranquilla 135 Table 22. Equity structure of AAA Atlántico S.A. E.S.P. 136 Table 23. Operator and Contracting Entity’s Main Contractual Obligations 138 Table 24. Most relevant indicators associated with service quality for the three municipalities (Barranquilla, Soledad, and Baranoa/Polo Nuevo) 143 Table 25. Aguas de Manizales S.A. E.S.P. Equity Structure 150 Table 26. Obligations Arising from the Concession Agreement 151 Table 27. Selected Relevant Contractual Aspects 165 Table 28. Investments of TUNJA Municipality from 1996 to 2005 176 Table 29. Investments of SERAQA TUNJA from 1996 to 2005 176 Table 30. Subsidies by stratum in Tunja, as approved by the Municipal Council for the year 179 Table 31. De�nition of the Variables 197 Table 32. Summary Statistics 198 Table 33. Mean and Median Analysis in Levels 200 Table 34. Mean and Median Analysis of Growth Rates 206 Table 35. Regression Analysis 216 Table 36. Summary of the Results 228 Table A1: Additional Analysis 231 Table A2: Regression Analysis 238 List of Figures Figure 1. Institutional Regulation and Control Scheme of the WSS Sector 35 Figure 2. Real Average Annual Variation of the Tariff (*) for Water and Sanitation 1998-2004 41 Figure 3. FINDETER Credit and SGP Transfers 48 Figure 4. Evolution of Number of Municipalities with PSP Operator (Year of Start of Operations) 59 Figure 5. PSP by Municipality Size and Stages of Entry and Corporate Modernization Program (PME) between 2000 and 2006 60 Figure 6. Comparison Between Produced and Billed Water in Cartagena 85 Figure 7. Evolution of Water Coverage in Cartagena 87 Figure 8. Evolution of Sanitation in Cartagena 87 Figure 9. Evolution of the Water Service Continuity in Cartagena (hours/day) 88 Figure 10. Increase in Water and Sanitation Subscribers in Cartagena per stratum 89 Figure 11. ACUACAR’s Tariff Evolution 91 Figure 12. Financial Performance of ACUACAR During 10 Years of Operations 91 Figure 13. Results of Investment in Water Production and Treatment in Marinilla and Santa Fe de Antioquia 102 Figure 14. Unaccounted for Water in Three Representative Municipalities of Antioquia 103 Figure 15. Results of Annual Survey of Customer Satisfaction with the Water and Sanitation System in Santa Fe de Antioquia and Marinilla 105 Figure 16. Evolution of Water System Average Bill for Stratum 4 in Marinilla and Santa Fe de Antioquia (1996-2006) 107 Figure 17. Financial Performance 108 Figure 18. Evolution of the Population with Water and Sanitation Services 115 Figure 19. Water Volume Produced and Billed during ACUAVIVA’s Management Term 116 Figure 20. Evolution of the leak repair indicator in Palmira, Valle del Cauca 117 Figure 21. Evolution of Requests, Complaints, and Claims in Palmira, Valle del Cauca 119 Figure 22. Evolution of ACUAVIVA’s Financial Performance over 10 Years of Operation and Management 120 Figure 23. Produced Water/Billed Water Ratio in the City of Santa Marta 127 Figure 24. Evolution of Water Supply Coverage in Santa Marta 129 Figure 25. Evolution of Sanitation Coverage in Santa Marta 129 Figure 26. Evolution of Sanitation Coverage in Santa Marta 130 Figure 27. Operator’s Tariff Evolution: AGBAR (1998 – 2000) and Canal de Isabel II (2001 – 2006) in Santa Marta 131 Figure 28. MetroAguas’ Financial Performance in Santa Marta (1998-2006) 131 Figure 29. Produced and Billed Water Ratio in the City of Barranquilla 139 Figure 30. Percentage of Unrecorded Water for Barranquilla and Soledad 140 Figure 31. Produced and Billed Water Ratio in Soledad 140 Figure 32. Evolution of Service Coverage in Barranquilla 144 Figure 33. Evolution of Service Coverage in Soledad 144 Figure 34. Evolution of Continuity of Service (hours/day) in Barranquilla, Soledad and Baranoa / Polonuevo 145 Figure 35. Tariff Evolution of Stratum 4 Average Water Bill in Barranquilla 146 Figure 36. Financial Performance 1996-2006, Triple A de Barranquilla (includes results of AAA Atlántico). 147 Figure 37. Evolution of Water and Sanitation Coverage 153 Figure 38. Difference between Produced and Billed Water Volumes 154 Figure 39. Variation of Unaccounted for Water Index 154 Figure 40. Investments in Loss Control 155 Figure 41. Evolution of Losses/Network Km. 156 Figure 42. Evolution of Losses/1000 Connections 156 Figure 43. Evolution of No. of Employees 157 Figure 44. No. of Employees / 1000 connections 158 Figure 45. Total Payroll Cost Variation 158 Figure 46. Variation of Water Tariffs 159 Figure 47. Financial Performance of Aguas de Manizales S.A. E.S.P. 160 Figure 48. Evolution of Collection Ef�ciency 161 Figure 49. Evolution of the Continuity Level in the City of Montería 166 Figure 50. Evolution of Number of Water System Connections in Montería 167 Figure 51. Production, Billing and Losses in Water Volume vis-à-vis Population in Montería 168 Figure 52. Extension and Replacement of Water Network in Montería 169 Figure 53. Number of Leaks Repaired in the Main Water Network 169 Figure 54. Level of Customer Satisfaction with the Provision of the Service by PROACTIVA in 2006 170 Figure 55. Financial Results of the Operations of PROACTIVA in Montería 171 Figure 56. Growth of Users while Maintaining the Water Treatment Volume (production) 177 Figure 57. Unaccounted for Water Index in Tunja 177 Figure 58. Evolution of the continuity factor in Tunja and water and sanitation coverage 178 Figure 59. Average Annual Bill in Tunja (1997 – 2006) 179 Figure 60. Operating Income and Costs of SERAQA TUNJA 180 Figure 61. Time line for transition from public to private participation 191 Figure 62. Estimation with and without �rm speci�c trend – Average number of water connections 193 Figure 63. WSS indicators 214 Executive Summary Infrastructure plays a key role in promoting economic growth and opportunities. In particular, the ef�cient provision of basic infrastructure services, like water and sanitation, is a key ingredient in fostering a country’s social and economic devel- opment. Previous studies have found that infrastructure has a positive impact on output, and can improve economic opportunity, including health and education for the poor, particularly in developing countries.1 In Argentina, a 2005 study2 found that child mortality fell by 8 percent in areas that had experienced im- proved coverage and quality of basic water and sanitation through utility reform, with most of the reduction occurring in low-income areas where the water net- work expanded the most3. More generally, Fay and Morrison4 found that allowing the poorest quintile in developing countries the same access to basic services as the richest quintile would reduce child mortality by 8% and child underdevelop- ment by 14%. Calderon and Serven5 also found a signi�cant positive impact of infrastructure access and quality on overall inequality6. 1 Andres, L., J. Guasch, T. Haven, and V. Foster. 2008. The Impact of Private Sector Participation in Infrastructure. Lights, Shadows and the Road Ahead. Washington DC. The World Bank. 2 Galiani, S., P. Gertler, and E. Schargrodsky. 2005. “Water Life: The Impact of the Privatization of Water Services on Child Mortality.� Journal of Political Economy 113 (February): 83-120. 3 Andres, et. Al (2008) 4 Fay, M. and M. Morrison. 2006. Infrastructure in Latin America and the Caribbean: Recent Devel- opments and Key Challenges. Washington DC. The World Bank. 5 Calderon, C. and L. Serven. 2004. “The Effects of Infrastructure Development on Growth and Income Distribution.� Policy Research Working Paper No 3401, World Bank, Washington DC. 6 Andres et. Al. (2008) 15 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Thus, providing access to quality water and sanitation infrastructure ser- vices is both a public health imperative and an essential step in increasing the quality of life for the poor. It is a critical step for ensuring a population’s hygiene, health, and overall well-being. The development of an accessible, ef�cient, quali- ty-driven, and sustainable basic water and sanitation sector has therefore become a priority for many countries’ development agendas. Given its importance, it is an area that should be guided by informed and well thought out policy decisions. While some countries in Europe have a long tradition of involving the pri- vate sector in the provision of public services, during the 1990’s an important shift took place in many developing nations in regard to the model of infrastruc- ture service provision7. New models, involving private sector participation in a va- riety of ways, was a result, on one hand, of governments realizing that the private sector could bring needed capital and management expertise to provide viable solutions to the problems posed by poor infrastructure services and, on the other hand, the a realization by private actors that investing in emerging economies could be commercially attractive8. In the Latin America and Caribbean region, this wave of reforms promoted a wide range of institutional approaches, from full blown privatizations, to con- cessions, to management arrangements of previously state-owned enterprises (SOEs). Both the implementation and success of these reforms have been uneven across sectors. While the telecommunication and electricity sectors have been broadly concessioned, private participation in the water supply and sanitation sector has been limited with less than 13 percent of households in the region being served by a private company in 2003.9 Colombia was no exception to this trend and, in fact, emerged as a leader in the development of innovative public-private solutions in the water and sani- tation sectors. Beginning in the mid-1990s, Colombia implemented a set of insti- tutional reforms in the sector that provided a framework for private participation in service provision. The main objectives of these reforms were to incorporate market economy elements as well as to strengthen the business capacities of the entities providing the services all in the name of delivering sustainable, quality services to Colombia’s underserved population. While Colombia has emerged as a fairly unique case in that it has a mix of successful public and private utilities, some with varying degrees of private sector participation, and also has a number 7 Andres, et. Al. (2008) 8 Andres, et. Al. (2008) 9 Andres et al (2008). 16 The World Bank Colombia Introduction of underperforming utilities (both public and private), two particular characteris- tics should be taken into consideration: The country has had a relatively scattered geographic and demographic de- velopment, with many intermediate size cities and small municipalities, as well as 7 large cities with over 500,000 inhabitants. There are over 1,100 mu- nicipalities in total, within the context of a unitary state but with high levels of political and administrative decentralization process. At the time of the major reforms in the sector, in large cities, and in some of the medium-sized urban areas, public companies provided water and sanita- tion services, while in the vast majority of the country, local administrations provided these services directly under a highly centralized institutional model with the National Government’s �nancial and technical support. The sector reforms of the 1990s in the water and sanitation sector in Co- lombia generated positive results, though clearly there remains work to be done. Through them the country was able to set up a signi�cant number of “Special- ized Operators� (the term used for commercially independent utilities established as public companies), public and private, national and foreign, who have been operating part of the water and sanitation systems with greater ef�ciency and improved management. In larger cities and in some smaller municipalities there has been signi�cant progress in terms of coverage and quality. The policy framework developed has been suf�ciently broad for the emer- gence and coexistence of several schemes of private participation, corporate devel- opment, and competition. These have made it possible, for example, to restructure some public companies at a municipal level so that they are more competitive today, using a range of private-public partnership instruments. This diversity also makes Colombia a special case, particularly in the Latin American context. Today, Colombia presents us with a nearly unique case of activities in the WSS sector. Currently, combining operations, concessions, and ownership, the private sec- tor is active in water and sanitation services of 139 municipalities, representing 35 percent of the urban population in the country. A group of 6 international specialized operators manages 21 municipalities while the remaining 118 are operated by small and medium national groups. More importantly, perhaps, is that unique feature of the Colombian experience – often overlooked – is that the government utilized the public- private tool as an instrument to address the more complicated cases, places in the country where traditional approaches had not succeeded. Cities with well developed and functioning public utilities (like Bogota or Medellin) were not the focus of the 17 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector government’s approach. Colombia has multiple examples of successful arrangements with the private sector in some of the most underdeveloped regions of the country. As a result of such diversity, the case of Colombia presented in this book serves as an example for successful reform and improvements in service provision for systems under very different initial conditions. It is rarely the case that a single country can present suf�cient observations to analyze and evaluate the different models for water provision. In general, and particularly in the Latin America and the Caribbean region, models for service provision are concentrated in perhaps a few private operators, and for the rest service provision is the responsibility of either larger public entities, municipalities or usually some combination of the two. The dif�culty of performing a cross country analysis is further intensi�ed by the lack of consistent data. Colombia serves as both an incubator and a labora- tory for different models and thus provides observation points necessary for a comparative analysis of performance. Consequently, Colombia serves as a unique microcosm that enriches the global debate about forms of water provision and provides successful experiences for a wide range of alternatives. By providing an analysis of the country’s experience, this book uses the Co- lombian case to illustrate how a series of well thought policy reforms that create incentives for ef�cient service providers, can radically transform the dynamics of a highly politicized and underdeveloped sector. We show that: The transformation of sector policies has led to a signi�cant number of municipalities in the country currently having specialized operators (be they public or private) for the water and sanitation systems. This process has led to greater ef�ciency and better management and to signi�cant improvements in coverage and quality of services. The historical account of the country’s institutional and regulatory framework within a broader decentralization process led to a fertile environment in which private participation materialized. The institutional reforms that Colombia under- took during the 1990s in the water supply and sanitation sector in its attempt to adopt elements of a market economy and more business-oriented practices in the provision of services led to a one-of-a-kind transformation in the water sector that may serve as an example for other developing countries. Moreover, the analysis highlights the importance of normative and regulatory processes in promoting private sector participation. The process has led to greater ef�ciency and better management and to signi�cant improvements in coverage and quality 18 The World Bank Colombia Introduction of services. Additionally, while much work remains to be done, new resources for investment in the sector became available through the establishment of tariff methodologies and increased transfers to municipalities. Currently the country has a framework of laws, regulations, and sector policy that has stimulated the generation of reliable information for the sector, which de�nes the setting of tariffs for services based on their production costs, sending adequate signals to rationalize consumption, with positive environmental impacts, and making it possible to program the extension of systems’ capacities with ef�ciency criteria. There is no unique model to improve service provision through private participation. Different initial condition, call for different choices and solutions to service provision. By providing a more nuanced view of private participation through the discussion of eight case studies, we illustrate how private sector participation occurred and more importantly, highlight the lessons learned from each. Chapter Two provides a more tangible and speci�c account of the Colombian experience with respect to the different approaches to private sector participation in the water sector. For instance, the case studies show that policies promoting private sector participation in the provision of public services should carefully consider relevant economic, po- litical, and social factors. Each case study depicts a particular set of lessons learned, which we hope will trigger a discussion on effective ways to promote institutional reform sector participation in other countries and regions. A few conclusions men- tioned in this section include the importance of the collaboration between state and private entities in order to achieve optimum ef�ciency indexes, the role of in- stitutional, regulatory, and legal frameworks in ensuring transparent private sector participation, and the impact of effective management and operational practices in the communities of bene�ciaries on the development of a regional process. Private sector participation is associated with higher levels of output, employment, ef�ciency, labor productivity, quality and coverage after the transition period. Number of connections, coverage, and percent of non-billed water and labor productivity also show signi�cant changes in levels between the public and the transition periods. This observation indicates that pre-private reforms were effective in WSS in Colombia. We present an empirical analysis of private participation in the water and san- itation sector in Colombia. This section measures the effects of private sector 19 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector participation from the perspective of both consumers and �rms through a sys- tematic methodology that combines operational indicators such as output, input, ef�ciency, quality, coverage, and prices with �nancial indicators such as operational costs and revenues. The chapter begins with a literature review of private sector participation and builds upon the already established methodologies to perform a systematic analysis of effectiveness based on a set of reliable performance in- dicators. In doing so, it assesses private participation processes in three different phases: (i) solely public participation prior to PSP; (ii) transition between public and private; and (iii) private participation period, using the utility’s initial performance as “counterfactual� to evaluate the interventions that followed. The analysis presents short- and long-term results, as well as growth rates of each indicator in an attempt to isolate and measure the effect of each inter- vention. The analysis also evaluates the introduction of private participation at the local level, mindful of the fact that such arrangements within utilities evolve over time, often extending to different municipalities. Finally, based on a sample of 118 cities representing a total of 77 utilities that experienced some form of private intervention between 1995 and 2006, we show that private participation is associated, overall, with higher levels of output, productivity, ef�ciency, and quality of services. More signi�cantly, we demonstrate that the Colombian case counter-argues previous studies on private sector participation which concluded that private intervention results in fewer jobs. The Colombian case is a valuable tool to identify the necessary elements for effective public-private partnerships which lead to improved basic services. In this sense, Colombia can provide policy makers with a reference point with which to evaluate their plans and policy recommendations in the water and sani- tation sector. In any case, it is important to mention that the process of private participation in Colombia, as in any other country, is far from being homogenous across utilities and across municipalities. We recommend that an assessment of the bene�ts and drawbacks of private participation should seriously take into ac- count the circumstances at the regional and local level. Furthermore, the book sheds some light on how to address the main challenge for the future which may be to attract specialized operators to the smaller munici- palities which do not currently have them. For that purpose in Colombia, for example, over the last two years, the policy framework has been focused on promoting the sector’s development, by using the departments as the intermediate institutional level between the National Government and the municipalities, to formulate programs with regional impact and promote comprehensive investment plans. 20 The World Bank Colombia Introduction 1 Institutional Reforms in the Water Supply and Sanitation Sector in Colombia .Scott Wallace. The World Bank 21 I n the 1990s Colombia implemented a series of institutional reforms in the wa- ter supply and sanitation (WSS) sector, reforms which were primarily designed to incorporate market economy elements and which tended to strengthen the business development of the entities providing services. Overall, though far from complete, the implemented reforms should be considered successful. For that reason, the main purpose of this chapter is to share and disseminate the lessons learned by describing the institutional reforms which took place in Colombia, with special emphasis on the norms, regulations, �nancial mechanisms, and sector policies that have made it possible to markedly inprove the coverage and quality of basic servises to Colombia’s population. The chapter �rst presents the background and context associated with the reforms and includes considerations of the sector model applied in the country for most of the 20th century. Second, the chapter describes the institutional situ- ation as de�ned by the Political Constitution of 1991 and lists the main mecha- nisms and rules that regulated it and generated the intervention model currently existing in the sector. Third, it continues with a description of the WSS sector in Colombia and the main policies to promote partnerships with specialized opera- tors, public and private, with a special emphasis on the National Government’s Corporate Modernization Program (Programa de Modernización Empresarial, PME). Finally, as a conclusion and summary, the last section briefly sets forth the main sector achievements of the reform, and de�nes some actions wich policy makes might wich to consider. 23 Jonathan French. The World Bank 1.1. Background and Context of the Sector Reforms During the 1990s, Colombia implemented a set of institutional reforms in the WSS sector. The main purposes of these reforms were to incorporate market economy elements as well as to strengthen the business capabilities of the entities providing services. At the time when these reforms were implemented, Colombia’s sector pre- sented two particular characteristics that need to be taken into consideration: - ment, with many intermediate size cities and small municipalities, as well as 7 large cities with over 500,000 inhabitants. There were 1,122 municipalities in total, under a non-federal state organization that was moving towards a political and administrative decentralization process which would become consolidated in institutional terms with the 1991 Constitution. - panies providing water and sanitation services and in the rest of the mu- nicipalities – the majority of the country – local administrations provided these services directly under a highly centralized institutional model with the National Government’s �nancial and technical support. Generally speaking, the quality and coverage of service provision were poor. Smaller municipalities had lower coverage and rural areas were signi�cantly underrepresented (Table 1). As urbanization intensi�ed, and investment was con- centrated in urban areas in order to sustain or increase urban coverage, smaller and rural municipalities in general, lagged. 24 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia In many of the country’s important cities, the poor provision of water and sanitation services was critical and although municipal entities made progress in terms of coverage, they faced a �nancial de�cit that caused some to become effec- tively insolvent. These companies also presented de�cient indicators with respect to management, pointing towards administrative inef�ciencies in their processes.10 Table 1. Coverage in 1993 Municipalities Number of Water Coverage (%) Coverage of Sanitation Population Range Municipalities System Total Urban Rural Total Urban Rural >500,000 7 96.9 97.5 64.8 88.1 89.0 44.4 100,000 – 500,000 48 88.8 94.9 47.5 75.9 84.1 19.7 50,000 – 100,000 55 78.2 92.3 44.1 56.3 72.9 15.9 25,000 – 50,000 148 63.5 88.7 38.9 41.4 68.5 14.8 <25,000 inhabit. 841 56.5 89.9 39.1 31.0 67.8 11.8 Source: DANE, 1993 census. The low tariffs and poor physical metering of water (through domestic and bulk water meters) in the country were reflected not only in the low �nan- cial sustainability service providers, lagging investments and poor operation of the systems, but also in the high consumption11 together with high indexes of unaccounted for water, resulting in a condition of sector inef�ciency that in the literature is referred to as “low level equilibrium�. The National Government’s intervention model in the development of the sector, which prevailed during most of the 20th century, reached its pinnacle with the creation of the Municipal Promotion Fund in 1940, which increased and centralized the resources assigned to the municipalities and Departments with the aim of facilitating municipalities’ access to credit under favorable conditions. A sign of the growing intervention of the Central Government was seen when the Municipal Promotion Fund was turned into the Municipal Development Institute (INSFOPAL) in 1950 under the Promotion Ministry which later became 10 In 1993 the Bogota Water and Sewer Company (EAAB) went through a �nancial crisis; the companies of Cali (Emcali) and Cúcuta would end up being taking over by the Superintendence of Public Housing Services (SSPD); in cities like Cartagena, Barranquilla, Santa Marta, Florencia and Riohacha the companies would be wound down to open the road to private operators; and others would be restructured with some private participation as in Pereira and Manizales. 11 High consumption was illustrated by the signi�cant decrease observed once the tariff formulas were applied and the tariffs were increased. 25 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector the Ministry of Development. The main function of INSFOPAL was to �nance and carry out water, sanitation, and public waste management projects. Local institutions were strengthened by the constitutional reform of 1954, when the creation of agencies as legal entities was authorized, along with an inde- pendent budget and their own labor and administrative regimes. This made it possible, in some cases, to turn entities into “decentralized institutions� at the municipal level, as is the case of the current water and sanitation companies in large cities such as Bogotá, Medellín, and Cali. At that time, two different systems began operating in the country: the municipal companies in medium and large cities – decentralized from the local government – and those managed directly by the National Government through INSFOPAL, which carried out tasks in the areas of �nance, planning, design, construction, operation, maintenance, and management of water and basic sanitation services in municipalities with less capacity to manage their own companies. Within the framework of the Constitutional Reform of 1968, INSFOPAL was transferred to the Ministry of Health, with the intention of recovering local man- agement and for the �rst time, promoting the provision of services with market criteria in municipalities with more than 2,500 inhabitants. Smaller municipalities would be the responsibility of the Ministry of Health, through the National Health Institute. Additionally, the National Board for Public Service Tariffs was created with the objective of recovering investment, operation, maintenance, and expan- sion of the services through tariffs, as well as the policy of favoring the poor through cross subsidies by charging tariffs above costs to commercial and indus- trial users and below cost to residential users in lower socioeconomic brackets. In 1974, departmental companies (ACUAs) and some municipal ones (Empresas de Obras Sanitarias, EMPOs) were created as branches of INSFOPAL with the purpose of improving the low institutional quality to address the de�cit in coverage. These reforms did not generate the expected results; approaches adminis- trative systems did not reach the market objectives, the tariff system fell far short of achieving the cost structure of the companies, and, among other reasons, be- cause of clientelistic practices more focused on electoral results than on technical and administrative considerations.12 The �nancial dif�culties and poor results of the INSFOPAL model led to its dissolution in 1987.13 12 CRA (2002). 13 The coverage in water and sanitation achieved by the INSFOPAL and its 40 branches was lower when compared to the coverage by the state commercial companies at the municipal level. (Betancurt, L. et al. (1985); quoted in CRA [2002]). 26 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia The sector’s �nancing responsibility was shifted to the Finance Fund for Urban Development, managed by the Central Mortgage Bank, following the rec- ommendation of the World Bank. As a prerequisite for loans to the sector, the new approach required radical transformations aimed at the elimination of the allocation of resources without counterpart funding and non-reimbursable cred- its, and the imposition of conditions relating to improvements in the technical and administrative management of the service providers. In addition, the Na- tional Government started to transfer regional branches (EMPOs and ACUAs) to the Departments and delegated responsibilities to the municipalities, which then would be in charge of implementing and operating the services. To that end, the National Government transferred the assets without change and provided subsi- dized credits to �nance debt. This transfer process was only effective in the larger and more sophisticated municipalities: Medellín, Cali, Bogotá, and Manizales. Co- ordination, planning and technical assistance functions were transferred to the Water and Sanitation Directorate of the Ministry of Public Works and Transport. Once INSFOPAL was dismantled, the sector entered a transition stage until 1994, when the National Planning Department (DNP) was assigned the func- tion of planning and technical assistance for the sector. This would supplement FINDETER (created in 1989), an entity reporting to the Ministry of Finance which replaced the Finance Fund for Urban Development. 27 Marcela Godoy. Creative Commons 1.2. The Sector’s New Institutional Model The inclusion of �nanced sustainability elements in the WSS sector, intended to strengthen business development and to improve the sector’s ef�ciency, took place within the framework of an international trend of institutional changes that took a �rm hold in Latin America. This framework applied two fundamen- tal principles14: (i) the de�nition of a legal and regulatory framework, as well as the design and creation of the institutions in charge of enforcing them, which would precede the process of corporate modernization and, in some cases, pri- vate participation; and (ii) the separation of the policy-making functions for the development of the sector from those concerning service operation. This latter differentiation represented a major institutional achievement and remains a core tenant of the government policy. . Within the context of the region, Colombia moved forward plataform impressively in these two areas. 1.2.1. Overview of Reforms The 1991 Constitution de�ned a model of greater decentralization for the pro- vision of services and promoted a shift from an approach based on the direct provision of services by the government to one where the supply is carried out by public or private companies. This new system, in turn, was positioned within an institutional framework based on the division of functions between the national government, in charge of formulating the sector’s policy, enforcing rules and 14 CEPAL (1999). 28 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia oversight, and municipalities, responsible for ensuring an ef�cient supply of the services. General rules for the participation of the private sector in the economy were also formulated at the constitutional level. This constitutional framework de�ned speci�c rules to promote the busi- ness development of the sector. Those rules resulted from the passing of Law 142 in 1994, establishing the Residential Public Services Regime in the coun- try. This law established a general framework to transform regulation, control and oversight and to strengthen the spirit of decentralization embodied in the constitution which consolidating service provider companies through business modernization policies and tariff methodologies. These measures focused on re- covering economic costs, promoting private participation in the sector, increasing ef�ciency, and increasing competition, while preserving state intervention tools in accordance with its social aims. Box 1. WSS Public Services in the Political Constitution of 1991 Section 333.- Economic activity and private initiative are free, within the limits of com- mon good. […] Free economic competition is a right enjoyed by everybody which implies responsibilities. Companies, as the basis for development, have a social function which implies responsibilities. The state will strengthen the solidarity-based organizations and will stimulate business development. The state, as mandated by law, will prevent the obstructions or restrictions to economic freedom and will prevent or control any abuse by companies or individuals of their dominant position in the domestic market […]. Section 365.- Public services are inherent to the social purpose of the state. It is the state’s duty to ensure their ef�cient provision to all the inhabitants of the national ter- ritory. Public services will be governed by rules dictated by law. They may be provided by the state, directly or indirectly, by organized communities or by private individuals. In all cases the state will regulate, control and supervise those services. […]. Section 366.- The wellbeing of the population and improvement of its quality of life are the social purpose of the state. The basic goal of the state’s activity will be to solve the unmet health, education, environmental sanitation and water supply needs. To that end, public social expenses will have priority over any other allocation in the plans and budgets of the Nation and the territorial entities. Section 367.- The law will de�ne the competences and responsibilities pertaining to the provision of residential public services, their coverage, quality, �nancing and tariff scheme which will consider, in addition to cost criteria, those of solidarity and income redistribution. […] The law will determine the entities with powers to set the tariffs. 29 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Section 368.- The Nation, Departments, districts, municipalities and decentralized enti- ties may grant subsidies, within their own budgets, so that people with lower incomes can pay the tariffs of residential public services covering their basic needs. Section 369.- The law will de�ne the duties and rights of users, the system for their protection and the way in which they will participate in the management and oversight of the state companies providing the service. It will also de�ne the participation of the municipalities or their representatives in the entities and companies providing them with residential public services. Section 370.- The President of the Republic will be responsible for de�ning, according to the law, the general policies for the management and ef�ciency control of residential public services and through the Superintendence of Residential Public Services, for in- specting and supervising the entities providing the services. In addition, Law 142 of 1994 established an independent regulator, the Com- mission for the Regulation of Water Supply and Sanitation (Comisión de Regulación de Agua Potable y Saneamiento Básico, CRA), allocated competencies to or different levels of Government, and clearly de�ned the legal nature of the institutions and entities that would be allowed to provide public services: public service companies (ESPs), set up as public companies under commercial law. The law mandated that all residential public service companies convert to stock companies before July 11, 1996, with the possibility of being state-owned, private, or mixed. In July 1996, a law was passed extending for 18 months the deadline for the transformation of the entities, until December 1997. The law also de�ned some exceptions concerning in- dustrial and commercial companies at the municipal level, which to that point, had been providing public services and could be turned into ESPs without being required to become stock companies. Additionally, it authorized the creation of community organizations in rural areas and in some speci�c urban areas. The requirements of this law opened the opportunity for private participation in the sector. The issuance of the �rst tariff methodologies by the CRA in 1995 repre- sented one of the main structural and operational reforms in the sector.15 These methodologies made it possible to recognize the economic cost of providing the service through tariffs. Their application required the generation of reliable 15 CRA Resolutions 08 and 09 of 1995. 30 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia technical and economic information that did not exist in the sector, which in turn become an important tool for regulation and control. One highly relevant element is that the technical application of the meth- odologies partially isolated the de�nition of the tariffs from the country’s politi- cal context, something which created an opportunity for �nancial strengthening of companies. This process was reinforced when the approach of demand-base cross subsidies was rationalized through a “tariff transition� process whereby the percent subsidized was reduced with the imposition of maximum caps. This regulatory framework was complemented by Law 60 of 1993 and Law 715 of 2001 – the General Revenue-Sharing System (Sistema General de Participa- ciones, SGP), a tax-sharing system which determined the distribution of the resources that the national government is required to transfer to the municipal entities, part of which is allocated directly to the WSS sector. In this way, the decentralization of the responsibility of providing the population with access to services was accompanied by a signi�cant increase in the resources assigned to the sector in the form of transfers. Under this institutional and regulatory context, the national government im- plemented an active policy to foster the development of private sector participation which can be divided into three stages: (i) in the �rst half of the 1990s the national government supported the structuring of partnerships with specialized operators in a small number of municipalities where the service provision was critical; (ii) by the mid 1990s the National Government formulated an explicit policy for private partici- pation and set up a Private Participation Management Area in the National Planning Department (Departamento Nacional de Planeación, DNP), with the aim of organizing a broader and more solid program which would standardize the parameters for the participation of the national government in this type of operation (as well as in other sectors); and (iii) in 1998, the area of WSS of the Private Participation Management Area of the DNP was eliminated and the Corporate Modernization Program (PME) was set up in the Ministry of Economic Development, thus adjusting the institutional framework of the sector to take ownership of the policies directed at its promotion.16 The regulatory framework developed was comprehensive enough for the co- existence of different schemes for private participation, business development and competition. The following aspects of the policy are worth highlighting: (i) freedom to enter the market (market competition); (ii) municipality/ESP agreements under dif- ferent schemes (operation, operation with investment, constrution and operator); (iii) partnership schemes; (iv) outsourcing of processes with private participation (an ap- proach used in Bogotá); and (v) community organizations. 16 DNP (1997). 31 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Box 2. The Planes Departamentales de Agua Despite steps taken to incentivize greater private sector participation, attain econo- mies of scale, and achieve greater regional integration through PME and other reforms, in 2008 MAVDT took an additional step in this direction through the introduction of Planes Departamentales de Agua y Saneamiento (Departmental Plans for Water and Sanitation) with the goal of realizing greater economies of scale and less fragmenta- tion of resources. With the ultimate goal of improving water and sewage coverage, quality, and ef- �ciency of provision of service, the Planes Departamentales are designed speci�cally for the conditions in each individual Department and focus on four key elements: (i) coordinating agents from all levels, from municipal through national, to improve coordination and provide technical assistance expertise at the departmental level; (ii) transforming the business environment within the sector, thereby improving le- gitimacy, �nancial viability of the providers, and the transparent application of cross subsidies within the solidarity framework; (iii) incentivizing greater regional manage- ment of water and sanitation services, thereby achieving greater economies of scale and regional agreement on the use of �nancial resources to the greatest bene�t of the end user; and (iv) creating conditions for the entrance of specialized operators and allowing users to bene�t from reduced costs. Resources for the Planes Depatamentales are jointly contributed by the Department, the municipalities, the Regional Autonomous Corporations (Corporaciones Autónomas Re- gionales, CARs), occasionally by multilateral institutions, and the majority coming from the National Government through SGP transfers. Once an agreement is signed between the Department and MAVDT, the funds are held within a trust fund, or Patrimonio Au- tónomo, in distinct accounts, until they are assigned to a speci�c end purpose whereupon they are transferred directly to contractors or utilities. The key elements of this framework are that: (i) the Department plays a greater role in managing an interinstitutional, regional approach to the provision of water and sanitation services; (ii) once committed to the Pat- rimonio Autónomo, a standalone legal entity, funds cannot be withdrawn for other uses – critical for the long-term viability of service provision and investment, especially with changes in local political leadership; and (iii) funds are sent directly to the contractors or ESPsfor speci�c works rather than through the departmental or municipal governments. Municipalities which participate in the Planes Departamentales have priority access to ad- ditional national and departmental funding, releasing municipal resources for other uses. As of June, 2009, 691 water projects totaling COP$1.7 trillion (US$8 million in 2009) are underway within the framework of Planes Departamentales.17 A report by Unión Temporal Centro Nacional de Consultoría-ECONOSUL found that 80% of municipalities believed that 17 Secretaria de Prensa, Presidencia de la República de Colombia, May 29, 2009. http://web.presi- dencia.gov.co/sp/2009/mayo/29/12292009.html. 32 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Planes Departamentales would have a positive or very positive effect on improving delivery of services and access to resources. The majority of municipalities (61%) planned to take part in the framework, or have already implemented a Plan Departamental. Only 2% of munici- palities did not plan to take part in the framework.18 1.2.2. Institutional Organization of the Sector, Regulation, and Control Since 1994 Colombia has developed a scheme of “multi-regulators� with compe- tencies scattered in different entities and territorial levels under a decentralized structure for the provision of services. This structure demands a high level of inter-institutional coordination and clear policies to avoid conflicts in environ- mental, technical, water quality and tariff objectives. The Ministry of Environment, Housing and Territorial Development (Minis- terio de Ambiente, Vivienda y Desarrollo Territorial, MAVDT) implements the sector policies and national government’s programs, promotes the ef�cient management of the service providers, and de�nes the technical rules for the sector. The Ministry of Social Protection, together with the MAVDT, de�nes the minimum quality pa- rameters for water supply and supervises them through its health of�ces. Likewise, departments, through their Health Secretariats, carry out water quality tests in their municipalities, and the Superintendency of Residential Public Services (Superinten- dencia de Servicios Públicos Domiciliarios, SSPD), in its role as service provider over- seer, takes part in monitoring compliance with these parameters. In addition, the autonomous regional corporations, as environmental control entities at a regional level, implement environmental plans and programs and renew- able natural resource conservation plans. They de�ne the quality goals for the wa- tersheds within their area through the Watershed Administration and Management Plans (Planes de Ordenamiento de Manejo de Cuencas Hidrográ�cas, POMCA), grant water concessions and de�ne and manage – following MADVT rules – the retribution and compensation fees for water usage. Within the framework of the POMCA, sanita- tion companies, in turn, develop “Sanitation and Wastewater Discharge Management Plans� (Plan de Saneamiento y Manejo de Vertimientos, PSMV) that must be approved by the corresponding environmental authority. 18 Unión Temporal CNC – ECONOSUL (2009). 33 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector It is important to note and make clear that the functions of oversight, in- spection, and control of service providers assigned to the SSPD are institutionally separate from the economic regulation function carried out by the President of the Republic and delegated to the Commission for the Regulation of Water Supply and Sanitation (Comisión de Regulación de Agua Potable y Saneamiento Básico, CRA). While the CRA issues general rules on matters like tariff methodologies, de�nition of quality parameters in the provision of services, methodologies to evaluate man- agement, and ef�ciency of the providers and regulation of monopolies and markets in general, the SSPD supervises the adequate application of the aforementioned rules by the providers and manages the sector’s Uni�ed Information System. The CRA is a special administrative unit, with technical autonomy, attached to the MAVDT.19 The Commission, as regulatory decision maker, is made up of four full time Commissioned Experts, appointed by the President of the Republic for de�ned periods with staggered end dates, and by three ministers: the Minister of Environment, Housing, and Urban Development (the chairman), the Social Pro- tection Minister, and the Director of the National Planning Department.20 The Superintendant of Residential Public Services also sits on the Commission, but has no vote and decisions are made by majority vote. In this sense, the regulatory decisions of the Commission occur within a framework of limited independence. The arguments in favor of independent regulatory institutions prevail in the international debate. In the case of Colombia, experience has shown both positive and negative aspects of a “relative independence� scheme. On the one hand, the presence of the National Government through the participation of the ministers has guaranteed a high degree of coordination of the regulation with sector policy and with different normative developments. In fact, it could be said that the staged regulatory development of the sector has been the result of such an approach. On the other hand, the mixed system of the Commission has gener- ated a perception of suf�cient independence to dilute the political impact of the signi�cant tariff increases experienced by most users in the country that took place between 1996 and 2005. By the mid 1990s, and even today, it was usual to �nd legislative initiatives in Congress to reduce the independence of the Com- mission or even eliminate it, as well as political control subpoenas, not only for ministers but also for the Executive Of�cer of the CRA, situations which in most cases result from the contemporary political circumstances of the country. 19 The CRA does not have budgetary autonomy. 20 The Ministers can delegate their participation on the Vice Ministers. 34 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Figure 1. Institutional Regulation and Control Scheme of the WSS Sector INSTITUTIONS FUNCTIONS Policies design and implementation President of the Republic Follow up and evaluation of sector investment, technical Ministry of National Social assistance Environment Planning Protection Ministry Housing and Urban Department Ministry of Economy (1) Encironmental Regulation Development (1) (2)Water quality Regulation National Level Financing and support for access to credit Generating information for IDEAM FINDETER natural resources management and support to SINA Drinking Water and Basic Regulation of monopolies, Sanitation Regulatory Superintendence of Residential tariffs and market Commission Public Services Control and supervision of public services provision Regional Level Territorial Boards Development and control of environmental, pollution and use of water resourses policies Regional Autonomous and regulation Corporations Health Offices Water quality control Technical assistance, Water Departmental Units / Departments regional scheme definition, co-funding Local Level Municipalities Ensuring the effcient provision of the service Public Service Companies (Public, Pivate, Mixed) Autorized Community Organizations Source: DNP (2005) The municipalities and the National Congress have a “residual regulation� capacity on tariff issues. On the one hand, municipalities, at the time of assigning the services to an operator through a bidding process, can arrange a “contract� tariff as long as this has been part of the selection criteria in the process. The mayors and the municipal council are in charge of establishing the subsidies and “solidarity� contributions, according to the strata of the users (which in Colom- bia are de�ned by a range of one to six, with one being the poorest), within the municipal budget process and in accordance with the resources available. On the other hand, the maximum percentage of subsidies granted to low strata users are de�ned by law and can only be modi�ed by the National Congress. For example, the “tariff transition�, which adjusted subsidies up to the maximum level, was intended to end by December 2001, but the term was extended by National Law 35 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector until December 2005. In addition, the maximum subsidy for users in stratum one, which Law 142 of 1994 had established at 50 percent, was increased to 70 per- cent by Law 812 of 2003 (National Development Plan 2003-2006). The division of labor of the sector’s regulation and control in Colombia is a special case within the context of Latin America. As can be seen in Table 2, in other countries, supervision is carried out by the regulator, which in some cases is at the national level – as in Colombia – while in other cases (particularly in federal systems) it is at the provincial level. Furthermore, the application of tariff meth- odologies issued by the regulators, the approval of tariffs, and the opportunities for appeal, correspond to different institutions in the different countries. Table 2. Institutional Responsibility for the Application of the Tariff Methodology Country / Regulator Institutional Responsibility City Application Approval Appeal Supervision Argentina Province of ETOSS Provider Regulator Water Resources Regulator Buenos Aires Undersecretariat Province of ERSEP Provider Executive Provincial Regulator Cordoba Government Bolivia SISAB Provider Regulator Supreme Regulator Court General Superintendent Brazil Regulator Ceara ARCE Provider Municipality ---------- Pernambuco ARPE Regulator Regulator None Regulator Sao Paulo None Provider Provider Provider Provider Chile SISS Provider Regulator Arbitration Regulator Colombia CRA Regulator Municipality Administrative SSPD Jurisdiction Costa Rica ARESEP Regulator Regulator Administrative Regulator Jurisdiction Nicaragua INAA Regulator Regulator Arbitration Regulator Panama ERSP Regulator Regulator None ---------- Paraguay ERSSAN Regulator Executive None Regulator Peru SUNASS Regulator Municipality Administrative Regulator Jurisdiction Uruguay URSEA Regulator Executive Administrative ---------- Jurisdiction Source: Fernández (2006) 36 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Coordination within the WSS sector remains complex. The sector is highly decentralized, and the National Government allocates responsibility for the ser- vice and transfers resources to the municipal level, further enforcing the scattered sector structure and incomplete process of utility transformation. In spite of the signi�cant progress, nearly half of the country’s 1,122 municipalities continue to provide the services directly and not through ESPs as mandated by Law. Bearing in mind the main objective of creating a more consolidated sec- tor with ef�cient companies, where a better use of economies of scale is made through regional schemes for the provision of services, it should be noted that the country’s arrangements to regulate the structure of the industry are fragmented. Additionally, this structure results not only from regulation of the business de- velopment policy of the National Government, but also from the application of control by the SSPD, which affect the policy decisions that the municipalities and departments may adopt. Though CRA has the functions of merging or dividing companies when it considers that this is technically appropriate, and of ordering the liquidation of inef�cient public providers, it has not developed the general rules to put these func- tions into practice. The SSPD, on the other hand, has the power to place providers, in receivership, in order to administrate or liquidate them. At the same time, the MAVDT has been promoting business modernization with technical and �nancial support to the municipalities in what are usually complex and long processes that require the consolidation of a local political consensus involving the mayor, the mu- nicipal council and the community. The mayor has to request municipal council for the approval of powers to hand over the provision of the services to a third party or to create a regional company together with other municipalities, as well as to com- mit future budgetary resources to guarantee the �nancial success of the projects. With respect to control functions, the SSPD is in charge of the inspec- tion and oversight of the entities that provide public services. The following are some of its functions: (i) controlling and evaluating the enforcement of the law’s regulatory framework and in the rules issued by the regulatory commissions; (ii) supervising and controlling compliance with the law and administrative acts, to the extent that their compliance (or non compliance) affects particular users di- rectly and immediately; (iii) penalizing violations; (iv) overseeing and controlling compliance with agreements between public service companies and their users; (v) establishing consistent information and accounting systems; (vi) overseeing the use of subsidies which are mandatory for low income users; and (vii) evaluat- ing companies’ �nancial, technical, and administrative management. 37 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector While the control of utility companies is vested in the SSPD, the Constitu- tion of 1991 and Law 142 of 1994 emphasize the participation of users in the management and oversight of the companies. Such participation is embodied in Social Development and Control Committees. These can propose programs to solve failures in service delivery, request modi�cations in the decisions concern- ing strati�cation, and collaborate in general with the Superintendence of Resi- dential Public Services in the oversight of each company’s management. Moreover, the presence of public �nancing sources and of state companies in the sector causes the auditing agencies of the public sector to play a fundamen- tal role in the sector’s control. In recent years, due to the concern regarding an inef- �cient use of the resources transferred by the central government to municipalities through the General Revenue-Sharing System (Sistema General de Participaciones, SGP) and the limited responsibility of the SSPD in controlling the municipalities as territorial entities, the Public Prosecutor’s Of�ce (Procuraduría General de la Nación, PGN) and the Of�ce of the Comptroller General of the Republic (Contraloría General de la República) have been more actively involved. In 2006, the Inter-Institutional Board of Achievements (Mesa Interinstitucional de Logros) was created in the WSS sector under the leadership of the PGN with the participation of the various regula- tory and control agencies. This Inter-Institutional Board has been exercising a com- prehensive control of the departmental improvement plans, with special emphasis both in business modernization and the adequate use of public resources. This institutional framework reflects the evolution of the role played by the state in the development of the sector. This role targets the strengthening of regulatory and control institutions, focused not so much on the isolated de�ni- tion of tariff schemes as on seeking ef�ciency in the provision of the services, improvements in productivity, coverage, and quality, introducing market criteria, eliminating barriers for competition, and preventing the abuse of dominant posi- tions and discriminatory or unfair practices. 1.2.3. Development of Regulation within the Framework of the Reforms The analysis of the Regulatory Framework of the WSS sector must take into ac- count its context, in particular during the �rst half of the 1990s. At the time, there was little consistency in the accounting of the companies and municipalities which provided services directly. That made it practically impossible to have any certainty concerning the cost of service supply. Moreover, there was no culture of assessment of the assets and the information available on the condition of the infrastructure 38 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia was very limited. This made it quite dif�cult to develop an initial regulatory ap- proach for asset replacement. Another fundamental aspect was recognizing the poor �nancial situation of most service suppliers as a result of inef�ciency and poor business management. The combination of these factors motivated the gradual development of regu- lation starting in 1995 (see Table 3). The paucity of available information and its poor quality made it almost impossible to demand a completely transparent cost allocation or to apply comparative ef�ciency criteria. Additionally, because of their weak �nan- cial situation, utilities were not able to meet the ef�ciency requirements in the short term, but rather made it necessary to move gradually towards their achievement. Table 3. Evolution of the Regulatory Framework First Stage Second Stage Third Stage (1995-2003) (2004-2008) (2009 onwards) Focus Financial Ef�ciency in Ef�ciency in strengthening of administration the investment providers and operation component components Service quality Transparency in the Structure regulation investment component Targeted subsidies Instruments Tariff methodologies Tariff methodology: to reduce the gap comparative Tariff regulation: between tariffs and ef�ciency parameters introduction of costs of service supply for management and criteria for investment Methodologies for operation costs component. plans and evaluation Replacement of assets Rules on “quality, of management and plans instead of value discounts, repairs� results of new ones Development of Explicit de�nitions regulation for mergers of useful life and and liquidation of infrastructure inef�cient public components providers Results Rational consumption Higher ef�ciency of Improved economies Improved coverage companies of scale and quality Improvements in Coverage Generation of sector quality and coverage consolidation information Consolidation of Improvement in a Uni�ed Information wider set of quality System indicators Business modernization throughout the country Source: DNP (2007), “Bases del Plan Nacional de Desarrollo 2007-2010� (Basis for the 2007-2010 National Development Plan). 39 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector As mentioned above, in a �rst stage, the tariff methodologies issued by the CRA in 1995 focused on standardizing basic accounting processes. This included forcing the providers to organize their accounting and de�ne a “reference cost� for the provision of the service, based on the accounting information on the operation and administration expenses of each company, as well as on the submittal of an expansion investment plan and an asset replacement value based on their “brand new value�. In this way, the �nancial recovery of many providers was prioritized, as well as the generation of sector information, along with improving management, coverage, and quality of services. Additionally, the increase in tariffs – which were too low at the time the methodologies were applied – generated price signals that were economically more ef�cient and resulted in signi�cant decreases in consump- tion.21 In addition to this positive environmental impact, the decrease in consump- tion made it possible to postpone investments in expanding the capacity of the systems, thus limiting the cost increase of the service for all users. The second regulatory stage began with the tariff methodologies issued in 22 2004. These were more demanding in terms of ef�ciency and more transparent with regards to cost allocation, in order to make it easier to control the implemen- tation of the investments. The administrative cost (�xed charge) and the operation cost were limited in the new methodologies with an ef�ciency parameter resulting from the estimate of a comparative ef�ciency model with information from the ex- isting companies. An expansion investment plan is laid out as in the previous meth- odology and, instead of calculating the value of new assets, the companies must submit a replacement plan for a �nite period (See Box 2). The process of �nancial strengthening and generation of information that resulted from the �rst regulatory stage was expected to make it possible for the companies to respond adequately to the higher ef�ciency demands and to optimize their investments. The application of the comparative ef�ciency model across companies has had, overall, a positive impact. The model has led to reductions in the admin- istrative and operation costs that are passed through to the tariff and to im- provements in the quantity and quality of information reported by companies, including greater accuracy and consistent criteria for the accounting of expenses and the assessment of technical and commercial variables. In addition, the as- sessment of relative ef�ciency scores has generated a competitive environment, as companies do not want the recognition of their expenses as passed through to the tariff reduced, nor the negative impact on their reputation among users that 21 �ngel, J. and Rozo, J. (2002), compiled the information on consumption by stratum, showing signi�- cant reductions between 1997 and 2002, and estimated price-demand elasticities of around -0.24. 22 Resolution CRA 287 of 2004. 40 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia would result from the disclosure that they are not as ef�cient as other companies in the country. Figure 2. Real Average Annual Variation of the Tariff (*) for Water and Sanitation 1998-2004 Stratum 1 1998 2004 2000 13% 29% 24% 27% 18% 25% Tarifa media $/m3 1500 27% 1000 500 0 Bogotá Cali Medellín Barranquilla Cartagena Manizales Pereira Stratum 2 1998 2500 21% 23% 2004 Average tariff m3 2000 9% 16% 15% 14% 1500 16% 1000 500 0 Bogotá Cali Medellín Barranquilla Cartagena Manizales Pereira Stratum 4 1998 13% Average tariff m3 4000 2004 3000 7% 1% 3% 3% 8% 1% 2000 1000 0 Bogotá Cali Medellín Barranquilla Cartagena Manizales Pereira Stratum 6 1998 13% Average tariff m3 8000 2004 6000 1% 3% 7% 3% 4000 1% 8% 2000 0 Bogotá Cali Medellín Barranquilla Cartagena Manizales Pereira 3 * Basic average tariff (value per m including �xed charge and consumption of 20 m3/user/month). Source: SSPD, DNP – DDUPA Calculations 41 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Regulation is expected to evolve in the future towards an approach where it will have a greater effect on asset management and foster increased ef�ciency in investment. This would be complemented with the development of the CRA responsibilities concerning “structure regulation� in issues such as provider mergers and the liquidation of inef�cient public providers, with the aim of achieving the aggregation of utilities and a better use of economies of scale.23 It may be necessary to introduce quality parameters in tariff method- ologies and to improve the targeting of subsidies through the adjustment of parameters that may be modi�ed by the CRA, such as the basic consumption level (maximum consumption that can be subsidized) and the conditions to grant subsidies to Stratum 3 users. Box 3. Structure of Tariff Methodology Since 1995 a “mean long term cost� approach has been adopted, as well as a two-part tariff: (i) a �xed charge ($/user) equal to the Mean Administration Cost (Costo Medio de Administración, CMA), which results from dividing the administration costs among the total users; and (ii) a consumption charge ($/consumed m3), which results from the sum of a Mean Cost of Operation (Costo Medio de Operación, CMO) plus a Mean Investment Cost (Costo Medio de Inversión, CMI), expressed as a cost by cubic meter produced. In 2004 the mean cost for environmental fees (Costo Medio Tasa Ambiental, CMT) was disaggregated as an independent component. This is a cost to be paid by the companies to the regional environmental authorities (fees for the use of the water and retribution rates for wastewater discharges). Thus, the general expression of the formula is the following: Tariff = CMA + CMO + CMI + CMT The methodology contains elements of regulation by comparative ef�ciency (yardstick competition) in the CMA and CMO components (since 2004), and of regulation by rate of return (ROR regulation) in the CMI. Administrative and operation costs are broken down into “comparable costs� between companies and “particular costs� for each company, which reflect conditions out of the companies’ control, such as local taxes, energy consumed in the distribution system (de�ned by the topography and a market price) and chemical inputs (de�ned by the quality of the available water source). “Particular costs� are transferred directly to the tariff (pass through) with some technical criteria for ef�ciency. 23 DNP (2006). 42 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia With the comparable operation and administrative costs reported by the companies, ef�ciency frontiers are estimated with the DEA (Data Envelopment Analysis) methodol- ogy, aimed at minimizing costs. The output in the administrative costs model is the users of water and sanitation, and in the operation costs model, it is the amount of water produced. Both models are controlled for other variables which might affect cost. The companies whose costs de�ne the ef�ciency frontier transfer the total of their costs to the tariff. The rest of the companies have a restriction on the costs they can transfer to users with their relative ef�ciency score, which is lower than 1. The CMI has three components, which include the Present Value of Investments in replacement, expansion, and rehabilitation of assets (VPIRER); the existing Assets Value which has not been recovered (VA), approximated by their book value or by calculat- ing their linear depreciation, and the Mean Cost of Investment in Land (CMIT), as the purchase value of the asset not including its appreciation, over the present value of the demand (VPD). To obtain the CMI expressed in cubic meters of water, the VPI and the VA are divided by the present value of the demand (VPD), projected over a time horizon equivalent to the useful life of the system, which is established based on the useful life de�ned by the CRA for each kind of asset. The projected water demand is affected by the maximum “Unac- counted for Water Index� recognized by the CRA, and it is brought to present value with the same discount rate used when calculating the VPI. This rate has to be the weighted average cost of capital (WACC), also regulated by the CRA. Thus, the expression to cal- culate the CMI is the following: The VPI is calculated over a 10 year investment planning horizon. Companies with fewer than 25,000 users can apply a horizon of 5 to 10 years, and those with fewer than 8,000 users have the option of applying, for the sake of simplicity, a table of pre-established val- ues according to the water demand and its growth. Investments must follow a principle of prioritization, taking into account coverage targets, vulnerability, and reduction of losses. 1.2.4. Sector Financing within the Framework of the Reforms The resources available for investment in the WSS sector come from differ- ent sources and have increased significantly over the last 15 years within the framework of the reforms. Annual resources are estimated to have qua- drupled in real terms since 1993 and amounted to US$ 1,109 million in 2007, reflecting two central facts (Table 4): (i) the strengthening of the sector’s decentralization, with the substantial increase of transfers from the Nation to 43 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector the municipalities24; and (ii) the tariffs paid by users have becomean impor- tant source of funds, as a result of the application of the tariff methodologies wich began in 1996.25 Projections or sector financing with the new Planes Departamentales are expected to be significantly greater. Table 4. Annual Resources for Investment in WSS in Colombia by Source – 2007 Source Annual Investment Resources Sources Share (million dollars) (%) Transfers (SGP) 412 37.2 Tariffs/ 1 358 32.3 MAVDT – Under Ministry of Water 175 15.8 Supply and Sanitation/2 Direct royalties /3 100 9.0 Regional Autonomous 53 4.8 Corporations/4 National Royalties Fund /5 10 0.9 Total 1,109 100.0 /1 Estimate based on the free cash flow of 80 companies of different sizes. An average for 5 size ranges was estimated and applied to the rest of municipalities in the country. /2 The value corresponds to the annual average of what is allocated in the Law for the National Development Plan 2007-2010 for the four year period. In 2007 additional previous commitments will be executed. /3 The value corresponds approximately to 15 percent of the total direct royalties received by departments and municipalities in 2005. /4 The value corresponds to the CARs average annual investment budget between 2004 and 2006, for sanitation and wastewater treatment. /5 The value corresponds to DNP estimates. Source: DNP As can be seen in Table 4, apart from the tariffs and transfers from the cen- tral government to the municipalities, other sources of investment funds include ad hoc contributions from the central government, currently through the sector programs of the MAVDT, royalties that municipalities and departments receive for the exploitation of natural resources, part of which by law must be allocated to investment in WSS, contributions from the CARs (regional environmental au- thorities) which collect revenues through environmental fees and can invest in sanitation and wastewater treatment infrastructure, and �nally, resources of the 24 Law 60 of 1993 and Law 715 of 2001 (General Tax-Sharing System -SGP). 25 Tariffs are an important source of funds for investment in mid sized and large cities. 44 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia National Royalties Fund managed by the National Planning Department, to which territorial entities may apply for funding of projects in speci�c regions, The relative importance of these sources of funding is evolving. While the resources directly contributed by the central government have fallen in accordance with the decentralization process when compared to 1993, they have an important strategic value since to a great extent they are applied to structured projects as part of the business transformation process. Moreover, since 2003, there has been a tendency to increase budget allocations by the National Government through the MAVDT, reinforced in the 2007-2010 National Development Plan that was ap- proved by the National Congress in June of 2007.26 Also, the rules have introduced a tax incentive27, with an income tax exemption for companies investing in regional systems outside the municipality where they are established. The SGP transfers from the Central Government to municipalities are es- timated to �nance around 40 percent of the investment in water and sanitation, but de�ciencies can be seen in their application.28 Among these are inef�ciency and lack of coordination in comprehensive investment plans, partly because they are carried out directly by the municipalities even when there is an operator pro- viding the service; the segmentation of the resources due to annual budget effec- tiveness and lack of dynamic access to credit and the capital market that generate scattered and incomplete investments; geographic atomization of resources; and �nally, the mechanism for distribution to the municipalities is not directly related with the sector’s local needs and lacks an incentive scheme for the adequate use of resources and business transformation in service supply. The atomization of the SGP allocation is made evident by the fact that 768 municipalities with fewer than 25,000 inhabitants, representing only 19 percent of the population, receive 46 percent of the resources. Although in the small munici- palities the rate of coverage is low, the number of people to serve is higher in the medium-sized cities (between 25,000 and 500,000 inhabitants). Meanwhile, the eight cities with over 500,000 inhabitants receive 19 percent of the resources, but these have higher rates of coverage and have the ability to make a greater tariff effort.29 26 The annual budget of the National Government allocated to the WSS sector at the beginning of the 1990s was approximately US$190 million, then it fell to levels close to US$50 million in the second half of the decade. Beginning in 2003 the contributions have increased and between 2007 and 2010 they will be US$ 175 million a year. 27 Despite two decrees of 2003 for the application of this exception, now 7 years later has not been used. 28 Silva, J. and Rozo, J. (2005). 29 Silva, J. and Rozo, J. Ibid 45 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Additionally, there is a lack of an adequate regional balance of the differ- ent sources of funds available for the sector, when considering the SGP, tariffs, and royalties. In municipalities with a surplus, this situation might be leading to an investment bias that is not in line with the water and sanitation investment priorities at a national level. Also, this could generate incentives for some munici- palities to avoid making adequate tariff efforts. Adequate sector �nancing requires access to long term credit and capital. The larger companies have access to long term �nancing, including through the issuing of bonds. However, little use is made of the national �nancial system in the sector, which remains highly dependent on state contributions (mainly through the SGP) to generate positive cash flows for most of the providers in the country. This situation demands the design of an explicit strategy for access to credit for the sector as a whole, where the Multilateral Banks could play an important role (see Box 3). Box 4. Credit from Multilateral Banks The sector’s credit from multilateral banks has traditionally been concentrated in large cities, and those credits encompassing a wider geographical area have been taken through national agencies.30 Since 2004, the policy of access to credit for the sector has shifted so that the sectoral indebtedness was produced regionally, with the en- dorsement and guarantee of the Nation. Thus, credit operations were structured in the departments of La Guajira, Magdalena, and Cesar with the World Bank and the Cor- poración Andina de Fomento (CAF) to �nance the Water and Sanitation Departmental Plans. These credit operations have been useful in coordinating the flow of funds to the sector, which have been scattered across different sources, and to arrange them as a future flow of �scal funds to address short term comprehensive investment and busi- ness modernization plans. Credit and cooperation from multilateral banks 1984-2007 (million US$). 30 The four credits at a national level that focused on medium and small municipalities were ar- ranged with the World Bank: (i) US$150 million, agreed in 1988 and implemented by the Urban Development Fund; (ii) US$40 million, as part of the “credit for the development of urban infra- structure�, implemented by FINDETER; (iii) US$40 million in 2001 to �nance the MAVDT’s Business Modernization Program; and (iv) US$70 million in 2005 to �nance works scattered all over the country, as part of the regional investments of the National Development Plan 2003-2006. 46 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Territorial World IADB Other Total Bene�ciaries Level Bank LARGE CITIES 402.0 325.2 8.5 735.7 Cucuta (WB, 1984); Barranquilla (WB, 1985), Cali (IADB, 1987), Bogota (WB 1984 and 1994), Medellin (IADB 1994), Buenaventura (Dutch Development Dutch, 1996), Pereira (IADB, 1998), Cartagena (IADB and WB 1998). NATIONAL 300.0 - - 300.0 Medium and small cities GOVERNMENT (WB: 1987, 1988, 2001, and 2004) REGIONAL 90.0 50.0 100.6 240.6 CAR (IADB 1989), Cesar ENTITIES (CAF, 2006), Magdalena (CAF, 2007), La Guajira (WB, 2007) Institutional 3.0 3.1 - 6.1 CRA regulatory strengthening developments and studies (IADB, 1994), Pereira preinvestment studies (IADB, 1996); PSP Structuring - DNP and Ministry (WB, 1997); Study on Subsidies (IADB, 2003) TOTAL 795.0 378.3 109.1 1,282.4 WB: World Bank; IADB: Inter American Development Bank; CAF: Corporación Andina de Fomento. FINDETER (La Financiera de Desarrollo Territorial), a state-owned bank for territorial development, has traditionally channeled credits from the multilateral banks through the �nancial system towards infrastructure works with long ma- turity periods. However, there has been a process of credit substitution by the SGP transfers (see Figure 3). 47 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 3. FINDETER Credit and SGP Transfers 400 Transfers (SGP) 350 300 US$ Millions 250 200 150 Credit Findeter 100 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: FINDETER and DNP From the above it may be stated that the sector’s investment �nancing approach in Colombia provides several lessons: (i) it is necessary to establish institutional arrangements to ef�ciently coordinate the scattered funding re- sources; (ii) in a decentralized system with such a fragmented industry struc- ture as in the case of Colombia, and with a system of transfers from the Central Government to the municipalities, regional service provision schemes can be a useful tool so that the state contributions are not atomized; (iii) when there are substantial annual state allocations speci�cally earmarked for the sector, it is essential to establish arrangements so that the departmental and municipal global �scal restrictions do not become an obstacle to access credits secured by those future flows; and (iv) if there is a system of transfers from the Central Government to the municipalities, objective criteria can be established for their regional distribution for improved targeting. 1.2.5. Supply and Demand Subsidies in Colombia The sector �nancing approach in Colombia combines demand-side subsidies, which cover a lower cost service for selected users, with supply-side subsidies, understood as those covering part of the investment costs, whether through di- rect subsidies to the service provider or through the delivery of infrastructure that is not reflected in the tariff. Demand-side subsidies are included in cross subsidy system among users classi�ed in six strata, according to a methodology which takes into account the 48 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia characteristics of the household and the neighborhood. Strata 1, 2, and 3 users receive maximum subsidies of 70, 40 and 15 percent, respectively; those of stra- tum 4 pay the cost of the service and those in strata 5 and 6, as well as industrial and commercial users, pay a “solidarity contribution� of 20 percent at a minimum over the cost as may be required. Since the cross subsidy scheme often runs a de�cit due to the fact that most users fall in the lower strata, demand subsidies are partially �nanced with the General Revenue-Sharing System (SGP). Supply-supported subsidies are mainly �nanced with SGP resources, ex- ecuted by the municipalities, and with investments made by other agencies at various government levels. In some cases, infrastructure works are contracted by the public agency executing the investment, and in others, by the service provider through agreements with the municipality when it is a state company, or under the speci�cations of an “constructor-operator� agreement, when such a partner- ship exists. Within the Latin American context, cross subsidies and investment sub- sidies prevail (see Table 5). Targeting schemes based on geographical zoning ac- cording exclusively to household and neighborhood characteristics, similar to that in Colombia, can be found in Argentina, Bolivia, Paraguay, Peru, and Panama. In other countries like Brazil or Chile, household socioeconomic information is used. The Chilean case also has the special characteristic of not having a cross subsidy scheme and applying direct subsidies. 49 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Table 5. Subsidy Schemes in Some Latin American Countries Country/City Are there Are there Are investments Targeting scheme cross direct subsidized? subsidies? subsidies? Argentina Buenos Aires Yes No Investments By zone, quality of (some housing and year municipalities) of construction Cordoba Yes No No - Bolivia Investments By geographic area (population below 10,000 inhabitants) (La Paz/El Alto) Yes No Brazil Ceara Yes No Some By social conditions Pernambuco Yes No --- By social conditions Sao Paulo Yes No No By social conditions and geographic area Chile No Yes No By family income Colombia Yes Partial Yes By geographic area (based on quality of housing) Costa Rica Yes No Yes --- Nicaragua Yes No Yes --- Panama Yes Yes Yes By geographic area Paraguay Yes No Yes By type of housing Peru Yes No Yes By geographic area Uruguay Yes No --- --- Source: Fernández (2006) The cross subsidy scheme is a good “solidarity� tool among served users, but it is not necessarily the most ef�cient one to provide access to households that do not have the service.31 In this sense, an investment subsidy is a necessary complement until high levels of coverage are reached. In spite of this, there are two aspects to bear in mind when assessing the Colombia case, but which have 31 Foster et al (2000). 50 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia been demonstrated elsewhere: (i) a good �nancing/subsidy system will often in- clude adequate targeting mechanism, so that the subsidies reach those who re- ally need them; and (ii) a premium should be given to transparency in terms of �nancing, accounting registration, and use of subsidies. In the case of Colombia, there is evidence of less than optimal targeting.32 This is not only due to flaws in the bene�ciary selection tool, but also to the de�- cient calibration of regulatory parameters such as the percent of subsidy granted (regulated by the National Congress), and to the basic consumption level or maxi- mum consumption that can be subsidized (regulated by the CRA), which has been set at 20 m3 per user per month, above international standards.33 The targeting schemes based on socioeconomic characteristics, as in Chile, which operates a “self-selection� process, produce a lower error in the inclusion level (households receiving the subsidy that should not receive it due to their income level), but at the cost of a higher exclusion error (households that should receive subsidies but do not). This inverse relationship is seen when comparing the cases of Colombia and Chile.34 32 DNP (2006) and Fedesarrollo (2005). 33 Estimates of monthly subsistence consumption from private connections range from 8 m3 per month (for a family of �ve to meet basic hygienic requirements) to 16 m3 per month (modest domestic use in urban settings for a family of �ve.) Kovines (2005). 34 Gómez-Lobo, A. (2000). 51 María Clara Ucros. The World Bank 1.3. Institutional Organization of the Sector and Participation of the Private Sector In Colombia, as in other countries, sector development and theresulting structure of provision is determined to a great extent by the political administrative orga- nization of the country. This includes achieving an effective transfer of responsi- bility of service provision to the municipal level through the intervention of the departments. There are 1,122 municipalities in the country, 841 of which have fewer than 25,000 inhabitants and 203 in the range of 25,000 to 100,000, each of which receive National Government transfers to be used speci�cally for WSS.35 The result is the scattered structure of the industry as a result of the presence of different operators in municipalities that could, in principle, be agglomerated, just one with bene�ts in terms of economies of scale.36 Despite the above, the results of the reforms have been favorable for the development of the sector. As can be seen in Table 6, as of 2006, there were 620 Public Service Companies (ESP) registered in the country, 38 percent of which have some degree of private sector participation (PSP). Most of these ESPs with private sector involvement have operated the water and sanitation systems 35 Law 60 of 1993 and Law 715 of 2001. 36 In spite of this, some regional schemes have been developed. In the Valle department there is a model that revolves around a departmental public company, Acuavalle S.A. – ESP, which operates in 35 of the 42 medium sized and small municipalities in the department; Empocaldas S.A. ESP provides services to 21 small and medium sized municipalities out of the 27 in the Department of Caldas. 52 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia with a higher ef�ciency and business management, and in the larger cities and in some municipalities there has been signi�cant progress concerning coverage and quality. The territorial con�guration of PSP has been the result of different dynam- ics (see Box 4). Although the greater proportion of companies with PSP is found in the larger municipalities (with nearly 60 percent of the companies operating in cities with over 100,000 inhabitants), there is also an important number of them in medium-sized and small municipalities (there are 160 companies with PSP operating in municipalities with less than 100,000 inhabitants). Close to 650 municipalities, however, still have direct service provision by the municipal administration (an exceptional arrangement) and it is almost al- ways inadequate. Other municipalities, in spite of having established Public Ser- vice companies, have poor business management. Table 6. Providers According to Legal Status and Size of Municipality 2006. Range of number Municipalities Total Private ESP Public ESP Municipality Community of inhabitants per in the country providers (2) direct organization municipality (1) provider (3) No. No. No. % No. % No. % No. Over 500,000 7 26 21 80.8 5 19.2 0 0.0 59 100,000 to 500,000 48 103 55 53.4 43 41.7 5 4.9 190 25,000 to 100,00 203 274 79 28.8 134 48.9 61 22.3 245 Less than 25,000 841 866 81 9.4 202 23.3 583 67.3 788 Total 1,099 1,269 236 18.6 384 30.3 649 51.1 1282 (1) Includes private and public ESPs and provider municipalities, and excludes community organizations. (2) Of the 236 ESPs with private participation, 197 are private and the rest are mixed (with a public shareholding of at least 50 percent), and 113 are the main operator in the respective municipality. (3) There is no operator registered for 162 municipalities and it has been assumed that these municipalities provide the service directly. Source: SSPD - Registro Único de Prestadores (Uni�ed Providers Registry) (December 2006): by place of operation Some municipal public companies have undertaken restructuring process- es, which to a greater or lesser extent have made it possible for them to improve their competitiveness, at least compared with the previous decade. The presence of the PSP option, apart from its direct effect on markets, in a way generated a more credible threat for state companies, prompting restructuring processes 53 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector with or without PSP37, within a framework of rules which does not discriminate between state or private companies.38 In addition, some municipalities found a solution for the management of services through a community organization approach. There are 1,282 organi- zations of this type that are registered, 77 of which are the main provider in a municipality; 23 percent are in urban areas and the rest are rural. In some cases, this type of service provider can be ef�cient in its operations as well as in terms of market structure, because of their location in areas far from the urban centers. Other cases, although they might be successful operatively and in the view of the community, by presenting relatively low costs – even being located within or close to urban centers – could be generating a suboptimal industrial structure. Moreover, though there are no documented cases, it is believed that these orga- nizations provide very poor quality levels of service to users who could be served by the main operator in the area under better conditions. Another dimension of the PSP experience in Colombia and its relationship with the structure of the industry can be seen in the identi�cation of “business groups�, understood as the presence of a majority or important shareholder in at least two municipalities, which accounts for a business structure that seeks to expand its presence in the markets. Seven foreign and �fteen domestic groups have been identi�ed.39 In addition, another 33 private Colombian companies pro- vide services as the main operator in just one municipality and 99 are in relatively small areas of speci�c municipalities (Table 7). The seven foreign groups operate in 23 municipalities and serve more than 12 percent of the urban population of the country, while the domestic companies are the main providers in 111 municipalities and cover 20 percent of the popula- tion, for a total participation of the private sector of 32 percent of the country’s urban population.40 37 For example, the EAAB carried out a restructuring process that made it possible to overcome the serious �nancial situation it was going through in 1993; EPM of Medellin is considered a stable company which has the advantage of also operating the energy and telecommunications services; and some companies, like Aguas, Aguas de Pereira, and Aguas de Manizales, which became mixed ESP with a small private participation, have improved their performance. 38 An exception was that the tax regulations maintained a partial income tax exemption for state companies only, until 2002, which generated some distortion in connection with the regulated capital cost. 39 Rozo, J. (2007). 40 The participation of community organizations is not included. 54 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Table 7. National and Foreign Private Business Groups: Participation in the Urban Market and Distribution by Size of Municipality Origin Number Number or % of Number of municipalities according to range of of municipalities urban inhabitants groups population > 100,000 50,000 25,000 < 500,000 to to to 25,000 500,000 100,000 50,000 Foreign groups 7 23 12.4 2 6 3 3 9 Colombian 15 78 11.2 2 9 17 16 34 groups (in 2 or more municipalities) Colombian 33 33 8.9 1 11 2 4 15 companies (main in 1 municipality) Subtotal (main 55 134 32.5 5 26 22 23 58 providers) Colombian 99 99 n.a. 16 28 24 9 22 companies in municipality areas Total of private 155 233 n.a. 21 54 46 32 80 companies Source: DNP – Subdirectorate for Water Services and Sanitation (Subdireccion de Agua Potable y Saneamiento Básico) Box 5. PSP Territorial and Business Con�guration Although the �rst private operators went to large and medium sized cities, PSP has been progressively expanding to smaller municipalities since the second half of the 1990s. A signi�cant percentage (72 percent) of the municipalities where private operators have initiated operations since 1991 are concentrated in the Atlantic Region and the An- tioquia Department. The highest concentration of PSP is in the Atlantic region, where 48 municipalities (25 percent of the region’s total) have private operators, 28 of which participated in the framework of the MAVDT’s Business Modernization Plan. One important aspect is the fact that in some cases these operators are small and me- dium enterprises with technological and managerial capacity adapted to the charac- teristics of small municipalities, contrary to the general belief that private participation 55 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector would only be able to operate or be pro�table in the country’s large cities. These com- panies, on the contrary, operate in one or several municipalities and some concentrate their activity in speci�c regions. There is an interesting case of a large operator established in an important urban cen- ter, which has expanded its operations to nearby smaller municipalities making use of economies of scale. Triple A of the Spanish group INASSA (Canal de Isabel II), provides services in Barranquilla, a city with 1.1 million inhabitants, Soledad, Puerto Colombia, and Galapa, and as majority shareholder of the new company AAA Atlántico S.A ESP, operates the “coastal water system�, which covers the municipalities of Usiacuri, Juan de Acosta, Piojo, Tubara, within the framework of an agreement with a state company (ARCOS ESP), made up of four municipalities. Triple A ESP has thus increased its market from 205,000 subscribers to approximately 296,500. Foreign and domestic private business groups: Departmental and municipal distribution and concentration Business Group Departments (municipalities Number of between parenthesis) municipalities Domestic groups 15 78 Aas Sa Antioquia (12) 12 Hydros La Guajira (9), Cundinamarca (2), Tolima 12 (1) Conhydra Antioquia (8), Valle (1) 9 Aguasol Antioquia (4), Atlántico (2), Magdalena (1) 7 Aguas de La Guajira La Guajira (1), Atlántico (1), Magdalena (1), 5 Quindio (1), Sucre (1) Grupo Sala Bolívar (3), Sucre (2) 5 Ingeniería Total Antioquia (5) 5 Acuagyr Cundinamarca (4) 4 Operadores de Sevicios Antioquia (4) 4 Uniaguas Córdoba (4) 4 Presea Magdalena (2), Antioquia (1) 3 Francisco Velásquez Chocó (2) 2 Sie Cauca (1), Nariño (1) 2 Sistemas Públicos Antioquia (2) 2 Salas Santander (1), Vichada (1) 2 56 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Foreign groups 7 23 Inassa (Canal de Isabel II) Atlántico (13: Barranquilla & 14 neighbors), Magdalena (Santa Marta) Proactiva Córdoba (1), Boyacá (1), 3 San Andrés (1) Grupo Cundinamarca (2: Agua de Dios & 2 Colombo-Cubano Tocaima) Aguas de Barcelona Bolívar (Cartagena) 1 Bermad Valle (Tuluá) 1 Grupo Cauca (Caloto) 1 Colombo-Venezolano Suez Lyonnaise Des Valle (Palmira) 1 Eaux Source: Taken from Rozo (2007). 1.3.1. Evolution of Private Sector Participation in Colombia’s Water Services and Sanitation Sector In the years prior to the structural reforms of the 1990s, the sector’s institutional crisis worsened, with state-owned companies with high labor and �nancial liabili- ties, poor quality and continuity of service, poor infrastructure conditions, invest- ment de�cits, inadequate tariff policies, and poor commercial management.41 The crisis was conducive to local political consensus in some cities which made it possible to initiate the �rst attempts at restructuring. The National Plan- ning Department supported the structuring of the �rst PSP processes in four de- partmental capitals (Montería, Barranquilla, Santa Marta, and Florencia), with the writing off of liabilities and the creation of mixed-capital companies, succeeding in incorporating nearly 50 percent of the shareholding by investors in each city. This became the “�rst PSP generation� and took place between 1991 and 1994. 41 The crisis was evident in the serious �nancial situation of important state companies such as those of Bogotá and Barranquilla, and over the following decade – and in spite of the regula- tory and policy tools developed by the National Government – in the SSPD taking over the state companies of Cali, Cucuta, San Andrés, and Quibdo, among others, or in the poor services that some municipalities continue to provide directly. 57 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector After this �rst experience, the need for a more elaborate institutional frame- work for the development of the PSP processes became evident. This “second gen- eration PSP� policy package was implemented in two stages. The �rst was de�ned by a new regulatory framework which offered clearer conditions for private par- ticipation (Law 142 of 1994 and tariff regulation issued by the CRA in 1995). The second stage was de�ned by the formulation of an explicit public policy for the promotion of PSP42, which materialized with the creation of the Corporate Modern- ization Program of the MAVDT43 in 1998, and the incorporation of the �rst private operators within the framework of that program, starting in 2000. Law 142 of 1994, as well as the issuing of the �rst tariff methodologies by the CRA in 1995,44 considerably stimulated private sector participation. This can be seen in the appearance of operators with PSP in 37 municipalities between 1996 and 1998 through processes originating at the local level and some with the support of the National Government (Figure 4). It was at this stage that the �rst foreign operators came to the country.45 The “third generation of PSP� has emerged since 2000, when the �rst pri- vate operators came as a result of the processes included in a structured support program by the National Government for PSP. The structuring supported by the Corporate Modernization Program (PME) of the MADVT covers 34 of the 59 mu- nicipalities (58 percent) where PSP emerged between 2000 and 2006. 42 DNP (1997). 43 Environment, Housing and Territorial Development Ministry starting in 2003, previously the Drinking Water Board was in the Development Ministry, which disappeared with the adminis- trative reform of that year. 44 CRA Resolutions 08 and 09 of 1995. 45 The Spanish groups INASSA (Canal De Isabel II of Madrid) in Barranquilla and Aguas de Barce- lona in Cartagena, and the French group Suez Lyonnaise Des Eaux in Palmira. 58 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Figure 4. Evolution of Number of Municipalities with PSP Operator (Year of Start of Operations) 113 106 100 100 88 77 Municipalities CRA Resolutions 08 and 09 of 1995 62 54 50 45 42 37 Law of 1994 29 15 11 12 8 9 8 7 4 5 3 5 6 11 23 1 1 3 0 1991 1992 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Initially Accumulated Source: DNP – Under-Directorate of AP and SB, based on SSPD – SUI and direct consultation Note: The information refers to municipalities where the company with PSP is the “main operator� according to the number of subscribers. Seventy seven municipalities are excluded where the main operator is a community organization The PME deliberately focused on the Atlantic region, in large part because it is one of the areas where coverage and quality are most lacking, where the institutional weakness is more pronounced, and where the sector resources are limited. An interesting characteristic of this stage is the consolidation of the PSP expansion to medium municipalities and, especially, to small ones (less than 25,000 inhabitants), following the concentration in the �rst and second genera- tions on cities with more than 100,000 inhabitants (Figure 5). Through the PME, the National Government has played an important role in �nancing PSP structur- ing processes and investment in infrastructure in municipalities of smaller size and more precarious socioeconomic conditions. 59 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 5. PSP by Municipality Size and Stages of Entry and Corporate Modernization Program (PME) between 2000 and 2006 60 6% 54 20% 41 PME:16 40 Municipalities PME:14 3% 24 8% 33% 20 24% 17 18 13 PME: 4 5% 3 0 Until 1993 Until 2000 Until 2006 More than 25,000-100,000 Less than 100,000 inhabitants inhabitants 25,000 inhabitants Source: DNP – Under-Directorate of AP and SB, based on SSPD – SUI and direct consultation 1.3.2. Mechanisms for Partnership with the Private Sector Colombia has supported the coexistence of different institutional arrangements of public-private actors for service provision. This is partly due to the broadness of the framework established in Law 142 of 1994 for PSP under the principle of free entry to the market, as well as the institutional quality and the local com- petition surrounding the provision of services, leading to different market and competition dynamics. This diversity of schemes is part of what makes Colombia a special case. In may countries, PSP arrived exclusively through concession agreements in certain cities, under rules and, in some cases, under a regulatory institutional framework exclusive to the agreement.46 The economic nature of water and sanitation services places it close to a natural monopoly and, therefore, competition in the market is not com- mon, though it may be found in some special cases. Although this lack of competition does not result in a large market share for companies, they can be located in strategic expansion areas, either because of the type of users 46 The modality that has not emerged in Colombia is pure privatization (with transfer of owner- ship of the assets), although this is not common in other countries either. 60 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia – who can be relatively profitable – or because, in the medium term, an area may become a market of considerable proportions.47 This scenario is a reality in Bogotá and in other cities in the country.48 There are at least 47 municipali- ties where the main provider is public and there is at minimum one private company and, in some cases, community organizations providing the services in urban areas.49 It is clear that regulation is required to preserve ef�ciency and fairness. It provides guidelines to prevent conflicts or to solve them in case of potential abuses of a dominant position, unfair competition or damages generated by any of the parties. In the case of the city of Bogotá, conflict arose between Empresa de Acueducto de Bogotá (EAAB), a state company, and Coopjardín Ltda., which serves a small share of the market in the northern area of the city and which competes with the former for the expansion market in the area. EAAB set limits to the amount of water sold in block to Coopjardín and denied it access to two interconnection points, thus limiting its expansion capacity. The CRA solved the case by applying the corresponding rights of way. Competition in the market requires the existence of some behavior regu- lating mechanism so that companies are committed to ef�cient and results ori- ented management. In Colombia, the tariff and Management and Results Plan regulations issued by the CRA ful�ll that function. In addition, competition for the market through contracts is de�ned by the ownership of assets, which belong to the municipalities, to be managed by private companies. This market power translates into a decision-making power through the way in which the municipalities meet their legal responsibility of ensuring an ef�cient service provision. There have been several types of arrangements to establish a PSP part- nership in Colombia: (i) operation agreements, which can differ in mechanisms for remuneration, but which have in common the fact that the responsibility of �nancing investment is not assigned to the operator; (ii) the special case of op- eration agreements for a private company to manage and operate speci�c activi- ties in the process of service provision, having as a special characteristic that the 47 Market competition can also appear in some regions where there is a market dynamic of “block water sales� to companies distributing the water in their respective municipalities and where there are alternatives for supply. 48 Section 11 of Law 142 de�nes the obligation of allowing other companies or large consumers to access water networks to allow for transactions with the company that owns those networks. 49 These dynamics are more probable in markets where there is no historically established agree- ment between the municipality and the state-owned company. 61 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector contracting party is a state-owned company and not the municipality, since the state-owned company is for all purposes responsible for the integral provision of services50; (iii) concession agreements with different designs, but characterized by the fact that the operator has the responsibility of managing and �nancing investments and of taking on the operating and commercial risks, derived from �nancing and from the process of investment in infrastructure; and (iv) partner- ship schemes. There are 14 concession agreements that cover 22 municipalities, 27 op- eration agreements covering 37 municipalities, and 31 partnership arrangements which are all individual. These can also involve some kind of agreement between the municipality and the company that is set up, even if the municipality, in itself, is a partner of the company. In Barranquilla, for example, the private company has the municipality as a partner and there is a concession agreement between the company and the municipality; in Santa Marta the agreement is for the conces- sion of the infrastructure and in Palmira there is a concession agreement between ESP Acuaviva and the company in which the municipality is a shareholder and Empalmira, the state company which previously provided the service. Box 6. The Case of Bogotá Beginning in 2003, Empresa de Acueducto y Alcantarillado de Bogotá (EAAB) adopted an outsourcing process of its activities of operation and management of systems by area. Within this scheme EAAB has retained the ownership of the assets and the de�nition of the investment plans to be carried out, outsourcing the system management to special- ized operators (SO). In this way, the SOs are subject to obligations regarding operation and maintenance of the systems. For this purpose, the systems were divided into hydraulic sectors. These agreements –unlike the typical management agreement where there is no relationship between manager and user – have explicit obligations in commercial matters (customer service, responding to petitions, claims, and complaints) although there is no direct contact between the manager and the customers through bill collection. That is to say, for the user EAAB is still the responsible party, even if it is the managers who directly address the users’ petitions. 50 This modality results from a restructuring process of a state company which seeks better ef- �ciency levels through subcontracting processes to provide the services, as could be the opera- tion of sectors in the system, but it is not the same as outsourcing an isolated activity. The case of Bogotá has been identi�ed within this modality (see Box 5). 62 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia The SO remuneration has been programmed based on the targets de�ned in their pro- posal. The managers’ special obligations are based on meeting indicators of Customer Service, Updating, and Maintaining User Records, Index of Unaccounted for Water, and Consumption Metering. In connection with commercial aspects, the managers have to meet customer service targets, add new users to the company’s database, and manage the portfolio in their area. In terms of operations, the manager has obligations in areas related to loss control and damage repair. The company pays a rate to the contractor per cubic meter invoiced and paid through billing. It also pays for the value of the new water and sanitation works. The manager gets 4 percent of the portfolio effectively recovered and 8 percent of the value of the works in its area for the concept of intervention. For the management of developers and constructors, the manager receives 2 percent for reviewing and approving the designs and 6 percent for inspection and acceptance of works. The market is divided into 5 areas, based on the hydraulic segmentation of the network. The mixed scheme adopted in Bogotá has shown some positive results, in addition to the high levels of coverage and service quality. Before the arrival of the SOs an applica- tion for connection took 56 days, while the average recorded for 2006 was 9.2 days. In addition, it took 22 working days on average for a claim to be answered and with the SOs this was reduced to 2 days in 2006. The outcomes in terms of positive image of EAAB have improved signi�cantly since the arrival of the SOs. In 2000 48 percent of the market in Bogotá had a positive impression of the company; by 2003 this indicator had gone up to 68 percent, and in 2006 it was 75 percent. Since 2002, there have been 60,000 new users added per year, 47 percent more than before the SOs. 63 María Clara Ucros. The World Bank 1.4. The MAVDT’s Corporate Modernization Program (PME) Faced with the need to evolve towards a more standardized model of PSP in con- nection with the so called “�rst generation� processes, DNP and the Ministry of Economic Development agreed that it was necessary to formulate a national PSP policy for the sector and to structure competitive and free competition processes, with objective selection criteria, for effective competition at the time of market access. Furthermore, it was decided that it was necessary to make signi�cant state contributions to co-�nance investments and improve the targeting of pub- lic resources. The Conpes (Consejo Nacional de Política Económica y Social, or National Economic and Social Policy Council) document 2912 of March 1997 de�ned the strategies for PSP in WSS, among which the following stand out: (i) setting up the Private Participation Technical Committee for WSS with the Ministry of Eco- nomic Development, FINDETER, and the DNP to promote partnerships with the private sector; (ii) generating a program for private participation in WSS in the Ministry of Economic Development under the guidelines of the Technical Com- mittee to carry out well structured demonstrative processes; (iii) managing credit and cooperation with the multilateral banks to �nance the program, and autho- rizing FINDETER to allocate part of the INSFOPAL debt collection to �nancing the program; (iv) carrying out a study, under the coordination of the Ministry of Economy and Public Credit, to de�ne the methodology for the identi�cation and allocation of risks, and for the valuation, �nancing, accounting, and liquidity of 64 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia guarantees; and (v) reviewing the criteria for the allocation of co-�nancing re- sources to stimulate institutional modernization in the WSS sector. In this context, in 1997 the “Private Participation Area� was set up in the DNP and the Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público, MHCP), the �nancing of which came from cooperation and credit resources of the Inter-American Development Bank (IDB). In February 1998, the Corporate Modernization Program was incorporated into the Municipal Develop- ment Project with the World Bank. Its goal was to provide technical assistance to decentralized entities (municipalities and departments) for partnerships with the private sector. The program resources would be used to pay for consultation on the structuring of pilot cases and to carry out studies that would be useful in the de�nition of new credit operations with the World Bank, including funds for infrastructure investment. Also, over the following months the water supply component was shifted from the “Private Participation Area� of the DNP to the Economic Development Ministry. 1.4.1. Financing and Functioning of the PME The Government signed a loan with the World Bank in 2001 for US$40 million.51 This loan took into account previous experiences of PSP process structuring (see Box 6). These resources were used to �nance infrastructure works for some of the processes that had been structured in the past and in new PSP processes, as well as for the respective consultant studies for the technical, legal, �nan- cial, and environmental structuring, and the PME implementation unit in the Ministry of Economic Development, whose functions in the sector would later shift to the MAVDT. The program activities were directed to the Caribbean Region. The new operation de�ned two types of schemes to partner with specialized operators: Operation with Investment Agreement: a modality with a strong emphasis on the concession scheme, for municipalities where the payment capacity of the population made it possible to �nance a signi�cant portion of the investment through tariffs and the support of public resources would be supplementary. The operator would be in charge of the design and execution of works. : a modality with a greater emphasis on management, devised for smaller municipalities where most of the invest- ments are done with public resources, given the low payment capacity of 51 The national counterpart was US$30 million, for a total budget of US$70 million. 65 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector the population. In this model, key system investments are planned for the �rst two or three years and are designed from the outset, so the operator is in charge of their construction. This has two main advantages: (i) it makes it possible to show the population a short term service improvement, generat- ing trust, and legitimizing the process; and (ii) through the inclusion of the construction business, the cash flow of the �rst operating year is improved, which helps mitigate risk. Box 7. Lessons from the PSP Processes Prior to 200052 This is necessary since the politi- cal commitment of mayors, which is essential for the success of the program, may change during the implementation. Due to the risks of incom- plete and unveri�able information, the bidding design has to be flexible and there has to be an adequate time to reformulate the proposals in order to provide conve- nient incentives to attract bidders. It is preferable to manage just one consulting agreement to prepare a PSP process, including respon- sibility for all activities, rather than dividing activities into two contracts involving the preparation of the investment program and the preparation of �nancial projec- tions, legal aspects, and bidding documents. Additionally, due to the complexity of the processes, the consulting �rms are not able to prepare more than two or three processes simultaneously for the medium sized cities. The munici- palities’ contribution to investments is low and in the best of cases it might reach 20 percent. Therefore, the Government must continue playing an essential role in the sector by providing funding to small municipalities. Signing a PSP agreement is just the beginning of a complex process that requires several years to consolidate. The Gov- ernment must permanently support the new processes in technical, �nancial and political terms. 52 World Bank (2000), Project Appraisal Document - Credit 7077-CO. 66 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia The PME approach relies upon each municipality’s demand. Thus, the municipalities need to express their interest to be part of the PME through the signing of an agreement for technical assistance with the Ministry, having pre- viously submitted an agreement with the Municipal Council where the follow- ing has been approved: (i) the commitment of future flows of funds transferred by the Nation for speci�c use in WSS (Law 715 of 2001), to be used within the framework of the project; and (ii) the mayor’s powers to implement the process of partnership with a specialized operator, including the usufruct of the infra- structure, the credit agreements, and the liquidation of the existing company to create a new one. The structuring of the PSP start-up process is divided into three stages: (i) gathering information on the company, service, and municipality; (ii) �nancial modeling of the business and development of the terms of agreement and bid- ding documents; and (iii) supporting the bidding process until the signing of the agreement with the specialized operator. Finally, a �nancial support agreement is signed con�rming the Nation’s contribution of resources to the project. The structuring process seeks to formulate and put into practice a scheme that is attractive to investors. This is a complex exercise for several reasons. First, the provision of services at the municipal level that arrives at the PME is often in critical condition due to poor coverage, low quality and �nancial problems of the existing companies with numerous labor and �nancial liabilities. Second, the municipalities are often in a bad �scal situation. Third, dissatisfaction and distrust often prevails in the population with regards to its leaders and the providing company. Fourth, the infrastructure has often deteriorated and large investments are needed to enable the service. Additionally, tariff collection levels are almost always very low or nonexistent. In many municipalities, reaching political consen- sus among municipal council members is dif�cult. Finally, there is often strong political opposition to any signs of a tariff increase. 1.4.2. Results of the PME Between 1998 and 2008 the PME has taken part in the structuring of 30 pro- cesses to establish arrangements with specialized operators, involving 49 mu- nicipalities and bene�ting approximately 2.5 million inhabitants. The processes have been structured in municipalities with a much lower coverage than that of the average in the country. The progress to date has been overwhelming in most cases (Table 8). In more advanced processes like Maicao, Soledad, and Montería, progress has been quite signi�cant, but also in more recent projects, like ERAS 67 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector (Córdoba) and Turbaco and Arjona, signi�cant improvements can be seen in the continuity of services even where there has been no construction of major works in service infrastructure. In reviewing the PME experience, we �nd that not all cases have been suc- cessful. Some of the processes that were structured used up resources and did not end in the contracting of a specialized operator. These “failures� can be clas- si�ed as “total failures� and “partial failures�. Within the �rst category, there are processes with partial or complete structuring that covered at least 40 municipal- ities and in which the bidding process was not opened. In most cases the failure resulted from the dif�culty in reaching political consensus by local of�cials.53 The “partial failures� correspond to processes that did not achieve the in- volvement of an operator in the �rst attempt but that later were carried out, as in the cases of Soledad, Buenaventura and San Andrés54, and regional ERAS (Córdoba), Sincelejo and Corozal (Sucre), Arjona and Turbaco (ARAT in Bolívar), Baranoa and Polonuevo (Atlántico). The cases of ERAS and ARAT went through bidding processes three and four times respectively, until they were successfully awarded in 2003 and 2004. 53 These include Neiva, Ibagué, Popayán, Malambo, Sabanagrande, Magangue, Quibdo, Armenia, Bar- rancabermeja, Desquebradas, Bucaramanga, Tumaco, Piojó, Manatí, Usiacurí, Juan de Acosta, Tu- bará, Repelón, Duitama, Cúcuta, Cármen de Bolivar, Magangué, Santa Lucia and Palmar de Varela, and regional Acuavalle, Lorica (Erca), North of Córdoba, Atlántico Oriente, Regional of Nariño, Regional Centro Cesar. Completed structurings which never opened to bidding are found in Chía, Cajicá, Tabio, Tenjo, Sopo, Tocancipa, Gachancipa, Mahates, Villeta, Sasaima, and La Vega. 54 In San Andrés the process was led by the SSPD within the framework of a take-over process, while the PME supplied technical assistance. 68 The World Bank Colombia Table 8. Processes Structured with PME Support Coverage Department Municipalities Scheme Operator No. Of Starting Initial Initial Current Current Target Target Municip. date Water S. Sanitation Water S. Sanitation Water S. Sanitation 2006 2006 1 Cordoba Monteria 20-year concession Proactiva S.A. E.S.P. 1 Jan-00 60,0% 25,0% 93,0% 93,0% 90,0% 80,0% 2 La Guajira Riohacha 20-year Operation Aguas de la Guajira 1 Nov-00 80,0% 41,0% 95,0% 80,2% 90,0% 85,0% S.A. E.S.P. 3 Huila Nataga Construction - 10-year Empresa de 1 Mar-01 76,0% 90,0% 99,0% 95,0% 100,0% 98,0% Operation Acueducto y Alcantarillado de Nátaga A.A.S.S. - S.A. E.S.P. 4 La Guajira Maicao 30-year concession Aguas de la Península 1 Apr-01 38,0% 23,0% 76,0% 53,0% 98,0% 95,0% S.A. E.S.P. 5 Meta Cumaral Construction - 10-year Empresa Aguas del 1 Aug-01 93,0% nd 97,0% 95,0% 100,0% Operation Llano S.A. E.S.P. 6 Chocó Tadó 12-year Operation & Francisco Velásquez 1 Oct-01 46,0% 50,0% 95,0% 85,0% Management with Ingeniería Civil y Construction Plan Sanitaria S.A. execution 7 Chocó Itsmina 12-year Operation & Francisco Velásquez 1 Oct-01 33,0% 17,0% 95,0% 85,0% Management with Ingeniería Civil y Construction Plan Sanitaria S.A. execution 8 Bolívar San Juan 10-year Operation Consorcio Estudios 1 Dec-01 76,0% 13,0% 80,0% 13,0% 100,0% 43,0% Nepomuceno Técnicos S.A. - ANDECON Ltda., (Aguas de la Costa S.A. E.S.P.) 9 Atlántico Soledad Operation with 20- Sociedad de 1 Jan-02 47,0% 36,0% 80,0% 69,0% 94,0% 90,0% year Investment Acueducto, Alcantarillado y Aseo de Barranquilla S.A. E.S.P. 69 10 Cauca Guapi 20-year Operation SIE de Colombia S.A. 1 Jan-02 75,0% 65,0% 100,0% 100,0% E.S.P. 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Coverage Department Municipalities Scheme Operator No. Of Starting Initial Initial Current Current Target Target Municip. date Water S. Sanitation Water S. Sanitation Water S. Sanitation 2006 2006 70 11 Vichada Puerto Carreño Operation with 20- Empresa de Servicios 1 Jan-02 80,0% 10,0% 100,0% 10,0% 100,0% 50,0% year Investment de Puerto Carreño - Seppca - S.A. E.S.P. 12 Nariño El Charco 12-year Operation & SIE de Colombia S.A. 1 Jan-02 75,0% 75,0% 100,0% 100,0% Management with E.S.P. Construction Plan execution 13 Valle Buenaventura Management & 20- Consorcio 1 Jan-02 90,0% 70,0% 98,0% 90,0% year Operation Hidroestudios - Conhydra - Hidropací�co The World Bank Colombia 14 La Guajira Barrancas, Operation - 12-year Aguas del Sur de la 4 Jun-02 70,0% 67,0% 75,0% 75,0% Distracción, Management Guajira S.A. E.S.P. El Molino, Villanueva 15 Sucre San Marcos Operation with 15- Aguas de la Mojana 1 Sep-02 60,0% 30,0% 90,0% 0,0% 90,0% 75,0% year Investment S.A. E.S.P. 16 Atlántico Sabanagrande, Operation with 20- ASOSASA E.S.P., 2 Nov-02 74,8% 64,3% 95,0% 75,0% Santo Tomás year Investment terminated the contract. The new operator is Triple A. 17 Sucre Sincelejo, Operation with 20- Aguas de la Sabana 2 Jan-03 80,0% 77,0% 82,3% 80,8% 98,0% 90,0% Corozal year Investment S.A. E.S.P. 18 Atlántico Ponedera Design, construction & Aguas de la Rivera 1 Mar-03 78,0% 60,0% 88,0% 60,0% 95,0% 70,0% 10-year operation S.A. E.S.P. 19 Magdalena El Banco Operation with 16- Operagua El Banco 1 Jun-03 43,0% 28,0% 65,0% 28,0% 90,0% 75,0% year Investment S.A. E.S.P. 20 Cundinamarca Agua de Dios, Operation with 20- Aguas del Alto 2 Nov-03 93,0% 84,0% 99,0% 80,0% 98,0% 95,0% Tocaima year Investment Magdalena S.A. E.S.P. 21 Atlántico Baranoa, Operation with 20- Aguas del Norte 2 Dec-03 72,0% 0,0% 95,0% 50,0% polonuevo year Investment S.A. E.S.P. Contract transfered to Triple Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector A Atlántico on June 2005 Coverage Department Municipalities Scheme Operator No. Of Starting Initial Initial Current Current Target Target Municip. date Water S. Sanitation Water S. Sanitation Water S. Sanitation 2006 2006 22 Cordoba Cerete, Cienaga Operation with 20- UNIAGUAS S.A. E.S.P.: 4 Jul-04 70,0% 45,0% 86,2% 73,3% 100,0% 100,0% de Oro, year Investment Created by the UNIÓN Sahagún, San TEMPORAL ERAS Carlos 23 Bolívar Arjona, Turbaco Operation with 20- ACUALCO S.A. E.S.P. 2 Oct-04 54,0% 9,5% 90,0% 90,0% year Investment 24 Cauca Guapi 20-year Operation New operator 1 Jun-05 100,0% 100,0% 25 San Andrés San Andrés Design, construction & Proactiva aguas del 1 Oct-05 27,0% 7,0% 65,0% 54,0% 15-year operation archipiélago S.A. E.S.P. 26 La Guajira Fonseca, NA Aguas del Sur de la 3 Dec-05 Hatonuevo, San Guajira S.A. E.S.P. Juan del Cesar 27 Sucre San Onofre Construction - 15-year Tecniaguas S.A. Esp 1 Aug-06 78,7% 27,9% 78,7% 27,9% 90,0% 40,0% Operation 28 Antioquia Apartadó, Operation agreement The regional company 5 2006 Carepa, Aguas de Urabá S.A. Chigorodó, E.S.P. is temporary Mutata, Turbo and will look for an specialized operator. 29 Atlántico Juan de Acosta, Operation agreement Sociedad de 4 2006 Piojó, Tubara, Acueducto, Usiacurí Alcantarillado y Aseo de Barranquilla S.A. E.S.P. 30 Bolívar Carmen de Operation agreement Aguas de la Costa 1 2006 Bolívar S.A. E.S.P. Source: PME Archives 71 Note: Itsmina, Tadó, Condoto, and El Charco were part of the Minor Municipalities Group and Rural Areas of the MAVDT, in a pilot case for very small municipalities. 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector 1.4.3. Lessons Learned from the PME Some of the lessons learned with the development and implementation of the PME include the following: (i) Scheduling of the resources contributed by the Nation: Most initial sched- uling did not contemplate the time needed for processing the National Gov- ernment contributions, and as a result the operators received resources much later than expected; (ii) Write off of liabilities: In some processes55 the labor liabilities of the old companies, prior to the arrival of the operators, were not covered and the responsibility was delegated to the municipalities. This generated the risk of labor substitution for workers’ legal claims against the municipality. In the case of San Juan Nepomuceno, the start date was delayed for almost two years because the electric power company did not provide service until the municipality paid the old arrears. (iii) Concession terms: In most processes, short periods were assigned for the bidders to prepare their proposals, considering that these agreements have a duration of ten or more years. Periods of less than two months for the prepa- ration of proposals were identi�ed in at least nine processes. (Table 9). This tendency is sure to provoke more uncertainty in the processes, as it forces the bidders to use high safety factors in their estimates, and discourages the par- ticipation of investors who are more risk averse or who have business models that demand a good knowledge of the infrastructure situation. (iv) Bene�cial use of the infrastructure: In most municipalities the infrastruc- ture is not properly valuated and recorded in inventory. There were cases in which bids were opened without considering that not all the infrastructure belonged to the municipality. In one of the failed concession processes of ERAS (Córdoba), there was no authorization from the Governor and this was one of the reasons given by the operators for not bidding. 55 Sincelejo, San Juan Nepomuceno, El Banco, Sabanagrande, and SantoTomás. 72 The World Bank Colombia 1. Institutional Reforms in the Water Supply and Sanitation Sector in Colombia Table 9. Participation of Selected Bidders in Competitions for the PME Market Process Opening Closing Proposal # Bidding # Bidders presentation term documents (months) sold Turbaco and Arjona 10/22/2003 01/16/2004 2.90 2 1 Baranoa and Plonuevo 08/252003 09/29/2003 1.20 3 1 ERAS 11/14/2003 01/03/2004 2.60 5 1 Buenaventura 08/15/2001 11/06/2001 2.80 1 1 Sincelejo and Corozal 08/06/2002 09/06/2002 1.07 1 1 El Banco 12/31/2002 02/14/2003 1.53 2 2 Maicao 11/15/2000 12/13/2000 0.97 1 1 Montería 07/07/1999 10/01/1999 2.90 3 3 Ponedera 12/10/2001 02/15/2002 2.27 4 4 Sabanagrande and 01/282002 03/15/2002 1.57 2 2 Santo Tomás San Juan Nepomuceno 01/20/2001 07/05/2001 5.57 1 1 San Marcos 03/14/2002 05/14/2002 2.07 4 4 Soledad 04/14/2000 06/02/2000 1.67 8 8 Turbaco and Arjona 10/22/2003 01/16/2004 2.90 2 1 Source: Rozo (2007). (v) Uncertainty of investment plans at pre-feasibility level: Most processes applying to the PME have a signi�cant investment lag and lack precise infor- mation on the state of the systems and on the necessary master plans. Given the urgency of presenting a solution and the limited time during which the Municipal Council has granted powers to the mayor in the matter, the agree- ments were structured based on conceptual investment plans and not on more structured plans which would demand more time for preparation. It is necessary to design agreements that are better suited to this restriction, in such a way that the allocation of risks is adequate to attract more operators. construction supervisors: The monitoring role should be based on meeting the established commitments but, in most cases, the contract did not include a de�nition of the monitoring tasks, nor of the indicators to be monitored. This was in addition to the appointment by the municipalities of people or �rms that did not have the correct pro�le, and they have evidenced more interest in intervening in the operator’s administrative decisions than in the achievement of the targets set in the agreements. 73 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector (vii) Agility of shock plan: The initial PME model implied that the selected op- erator would only have a conceptual investment plan and had to begin the studies at the design level once the operation started. After that, it had to submit the project for approval and begin the necessary proceedings to sign the �nancial support agreement with the Nation, to later implement the bid- ding process for the concession of the works and their execution. This cycle may take up to a year, with a negative effect on the community’s perception of the process, lacking rapid improvements in the quality of service. Recent processes have included schemes allowing for the essential works to begin immediately following the arrival of the operator. (viii)Awards at the end of the mayor’s term: Often concession processes that were awarded during any mayor’s term in of�ce were subject to the opposi- tion of other party candidates during the following mayoral election cam- paigns. A newly elected opposition mayor often put obstacles in the way of an adequate development of the service operation by delaying the contributions that were his responsibility and using the service as a political tool. The lesson learned is that the process to establish an arrangement with a new operator must involve not only the municipal administration but also the community in general and the other political groups in the region. (ix) Institutional aspects: The processes of corporate modernization require strong political leadership due to the local consensus that is required, as well as a stable and highly specialized support team. These two factors were af- fected by the PME’s positioning in a fourth level within the National Gov- ernment structure, under the Water Supply Board of the MAVDT. This was reflected in the failure of some processes and in discretionary changes in its management and work team. 74 The World Bank Colombia Edwin huffman. The World Bank 1.5. Conclusion: Sector Achievements and Challenges The sector reforms of the 1990s in the WSS sector in Colombia have generated positive results. Through them the country was able to set up a signi�cant num- ber of specialized operators, public and private, national and foreign, who have been operating part of the water and sanitation systems with greater ef�ciency and better management. In larger cities and in some smaller municipalities there has been signi�cant progress in terms of coverage and quality. Currently the country has a framework of laws, regulations, and sector policy that has stimulated a generation of reliable information for the sector, which de�nes the setting of tariffs for services based on their production costs, in this way sending adequate signals to rationalize consumption, with a positive impact in the environment, and making it possible to program the extensions of the systems’ capacity with ef�ciency criteria. The policy framework developed has been suf�ciently broad for the emer- gence and coexistence of several schemes of private participation, corporate development, and competition. These have made it possible, for example, to re- structure some public companies at a municipal level so that they are more com- petitive today, using flexible schemes of private-public partnership. This diversity also makes Colombia a special case, at least in the Latin American context. The sector reforms have also generated a signi�cant increase in the re- sources available for investment in the WSS sector. This increase is due to two main factors: the strengthening of the sector’s decentralization process, with a signi�cant increase in the transfers from the Nation to the municipalities, and the 75 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector use of tariffs as a natural source of �nancing for the sector, after the application of the tariff methodologies starting in 1996. In terms of incentive mechanisms for the PSP, the creation of the PME in the MAVDT should be emphasized. Indeed, the PME made it possible to structure a solid and standardized model to establish arrangements with specialized opera- tors in the sector, through competitive and free access processes, with objective selection criteria for effective competition at the time of de�ning access to the market. These processes, which have been successful in municipalities of different sizes, were accompanied by signi�cant state contributions to co-�nance invest- ment and mechanisms which facilitate a better targeting of public resources in the sector. The main challenge for the future may be to attract specialized operators to the smaller municipalities which do not currently have them. For that purpose, over the last two years the policy framework has been focused on promoting the sector’s development, by using the departments as the intermediate institutional level between the National Government and the municipalities, to formulate pro- grams with regional impact and promote comprehensive investment plans. The idea behind this strategy is to accelerate the expansion of coverage and improve the quality of service, making it easier to meet the following poli- cy guidelines: (i) effective inter-institutional coordination within each level and across different levels of Government; (ii) accelerating the sector’s modernization throughout the country; (iii) taking advantage of economies of scale by structur- ing regional supply schemes; (iv) connecting the different sources of funding and facilitating the sector’s access to credit; (v) exercising a better control over resources and compliance with regulations; and (vi) having comprehensive in- vestment plans with regional perspective for the short, medium and long term. 76 The World Bank Colombia 2 Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Sebastian Szyd. The World Bank T his chapter will present eight case studies, illustrating different examples of how private sector participation in the water sector was implemented in the Colombian context, highlighting the lessons learned from each. First, the chapter presents the case of the city of Cartagena de Indias, where the operation notably improved the sector’s ef�ciency, quality, and coverage once the mixed company was set up as service provider. In this case, the PSP process was easier after a regulatory framework had been established for the provision of residential public services. Second, the case of CONHYDRA S.A. E.S.P. underlines the importance of the collaboration between state and private entities in order to achieve optimum ef- �ciency indexes and increase the quality of services. Additionally, it illustrates the development of the provision of residential public services, a new business that did not exist before 1994. The case shows a situation where the local municipal administrations involved did not have a history of private participation nor did the municipalities have any experience in service provision. Up to that point, the operator had been regional and its management had mostly disregarded the local authority, following the logic of politicized administrations that sought their own interests and not those of the communities. Third, the case of the city of Palmira shows how a business organization in- tegrating private participation can be structured by following very strict technical parameters to ensure the provision of adequate water and sanitation services. For this purpose, in addition to political will, detailed knowledge of the sector and the city where the model is to be applied are required. Previous interaction with the potential operators to address their most relevant concerns is also necessary. 79 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Fourth, the case of the city of Santa Marta is an atypical case of an early transformation into a private company, which occurred even before the National Public Services Law. It turned out to be an ineffective effort motivated more by clientelism than by service related motivations. As a consequence, the process ultimately led to the involvement of a specialized operator, which in turn resulted in service improvement. Even today however, the service conditions are not op- timal for a departmental capital city with a high tourism potential that is not yet fully developed. Fifth, the study will examine the regional scheme adopted in the Atlántico Department, with the company Triple A de Barranquilla leading the process, fo- cusing on the impact that private intervention, i.e. operation and investment, has had on each of the service indicators. One of the facts that should be underlined in this analysis is that Triple A has completely separated the state from its func- tioning and policy decisions, both because of legal aspects and as a consequence of the drive of the company as manager of the upgraded WSS public services in Barranquilla. The economies of scale that make it possible to keep low operating costs, the results derived from prioritized and effective investments in socially vulnerable sectors, and an aggressive and continuous image management in the communities of bene�ciaries can be considered key factors in the development of a regional process. Sixth, we describe the case of the management and operation of Aguas de Manizales S.A. E.S.P. It focuses on the company’s success because of excellent public management at a political, operational and technical level, without the participation of any specialized operator. Seventh, the case of Proactiva Aguas de Montería highlights social resis- tance in the context of a successful case of concession. Finally, the case of SERAQA S.A. E.S.P. presents a concession with shared �nance as a response to an urgent need for water supply and service improve- ment in Tunja. This case underlines the importance of cooperation between public and private entities. In this case, the municipalities and the specialized operator worked together to achieve optimum ef�ciency indexes with an outstanding ser- vice to the communities served. 80 The World Bank Colombia María Clara Ucros. The World Bank 2.1. Cartagena de Indias Since the 1960s, Empresas Públicas Municipales de Cartagena (EPMC) was not only the city’s water and sanitation operator, but also operated other public ser- vices such as street cleaning and market squares. In 1992, EPMC faced a �nancial crisis due to very de�cient performance and commercial management. It had little information, minimum measurements and few controls; its cumulative cash de�cit amounted to US$ 33 million; its revenues did not fully cover the expenses; only 45 percent of the total revenue portfolio was collected in 12 months; over 50 percent of the bills went uncollected; there was excess staff and a continuous turnover56; there were approximately 15 employees per each 1000 connections; the network losses amounted to 52 percent due to the poor condition of infra- structure (30 percent was out of order) and the lack of investment; service was discontinuous with 20 percent of the users suffering from serious interruptions and 42 percent from intermediate interruptions.57 The reform in the provision of water and sanitation services in the city of Cartagena was mainly driven by two players who sought to solve their own prob- lems. First, EPMC’s �nancial crisis had led the National Government to cover the company’s de�cit with the aim of guaranteeing the service. Second, the failures in the water and sanitation service led civil society and, more importantly, the hotels trade association, to make demands regarding service quality.58 56 Especially the management, which changed every time a new mayor took of�ce. 57 Data supplied by ACUACAR S.A. 58 IADB (2000). 81 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector In 1993, when a new mayor took of�ce in Cartagena de Indias, the Na- tional Government demanded a reform to solve the problems in the water and sanitation sector, in order to be able to �nance the expansion of coverage to the poorer areas. Thus, the mayor initiated a process to carry out a structural reform of the water and sanitation service, based on the case of Barranquilla, where ser- vice was provided by a mixed capital company, the only example that existed at the time. This decision was opposed by the District Council, the body responsible for approving this type of reform.59 Nevertheless, the mayor continued pursuing this objective and succeeded, as a �rst step, in creating a new company that was solely responsible for providing water and sanitation services: Empresas Públicas Distritales (EPD). The other services were transferred to other municipal agencies or outsourced to private companies. In spite of these changes, by late 1993 no substantial improvements had been achieved in terms of quality, ef�ciency, and coverage of the water and sanitation sector.60 In 1994, based on the regulatory framework provided by Law 142 of 1994, it was decided that a private operator would provide the service under a mixed company arrangement. Thus, EPD was liquidated and an international tender was called to select a highly experienced operator in the provision of water and sani- tation services. The bidding process was accelerated (lasting from May – Decem- ber 1994), because the mayor wanted to complete the process before his term ended on December 31. Furthermore, his successor had been elected in October on a platform of opposites to the participation of a private operator and even more to that of an international operator.61 Of the three companies that purchased the bidding documents, only one – Aguas de Barcelona (from Spain) – made a proposal. The lack of interest of the other two companies62 could have been due to the situation of violence that the country was experiencing at the time, as well as to the short time available to submit a bid, the super�ciality of the contract between the district and the private operator (the terms were very incomplete and relevant issues were not de�ned), the pressure of the municipal company’s unions to preserve their jobs, the rejection to the partici- pation of foreign operators on the part of civil society, or �nally, to the fact that similar processes were under way in other Latin American countries.63 59 IADB (2000). 60 IADB (2000). 61 IADB (2000); PPPUE (2001). 62 Compagnie Genérale des Eaux of France and North East Water Company of the U.K. 63 IADB (2000). 82 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia In consequence, on December 30, 1994, a contract was signed between Aguas de Barcelona (AGBAR) and the District, creating Aguas de Cartagena S.A. E.S.P. (ACUACAR), a mixed company with the shareholding structure that is il- lustrated in Table 10. Table 10. Capital Structure of ACUACAR S.A. E.S.P. (year 1994) Shareholder % Interest District of Cartagena 10% Aguas de Barcelona 50% Private Shareholders 40% Source: Aguas de Cartagena S.A. E.S.P It is important to note that Cartagena had began looking for alternatives to improve the WSS sector, and the bidding process was initiated before the pass- ing of Law 142 of 1994.64 2.1.1. Most Relevant Contractual Aspects In January 1995, a new mayor of Cartagena took of�ce with the intention of put- ting an end to the reform carried out by the previous administration, but numerous national and international institutions opposed him. The World Bank was one of the most insistent on the participation of private operators as a condition for future loans to the District of Cartagena’s WSS sector.65 In spite of this, the mayor man- aged to have the contract signed in December 1994 revised and some of ACUAC- AR’s rules were renegotiated. This process continued until June 1995 and the main modi�cation concerned the distribution of the shares, as illustrated in Table 11. Table 11. Structure of ACUACAR S.A. E.S.P.’s stock capital Shareholder % Modi�ed Interest % Interest Year 1994 Year 2005 District of Cartagena 50.00% 50.00% Aguas de Barcelona 45.91% 44.81% Private shareholders 4.09% 5.19% Source: Aguas de Cartagena S.A. E.S.P 64 It was issued on July 11 and the bidding process began in May. 65 PPPUE (2001). 83 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector On June 12, 1995 the District of Cartagena entered into a management contract with ACUACAR for the operation, maintenance and rehabilitation of the WSS systems for a period of 26 years, granting management autonomy to the operating partner. To ful�ll its contractual obligations, ACUACAR is required to generate and maintain a minimum corporate capital of COP$4 billion (ap- proximately USD$1.9 million in 2009).66 The District entrusted ACUACAR with the management of the Water and Sanitation Master Plan.67 In turn, ACUACAR executed a management contract with AGBAR whose commitments as operating partner were mainly the transfer of technology (com- puter programs and systems68), recruitment of specialized staff and training of workers, in addition to improving the indicators for ef�ciency in operations and investments for the rehabilitation and replacement of networks and systems. The operator’s remuneration for its work is a percentage of ACUACAR’s income from tariff revenue69, in addition to earnings on its ACUACAR shares. The deed transferring and delivering management of the district’s assets to ACUACAR was signed on June 20, 1995, indicating that their physical and mate- rial delivery would take place on June 25, the date on which ACUACAR started operating the water and sanitation service in Cartagena. 2.1.2. Condition of the Infrastructure The reform to the provision of public residential services in Cartagena facilitated the process for the participation of private investors with a specialized operating partner (AGBAR), and contributed to the continuous improvement of the man- agement indicators that are presented in this chapter. The charts illustrate the progress since the start of operations of ACUACAR and the tables compare some performance indicators of the public companies (EPD and EPMC, before 1995) and the mixed company (ACUACAR). 66 Data supplied by ACUACAR S.A. 67 PPPUE (2001). 68 Data supplied by ACUACAR S.A. 69 During the �rst four years of operation, AGBAR increased the percentage over the volume of billings gradually, 2.94 percent in the �rst year, 3.37 percent in the second year, 3.82 percent in the third year, 4.25 percent in the fourth year (IADB, 2000; PPPUE, 2001). From the �fth year onwards, 4.85 percent of the income (Source: data supplied by ACUACAR S.A.) 84 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 2.1.3. Changes in Service Delivery Under ACUACAR’s management, the production of raw (untreated) water was increased to 230,000m3 per day; the plant treatment capacity was expanded up to 270,000m3 per day; the treated water storage capacity was increased by 30,000m3; over 500 km of new water pipes and 400 km of new sanitation net- works were installed; and meters that provide 100 percent reliable readings were installed, allowing for an increase of the total revenue portfolio in 12 months from 45 percent in 1995 to 92 percent in 2006.70 Figure 6 shows the operator’s ef�ciency. While the number of potable water connections was substantially augmented, the volume of water produced gradually decreased during the �rst �ve years of operation and later stabilized. In addition, the percent of unbilled water dropped from 52 percent in 1992 (prior to any reform) and 60 percent in 1995 (before ACUACAR began operating) to 42.6 percent in 2006. ACUACAR’s commercial management and the investments in replacement of water pipes have contributed to the reduction of the percent of unaccounted for water. For example, in 1996, 1,105 repaired leaks were reported and in the year 2006, the number of repairs fell to 960. Figure 6. Comparison Between Produced and Billed Water in Cartagena 180.000 60% 160.000 50% 140.000 120.000 40% Thousand M3 100.000 30% 80.000 60.000 20% 40.000 10% 20.000 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Volume of Billed Water Non-revenue water Water Production (m3) Number of Connections Source: Aguas de Cartagena S.A. E.S.P 70 Data supplied by ACUACAR S.A. 85 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector 2.1.4. Service Characteristics Table 12 presents the evolution of the main management indicators in order to compare public management (up to 1995) to private management (since 1995) in the provision of Cartagena’s water and sanitation service. Table 12. Management Indicators of the Water and Sanitation Service in Cartagena INDICATOR 1992 1996 2006 Service Water coverage 72% 74.27% 99.90% structure Sanitation coverage 59% 62.16% 78.81% Micrometering Coverage 47% 72.21% 98.99% Operation No. of employees per connection / 1000 9 4.58 2.87 connections Network losses (% non-revenue water) 52% 51.09% 42.64% Quality Service continuity (No. hours/day) 7 20 23,9 Economic Total revenues (Millions of pesos) 62 28,592 103,966 7,380 Net result (Millions of pesos) – 2,214 2,157 9,539 Operating expenses (Millions of pesos) 3,616 27,973 83,184 Middle and long term debt (Millions of pesos) - 16,033 86,075 Source: Aguas de Cartagena S.A. E.S.P Notes: The values for the year 1992 were obtained in dollars (Source: IADB, 2000; p. 5); the conversion into Colombian pesos was done based on the historical data of the website http://www.wilkinsonpc.com.co/free/ dolar-hoy.html. For the years 1996 and 2006, the data were provided by ACUACAR S.A. The Investment Master Plan designed for 1995-2004 focused on water and sanitation network expansion allowing the water system, with a coverage of 73.1 percent and 89,678 connections in 1995, to reach a coverage of 99.9 percent with 157,698 connections in 2006 (see Figure 7). To that end, it was necessary to install 550 km of new networks, with a present total length of distribution networks of 1,339 km.71 71 Sales revenues. 86 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 7. Evolution of Water Coverage in Cartagena 180.000 120% 160.000 100% 140.000 120.000 80% 100.000 60% 80.000 60.000 40% 40.000 20% 20.000 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of drinking water connections % of drinking water coverage Source: Aguas de Cartagena S.A. E.S.P Figure 8 illustrates the fact that in 1995, when the private operator had only re- cently begun its operation, the sanitation system had 60 percent coverage with 92,682 connections; while in 2006 it amounted to 78.55 percent with 121,477 connections. Currently, Cartagena has 946.4 km of sanitation networks installed, an additional 50 percent of what it had in 1995, which represented 350,000 connected inhabitants. Figure 8. Evolution of Sanitation in Cartagena 140.000 90% 80% 120.000 70% 100.000 60% 80.000 50% 60.000 40% 30% 40.000 20% 20.000 10% 0 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sewerage connections % Sewerage coverage Source: Aguas De Cartagena S.A. E.S.P 87 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector In 1994, the service continuity was seven hours per day. With the new operator entering in 1996, major improvements were achieved representing an increase in service continuity to an average of 20 hours of service per day, and then in 2002, to 23.9 hours per day. Figure 9 shows that the continuity of water supply went from 60 percent in 1995 to close to 100 percent in 2004. There has also been a substantial drop in the number of complaints: the number of claims went from an average of 2,400 per month in 1995 to only 589 during the year 2006, of which 70 percent are favorable to the company. Figure 9. Evolution of the Water Service Continuity in Cartagena (hours/day) 25 24 23 22 21 20 19 18 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Continuity: Number of hours of service per day Source: Aguas De Cartagena S.A. E.S.P Figure 10 compares the main bene�ciaries of the increased water and san- itation coverage achieved since the entrance of the private operator. 56 percent of the new subscribers of the water system belong to stratum 1; 28 percent to stratum 2 and 6 percent to stratum 3. As for the sanitation system, 36 percent of the new subscribers belong to stratum 1; 44.7 percent to stratum 2 and 9.4 percent to stratum 3. 88 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 10. Increase in Water and Sanitation Subscribers in Cartagena per stratum 60% 50% 40% 30% 20% 10% 0% Estrato 1 Estrato 2 Estrato 3 Estrato 4 Estrato 5 Estrato 6 Water supply connections Sewerage connections Source: Aguas De Cartagena S.A. E.S.P 2.1.5. Investments The Master Plan stipulated total investments of US$236 million in the period 1995 – 2004, as follows: (i) investments in water services: US$ 64.6 million (27 percent); and (ii) investments in sanitation: US$171.4 million (73 percent). To develop this in- vestment plan, ACUACAR has three important sources of �nancing: tariff revenues from the public service and loans of the Inter-American Development Bank and the World Bank.72 In addition, there is an Investment Fund designated for the expansion or improvement of the assets handed over by the district.73 In 1996, ACUACAR adapted its tariffs based on the scheme approved by the Commission for the Regulation of Water Supply and Sanitation (Comisión de Regulación de Agua Potable y Saneamiento Básico, CRA). These regulations estab- lished that the portion of the tariff accounting for �xed costs had to be invested or used to pay for the costs of investments that had already been made; however, this did not apply to the case of companies that had no investment obligations. ACUACAR and the district studied the situation and decided that ACUACAR would allocate the �xed cost portion of the tariff corresponding to expansion in- vestments, but since this was not enough to cover the city’s needs, they split be- tween them the investment commitments. Therefore, it was agreed that ACUACAR 72 This arrangement was de�ned in April 1998. 73 Information supplied by ACUACAR S.A. 89 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector would bear the investments in the Master Plan corresponding to water services and the District would bear the investments corresponding to sanitation. A program was presented for Cartagena’s sanitation network discharging into the Bay with a total cost of US$ 40.5 million, which was �nanced by the Inter-American Development Bank (IDB), through a loan of US$ 24.3 million and the District of Cartagena with US$ 16.2 million, through the mechanism of valu- ation and recognition of investments already executed by the district. The loan agreement signed between the IDB and the District of Cartagena de Indias in 1998 appointed Aguas de Cartagena as the project implementer. The execution of this project was completed in 2006. The International Bank for Reconstruction and Development (IBRD) grant- ed a loan for US$ 85 million to the District of Cartagena in 1999 to �nance the Cartagena Water, Sewerage and Sanitation Project, with a total cost of US$ 117.2 million. The remaining US$ 31.2 million was �nanced with funding from the Na- tional Government, the District and Aguas de Cartagena for US$ 20 million, US$ 7.6 million and US$ 4.6 million, respectively. 2.1.6. Evolution of Tariffs When AGBAR began its operations, it was decided that it would maintain the same tariff that the Public District Companies had been charging during the sec- ond semester of 1995.74 Beginning in 1996, the tariffs were increased as shown in Figure 11. 74 Information supplied by ACUACAR S.A. 90 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 11. ACUACAR’s Tariff Evolution 3000 25% 2500 20% 2000 15% Pesos 1500 10% 1000 5% 500 0 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Average tariff - w/monthly consumption of 6 m3 Tasa de inflación Source: Aguas De Cartagena S.A. E.S.P 2.1.7. Financial Performance Figure 12 shows that Aguas de Cartagena began investing its own resources two years after the start of operations in the projects presented to the multilateral banks. The chart depicts the increase in total revenues and shows that from 1998 the in- crease in operating expenses does not follow the rate in the increase of revenues. Figure 12. Financial Performance of ACUACAR During 10 Years of Operations 110.000 100.000 90.000 80.000 Millions of Pesos 70.000 60.000 50.000 40.000 30.000 20.000 10.000 - 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net Income Investment Debt (Short and medium term) Total Income Operational expenditure Source: Aguas De Cartagena S.A. E.S.P 91 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector 2.1.8. Lessons Learned The operation of the water and sanitation service in Cartagena de Indias notably improved its ef�ciency, quality, and coverage after the mixed company was set up to provide this service. The PSP process was easier once a regulatory framework had been established for the provision of residential public services. With this type of scheme, it is possible to safeguard the interests of its shareholders (public and private) without affecting the users and the company’s �nancial sustainability. The district’s participation in the mixed company creates some instability from an organizational point of view, since every four years when there is a change of municipal administration new employees join the company, particularly in man- agement positions. As a consequence, the private partner has a better knowledge of the company’s structure and procedures, and holds a higher status. Although there are citizen participation arrangements to oversee the pro- vision of public services and state functions, civil society often fails to participate either due to lack of knowledge and/or promotion on behalf of the municipal, de- partmental and state authorities. Consequently, citizens do not effectively over- see the tariff increases, the condition of the investments, nor the condition of the existing infrastructure or that under construction. 92 The World Bank Colombia SajoR. Creative Commons 2.2. CONHYDRA S.A. E.S.P. This case study highlights the importance of the collaboration between state and private entities – represented in this case by the municipalities and the special- ized operator – in order to achieve optimum ef�ciency indexes and increase the quality of services. The case is interesting in that in the beginning, the local municipal admin- istrations involved not only did not have a history of private participation but had no experience of service provision by the municipalities either. Up to that point, the operator had been regional and its management had mostly disregarded the local authority, following the logic of politicized administrations that sought their own interests and not those of the communities. CONHYDRA S.A. E.S.P., as specialized operator, developed a good part of its capacity in operations associated with these municipalities. It is a clear example of the materialization of the business opportunities generated by Law 142 and one of the �rst initiatives of this type in the country. 2.2.1. The Beginning of Private Operation in Antioquia The centralized character of the water and sanitation services in the country was especially manifest in Antioquia, one of the departments with the largest number of municipalities in the country – more than 120 – mostly operated by ACUAN- TIOQUIA, a state-owned regional entity under the INFOSPAL, a national institute that governed the sector since the 1950s. 93 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector ACUANTIOQUIA suffered a crisis largely generated by insuf�cient funds be- cause of the winding down of INFOSPAL in 1987 and other administrative reasons. This led the Governor of Antioquia in 1994 to rethink the management, operation and investment scheme for which the entity was responsible. It was decided that management contracts would be granted to private companies through bidding processes, taking advantage of the new legal framework concerning the provision of public services, established by Law 142 of 1994. The process would later demonstrate to be a good business, with adequate tariff conditions for the community and good service levels. However, the Gov- ernment began by consulting with multinational water companies, which stated that it was impossible to provide good quality service under the economic condi- tions in which the business was presented, due to the socioeconomic situation of the municipalities included in the plan. This was another paradigm that was disproven once ef�cient operations with adequate pro�tability margins were ob- tained thanks to the entry of new business alternatives that better understood and adapted to the reality of the regions involved. ACUANTIOQUIA opened a bidding process for the “operation, management and maintenance of the water and sanitation systems� for more than �fteen mu- nicipalities. It was a �rst phase to grant 42 of the systems for which the company was responsible. There were numerous interested parties, which in the end were reduced to just a few consulting and construction �rms. Seven of the 42 systems were granted to CONHYDRA to cover different areas of Antioquia. Several months into the execution of the agreement between CONHY- DRA and ACUANTIOQUIA, the latter decided to transfer the contract to the municipalities that began to play an active part in the management of their ser- vices. This role has been crucial to strengthen the community’s trust in private participation schemes and to gather support for the operator. Its management has more than 95 percent approval rates on average for the 7 municipalities in which it operates. The ownership of the assets was transferred to the municipalities after an intense process of negotiation to agree on their real value, having been used for 30 years without an integral rehabilitation of the system’s networks or compo- nents. The cost, paid in the end by the municipalities, was symbolic when com- pared to the cost of the system. Without intending to experiment with variations in the agreements, AC- UANTIOQUIA implemented a model scheme, which was applied for 15-year terms in each case. Table 13 highlights the most relevant characteristics. 94 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Table 13. Selected Contractual Clauses for the Municipalities Operated by CONHYDRA Main Contractual Obligations Main Contractual Obligations for the Operator for the Contracting Entity Providing water and sanitation service (where the Delivering all the components of the latter exists), network maintenance, connection water and sanitation system for their of new users, reading of meters, billing, collection, management, operation and maintenance. resolution of complaints and grievances. Distributing the resources generated by the Paying the agreed remuneration to payment of tariffs, following the order de�ned the operator. in the agreement: a. Operation expenses, maintenance and operation. b. Taxes and fees (includes CRA and SSPP). c. Operator remuneration. d. Amortization of credits chargeable to ACUANTIOQUIA. e. Payment of audit by ACUANTIOQUIA. f. Replacement, extension and emergency fund administered by ACUANTIOQUIA. Carrying out all the investments and expenses Providing the operator with the necessary required for the optimization, maintenance, resources for the expenses and the replacement, extension and expansion of the investments required to replace and systems chargeable to ACUANTIOQUIA E.S.P. expand the system according to the Master Plan for water and sanitation systems. Source: Conhydra S.A. E.S.P. In an interesting case of citizen participation, the community of Marinilla decided that a 15-year agreement was too long not to have periodic evaluations where the community could contribute and submit opinions. Therefore, it was de- cided that not only would the agreement be for just �ve years, renewable against targets, but also that the community would decide, together with the municipal administration, on the renewal of the agreement. Until 2007, no long-term ex- tension had been approved, with only additions of maximum one year allowed, mainly due to administrative complexities and not to any reasons associated with non-compliance on the part of the operator. As stated in the introduction, CONHYDRA was an operator with no back- ground in this activity which resulted from a joint venture between a consulting �rm and a construction �rm, motivated by the opportunities offered by the departmental government to access agreements for the management of the water systems admin- istered by ACUANTIOQUIA. The company’s growth, which started from the develop- ment of its entire operational and management framework when the agreements had already been assigned, has been a learning process. Although it was somewhat 95 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector traumatic and went through necessary readjustments, the company has positioned itself as one of the most important private operators with exclusively domestic capi- tal. The water systems currently operated by CONHYDRA are described in Table 14. Table 14. List of Systems Currently Operated by CONHYDRA Owners Type of Location and their agreement Representatives (Management, operation and Entity maintenance Municipality Department Inhabitants Connections Starting End Date of the…) Date Turbo Water system Turbo Antioquia 50,000 8,158 December December Municipality 16, 1996 15, 2011 Chigorodó Water and Chigorodó Antioquia 36,000 6,985 October October Municipality sanitation 20, 1997 19, 2012 system Mutatá Water system Mutatá Antioquia 4,000 694 October October Municipality 20, 1997 19, 2012 Santafé de Water and Santa Fe de Antioquia 15,000 4,438 September September Antioquia sanitation Antioquia 15, 1997 14, 2012 Municipality system Aguas del Water and Puerto Berrío Antioquia 40,000 9,679 December November Puerto sanitation 1st, 1997 30, 2012 system Marinilla Water and Marinilla Antioquia 23,000 7,806 March 7, December Municipality sanitation 1997 31, 2007 system Sonsón Water and Sonsón Antioquia 19,000 5,016 July 1st, June 30, Municipality sanitation 1997 2012 system Acueducto El Water system Rionegro Antioquia 2,000 440 March February Tablazo Civic 1st, 2004 28, 2006 Corporation El Capiro Users Water system Rionegro Antioquia 2,500 470 November October Corporation 1st, 1998 30, 2008 Sociedad de Water and Buenaventura Valle del 350,000 63,000 January December Acueducto y sanitation Cauca 1st, 2002 31, 2021 Alcantarillado de system* Buenaventura, SAAB Source: Conhydra S.A. E.S.P. Note: * Agreement developed in partnership with the �rm HMV-Ingenieros and implemented under the corporate name of Hidropací�co S.A. E.S.P. 96 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia CONHYDRA has been in operation in the region for over ten years, during which time it has developed a management and development strategy that al- lows it to include access to other water and sanitation system operations in the Department in its short-term plans. This access to other system operations is rel- evant particularly within the framework of the recently promoted “Departmental Water Plans� that represent the national government’s strategy to strengthen the sector and continue with the private participation schemes. Aguas de Uraba (ADU), for example, is an entity resulting from the association of �ve municipalities of this Antioquean region, three of which are being operated by CONHYDRA. This arrangement has been a positive step towards regional consolida- tion and has demonstrated how useful it is to have a lean structure with low costs, adaptation capacity and a management model tested and adapted for the kind of population that makes up the Association. Seeing the National Government’s inter- est in strengthening ADU, probably with the aim of demonstrating the importance of unifying the operation of several municipalities (regionalizing) in order to achieve better service conditions, there is also the possibility of showing that companies like CONHYDRA – or generally speaking, a water “SME� – can �t into that scheme. As a result of this process, CONHYDRA was able to have the �rst operators with certi�ed labor competency in Colombia in the water systems of the municipalities of Turbo, Chigorodo, Santa Fe de Antioquia, Puerto Berrio, Marinilla, and Sonson. 2.2.2. Condition of the Infrastructure ACUANTIOQUIA transferred to CONHYDRA the systems of the municipalities that the latter now operates, with great de�ciencies in most cases in terms of func- tioning, capacity and physical condition. The service continuity and the water quality had constant failures and the way in which the community’s claims and complaints were handled generated a permanent feeling of dissatisfaction. The geographic and demographic variety of the municipalities where CON- HYDRA is present considerably affect different aspects of service provision. For example, water consumption is much higher in coastal areas than in the moun- tains due to climatic factors, but the population there has less of a willingness to pay. This implies that the emphasis will be different in each management scheme. In addition, it resulted in lower revenue for these coastal areas when ACUANTIO- QUIA was the service provider and therefore the resources available for invest- ment and infrastructure upgrading were almost nonexistent. This situation, on the other hand, would not be so prevalent in central municipalities within the Department. In summary, CONHYDRA received a system in better conditions in 97 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Marinilla, Santa Fe de Antioquia, Sonson (Mountain range) but in a state of near disfunction in Chigordo, Turbo, and Mutata. Within the optimization plan, “minor� investments were required to solve the more evident problems of water quantity and quality. For example, 15 km of pipes were replaced in the water network, optimizing the service by sectors to avoid general shutdowns of the service at times of rationing. This municipality in particular had constant interruptions of the service on weekends. With the large scale arrival of tourists (up to three times the municipality’s population), the system often col- lapsed and the service for all the population had to be shut down. Moreover, meters were replaced in 1,300 households and education pro- grams were started for the conservation and ef�cient use of water, as well as for the interpretation of the bill. This facilitated the collection process and promoted the acceptance of the operator by the municipal communities. Commercially, the unaccounted for water program was implemented and improved. This indicator was at 40 percent in 1997, which is to say that of every 100 liters of potable water that were sent to the distribution network only 60 liters were billed. Today the IANC (unaccounted for water index) is 12.44 percent, a much lower index than the national recommended average level of 30 percent, and is even at the level of the best water systems in the world. Within the company’s investments and short-term actions as part of the agreement optimization plan, the following have been carried out in the mu- nicipality of Santa Fe de Antioquia: (i) adaptation of water intake structure to diminish its vulnerability and improve the continuity of the service; (ii) instal- lation of 4500 meters of �berglass adduction pipes which increased raw water transportation from 55 l/s to 105 l/s; (iii) replacement of sanitation networks and construction of 2,000 meters of collectors; and (iv) domestic sewage treatment plants for 90 percent of sewage produced in the municipality. B. Marinilla The operator implemented the Master Plan for Water and Sanitation at a cost of COP$150 million (approximately US$ 131,260 dollars in 1997, given the average ex- change rate for that year) shortly after taking over. This plan has been the roadmap for the municipality’s investments. Over this same period, the water intake, pumping station and conveyance line over the Barbacoa stream were built. The investment for 98 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia these works was COP$650 million (approximately US$568,800 in 1997); a consider- ably lower value than the one budgeted by ACUANTIOQUIA. This investment turned out to be effective, as it increased the intake capacity and diminished its vulnerability. The �rst stage of the Master Plan for Water and Sanitation was carried out in 2000 and included plans for the construction of wastewater collectors, the north interceptor for wastewater, and the pumping station and wastewater treat- ment plant, as well as for the replacement of networks in the water system. The total investment of around COP$4,200 million (approximately US$2,007,099 in 2000) was contributed by the municipality, CORNARE (the CAR for the Rionegro- Nare region), the National Government and the system’s revenues. These works made it possible to improve environmental conditions in the Municipality.75 In 2002, COP$538 million (approximately US$208,531 in 2002) were invest- ed in improving the water system in the western sector and in the Mercedes sector, as well as in the south interceptor and Cuenca de Oriente sanitation system. The investments in 2003 amounted to COP$212 million (approximately US$72,158 in 2003), used in the replacement of the water and sanitation net- works in several urban area sectors. In 2004, the �lters of the water supply plant were upgraded and the second stage of the drying beds in the wastewater treat- ment plants was built. C. Chigorodó One of the cases where the systems were in poor conditions before the arrival of the specialized operator was Chigordo, a municipality in a violent area due to the existence of illegal armed groups. This situation is even more complex when the economic level of the population in this municipality of 58,600 inhabitants is taken into account, all of whom are in an alarming poverty situation, with no access to drinking water, scarce sanitation systems, and thus with a high vulnerability to gastrointestinal diseases. The support of the departmental government and the central government, and the commitment and vision of the operator, have contributed to improve- ments in the quality of life of the population. The investment carried out, in conjunction with the accompanying successful marketing campaigns, made it possible to achieve a 70.3 percent water system coverage, a 30 percent coverage in sanitation networks, and a total of 6,985 connections to water and sanitation. Today the municipality has service for 162.4 hours out of 168 hours per week and potable water (meeting quality standards) for a community that for 30 75 CONHYDRA S.A. E.S.P. Corporate web page (http://www.conhydra.com/marinilla.php). 99 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector years had consumed water with metals and color exceeding the acceptable limits for human consumption. The National Government has provided more than COP$500 million pesos (approximately US$235,891 in 2007) which have been used mainly for the re- placement of water networks and for optimization works in the treatment plant and respective pipelines. These investments, plus the operator’s management in the reduction of fraud, commercial management, and detection of losses have lowered the unac- counted for water index (IANC) from 56.0 percent in 1997 to 34.6 percent in 2006. 2.2.3. The Investments and their Impact The Marinilla and Santa Fe de Antioquia systems, and most of the other municipali- ties, have had the support of external �nancial resources. Costs recovered through tariffs are not suf�cient to cover all management costs, and capital subsidies are critical when the population is poor, especially for investment expansion. These external resources have come strictly from contributions made by the government within the support work coordinated by the MAVDT. This funding has been possible because of the signi�cant commitment of the municipalities to CONHY- DRA’s management, which ultimately targets the satisfaction of the users’ needs. The following table shows a comparison of the investments that were made annually in the systems of these two locations. Table 15. Investments According to Source in the Municipalities of Marinila and Santa Fe de Antioquia (in millions of pesos) Municipalities 1998 1999 2000 2001 2002 2003 2004 2005 2006 TOTAL Investments with own resources Marinilla 201.0 29.3 17.9 45.9 50.0 85.2 85.0 72.3 330.0 916.8 Santa Fe 12.8 32.4 158.5 186.4 161.0 322.0 339.0 886.2 186.4 2,284.9 Investments With External Resources Marinilla 4,085.0 0 335.0 145.1 0 35.0 271.0 4,871.1 Santa Fe 0 0 119.0 1,050.0 0 0 0 1,169.0 Total Investments Marinilla 201.0 29.3 4,102.9 45.9 385.0 230.3 85.0 107.4 601.0 5,787.9 Santa Fe 12.8 32.4 158.5 186.4 280.0 1,372.0 339.0 886.2 186.4 3,453.9 Source: Conhydra S.A. E.S.P. 100 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia These two municipalities have bene�tted from direct subsidies from the central government and departments. In the case of Marinilla, for example, these external contributions are well in excess of the investment component resulting from tariff revenues (“Investments with Own Resources�). This approach has been fundamental, and it is necessary to continue with it to provide sustainability to systems where the cross subsidy component is minimal. The municipalities, in turn, “spend� their contributions in subsidies to the poorest communities. As can be inferred from Figure 13, both Marinilla and Santa Fe de Antio- quia were able to optimize production. In the �rst case, the quantity of water from the plant was reduced and billing was increased, reducing the inef�ciency that existed in the operation of the treatment system. In the second case, where the water losses were lower (the system was in better condition and there was a lower incidence of fraud), the emphasis was on increasing production in order to achieve signi�cant increases in billing. 101 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 13. Results of Investment in Water Production and Treatment in Marinilla and Santa Fe de Antioquia Results of Investment in Water Supply Marinilla - Antioquia 2.500 2.000 1.500 MILES 1.000 500 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Non-revenue water Billed Production Results of Investment in Water Supply Santa Fé de Antioquia - Antioquia 1.800 1.600 1.400 1.200 1.000 MILES 800 600 400 200 0 0 0 0 0 0 0 0 0 0 0 0 Non-revenue water Billed Production Source: Conhydra S.A. E.S.P. 102 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia One of the aspects that best reflects the success of private participation in this region, apart from the acceptance of the community and the satisfaction of the local authorities with the operator, is the decrease in the unaccounted for water index to the levels obtained in Marinilla, Santa Fe, and Chirogodo. According to many specialists, the unaccounted for water index is precisely the indicator that reflects the good or poor management of the operator in a par- ticular system, even if there are countless variables that can affect it. The size of the system or network length is one of them, and in this case, it undoubtedly fa- vors the operator. Nonetheless, the operator’s management has been adequately controlled and the consequent results are evident. In Figure 14 the reduction trend achieved is evident, with current levels that can be rated as outstanding. Figure 14. Unaccounted for Water in Three Representative Municipalities of Antioquia Non-revenue Water 60% 50% 40% 30% 20% 10% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Marinilla Santafé Chigorodo Source: Conhydra S.A. E.S.P. The private operator’s arrival in the municipality of Marinilla had a sig- ni�cant impact on the water system coverage indicator. It can be inferred that there were households in the municipality that had no of�cial service from the 103 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector local water system while ACUANTIOQUIA was operating. With simple measures, in some cases new secondary networks, these households were connected and included in the billing of the new company. The coverage indicator in 1996 was 78 percent with 5,585 water supply connections, in 1997 it was 94 percent with 6,092 connections and in 2004 it reached 100 percent with 7,086. 2.2.4. Management Aspects Due to the operator’s investments, the emphasis of CONHYDRA’s actions has fo- cused on management aspects. Considering that most customers have a low socio- economic strati�cation (marginal tariffs, low payment capacity, high claim index) it is therefore necessary to reach the highest levels of productivity in order to guaran- tee the sustainability of the business, for the municipality and for the operator. Because of reasons already mentioned, the economies of scale have not ma- terialized in Antioquia like in other departments in the country. CONHYDRA turned this obstacle into an opportunity, centralizing the 10 operations it currently has in Medellín (capital of the Department). From Medellín, it is possible to plan and con- trol management, billing, and collection, among many other commercial, operative and administrative activities, while offering at the same time specialized services not frequently used in speci�c municipalities. The software development carried out there has contributed largely to the achievement of the ef�ciency shown in the indicators that follow for three of the municipalities served. Constant community engagement has been a key element in the strengthen- ing of the water and sanitation system management in these respective locations. The community’s open support of the operator in most cases, and the demands made through the municipal authorities have created a valid participation scheme in the most strategic decisions and even in the management evaluation. 104 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 15. Results of Annual Survey of Customer Satisfaction with the Water and Sanitation System in Santa Fe de Antioquia and Marinilla Client Satisfaction Santa Fe de Antioquia Satisfied Not satisfied 1999 2000 2001 2002 2003 2004 2005 2006 Client Satisfaction Marinilla Satisfied Not satisfied 1999 2000 2001 2002 2003 2004 2005 2006 Source: Conhydra S.A. E.S.P. 105 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector The efforts made by CONHYDRA and by the municipality of Santa Fe de An- tioquia have evidently had an effect on the way the users perceive the service. One of the most interesting cases found in this analysis concerning state- private collaboration and performed by CONHYDRA’s management in the Antio- quia municipalities was the small village of El Capiro. This voluntarily organized community decided to make use of the operator to improve their management and obtain a better level of water and sanitation services, for both their commer- cial and productive activities and for their daily domestic consumption. This public-private participation is noteworthy because of the high com- munity participation in this case, organized in the Corporation of Users of the El Capiro Water System, a non-pro�t entity trying to ef�ciently satisfy the popula- tion’s most elemental needs. Initially, this group of rural inhabitants in the mu- nicipality of Rionegro (Antioquia) from varied socioeconomic strata operated the village water system with local citizens, a system built on their own initiative and with their own resources, without the support of municipal authorities, at least economically. Since 1996, the number of water connections has doubled. 2.2.5. Tariffs and Subsidies Raising tariffs has been a key element to the sustainability of the operators and the viability of the reform effort. The water system tariff has evolved over the last ten years with increases well in excess of inflation, with an average increase of 20 percent between 2002 and 2007, while average annual inflation was lower than 5 percent. These increases have made it possible to implement the investment schemes. 106 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 16. Evolution of Water System Average Bill for Stratum 4 in Marinilla and Santa Fe de Antioquia (1996-2006) WATER SYSTEM AVERAGE BILL Marinilla and Santafe de Antioquia $45.000 25,00% $40.000 $35.000 20,00% $30.000 15,00% $25.000 Col $ $20.000 10,00% $15.000 $10.000 5,00% $5.000 $0 0,00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Marinilla Tariff Santafe Tariff Inflation Rate $10.132 $9.477 $10.865 $11.728 $13.161 $14.332 $17.044 $20.111 $23.758 $25.028 $33.742 $9.538 $9.118 $10.472 $9.269 $12.685 $13.814 $16.470 $19.523 $23.146 $27.721 $38.284 21,64% 17,68% 16,70% 9,23% 8,75% 7,65% 6,99% 6,49% 5,50% 4,85% 4,48% Source: Conhydra S.A. E.S.P. According to information supplied by the operator, the municipalities do not have the Solidarity Fund (Fondos de Solidaridad y Redistribución de Ingresos) ordered by the Government to receive subsidies for the less favored communities and, therefore, that amount must come from the service itself. This generates a signi�cant de�cit in the services, estimated at COP$10,000 million (approximately US$4,125,165 in 2006) for the period of 1996 to 2006. Apart from this, most of these localities do not have subscribers of high socioeconomic levels (in Colombia, strata 5 and 6), nor do they have signi�cant commercial or industrial users that might enable cross subsidies to compensate for this negative value. This situation undoubtedly conspires against the possibility of investing in the systems, which despite these dynamics have achieved sustainability and have seen improvement. 2.2.6. Financial Performance In a scenario where the operator has good �nancial indicators, like those reported by CONHYDRA after ten years of operation, it is evident that private participation in the water service and sanitation service sector is a pro�table activity. The ad- 107 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector vantage is as much for the active players as for the municipalities, and ultimately for the users receiving the service and bene�tting from having full access to water and sanitation. Aside from the operator’s �nancial indicators, the municipalities of Marinilla and Santa Fe report excellent results and show the following performance trends. Figure 17. Financial Performance $ 2500 $ 2000 $ 1500 $ 1000 $ 500 $0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Marinilla Result Marinilla Incomes Operational Expenses Debt $ 2500 $ 2000 $ 1500 $ 1000 $ 500 $0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Marinilla Result Marinilla Incomes Operational Expenses Debt Source: Conhydra S.A. E.S.P. 108 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 2.2.7. Lessons Learned The results obtained and lessons learned in each one of the Antioquia municipali- ties operated by CONHYDRA – under contractual schemes that did not involve large initial investments and which have systems requiring minor maintenance – should guide the decisions of municipalities in the country that still suffer from the poor quality of their water system. Such local administrations, as well as the communities are poorly affected as they have to constantly assign resources to “put out �res� due to emergencies in the functioning of the system. The performance of CONHYDRA as a specialized operator provides an im- portant case study because of the positive results obtained in complex scenarios concerning income, varying conditions of infrastructure and service before its ar- rival, and involving external pressures and violence. The coordination and cooper- ation with local authorities and communities, in a clear example of public-private participation for common growth and strengthening, is a key factor in this case. The conclusion to be drawn is that neither an operator exclusively focused on generating pro�ts nor an administration solely dedicated to enforcing compli- ance with an agreement or pleasing the community, makes sense. Mutual col- laboration, joint resolution of dif�culties and mutual acceptance of each party’s interests favor this scheme. Lastly, the CONHYDRA-municipalities team should be acknowledged as a clear example of the change in the country’s policy, through the inclusion in the 1991 Constitution of market elements that favored free competition in the provi- sion of residential public services. The opportunities generated by these structural changes in market conditions foster not only transparency in the granting of agreements based on free competition, but also the creation of jobs and new busi- ness sources for the companies, always for the sake of the economic strengthen- ing of the country and of the communities in each municipality. 109 Martín Duque Angulo. Creative Commons 2.3. Palmira This case, referring to the city of Palmira, shows how a business organization in- tegrating private participation can be structured by following very strict technical parameters to ensure the provision of adequate water and sanitation services. For this purpose, in addition to political will, detailed knowledge of the sector and the city where the model is to be applied are required. Previous interaction with the potential operators to address their most relevant concerns is also necessary. 2.3.1. The Business Model As in almost all the cities in the country, the enactment of Law 142 of 1994 was a timely tool to begin a process of transformation in the water and sanitation services sector and to begin to solve serious and complex problems resulting from the poor management of public services companies in Colombia. In Palmira, EMPalmira was in charge of the system’s management. EM- Palmira was a municipal company that was not immune to the corrupt and clien- telistic practices of the regional “chieftains� and, as a consequence, was burdened by a heavy �nancial load that it could not sustain. In addition, its piping system had deteriorated to a degree that made it impossible to recover whatever few in- vestments had been made and it was under pressure from the communities that received a poor and low quality service. This situation, which undermined Palmira’s potential as an economically strategic city in the Cauca Valley, a highly productive region for the country, led the 110 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia local administration to contract the business feasibility studies required by Law 142 of 1994, before initiating a transformation process involving private agents. This led to the beginning of the transformation of EMPalmira. The �rst step was separating the public services it provided (telephone, street cleaning, water and sanitation and public market). Next, actions were taken to execute a “delegated management con- tract to improve the quality and ef�ciency of the water and sanitation services in the municipality�, according to the authorization granted by the Municipal Council to the city’s Mayor – Agreement No. 100 of 1996. The bidding process that preceded the contract awarded in 1996 had the participation of the largest international water �rms, improving con�dence re- garding access to a high level of service for citizens under any of the options. The �rm selected to participate in the company with the municipality, which was al- ready represented in EMPalmira, was Lyonnaise des Eaux Services Associés (LYSA), a French company with a wide experience in the international water market and operations in several continents. Table 16 shows the capital stock of the new company, ACUAVIVA S.A. E.S.P. and its evolution over time. Table 16. Evolution of the Shareholding Interests in ACUAVIVA Original May 06 Empalmira 39.0 % -0- Municipality 1.0 % 40. 1% LYSA 36.34 % 49.62 % Other (private sector) 23.66 % 10.28 % Source: ACUAVIVA S.A. E.S.P In this process, there are two signi�cant points that should be highlighted: (i) The company EMPALMIRA remained an active partner in the newly created ACUAVIVA, providing an indication of the permanence of the municipality; and (ii) most of the local partners were businessmen in the region, giving the citizens’ perspective of the transformation and, at the same time, due to their representa- tive participation in the company, serving as a neutral element between the other two partners, inherently opposed in their business philosophy. Before the negotiation process, a preliminary shareholders’ agreement was signed on December 18, 1996, formalizing the terms under which the new company, ACUAVIVA, would operate and establishing LYSA’s role as operator, its compensation 111 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector and the contractual objectives inherent to its responsibility, coverage increases, collec- tion levels, unaccounted for water control and management optimization. Naturally, the legal process carried out in Palmira clearly established the players, timing, costs and conditions under which the agreements should be signed. The three agreements that were signed separated the duties and stages in the process, but did not exclude the specialized operator from any of them. This can be understood as having a single purpose: facilitating the participation of a highly skilled technical player in all the process stages, i.e. business organization, technical and �nancial planning, and administration and operation. The high risk of opposing interests could only be overcome with the operator’s dedication and commitment, and this has consistently been the case. Speci�cally, the following agreements were signed: A. Lease agreement between the municipality and ACUAVIVA: As an obvious condition to perform its corporate purpose, ACUAVIVA needed to receive under lease, among several options, the water and sanitation system for a �fteen-year term with monthly fees established therein. In June, 2007 the company’s management had submitted to the Municipal Government of Palmira for its consideration and possible debate with the Munici- pal Council, a proposed extension for an additional term (until 2027), arguing that the company (ACUAVIVA) needs to acquire debt in order to �nance the sanita- tion works required by the Regional Environmental Authority, to comply with the performance of the Sanitation and Disposal Management Plan proposed by the company in December 2005. The company has called this program “Palmira 2027 Water and Sanitation Project.� The most relevant features of the agreement are: - ture and any facilities that could be built as a result of the city’s growth or an increase in the number of users, for use exclusively to provide services to the residents of Palmira. years for the equivalent in Colombian pesos of US$ 815,000 as of July 2007, adjusted for inflation less 11 points in the �rst three years and for inflation plus three points in years four to nine; US$ 790,000 in the tenth year of the agree- ment; US$ 868,000 in the eleventh year; US$ 973,000 in the twelfth year; US$ 1,050,000 in the thirteenth year and US$ 1,052,000 in last two years. 112 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia - nism, EMPalmira and the Municipality of Palmira, maintaining their 40 per- cent ownership interest, will have the right to 60 percent of the company’s pro�ts, from the eleventh year of operations until the 15th year. - ity of Palmira the amount of COP$10 million of 1997 (equivalent to US$ 5.5 million as of 2007) for the sole purpose of subrogating or settling both the �nancial liabilities borne by the lessor and its labor-related liabilities so that the assets could be delivered free and clear from any liens. The above-men- tioned sum would be partially guaranteed by the lease fees and EMPalmira’s obligation to contribute COP$3 million (as of 1997) by pledging the National Government’s revenues to the Municipality of Palmira. As noted, this �rst agreement established the partnership conditions, but imposed no payment to be admitted as a partner, taking into consideration the high amounts that needed to be invested in the optimization of the system and, in general, in the proposed Investment Plan. All these investments would be re- covered through tariffs. B. Agreement for technical and engineering advice and preparation of the master plan The Draft Minutes of a Shareholders’ Meeting of the newly created ACUAVIVA S.A. E.S.P. authorized a contract for the technical and supply activities mentioned below, with the �rms SAFEGE and AQUA TECHNIQUE, which belong to the same group as LYSA: services, a telemetry system for the facilities and the water supply network and a network simulation model. - ter in fewer than �ve years. systems. 113 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector C. Delegated administration agreement between LYSA and ACUAVIVA The agreement’s structural elements were service targets, most importantly: production volume over �ve years; within �ve years; It should be noted that the business model approach of the Municipal- ity of Palmira openly states the intention of counting on a very strong strategic partner in the areas of engineering, administration and operation of similar sys- tems. This is reflected in the very demanding performance targets that were set for the contractor and which could only be agreed upon on the basis of knowing the potential revenue from tariffs. The outstanding performance indicators that ACUAVIVA has achieved during its management period also result from this ex- cellent business concept. 2.3.2. Investments and Their Impact The conditions in which the specialized operator found the water and sani- tation system may account for the targets de�ned in the agreement but, at the same time, explain the signi�cant investments required. The operating indexes in Palmira at the time are presented in Table 17. Table 17. Operating Indicators in Palmira (2007) Indicator Value Water coverage 85% Sewerage coverage 77% Unaccounted for water index 42% Collection % 68% Service continuity 19 hours a day Source: ACUAVIVA S.A. E.S.P. 114 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Likewise, it is understood that the technical assistance agreement signed for the initial period of the agreement was justi�ed by the need to properly plan the investments and achieve the best operating and service results in the shortest possible time. The technical support of LYSA and its consulting group was crucial in this sense, and resulted in very detailed calibrated modeling, which today is reflected in ACUAVIVA’s achievements. This bene�t has also been transferred to local of�cials who, after several years of training, occupy most of the company’s executive positions, especially at the senior level. One of LYSA’s policies, according to its corporate literature, is to adjust its intervention level based on the attainment of achievements and the ful�llment of the targets: it withdraws gradually as the local team becomes technically independent. However, it remains a partner and provides value to the business approach. Figure 18. Evolution of the Population with Water and Sanitation Services TOTAL POPULATION SERVED IN PALMIRA 260.000 99,5 99 250.000 98,5 240.000 98 97,5 230.000 97 220.000 96,5 96 210.000 95,5 95 200.000 94,5 190.000 94 1998 1999 2000 2001 2002 2003 2004 2005 2006 Population in Palmira Population served Water Population served Sanitation Sanitation coverage Source: Acuaviva S.A. E.S.P. Figure 18 shows the change in the trend (red line) from the fourth year onward. This was the period needed to plan, procure and build the new works to reach new sanitation users, unlike water users, whose connections were made gradually. 115 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector One of the most outstanding aspects of ACUAVIVA’s management over ten years is the signi�cant and consistent decline of the unaccounted for water index, due to signi�cant technical work. As a result, on average water losses are cur- rently below 25 percent, and as low as 21 percent, an outstanding performance indicator when compared to the results obtained in other cities in the country. Figure 19. Water Volume Produced and Billed during ACUAVIVA’s Management Term ACUAVIVA’s PRODUCTION VS. BILLING 25.000 40,00% 35,00% 20.000 30,00% 25,00% 15.000 20,00% 10.000 15,00% 10,00% 5.000 5,00% 0,00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Water volume produced Water volume billed Water volume unbilled (by difference) % unbilled water (NRW) Source: Acuaviva S.A. E.S.P. An example of the important work carried out during this period is the increase in the number of users achieved while reducing the production levels of treated water. This is evidence of optimization of the use of resources and offers a guarantee of ef�ciency to the inhabitants of Palmira: a 38 percent increase in the number of users, from 42,000 users in 1998 to 58,000 at the end of 2006. The 15 percent reduction in water production in the period 1998 – 2006 together with a 38 percent increase in the number of users in the same period con�rm the bene�t of having a private operator, essentially pro�t driven instead of an inef�cient entity offering no value to the end user. 116 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 2.3.3. Management Issues Arising from the Business Model The relationship between the business model adopted by a speci�c territorial en- tity and the management results are unequivocally reflected in the case of Palmi- ra. Although the natural incentive to attain the targets in a company with private participation are increased revenues, which determine the level of an operator’s compensation, the design of the contract for this city includes requirements for outstanding achievements by the private agent. The indicator of repaired leaks points out how critical the situation was. This indicator reflects a categorical decrease in the number of monthly leaks as compared to the situation under a municipal operator. Although the reason is not the same in all cases, usually the water systems managed by this type of municipal company were in such a condition of disrepair and neglect that the pipes carried less water than was lost. In addition to this, the time to repair damages was usually one or two days in cities the size of Palmira, as compared to the current four hours. In Palmira the situation was similar to that in the rest of the country. The number of leaks per year was 450 in 1998, implying an average in excess of 37 leaks per month. ACUAVIVA currently repairs fewer than seven leaks per month. This has implications in terms of losses while freeing operating resources to al- locate them to activities that add further value. Figure 20. Evolution of the leak repair indicator in Palmira, Valle del Cauca Breakages LEAK REPAIRS IN PALMIRA Km of pipes 500 500 450 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Leak repairs Total length of distribution network (est.) Source: Acuaviva S.A. E.S.P 117 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Certain anecdotes provided by ACUAVIVA refer to situations experienced by the company when the municipality was in charge of the operations. Undoubt- edly they can be taken as representative of many of the country’s state compa- nies. For example, workers were instructed not to repair leaks unless they were in the neighborhoods of their political supporters, or took more time to repair leaks in order to collect overtime. This undoubtedly affected the company’s �nances, as it generated additional costs agreed upon between the workers’ union and the politicians that managed the company. Chaos reigned and nobody assumed responsibility beyond personal or political interests. In addition to the implementation of technical elements to optimize the operation of a water system, it is necessary to design strategies so that the com- munity’s satisfaction results in higher revenues for the company. These strategies include the establishment of new connections, more ef�cient metering, higher collection percentages, portfolio recovery and more accurate business processes, such as readings with fewer errors, and timely delivery of bills. In this regard, the case of ACUAVIVA presents the following results: In 1997 it took EMPalmira over 15 days to connect a new user, while at pres- ent, ACUAVIVA meets this requirement in only four days; ACUAVIVA employs a unique variable as an indicator no common in other companies. There is a ratio between complaints addressed and accepted, which accurately reflects service problems. The basis for this measurement is that there will always be unsatis�ed customers but, to the extent that the complaint is justi�ed in a process supported by the Superintendence of Public Utilities, the problem is no longer the company’s. The number of complaints received has diminished from 9,766 in 1998 to 3,010 in 2006, i.e. a 70 percent reduction, while the percentage of justi�ed complaints is currently 9.8 per- cent, compared to 41.3 percent in 1997; Micrometering went from 72 percent in 1997 to 100 percent properly operat- ing meters by 2006. This impacts the company’s �nances and also positively affects the reduction of the unaccounted for water index. Another operating parameter which reflects the management optimization is the average of readings per worker-day, which grew from 210 to 490 in the period 1997-2006, with a 0.11 percent reading error rate. 118 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 21. Evolution of Requests, Complaints, and Claims in Palmira, Valle del Cauca Cauca 16.000 60,0% 14.000 50,0% 12.000 40,0% 10.000 8.000 30,0% 6.000 20,0% 4.000 10,0% 2.000 - 0,0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Complaints and claims accepted Complaints and claims resolved % acceptance by PQR Source: Acuaviva S.A. E.S.P. Acceptance of the arrangement by the community has several implications that should be highlighted. The service provided by ACUAVIVA, which ensures a continuous water supply is in contrast to the situation only ten years ago and there is a clearly favorable trend in terms of acceptance. On the other hand, due to the absence of a serious company while the system was managed by EMPalmira people were not accustomed to having their service cut off for non-payment, among other things. As mentioned by individu- als who currently work at ACUAVIVA and were previously with the state company, people were accustomed to having the same defective meter for 20 years, with constant sub-billing. One of ACUAVIVA’s strategies, common in most privately- owned companies in the country, is that meters must be changed whenever there is evidence that they are not measuring properly. In fact, ACUAVIVA was the �rst company in the western region and one of the �rst ones in Colombia to have a meter test bench certi�ed by the Superintendence of Trade and Industry, in sup- port of this policy. 2.3.4. Financial Performance The source of the company’s high level of debt is clear. The contractual terms did not require the investor to contribute funds, but to take the necessary actions to 119 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector ensure the flow of resources in accordance with the investment plan attached to the agreement, including working capital, which is reflected in the level of debt shown in Figure 22. These resources allowed for the implementation of very effective measures to optimize the system and the number of users has grown constantly. Figure 22. Evolution of ACUAVIVA’s Financial Performance over 10 Years of Operation and Management FINANCIAL PERFORMANCE 30.000.000 25.000.000 20.000.000 15.000.000 10.000.000 5.000.000 0 5.000.000 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net profits Medium and long term debt Total revenues Total operating expenses Source: Acuaviva S.A. E.S.P. 2.3.5. Lessons Learned The business model used by Palmira, based strictly on meeting technical and ser- vice interests, with pro�tability for ACUAVIVA’s shareholders, can be considered successful and to a large extent responsible for the achievements attained in ten years of service. It is important to note, however, that the model may have re- sponded to speci�c city conditions and may not be applicable to other cities. Although the shareholders have been guided by economic interests, the experience transferred from other equally successful cases by the specialized operator LYSA, in conjunction with the citizen’s view contributed by the local partners, have resulted in a responsible and serious management in partnership with the city. 120 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia The transfer of technology by the operator is important to meet training targets for local professionals. It enables them to continue operating the systems ef�ciently and effectively and strengthens their professional skills considerably, thus strengthening the sector in Colombia. Finally, a key factor in the company’s success is the private partners’ sup- port (with LYSA and local shareholders holding 60 percent of the capital) of the company’s management, which empowers the manager to resist pressures from local politicians. 121 Michael Kohn. Creative Commons 2.4. Santa Marta This section documents the case of the city of Santa Marta, as an atypical case of an early transformation into a private company, even before the creation of the National Public Services Law, which turned out to be an ineffective effort motivated more by clientelistic and corrupt interests than by service related mo- tivations. As a consequence, the process ultimately led to engaging a specialized operator, beginning a real process of service improvement. The service conditions to date are not optimal for a departmental capital city with a high tourism poten- tial that is not yet fully developed. Until very recently, most residential public service companies in Colombia were characterized by inef�cient operation which resulted in poor service to the community, and acted as a detriment to the economy. They offered no pro�ts to the shareholders or credits to the bene�ciaries. The inef�ciency of these compa- nies was favored by political negligence, clientelism and low labor productivity, thus generating an excessive indebtedness, poor service quality and a large num- ber of legal problems such as attachments, lawsuits, and complaints. The water supply and sanitation provider in Santa Marta was state-owned until 1972, when a mixed capital company76, Acueductos y Alcantarillados de Santa Marta S.A. (ACUAMarta) was organized on October 9, 1972 through Public Deed No. 852 signed by the General Manager of the National Municipal Promo- 76 Since the state owned over 90 percent of the shares, it was covered by the regime applicable to state-owned industrial and business companies. 122 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia tion Institute (Instituto Nacional de Fomento Municipal, INSFOPAL), the Gover- nor of the Department of Magdalena, the Mayor of Santa Marta, the Municipal Representative and the Manager of Empresa de Acueductos y Alcantarillado del Magdalena (ACUADELMA).77 Five years later, in 1977, ACUAMarta changed its business name to Em- presa de Obras Sanitarias de Santa Marta S.A. (EMPOMarta).78 In 1987, the National Government issued Decree 77, establishing that the supply of water supply and basic sanitation was the responsibility of each munici- pality, thus dissolving INSFOPAL, which had been carrying out that duty. Therefore, EMPOMarta was reformed again, with the mayor becoming its legal representative. Its life was de�ned in 20 years, through Public Deed No. 1350 of June 28, 1989.79 Over the two years following the decree, EMPOMarta focused on seeking alternatives to comply with its purpose of providing water supply and sanitation services in Santa Marta. For that purpose, loans were obtained in an attempt to improve the technical conditions of the system by engaging advisors specialized in the construction of wells, pumping stations, optimization of treatment plants, wa- ter pressure improvement and design of a pipe system to take the water collected from the wells to the treatment plant. The anticipated outcomes, however, were not achieved with the investments carried out by EMPOMarta. These were: increasing the coverage and quality of water supply and sanitation services in the city, improv- ing the billing, measurement and collection system, decontaminating water bodies, decreasing the losses in the networks and eliminating illegal connections.80 Due to a critical �nancial and technical situation that prevented EMPO- Marta from discharging its duties, the Mayor of Santa Marta issued Decree No. 207 on July 14, 1989, to establish a mixed economy company, with a 49 percent interest held by the District of Santa Marta and a 51 percent interest held by the private sector. Thus, in November 1989, Compañía del Acueducto y Alcantaril- lado Metropolitano de Santa Marta S.A. E.S.P. (MetroAgua) was organized and in December 1989 EMPOMarta was wound up. It should be noted that in October 1989, EMPOMarta had already granted the district the water supply and sanita- tion infrastructure under a trust to administer it on its own or through third par- ties through a lease agreement.81 77 Banco de la Republica (2000). 78 Through deed No. 1328 dated November 2, 1977, which amended the Public Deed dated 1972. 79 Banco de la Republica (2000). 80 Banco de la Republica (2000). 81 Established through Public Deed No. 1839 dated October 1989. 123 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector “Santa Marta was the �rst city in the country which, in a process of trans- formation and modernization of the water supply and sanitation services, incor- porated private capital and experience.�.82 However, this transformation was not ef�cient originally, because Colombia lacked a regulatory framework for private sector participation in the provision of residential public services83 and, further- more, no specialized operator was available to improve it. On the contrary, it might be considered that it created an opportunity to foster corruption and cli- entelism since, although EMPOMarta was a municipal mixed-capital company, it was also a state-owned industrial and business company, whose legal represen- tative was the Mayor. Despite the organization of the mixed company – MetroAgua – the water and sanitation services in the city of Santa Marta continued being poor and the company’s administrative and �nancial crisis persisted. Therefore, due to pressure exercised by the community, the Municipal Council and the National Government itself, a specialized operator was incorporated as a partner. Thus, in 1997, MetroAgua entered into an agreement with the joint ven- ture AGBAR Santa Marta, through a previous public bid, to operate the water sup- ply and sanitation service in the city and develop environmental consulting. The joint venture was formed by Aguas de Barcelona S.A. (AGBAR), Interamericana de Aguas y Servicios S.A. E.S.P. (INASSA), Eléctricas de Medellín Ltda. and Termotéc- nica Coindustrial Ltda.84 In July 2000, the joint venture AGBAR Santa Marta assigned its rights and obligations to the company AAA Servicios S.A. which, as the specialized technical partner, continued providing water and sanitation services in Santa Marta and, at the same time, became the majority shareholder of MetroAgua, as shown in Table 18. This was an internal transaction in the company, but originated the separation of a highly experienced operator, which became established as the specialized operator in the city of Cartagena with AAA Services becoming responsible for the cities of Barranquilla and Santa Marta. Finally, in 2001, a new specialized operating partner began operations in the District of Santa Marta, Canal de Isabel II, which by continuing to develop a more ef�cient and rigorous management, increased coverage and expanded the water and sanitation services in Santa Marta. 82 Banco de la Republica (2000). 83 De�ned in Law 142 of 1994. 84 Banco de la Republica (2000). 124 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Table 18. Capital stock composition of MetroAgua S.A. E.S.P. (year 2000) Shareholder Number of shares % District of Santa Marta 400,450 35 Local investors 252,111 22 Operating partner 505,130 43 Source: MetroAgua S.A. E.S.P. 2.4.1. Most Relevant Contractual Issues MetroAgua was registered through Public Deed No. 1895 on November 14, 1989 in order to “improve the management indicators at the request of the Superin- tendence of Residential Public Services, increase the water supply, sanitation and micrometering coverage, install macrometers, increase the collection rate and decrease the rate of losses.�85 In 1999, the District of Santa Marta and MetroAgua signed a lease agree- ment for the water and sanitation systems of the city for a 20-year term, whereby at the end of each month the Company must pay to the Municipality of Santa Marta a lease fee of 33 percent of the value resulting from the deduction from the Company’s gross collections of direct and indirect expenses. 2.4.2. Condition of the Infrastructure Below is a description of the most signi�cant changes introduced in the water supply distribution networks and wastewater collection systems and the resulting bene�ts since the international specialized operators (AGBAR and Canal de Isabel II) took over. To distinguish between the operations of AGBAR and Canal de Isabel II and to indicate the year in which the international non-specialized operator en- tered, a dotted line has been drawn in the charts below. Thus, AGBAR’s operation is represented for the period 1998 – 2000, although operations began in 1997, until the time when the national operator became involved.86 The operations of Canal de Isabel II are likewise represented in the charts beginning in 2001. Before the participation of the quali�ed operators, the situation in Santa Marta was critical, as the Company did not have an effective Sanitation Master Plan and there were periodic events such as the constant overflow of sanitation pipes due to the inflow of rainwater (because of the lack of a rainwater collection 85 Banco de la Republica (2000). 86 No data are available for the national operator prior to 1997. 125 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector system) especially in the area of El Rodadero, a highly touristic area, with the inevitable economic and image problems for the city. In the rural area there was no sanitation system and water coverage was low. Additionally, the water was not suitable for consumption. Furthermore, some water bodies that were sources of supply were diminishing or had dried up.87 The international operators made an important contribution to the basic sanitation system, expanding the sanitation coverage by 14 percent and treating the wastewater, as shown in Table 19. Table 19. Evolution of the Sanitation Service Coverage in Santa Marta 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of sanitation 35,200 44,840 48,862 49,991 51,092 53,092 57,020 58,663 59,400 61,061 Connections Sanitation coverage 59% 62% 65% 70% 70% 70% 73% 74% 73% 73% (%) Volume of wastewater - 12,266 12,765 13,148 13,409 13,175 12,834 12,490 12,349 11,617 treated (‘000 of m3) Source: MetroAgua S.A. E.S.P. Water quality and environmental management were the specialized op- erator’s priorities. Therefore, since 2000 water treatment plants have been rebuilt and expanded and the �rst ocean outfall in Colombia88, in order to mitigate the environmental impact generated by the discharge into the sea of untreated resi- dential wastewater, a common practice in Santa Marta until April 2000. Table 19 shows that during 1998 – 2000 water supply production increased by 4.7 million m3 to supply 6,841 new users (pink line). Since 2001 water supply production has decreased gradually, 6 million m3 over six years, despite having connected 12,262 new customers to the water network (pink line). However, wa- ter supply billing has remained stable during the presence of the international operators, at 15 million m3. This is due to a decreased need for repairs as networks have gradually been replaced where leaks have been detected. In the period from 87 Banco de la Republica (2000). 88 Santa Marta was the pioneer of ocean outfalls in Colombia; the country’s second outfall is being built in Cartagena de Indias. San Andrés Islas has already obtained the environmental licenses for the construction of an ocean outfall and recently (April 4, 2007) the company Pro- Activa Aguas del Archipielago S.A. E.S.P. has been authorized to fell trees at the location where the construction of an ocean outfall is being planned. 126 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 1999 to 2005, the number of leaks repaired diminished by approximately 50 per- cent (from 3,020 to 1,587) and in 2006 only 373 repairs were made. The unaccounted for water index (Figure 23) increased considerably – �ve percent – during the international operator’s �rst year. This is wholly due to rea- sons of public order in the country since at this time cases of rural population displacement to urban centers began being recorded. This led to the creation of substandard neighborhoods where squatters connected illegally to the public utilities networks. In 2001, the unaccounted for water index decreased by six per- cent, at a time when the government was seeking solutions to this social problem, facilitating centers to receive displaced families and thus avoiding such a large number of illegal connections. To date, this index has remained stable at ap- proximately 57 percent, since the legalization of the connections in substandard neighborhoods is a slow and complex process due to the social issues involved. Figure 23. Produced Water/Billed Water Ratio in the City of Santa Marta 80.000 66% 70.000 64% Qty. of cubic meters 60.000 62% 50.000 60% 40.000 58% 30.000 56% 20.000 54% 10.000 52% 0 50% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Billed water volume Produced water volume % Unbilled water (NRW) Qty. of connections Source: MetroAgua S.A. E.S.P. The specialized operators’ entry has contributed to improving and expanding the infrastructure required to properly provide water and sanitation services in the city of Santa Marta, as quali�ed by users and municipal authorities. The following section presents the most signi�cant corroborating management indicators. 2.4.3. Service Characteristics Different management indicators mark the performance in the provision of pub- lic utilities services, for example, service structure indicators such as coverage and micrometering which influence the produced and billed water volume, respectively. 127 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Operation indicators – number of employees by connection, water produced by con- nection, broken and clogged systems – determine the management ef�ciency; there- fore, leaks in the network and, consequently, the billed water volume, are controlled. Thus, quality indicators – service continuity, water quality, wastewater treatment – in combination with service structure and operation indicators, affect the economic in- dicators.89 Table 20 shows the improvement trend in water supply and sanitation ser- vice management indicators in Santa Marta. The indicators presented are considered to be those most relevant to the specialized operators’ management in MetroAgua. Table 20. Management indicators of the water supply and sanitation service in Santa Marta 1998 1999 2000 2001 2002 2003 2004 2005 2006 Service Infrastructure Water supply coverage 0.74 0.76 0.85 0.85 0.87 0.88 0.88 0.86 0.87 Sanitation coverage 0.62 0.65 0.70 0.70 0.70 0.73 0.74 0.73 0.73 Micrometering coverage 0.36 0.37 0.39 0.49 0.56 0.59 0.62 0.65 0.65 Operation Number of employees 3.2 4.0 3.9 3.2 3.2 3.9 3.2 3.1 3.2 per connection / 1000 connections Network leaks (% unbilled 0.59 0.64 0.62 0.58 0.57 0.55 0.57 0.57 0.57 water) Quality Service continuity 12 14 14 16 18 19 20 21 22 (No. hours/day) Economic Total revenues (billions of 16.0 18.1 37.8 37.1 45.8 39.8 36.8 36.5 37.6 pesos) Net result (billions of pesos) 3.53 1.41 2.18 3.88 9.62 1.76 1.13 5.91 0.51 Operating expenses 3.08 3.15 3.76 4.71 5.56 6.93 4.72 4.28 2.51 (millions of pesos) Medium- and long-term 24.8 30.4 37.2 42.0 45.3 43.8 46.6 43.3 27.7 debt (billions of pesos) Source: MetroAgua S.A. E.S.P. The increase in the coverage of both services – water supply and sanitation – is clearly noted in Figure 24 and Figure 25. The specialized operators’ management 89 Based on Aderasa (2007). 128 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia has allowed for a 13 percent increase in water supply coverage and an 11 percent increase in sanitation coverage, from 53,501 water supply connections in 1998 to 72,604 in 2006 and from 44,840 sanitation connections to 61,061 connections. In addition, the coverage of installed meters has almost doubled, from 36 percent in 1998 to 65 percent in 2006, as seen above in Table 20. Figure 24. Evolution of Water Supply Coverage in Santa Marta 80.000 90% 70.000 85% 60.000 Qty. of users 50.000 80% 40.000 75% 30.000 20.000 70% 10.000 0 65% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Qty. of drinking water connections % drinking water coverage Source: MetroAgua S.A. E.S.P. Figure 25. Evolution of Sanitation Coverage in Santa Marta 70.000 76% 74% 60.000 72% 50.000 70% Qty. of users 68% users 40.000 66% 30.000 64% 62% 20.000 60% 58% 10.000 56% 0 54% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Qty. of sanitation connections % Sanitation coverage Source: MetroAgua S.A. E.S.P. 129 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector In 1998, the water supply service was only 12 continuous hours per day, while in 2006, the continuous water supply reached 22 hours per day, as shown in Figure 26. Water distribution has been improved since the specialized operators optimized the treatment plants and built deep wells and pumping stations. Figure 26. Evolution of Sanitation Coverage in Santa Marta 25 20 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Continuous water supply service (hours/day) Source: MetroAgua S.A. E.S.P. 2.4.4. Evolution of Tariffs The private participation scheme has shown that it is possible to expand the water supply and sanitation systems, improve the service and further increase the economic ef�ciency through thorough monitoring and control. However, to achieve these developments it is necessary to increase the revenues by increasing tariffs and requesting loans. The operator AGBAR likely increased tariffs only in the second year of op- erations as a strategy to avoid giving rise to controversies at the beginning of its operations. However, in 1999 the tariff increase was very evident, as seen in a Fig- ure 27. When Canal de Isabel II arrived as operator, there was another signi�cant tariff increase (COP$1,000), although the inflation rate continued to decrease. 130 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 27. Operator’s Tariff Evolution: AGBAR (1998 – 2000) and Canal de Isabel II (2001 – 2006) in Santa Marta 8.000 18% 7.000 16% 14% 6.000 12% 5.000 Pesos 10% 4.000 8% 3.000 6% 2.000 4% 1.000 2% 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Average rate monthly consumption 6m3 Inflation rate Source: MetroAgua S.A. E.S.P. 2.4.5. Financial Performance As shown in Figure 28 MetroAgua’s �nancial performance has been quite varied. It should be noted that there is a gap between the company’s total revenues and total operating expenses. Also, since 2000 the level of indebtedness has been close to total revenues, aside from 2006, when the debt decreased signi�cantly. Figure 28. MetroAguas’ Financial Performance in Santa Marta (1998-2006) 50.000 45.000 40.000 Millions of pesos 35.000 30.000 25.000 20.000 15.000 10.000 5.000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Medium and long term debt Net result Total operating expenses Total revenues Source: MetroAgua S.A. E.S.P. 131 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector 2.4.6. Lessons Learned First, one of the reasons for the inef�ciency of state-owned residential public service companies is their instability. For example, in only 17 years there were three companies providing water and sanitation services in Santa Marta which, in turn, were subject to the winding-up of their partners on two occasions. As a result of these problems, the incumbent politicians were more concerned with the legal and administrative processes than with the proper provision of the public service, their true corporate purpose. Ideally, the stability achieved since 2001 will favor compliance. Secondly, the private participation scheme has shown that it is possible to expand the water supply and sanitation systems, improve service provision and further increase economic ef�ciency. This has been possible thanks to the involvement of a specialized operator that has experience in turning goals into achievements, while generating income. Finally, the private sector participation in the provision of public services has bene�ted the poorest population, thus contributing to public health improve- ments as it is now more dif�cult for political interests to postpone investments in water supply and basic sanitation. This was the case before the enactment of Law 142 in 1994 as due to political convenience – “propaganda� – it was prefer- able to invest in areas where the infrastructure was very visible in evidence of the government’s performance. 132 The World Bank Colombia Jdvillalobos. Creative Commons 2.5. The Atlántico Department This particular case analyzes the regional scheme adopted in the Atlántico De- partment, where the company Triple A de Barranquilla is leading the process. The study will focus on the impact that private intervention, i.e. operation and investment, has had on each of the service indicators, adding to the debate on the signi�cance of PSP in the provision of water and sanitation services. The case of Barranquilla points to the deterioration in the provision of residential public services, which began in the 1960s and worsened noticeably towards 1980. This phenomenon generated one of the most serious social and institutional crises the city has had to face, with serious clashes between society and the authorities, rampant corruption and an unusual increase in bureaucracy. When comparing the current situation of public services to the previous scenario – so complex and critical as to be highlighted by the press and historians – the clear conclusion is that there have been great transformations in the city. Many of these transformations occurred because of the partnership of the private sector with the local and National Government, a great support to the city, which would have otherwise faced the possibility of collapse. In 1991, through agreement No. 023 with the Municipal Council, the Mu- nicipal State Companies (Empresas Públicas Municipales de Baranquilla, EPMB) – until then responsible for the provision of the water and sanitation services – were �nally turned into a Mixed Economy Company. Sociedad de Acueducto, Al- cantarillado y Aseo de Barranquilla S.A. E.S.P., or Triple A de Barranquillla S.A. E.S.P. (Water, Sewerage, and Cleaning Services Company of Barranquilla) was created 133 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector mainly with resources of the municipal state and with limited private investment of 15 percent of the new company.90 The creation of this company implied a legal transformation of the old entity, but there was no partnership with private opera- tors, and so the technical aspects were relegated to the background. Within the framework of the above mentioned agreement, the municipality allocated the royalties from its shares in the company to the payment of EPMB’s �nancial and retirement debts, and invested “in-kind�, granting a 20-year conces- sion to TRIPLE A for the use of the assets of the water and sanitation system. Under these circumstances, TRIPLE A took over the operation of the Bar- ranquilla system in the midst of a crisis of water quality, discontinuous service, a high percentage of the city having no service, high losses of treated water, con- tinuous overflowing of sewers, gastroenteritis epidemics and the total absence of cleaning services.91 In 1996, when the technical and �nancial situation was still on the verge of collapse because of the insuf�cient revenues from the sale of services and municipal management resources assigned to the company, the municipality made the political decision of bringing in a specialized operator. After a bidding process, INASSA became a strategic partner of TRIPLE AAA. This improved the company’s systems structurally and led to the implementation of an enduring management system. Initially, this operator had an equity interest in Aguas de Barcelona (AG- BAR), a Spanish company which was renowned in the world and which was oper- ating in Latin America for the �rst time. Some years later, in 2001, AGBAR left this particular business and concentrated its operations in Cartagena, on the same Caribbean coast of Colombia. In 2002 it was replaced by Canal de Isabel II, anoth- er Spanish company, which operates the municipalities of the metropolitan area of Madrid. Despite the lack of data available for this study on the equity structure of INASSA, the impact of the specialized operator compared to the other partners, including the municipality, clearly shows that it has been very signi�cant for the success of the scheme in Barranquilla. Having consolidated the management of Barranquilla services, in 2000 TRI- PLE A began its expansion stage into other municipalities of the Atlántico Depart- ment (see Table 21) which exhibited unsustainable conditions concerning water and sanitation investments and management based on their trends at that time. 90 According to restrictions in the Agreement. 91 Internal document of TRIPLE A of Barranquilla; “Quince Años De Compromiso Con Barran- quilla�; 2007. 134 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Thus, the company initially signed a 30-year agreement with Puerto Co- lombia in March 1997, through direct negotiation with the municipal authorities and with all the required political support. Likewise, in December 2001, with the support of the National Government, it took part in the bidding process for the Soledad municipality as sole bidder, signing a 20-year agreement. It also partici- pated in the bidding process for the provision of services in the Galapa municipal- ity, and was awarded the service in October 2002, for a period of 20 years. Table 21. Population of the municipalities operated by TRIPLE A de Barranquilla Municipalities Population Operator Starting Date Served (2005) of Operator Barranquilla 1,109,067 Triple A de Barranquilla S.A. E.S.P. 1997 Puerto Colombia 38,637 Triple A de Barranquilla S.A. E.S.P 1997 Soledad 455,029 Triple A de Barranquilla S.A. E.S.P 2001 Galapa 31,596 Triple A de Barranquilla S.A. E.S.P 2002 Sabanagrande 24,880 AAA Atlántico S.A. E.S.P 2004 Santo Tomas 23,188 AAA Atlántico S.A. E.S.P 2004 Baranoa 50,261 AAA Atlántico S.A. E.S.P 2004 Polo Nuevo 13,518 AAA Atlántico S.A. E.S.P 2004 Sabanalarga 84,410 AAA Atlántico S.A. E.S.P 2004 Usiacuri 8,561 AAA Atlántico S.A. E.S.P 2007 Juan de Acosta 14,184 AAA Atlántico S.A. E.S.P 2007 Tubará 10,602 AAA Atlántico S.A. E.S.P 2007 Piojó 4,874 AAA Atlántico S.A. E.S.P 2008 Total 1,572,953 Source: TRIPLE A de Barranquilla S.A. E.S.P In 2004 and 2005, the results obtained in these municipalities generated a positive context to introduce TRIPLE A to the greater Atlántico region. Through an invitation by Atlántico’s government and with the support of the National Government, a contract was signed with AAA Atlántico S.A. E.S.P. where TRIPLE A holds a majority interest and the role of specialized operator for “Operation with Investment� in the municipalities of Sabanalarga, Baranoa, Polonuevo, Santo Tomás, and Sabanagrande (in separate processes). The National Government in- vested over COP$ 7 billion (equivalent to US$ 3.4 million in 2007) in these mu- nicipalities, in addition to the commitments made by the Department (Regional Government) and the municipality. 135 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Finally, by the end of 2006 and beginning of 2007, adjustments were ne- gotiated in the contract for the operation of the Coastal Water Supply System, which includes the municipalities of Juan de Acosta, Usiacuri, Tubará, and Piojó, where the company began implementation in 2007 and 2008. Thus, TRIPLE A is now associated with 13 municipalities in Atlántico, providing service to over a million and a half inhabitants, who according to the available surveys and opin- ions have given the company their full support. Table 22. Equity structure of AAA Atlántico S.A. E.S.P. Shareholder Participation % Triple A de B/q S.A. E.S.P. 94.9% Fontriplea 0.08% Gis Ltda. 1.58% Inassa S.A 3.44% R&T 0.0000381% Source: TRIPLE A de Barranquilla S.A. E.S.P 2.5.1. Most Relevant Contractual Aspects As previously mentioned, Colombia addressed the modernization of the scheme of residential public services provision in the 1990s, when the 1991 Constitution opened the way for service provision by private agents. This opening process was later re- flected in Law 142 of 1994, which completely rede�ned the institutional scheme and the arrangements for the provision of residential public services in Colombia.92 The process of transformation of the Municipal State Companies of Bar- ranquilla, and afterwards of TRIPLE A, began within this framework. It represented one of the �rst initiatives to bring about reform in the country, the so-called “�rst generation� processes.93 TRIPLE A’s activities within this new context began once the company was set up through a Subscription of Shares Agreement where the new shareholders took ownership and operational control, with the Barranquilla municipality remaining a non-executive partner throughout a 20-year concession agreement. The main re- sponsibilities included in the concession related to management of resources in in- frastructure works and targets for improved service quality in the city of Barranquilla. 92 Andesco (2005). 93 Burgos Mejia (2005). 136 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia The investments to be made by the company as concessionaire for the process of rehabilitation, construction and service improvement are not de�ned in the agree- ment in terms of amounts or execution terms. This provides flexibility in the de�nition of the investments to be carried out, since these are executed according to the com- pany’s revenues and its �nancial possibilities.94 The agreements for Puerto Colombia, Galapa, and Soledad, on the other hand, do not include any operator’s commitment for investment in the munici- palities, except for the resources generated in the operation of the systems itself or contributions from the Department or the National Government. In the smaller municipalities, which are being operated and managed by AAA Atlántico under the above stated conditions, there are three similar “opera- tion with investment� type agreements. These are typical operation agreements, with the difference being that the contractor is responsible for “developing the �nal designs, �nancing and carrying out infrastructure replacement and expan- sion works for the water and sanitation systems.�95 The operation, an investment agreement signed between ASISER S.A. E.S.P. – an existing association of the municipalities of Baranoa and Polonuevo, as well as the contracting entity – and AAA Atlántico is the assignment of an agreement originally executed with Sociedad de Aguas del Norte S.A. E.S.P. through a direct negotiation. The other agreements are similar to this one in the scope of their main components, but were awarded through other processes. Table 23 includes a description of the obligations of the operator and the contracting entity, in the three agreements signed up to 2007. 94 BANKWATCH RATINGS DE COLOMBIA S.A. Supporting documents for bond issue, 1997. 95 Investment with operation Agreement No 1 of 2003 by and between ASISER E.S.P. and Sociedad Aguas del Norte S.A. E.S.P. 137 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Table 23. Operator and Contracting Entity’s Main Contractual Obligations Operator’s Main Contractual Obligations Contracting Entity’s Main Contractual Obligations Meeting coverage and service quality targets. Authorizing operator to use assets related to Water and Sanitation System Service. Paying the part of paid-in capital (COP$ 1 Respecting the tariff structure that the billion – 2001). operator shall adopt as a result of the Obtaining the necessary �nancing to perform agreement under penalty of breach of the contract. contract in favor of the operator. Submitting an Annual Plan of Works and Transferring all the licenses. Investments, a Five Year Plan and the Guaranteeing the availability of the land corresponding Environmental Management for the provision of the services through Plan. Public Utility Declarations. Guaranteeing at its own risk the ef�cient, Supervising the performance of the continuous and regular provision of Operation with Investment agreement residential water and sanitation public Carrying out the necessary proceedings services, as well as their coverage and to provide subsidies for those users quality, operating capacity and infrastructure entitled to them. conditions. Assuming and taking responsibility for Developing the de�nitive designs, �nancing all the labor obligations with the workers and executing the infrastructure replacement generated prior to the operation with and expansion works for the water and investment agreement. sanitation systems. Timely payment for contract supervision. Within eight months of starting its activities, the operator should develop, together with the municipalities involved, the legal process that will make it possible to democratize the company, under the terms established in the agreement (up to 10 percent of AAA Atlántico S.A. E.S.P.’s total shares). Paying COP$ 300 million (2001) as a contribution towards the social security liabilities of ASISER ESP. Source: TRIPLE A de Barranquilla S.A. E.S.P 2.5.2. Condition of the Infrastructure Since several municipalities have TRIPLE A as a private partner and operator, the following description of the systems and bene�ts (impact) resulting from the company’s entry has been divided into two groups, based on how long they have had the operator and on their size. The result is a �rst group including Barranquil- la, Puerto Colombia, Soledad, and Galapa; and a second group with the smaller municipalities, which have had three years or fewer of operation. 138 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia As mentioned in the previous section, the infrastructure of the water and sanitation systems of Barranquilla was in a poor condition due to deterioration it had suffered during the 1980s and before. A large part of the population had ac- cess to water for only two to four hours a day, two or three times a week. Others had to carry water in containers or in carts pulled by animals over considerable distances. Moreover, the quality of this water was not optimal, and so there were gastrointestinal diseases, mainly in children, increasing children morbidity, mor- tality rates and adding to the conflicts generated by the dif�cult access to water. Figure 29 clearly shows the decline in the volume of non-billed water (bars) with the arrival of TRIPLE A to Barranquilla (dotted line). Even so, Figure 30 shows the gradual drop of the unaccounted for water index for Barranquilla and Soledad, starting from very high values: close to 70 percent for the �rst and 80 percent for the second. Figure 29. Produced and Billed Water Ratio in the City of Barranquilla Thousand of Cubic Meters 250.000 200.000 150.000 100.000 50.000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Produced water volume Billed water volume Non billed water volume (difference) Source: TRIPLE A de Barranquilla S.A. E.S.P 139 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 30. Percentage of Unrecorded Water for Barranquilla and Soledad 90% 80% 70% 60% 50% 40% 30% 20% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Unaccounted for water BAQ Unaccounted for water SOL Source: TRIPLE A de Barranquilla S.A. E.S.P. Figure 31. Produced and Billed Water Ratio in Soledad Thousand Cubic Meters 60.000 50.000 40.000 30.000 20.000 10.000 2001 2002 2003 2004 2005 2006 Produced water volume Billed water volume Non billed water volume (difference) Source: TRIPLE A de Barranquilla S.A. E.S.P 140 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 31 depicts the striking change as a result of the arrival of the op- erator (dotted line) at the end of the �rst year of operations in the municipality of Soledad, with no substantial investments but with speci�c measures taken by the specialized operator in similar cases. This also reflects the extremely poor conditions of the conveyance and distribution infrastructure, which generated signi�cant losses of water and insuf�cient supply for the population. As mentioned in previous cases, water losses are associated with countless variables which makes it a strategic indicator for management control. It shows the degree of vulnerability of the system (broken parts, age), management ef�ciency (early detection of leaks, ef�ciency in washing operations), and users’ maturity level (no fraud in answer to the operator’s good service and pressure), among others. TRIPLE A has been operating the water and sanitation systems of the Puerto Colombia and Galapa municipalities since 1997 and 2002, respectively. These were the �rst two municipalities of Atlántico that held a bidding process and which, due to their closeness to Barranquilla, have received a “neighborhood treatment� within the operational, technical and commercial areas of the operator. The bene�ts obtained from economies of scale in service provision are evident in these cases, as in Soledad. The results in terms of infrastructure management have been satisfactory for the local authorities and for the community itself, according to available surveys.96 They have perceived a signi�cant improvement in the service, apart from the good image generated by the operator through physical changes in the treatment plants and the administration buildings, generating a better living environment for the community. The situation in the municipalities of Baranoa and Polonuevo, Sabanagrande and Santo Tomás, and Sabanalarga did not improve as much and had systems that were in an even worse condition than in Barranquilla or some other larger municipalities. The main problem encountered by the operator from the bidding stage was the little information on the state and main characteristics of the system components, such as treatment plants, water and sewer pipes, collectors and interceptors, among others. This generated economic risks for the operator at the time of submitting an offer, as well as contingencies for the municipality due to the lack of information. In 1999 the Sabanagrande and Santo Tomás municipalities formed a regional water system operated by ASOSASA – an association of both municipalities – which shared the capture and adduction components, treatment plants, raw and treated water stations and management of the treatment plant. The water system had “leaks, illegal connections and irrational consumption on the part of the users, which made 96 Surveys. 141 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector it dif�cult to manage.�97 Furthermore, the sanitation system had approximately 60 percent coverage, with problems of sewage discharge in public thoroughfares and the consequent health problems for the population. The households that are not served by this system have latrines and septic tanks. Loss management became dif�cult be- cause of the absence of section valves and the lack of network cadastres (information on length, diameter and type of material).98 The system in Baranoa and Polo Nuevo was in similar condition and had even greater dif�culties concerning resources. Therefore, “ASISER’s revenues and portfolio make it impossible to repair even the minimum damages in the system and the debt to take care of the payroll, chemicals, electric power, etc. continues to mount day after day; while users stop paying because of the poor service conditions. These municipalities provided untreated water from wells because of de�cien- cies in the treatment plants of surface water (River Magdalena) intended to cover the total demand of the two municipalities. Besides, the plants operated an average of only �ve days a month because there were no administrative agreements between the municipalities on the amount of water corresponding to each, for which reason they did not contribute the resources for the purchase of chemicals. The total absence of sanitation systems led people to build septic tanks and latrines with no technical knowledge, affecting the health conditions of the municipalities. As set forth in this section, the overall situation of the water and sanitation systems of all the municipalities had serious de�ciencies making them impossible to manage as required by Colombian law, particularly with reference to water quality, service continuity and wastewater disposal, among other issues. The solution to these problems required large investments that could not be �nanced through tariffs because of the population’s economic situation. The National and Departmental Governments intervened with contributions for each of these processes. These resources were directly allocated to infrastructure upgrad- ing, managed by a trust fund and executed by AAA Atlántico S.A. E.S.P. The total investments made by the operator for this purpose, as reported by the company, was COP$ 9.6 billion from its own resources (through tariffs), COP$ 7.15 billion in contributions made by the Nation through the Ministry of Environment, Housing and Territorial Development, and COP$ 4.27 billion in contributions from the Atlán- tico Department (in 2007 currency). 97 Hidrotec (1999). 98 Hidrotec (1999). 142 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 2.5.3. Service Characteristics As can be seen in Table 24, there has been a clear trend towards improvement in each one of the most relevant indicators of the service in the cities and towns analyzed. Table 24. Most relevant indicators associated with service quality for the three municipalities (Barranquilla, Soledad, and Baranoa/Polo Nuevo) Quality: % conforming Continuity: % population Repaired samples with intermitent service leaks BAQ SOL BAR/POL BAQ SOL BAR/POL BAQ 1995 12.974 1996 24.589 1997 100,0% 29,6% 21.841 1998 100,0% 25,2% 19.205 1999 99,9% 21,8% 20.117 2000 99,0% 16,5% 21.116 2001 100,0% 8,7% 20.580 2002 100,0% 5,8% 27,0% 16.242 2003 99,0% 98,8% 0,0% 17,0% 16.838 2004 99,8% 98,9% 0,0% 17,0% 100% 14.237 2005 99,9% 99,8% 90% 0,0% 16,9% 100% 14.212 2006 99,5% 99,3% 98% 0,0% 0,0% 100% Source: TRIPLE A de Barranquilla S.A. E.S.P. One of the greatest achievements in a private participation scheme is increased coverage. It not only reflects an increase in customers for the operator, but also a ma- jor social bene�t in terms of access to water supply and to a better quality of life, sig- ni�cantly reducing the risks of gastrointestinal diseases, among many other bene�ts. It is evident that an important lag has been overcome in the municipalities that are the object of this study. This implies management capacity and signi�cant economic investments, and a lot of time. In �fteen years of management, Barran- quilla has been able to reach optimum levels of 99-100 percent coverage, starting from 70 percent in 1993; and a 25 percent increase in the municipality of Soledad, from 69 percent to 84 percent as seen in Figure 32 and Figure 33. Baranoa and Polo Nuevo, representing the other municipalities in the re- gion, have evolved from 62 to 69 percent with the change of operator, i.e. with 143 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector the arrival of AAA Atlántico S.A. E.S.P. This means that in less than three years approximately 10,000 people gained access to a service they previously lacked. Figure 32. Evolution of Service Coverage in Barranquilla 120% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Coverage AP Coverage ALC Measurement Coverage Source: TRIPLE A de Barranquilla S.A. E.S.P. Figure 33. Evolution of Service Coverage in Soledad 100% 90% 80% 70% 60% 50% 40% 30% 2001 2002 2003 2004 2005 2006 Coverage AP SOL Coverage ALC SOL Micrometering SO Source: TRIPLE A de Barranquilla S.A. E.S.P. 144 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Taking into account the fact that the expanded coverage of a water and sanitation system is not merely the installation of the network, but the effective and continuous provision of water supply or collection of sewage, there is a clear rela- tionship between these two coverage elements and the continuity of the service. Barranquilla enjoyed the bene�ts of increased water continuity, from 19 hours of service for 30 percent of the population, to 24 hours of service in 100 percent of the city in seven years. In Soledad it took the operator �ve years to achieve full water coverage of the population for 24 hours. Before the arrival of private sector involvement, there were only 12 hours of service for 40 percent of the population. Figure 34. Evolution of Continuity of Service (hours/day) in Barranquilla, Soledad and Baranoa / Polonuevo 30 6% 25 30% 20 # hours / day 27% 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Barranquilla Soledad Baranoa and Polonuevo Source: TRIPLE A de Barranquilla S.A. E.S.P. 2.5.4. Evolution of Tariffs The tariff increases in Barranquilla and the Atlántico municipalities resulted from the methodologies authorized by the Water and Sanitation Regulatory Commis- sion. Nevertheless, there were tariff lags that required constant increases, apart from the country’s inflation, which over the �rst years of operation exceeded 15 145 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector percent year on year.99 Thanks to the evident improvement in service quality, es- pecially in light of the situation at the time of arrival of the operator, the increases have not been met with insurmountable resistance in the community. Figure 25 shows data on the water tariffs, presenting an average bill (�xed charge plus 20 m3 of monthly consumption, called basic consumption) for stra- tum 4 in Barranquilla. Figure 35. Tariff Evolution of Stratum 4 Average Water Bill in Barranquilla 35.000 25,00% 30.000 20,00% 25.000 15,00% 20.000 Colombian Pesos 15.000 10,00% 10.000 5,00% 5.000 - 0,00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 6.736 10.677 14.244 16.449 21.222 22.979 23.646 25.178 26.832 28.749 29.859 21,6% 17,68%16,70% 9,23% 8,75% 7,65% 6,99% 6,49% 5,50% 4,85% 4,48% BARRANQUILLA WATER SYSTEM Inflation Rate Source: TRIPLE A de Barranquilla S.A. E.S.P. 2.5.5. Financial Performance Figure 36 shows the consolidated �nancial performance for the two operators: TRI- PLE A de Barranquilla S.A. E.S.P. and AAA Atlántico S.A. E.S.P. The operation began paying dividends two years after the arrival of the operator, reflecting the bene�ts 99 In the CRA methodology previous to Resolution 151 and 287, the tariff increase considered was from month to month. The new regulation considers tariff increases each time inflation reaches a certain value. This generates more stability in the perception of the public and in the practical aspects for the companies. 146 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia of the agreement without investment. In 2003, the Company began the major in- vestments in the system that was required in order to extend the coverage, based on credit and with the company being capitalized by its private shareholders. From the �rst year, the operating expenses were covered by the revenues as a result of speci�c user management actions and by optimizing the system’s operations. Figure 36. Financial Performance 1996-2006, Triple A de Barranquilla (includes results of AAA Atlántico). Million 220.000 170.000 120.000 70.000 20.000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -30.000 Net result Medium term debt Total income Operation expenses Investments Source: TRIPLE A de Barranquilla S.A. E.S.P. 2.5.6. Lessons Learned One of the facts that should be underlined in this analysis is that TRIPLE A, as a private company, has completely separated the state from its functioning and policy decisions, both because of legal aspects and as a consequence of the drive of the company as manager of the upgraded water and sanitation public services in Barranquilla. Having addressed this process in a responsible way with the city, it generated trust with the authorities. This does not mean that the district as a shareholder does not participate in the most important business decisions, safe- guard the wellbeing of the communities served, or supervise the city’s interests, 147 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector but rather that it has moved away from the business decisions, the company’s or- ganization and functioning, in order to avoid repeating the city’s previous crisis. The key factors in the development of a regional process like the one be- ing carried out in the Atlántico Department by Triple A de Barranquilla are: the economies of scale that make it possible to maintain low operating costs; the results derived from prioritized and effective investments in socially vulnerable sectors; and an aggressive and continuous image management in the communi- ties of bene�ciaries. Based on the experience of Triple A de Barranquilla it can be concluded that PSP should go beyond obtaining higher �nancial contributions from local or foreign investors (with purely �nancial and commercial interests) and should incorporate external agents that specialize in the provision of public services. Only in this way is it possible to have the technical, operational and commercial support required to focus on the most strategic aspects of the system with greater priority. The active participation of corporate of�cials from the specialized opera- tor – i.e. Aguas de Barcelona for the period 1997-2000 and Canal de Isabel II for the period 2001-2007 – is a necessary watchdog for TRIPLE A’s management, and a mechanism to convey best practices from these two international companies. 148 The World Bank Colombia Sgiraldoa. Creative Commons 2.6. Aguas de Manizales S.A. E.S.P. The case study presented here analyzes the management and operation of Aguas de Manizales S.A. E.S.P. It focuses on the company’s success because of excellent public management at a political, operational and technical level, without the participation of any specialized operator. 2.6.1. The Reform Process: Optimizing Good Management Before 1996, the state owned companies of Manizales, characterized by good management, provided water and sanitation, street cleaning, and telephone ser- vices. Nonetheless, seeing how most public services in the country provided by state monopolies had low levels of ef�ciency, quality and opportunity, it was feared that the same might happen in the city, considering the political uncer- tainty associated with the public nature of the company. Driven by this review of the traditional models fostered by the National Government, and seeking a higher autonomy and ef�ciency for its manage- ment, the Municipal Council through Agreement 164 of August 24 of 1994, bestowed on the Mayor powers to transform the state companies in terms of their structure, equity and management style. On February 28, 1996, Aguas de Manizales S.A. E.S.P. was created under Public Deed No. 521, as a mixed economy company for the provision of residential water and sanitation ser- vices, conservation of water basins and other supplementary activities, with the equity structure outlined in Table 25. 149 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Table 25. Aguas de Manizales S.A. E.S.P. Equity Structure Entity Number of Shares Shareholding Interest (%) INFI-Manizales 36,485,226 99.9753 Municipality of Manizales 121 0.0003 INVAMA 244 0.0007 Caja de la Vivienda 121 0.0003 EMAS 8,536 0.0234 Total 36,494,248 100 Source: Aguas de Manizales S.A. E.S.P. In Aguas de Manizales S.A. E.S.P., private participation represents just 0.0234 percent, owned by Empresa Metropolitana de Aseo (EMAS), which acted as facilitator since said participation did not translate into any real power in the management of the company but was useful in modifying its nature. The company’s new structure, equity shareholding, legal framework and management have generated results that are responsible for its progress in the operation of the city services and show the wisdom of transforming it. Part of the success was due to the inclusion of renowned city leaders in the Board of Direc- tors, thus providing a more business-oriented management, focused on increased competitiveness, which was reflected in the expansion of the Company to other regions in the country. Under the agreement, Aguas de Manizales S.A. E.S.P., apart from having to meet the obligations presented in Table 26, has to pay royalties for an amount equal to ten percent of the billings. This payment will be assigned mainly to legal- izing assets and rights of way, as well as to the purchase of land and reforestation for basin protection. In this way the Río Blanco, Chinchina and Guacaica river basin protection areas will be extended. These areas were initially created at the beginning of the 20th century thanks to the visionary awareness of the municipal administrations and the local civic leadership. Since the beginning of the concession agreement, 400 hectares have been bought in the Rio Blanco basin, for a total of 3,617 hect- ares, the conservation of which is the responsibility of Aguas de Manizales S.A. E.S.P. The owner of the land, however, is the main shareholder: INFI-Manizales, an entity created in 1999 for the city’s �nancing, promotion and integral develop- ment. In addition, in the Chinchina river basin, the conservation of 15,000 hect- ares of natural forest is included in the Procuenca project. 150 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia This project was the �rst one of its type in Colombia for CO2 capture and was recently approved by the Ministry of Environment, Housing and Territorial Development. This has generated the possibility of additional funding from the sale of CREs (emission reduction certi�cates) in international markets, with clear additional environmental bene�ts like the regulation of flow rates to supply wa- ter to the City of Manizales. Furthermore, Procuenca has been promoting the reforestation of private lands with commercial use in the central part of the basin, with over 4,000 hectares planted between 2002 and 2006. Table 26. Obligations Arising from the Concession Agreement Main Contractual Obligations for the Contractual Obligations Contractual Obligations for Concessionaire for the Grantor (Manizales the Municipality State Owned Companies) Guaranteeing the provision of water �t Transferring all the water Safeguarding and for human consumption, according to and sanitation service assets protecting the water the existing regulations, 24 hours a day, as well as service provision sources that supply the 365 days a year, except for temporary Collaborating with the treatment plants used by interruptions for maintenance, replacement concessionaire in all issues the Concessionaire or prevention of disasters, and with a or problems arising from Coordinating with the minimum pressure of 20 lbs/sq. inch events which occurred concessionaire the Providing water service to the entire urban when the grantor was the inclusion of its projects population located below the level of the service provider in the Land Use and treatment plants, as well as to the previously Covering economic Development Plans served rural population, with the obligation charges assumed by the Requiring a certi�cate of expanding coverage in this sector. Concessionaire that do not from Aguas de Manizales Implementing a geographical information correspond to the facilities on whether or not non- system to keep the cadastre of used for services or service residential wastewaters infrastructure and user register updated, provision, provided that need to be treated before in order to facilitate the future operation such charges relate to granting licenses of the system by people other than the assets transferred by the Covering the cost of water concessionaire Grantor or that were under consumed in recreational Maintaining 100 percent micrometering the Grantor’s responsibility fountains, public coverage in urban and rural areas bathrooms and fountains Operating, maintaining, repairing and installed for the free use of extending the water and sanitation citizens networks Promoting agreements Continuing with the studies and the between the execution of the project for water cleaning, Concessionaire and the intended to achieve compliance with the other utilities for the existing regulations on the disposal of liquid execution of works in waste a coordinated manner, Keeping the citizens informed on tariffs and seeking to reduce costs quality of services provided and inconveniences for the Informing the Municipality, and other citizens entities in charge of public works in the city, of its work plan for mutual coordination Source: Aguas de Manizales S.A. E.S.P. 151 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Aguas de Manizales received the recognition of the National Government, after ten years of consolidating its service management, when it was presented to the Departmental Governments of Cesar and Magdalena as a specialized opera- tor with the experience and the capacity required to develop their Departmental Water Plans. Thus, on September 20, 2006, Aguas de Manizales S.A. E.S.P., signed an Agreement with the Departmental Government of Cesar to manage and super- vise the Departmental Program for the Structural Transformation of Water and Basic Sanitation Services, for COP$12,459 million (approximately US$ 5,139,544 in 2006) for three years. Likewise, in December 2006, the Departmental Government of Magdalena signed an agreement with Aguas de Manizales S.A. E.S.P. for the Technical Man- agement and Supervision of the Water and Sanitation Plan in said Department, for COP$24,783 million (approximately US$ 10,223,398 in 2006) over �ve years. Thus, the company is expanding its area of operation to zones with tra- ditional de�ciencies in the provision of public services. This entails a major chal- lenge of knowledge transfer, and will allow the company to obtain signi�cant pro�ts in addition to those expected through tariffs, as well as to acquire essen- tial experience for the opening of new markets. 2.6.2. Condition of the Infrastructure As stated earlier, in the city of Manizales the provision of services by state-owned companies was adequate overall, although there were aspects to be improved that represented challenges for the companies taking over. Concerning water and sanitation coverage, at the time of the reform there was a signi�cant difference between the two. While water coverage was in excess of 99 percent, sanitation coverage was 86 percent, as shown in Figure 37. 152 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 37. Evolution of Water and Sanitation Coverage 101 99 97 95 % Coverage 93 91 89 87 85 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Water system coverage Sanitation system coverage Source: Aguas de Manizales S.A. E.S.P. The reform had a considerable impact on sanitation coverage, as a result of signi�cant investments between 1996 and 1997, when it increased from 89.5 to 98.3 percent. Data for 1996 is missing and it corresponds to the transition period from one company to the other, which caused part of the information loss. The reliability of the measurement of non-billed water volume has been a very controversial issue and Aguas de Manizales S.A. E.S.P. was no exception. The evolution of the volumes of produced and billed water is presented below in Figure 38, including the difference between them. 153 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 38. Difference between Produced and Billed Water Volumes 40 35 30 Millions of m3 25 20 15 10 5 0 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Prod. Water Vol. Billed Water vol. Non-billed Water vol. (difference) Source: Aguas de Manizales S.A. E.S.P. Figure 39. Variation of Unaccounted for Water Index 40 35 30 25 UFWI % 20 15 10 5 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Source: Aguas de Manizales S.A. E.S.P. 154 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia In the �rst years, there is an irregular variation in non-billed water vol- umes, like those corresponding to the two years of management by state-owned companies, when the unaccounted for water index was 18 and 24 percent, below national and international standards. Moreover, there is an increase of the Index with the entry of the Concessionaire because of better macrometering and the use of new calculation methodologies, which produced a more accurate value. In 1999, it diminished to close to 24 percent and after 2000, more logical values are observed, ranging between 33 and 26.5 percent. Another notable aspect is the clear reduction trend in the annual volume of produced and billed water. This could be the result of increased ef�ciency in the use of resources, both by the company in the treatment plants, and by the users in response to tariff increases. Figure 40 provides a possible explanation for the decrease in losses pre- viously observed, although not a total match. For example, although the larg- est investments were made in 2001, the unaccounted for water index increased slightly in 2002. There were large investments in 2001 and 2002, corresponding to valve automation, instrumentation and network inspection points (NIP), mac- rometering, telemetry, remote control and tank automation. In 2003 and 2004, investments were limited to instrumentation and NIP points, while in 2005 only a macro-meter and a tank level meter were installed. This progressive decrease reached zero in 2006, based on the achievement of very complete equipment, as well as very low losses, which imply the execution of large investments. Figure 40. Investments in Loss Control 600 500 Investment (Millions of ($) 400 300 200 100 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year 155 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector The evolution of the daily non-billed water volume, as a function of the wa- ter network length and the number of connections, showed the behavior illustrated in Figures 41 and 42 starting in 2000, when information �rst became available. Figure 41. Evolution of Losses/Network Km. 100 90 80 70 Daily non-billed water vol. / Network KM 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 Year Figure 42. Evolution of Losses/1000 Connections 0.45 Daily non-billed water vol. / 1000 connections 0.4 0.35 0.3 0.25 0.2 2000 2001 2002 2003 2004 2005 2006 Ye a r 156 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Once more, a decrease in losses proportional to the investments carried out becomes evident. In the last years, the trend is towards stabilization as a consequence of the decrease in the amounts invested. 2.6.3. Service Quality Since 1994 the service quality has been excellent throughout the operating period of Aguas de Manizales S.A. E.S.P. Although indicators of water supply conformity for the state-owned companies are not available, the water quality in Manizales was known to be high during previous years. This indicator, since at least 1996, has been 100 percent with 24 hours of service continuity. 2.6.4. Labor Component The increase in the numbers of employees over this 12 year period (1994-2006) cannot be explained by the city’s growth, as the indicator of number of employees per 1,000 connections shows the same behavior, although this data is only avail- able beginning in 1997, as seen in Figure 43 and Figure 44. Figure 43. Evolution of No. of Employees 400 350 300 250 200 150 100 50 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year 157 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 44. No. of Employees / 1000 connections 4,5 4 3,5 No. of Employees / 1000 connections 3 2,5 2 1,5 1 0,5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year A signi�cant increase took place between 1998 and 1999, when the num- ber of employees rose from 227 to 347, followed by three years of decline until 2002, when the total number of employees per 1,000 connections once again began to increase. Figure 45. Total Payroll Cost Variation 8000 7000 6000 5000 Total Payroll Cost 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year 158 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia The evolution of the total payroll cost is in line with the above, escalating from COP$ 2,538 million in 1997 (when information �rst became available) to COP$ 6,792 million in 2006, as seen in Figure 45. 2.6.5. Evolution of Tariffs Information on average water and sanitation tariffs for consumptions of 20m³ became available beginning in 1997. As can be seen in Figure 46, it has shown a logical behavior with strong annual growth between 1998 and 1999, as well as between 2000 and 2001. These increases, though, are lower than the major tar- iff increase in water experienced between 2005 and 2006, from COP$12,650 to COP$17,260, seemingly due to a new tariff schedule. Figure 46. Variation of Water Tariffs 20000 18000 16000 14000 Thousands of Pesos 12000 10000 8000 6000 4000 2000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Average water tariff 20 m3 2.6.6. Financial Performance As illustrated in Figure 47, and following the ongoing tariff increase, in the �rst ten years of operation the concessionaire had a continuous income growth. The only exception is 2005 where there is a slight decrease compared to 2004. The progressive improvement in net pro�ts stands out, illustrating that as a result of the company’s business orientation it was possible to maintain and improve the quality of service, and at the same time, generate more pro�ts for its shareholders and, therefore, for the city. This becomes even more relevant when we note that 159 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector the level of debt was controlled and is always lower than income, and the posi- tion is further strengthened when we take into account the income to be gener- ated from the expansion projects in which the company is involved. This could represent a greater availability of resources for investment in the city without affecting tariffs. Figure 47. Financial Performance of Aguas de Manizales S.A. E.S.P. 39500 34500 29500 Thousands of Pesos 24500 19500 14500 9500 4500 -500 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Net result Long & med. term debt Income Investments Operating expenses The information regarding collection ef�ciency is available starting in 1996, except for 1997-1998, and it reveals a signi�cant increase of 10 percent between 1996 and 1999. After that, it remains at very high levels, with a slight increase in 2001, exceeding 99 percent, after which it never drops below this value. The values in excess of 100 percent in 2002 and 2006 stand out, and are probably due to the good management of the portfolio from previous periods. 160 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 48. Evolution of Collection Ef�ciency 105 100 95 90 85 80 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year 2.6.7. Lessons Learned In the mid 1990s, the city of Manizales was one of the few exceptions in Colombia where the provision of public services could be considered equitable. Nevertheless, there was a concern that the general situation existing at a national level might ex- tend to the city as well, as it depended entirely on the municipal administration and was thus subject to political uncertainty. Furthermore, with the opening to private participation, through Law 142 of 1994, there was the possibility of changing the status of the company, from state-owned to mixed economy, making the contract- ing process easier. In addition, the new legal framework provided an opportunity for expansion to other regions in the country, and to that end, it was essential to become more competitive by providing the company with a new approach. Although the state-owned companies had mostly generated satisfaction at a local level, the arrival and consolidation of Aguas de Manizales S.A. E.S.P. pro- duced improved indicators. These made it possible to gain real knowledge of the management, thus acquiring national recognition and making it easier to expand into other regions. The company’s recent expansion to Departments in the Northern Coast of Colombia demonstrates the success of the reform as it resulted in higher compet- itiveness and provided the company with recognition at a national level. This will translate into bene�ts for the city with new resources for the company through channels other than tariffs. 161 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Although the quality of the water and sanitation services provided by the state-owned companies was quite good, the infrastructure was optimized after the reform, clearly improving the coverage of sanitation and the measurement of produced water volumes. The unaccounted for water index thus became more reliable, and it has gradually decreased since the beginning of this decade owing to signi�cant investments to this end. As a result, the Concessionaire was able to consolidate excellent indicators by maintaining those that were correct and focusing on those in need of improvement. The �nancial performance has been a clear demonstration of the business approach adopted by the company created with the reform. Consequently, there have been considerable improvements in collections, with the growth of revenues outpacing the operational expenses, and increasingly better net pro�ts, with the debt level under control. While there is a clear influence of the constant tariff increases in the income and results performance, largely due to changes in the regulatory framework, the trend is highly positive, considering the resources that the company will obtain through its participation in new markets. 162 The World Bank Colombia Martín Duque Angulo. Creative Commons 2.7. PROACTIVA Aguas de Montería S.A. E.S.P. 2.7.1. The Transformation Process Historically, a wide range of entities of varied nature have been in charge of the construction and operation of water and sanitation systems in Colombia. At the beginning, the municipalities or private parties (under a municipal concession) executed and operated these works. In other cities, the municipalities were in charge of these functions, receiving sporadic support from the Nation and the Departments. The requirements of Law 142 of 1994 allowed for greater private participation in the sector. In the speci�c case of Montería there has been private capital involved in the transformation of the sector. The potential coverage of its water system was 72 percent, but due to rationing for up to 24 hours, three times a week, the actual coverage was 35 percent and the water quality was poor. Losses exceeded 87 percent, with a collection ef�ciency of 60 percent. As a result of all this plus a fragile �nancial situation, the Empresa Municipal de Montería was wound up by a decision of the National Government and with its support through the Corporate Modernization Program of the Ministry of Environment, Housing, and Territorial Development, which played a major role in the project’s development and success. A program for the voluntary retirement of the workers was implemented, and three cooperatives were set up for public service provision, as well as a lim- ited liability company which provided services during the transition period. 163 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Sociedad de Acueducto y Alcantarillado de Montería (SAAM) was estab- lished on February 3, 1994. The equity structure of the new company was 60 percent municipal and 40 percent private. Among others, the former employees participate in the private capital. The company reported satisfactory ef�ciency in- dexes compared to those at the beginning of the process. The ratio of employees per 1,000 subscribers dropped to 4.32 and service continuity reached 83 percent. There was a call for tenders to bid through Resolution No. 01966 of May 28, 1999, issued by the Mayor of Montería exercising its constitution and legal powers, with the intention of selecting a Concessionaire to execute a conces- sion agreement to �nance the works, expansion, rehabilitation, maintenance and operation of the public service water and sanitation infrastructure in the city of Montería . The corresponding bid opened on July 7, 1999, and closed on October 1 of the same year. As a result of the ranking of the proposals, the Mayor of Montería awarded the contract to Consorcio FCC, with the concession beginning on Janu- ary 1, 2000. 2.7.2. Most Relevant Contractual Aspects The purpose of the contract is to grant a concession to �nance, expand, rehabili- tate, maintain and operate the public service water and sanitation infrastructure and related activities in the City of Montería . The Concession is for twenty years beginning on the date of approval of the insurance policies securing the Concession Agreement. The most relevant ob- ligations included are the following: 164 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Table 27. Selected Relevant Contractual Aspects Obligations for the Municipality of Montería Obligations for the Concessionaire Conveying all the assets of the city’s water Carrying out the Financial Closing in accordance with the and sanitation system, including the network Bidding Conditions and the Concession Agreement; and user cadastre, current works and systems, Establishing a Trust fund and depositing in it, as a lands and rights of way that are part of the fund available to the of�ce of the Mayor of the City of concession; Montería, the amount of COP$2,687.7 million. These funds Delivering to the Concessionaire, as and when will be allocated, by order of the Mayor, to the payment of due, the corresponding contributions from the assets in the winding up of SAAM by the Municipality, in municipality and the Nation; compliance with Minutes of May 4, 1999, as approved by Creating a trust to manage the contributions the Shareholders Meeting of May 10, 1999; from the Nation and the Municipality that Water quality. The quality of the water supplied to the have to be turned over to the Concessionaire; users must, as a minimum, comply with the requirements Respecting the tariff established in the of Supreme Decree No. 159 of 1984. The quality of treated Concession Agreement; wastewater must satisfy the requirements set forth in Maintaining in favor of the Concessionaire the Decree No. 1594 of 1984; exclusive service area; Water pressure: The water pressure must be 10 m.c.a. Pledging the resources derived from the measured at the point of residential connection. The municipality’s tax sharing in the regular Concessionaire must meet these targets within the �rst revenues of the Nation; three years of the Concession; Establishing the Liquidity Facility Program Service continuity. The water provision service shall be in the Industrial Development Institute continuous, without interruptions due to anticipated (Instituto de Fomento Industrial, IFI), or its system failures or inadequate capacity, and its availability replacement or any other �nancial entity of must be guaranteed 24 hours a day; the same category, with the cost payable by The Concessionaire must operate, clean, repair, replace the Concessionaire; and expand the sanitation system so that in dry weather The Municipality will be required to de�ne there will be no flooding of roads measured in terms of the socio-economic strata of new urban affected real estate or areas. The Concessionaire must developments within the three months of the schedule and execute replacement works that help Concessionaire’s application. minimize in�ltrations from the surrounding land and faulty connections in rainy weather; Over the period of the Concession, the Concessionaire will be responsible for the operation and maintenance of all assets received from the Municipality. At the end of the Concession, these assets must be returned to the Municipality in good operating conditions; Billing usage to each user and carrying out the required collection actions, as necessary. The Concessionaire shall install micrometers for all system users; Every �ve years the Concessionaire will submit to the Municipality of Montería an Investment Plan for the following �ve years, in accordance with the targets set in the Bidding Speci�cations, the Proposal and the Agreement. 2.7.3. Service Quality The two most outstanding aspects of the management conducted by PROACTIVA Aguas de Montería in the city correspond to service continuity and the level of micro-metering. These two indicators clearly evince the impact of the arrival of the operator on the quality of life of the population. Shifting from six hours a day 165 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector – and as low as three in some sectors – to more than 23 hours a day with water supply in all sectors of the city, undoubtedly makes a difference in the quality of life, clearly seen in Figure 49. Moreover, in a context like Colombia’s, where there has been an evolution concerning the value attached to water supply as an asset that requires expensive processes, and where losses have a cost effect for end consumers, it is surpris- ing to see that a city with more than 30,000 connections only had 797 meters installed. The indiscriminate use of water that this generated had a direct impact on the company’s costs. Figure 49. Evolution of the Continuity Level in the City of Montería Year 1999 Year 2007 12.0 3.5 24 4.5 4.5 Source: PROACTIVA Aguas de MonteríaS.A. E.S.P. Although Montería had water and sanitation networks covering a consid- erable area of the city, provision was discontinuous or simply nonexistent. The Works and Investments Plan developed by HIDROTEC, by indication of the Min- istry of Environment, Housing and Territorial Development, called for extensive investment that made the business unsustainable. For that reason PROACTIVA Aguas de Montería S.A. E.S.P. reviewed the studies and decided that with minor 166 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia works in the major networks, the service could be provided in a more continuous way, increasing the number of users of the water network. Increasing the number of water supply connections to 94.5 percent and the sanitation connections to 60 percent in seven years of operation is in itself an important achievement in com- mercial terms. But in the case of Montería , it is also a relevant technical achieve- ment demonstrating the success of the local engineers and the highly specialized ones brought in by PROACTIVA Aguas de Montería S.A. E.S.P. Figure 50 illustrates the increasing number of connections between 1999 and 2007. Figure 50. Evolution of Number of Water System Connections in Montería WATER SUPPLY COVERAGE Increase in coverage: 95% 70.000 Number of Connections 58.766 60.000 50.000 42.365 40.000 40.581 30.000 30.186 35.686 37.243 38.874 31.454 32.793 34.203 20.000 10.000 0 Dic Jun Dic Jun Dic Jun Dic Jun Dic Jun Dic Jun Dic Jun Dic May 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 Series 2 Series 1 2.7.4. Commercial Management The unaccounted for water index for 1999 of 64 percent, according to data pro- vided by the company, demonstrates the condition of the distribution infrastruc- ture, as well as the level of management of the predecessor of PROACTIVA Aguas de Montería . The evolution to the current 38 percent is the result of permanent works in the system and on the users’ consumption behavior. Figure 51 illustrates how water supply production has been optimized compared with the signi�cant increase in the number of connections, and reflects the high level of squandering in times of SAAM. 167 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 51. Production, Billing and Losses in Water Volume vis-à-vis Population in Montería 1.800.000 350.000 1.600.000 300.000 1.400.000 250.000 1.200.000 1.000.000 200.000 800.000 150.000 600.000 100.000 400.000 50.000 200.000 0 0 Volume of produced water Volume of non billed water Volume of billed water Water served population Figure 52 shows an analysis of water network replacement and extension indicators – in km of installed pipelines – which illustrates the huge economic effort made by the company, the municipality and the National Government through contributions for speci�c purposes. The replacement indicator, together with the annual indicator of repairs of broken parts (Figure 53) is a clear example of the condition of the treated water pipelines. In fact, it is not strange that con- trary to the case in other cities, where there is a reduction in the number of leaks repaired due to a more ef�cient management, in Montería there are dramatic increases. Undoubtedly this is due to the fact that works are �nally being carried out in the network, as points of water leakage are detected. 168 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 52. Extension and Replacement of Water Network in Montería Extension of Networks 600 60,0% 500 50,0% % of repair and extension Lenght of network (Km) 400 40,0% 300 30,0% 200 20,0% 100 10,0% 0 0,0% 2000 2001 2002 2003 2004 2005 2006 May-07 351,6 416,3 453,2 462,4 479,2 498,6 506,8 506,8 8,11 16,03 18,24 19,8 20,89 40,3 47,5 47,5 31,91 88,65 123,42 130,97 146,63 146,63 147,2 147,2 2,6% 4,9% 5,0% 6,1% 6,4% 8,1% 9,4% 9,4% 10,2% 28,7% 39,8% 42,2% 47,2% 52,6% 52,6% 52,6% Lenght of network (Km) Extension of network (Km) Repair of network % of extension of network (Km) % of repair of network (Km) Figure 53. Number of Leaks Repaired in the Main Water Network Number of repairs 500 450 400 350 300 250 200 150 100 50 0 2000 2007 (May) 169 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector The indicators for community satisfaction and acceptance of PROACTIVA Aguas de Montería present important progress which will likely consolidate over time. Nevertheless, it reflects the impact of the company’s aggressive manage- ment intended to achieve technical and commercial sustainability for the 20-year term, and for when the operator leaves. The four initial segments in the �gure are suf�ciently representative to indicate that doubts remain regarding PROACTIVA’s performance in Montería, which is only natural considering the intervention of public roads to build the network, install micrometers (including meter changes due to under-billing), and tariff increases, among other destabilizing factors. Figure 54. Level of Customer Satisfaction with the Provision of the Service by PROACTIVA in 2006 Global 3.6 5.8 5.4 9.0 8.3 67.9 Commercial 2.5 3.4 3.4 11.0 5.9 73.7 Domestic 3.8 6.8 6.5 8.2 9.2 65.5 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Totally dissatisfied Dissatisfied Some what dissatisfied Some what satisfied Satisfied Totally satisfied Source: CRITERIUM survey. 2.7.5. Financial Performance Income grew from COP$531.0 million (approximately US$ 253,754 in 2000) be- fore the concession to COP$1,945.5 million (approximately US$ 917,853 in 2007), with a 27.45 percent increase in the collection rate. The water and sanitation sys- tem has improved with the concession in the Municipality of Montería, and today it is a sustainable system from the technical and economic point of view. 170 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 55. Financial Results of the Operations of PROACTIVA in Montería Financial Results: Monteria Millions Millions 4.500 9.000 4.000 8.000 3.500 7.000 3.000 6.000 2.500 Indebtedness 5.000 of Proactiva 2.000 4.000 1.500 3.000 1.000 500 2.000 0 1.000 2007 (Mayo) 2000 0 -500 Net Income Total Income Operational expenditure Investment Debt (Short and medium term) Source: PROACTIVA Aguas de MonteríaS.A. E.S.P. 2.7.6. Lessons Learned Montería is the only case of a concession in Colombia where investment is exclu- sively borne by the operator or concessionaire. A business model where the risks are almost entirely borne by the operator seems to work well in cities where there is a high potential for improvement, with a well balanced combination of types of users so that income does not depend exclusively on subsidies. Cultural changes in Montería since the arrival of a private operator have been the main obstacle for the unanimous acceptance on the part of service users. However, the achievements so far seem to con�rm that eventually the bene�ts for everybody involved will overcome such resistance, consolidating the permanence of private operators in Colombia. 171 Louise Wolff. Creative Commons 2.8. SERAQA S.A. E.S.P. This case study underlines the importance of cooperation between public and pri- vate entities. In this case, the municipalities and the specialized operator achieved optimum ef�ciency indexes with an outstanding service to the communities served, while developing a new business that did not exist until 1994: the provi- sion of residential public utilities. 2.8.1. Private Participation as a Solution to the Lack of Supply in Tunja In a desperate attempt to draw the attention of the national government to the shortage of water and poor sanitation conditions that the inhabitants of Tunja (Boyacá) suffered, the mayor decided to march to Bogotá, the country’s capital city, to explain the serious problem represented by unsuitable for consumption water service less than six hours a day. This was compounded by the extremely poor con- dition of the water distribution infrastructure which, due to its damages and leaks, caused 65 percent of the water coming from the Teatinos dam to be lost. Despite the fact that Tunja was one of the country’s oldest cities, it was one of the most backward in terms of public utilities. The march succeeded in gaining a commitment of �nancial support from the government for some of the works urgently required; however, the local government decided to undertake a much more in-depth process, including the winding-up of Empresa de Acueducto de Tunja (EAT), through a partnership with a specialized operator who would co- �nance the works required to rescue this capital city from its state of neglect. 172 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia The purpose of Concession Agreement 132 of 1996 between the munici- pality of Tunja and the company SERAQA was to co-�nance investments for the operation, maintenance, restoration and expansion of the city’s water and sani- tation systems, for a 30-year term with each party committing to invest US$ 22 million (1996). The concessionaire’s primary obligations included: (i) To operate, manage and maintain the water and sanitation system to ensure the ef�cient provision of the services; (ii) To prepare plans for optimization, improvements and expansion and to design the projects; and (iii) To apply the tariffs established in the agreement. An additional role, resulting from the proposal presented in the bid and award process, was to carry out the investments contained in the Renewal, Im- provement and Expansion Plan of PRME systems, equivalent to the contractual US$ 22 million. In turn, the municipality of Tunja was obliged to oversee the agreement, approve the investment projects and plans and participate with funding in the execution of the required works, as agreed in the project structuring. The contract initially signed included the partnership of two companies with a successful technical background, which provided them with the “creden- tials� to successfully undertake this long-term project. The companies, selected as a consequence of the international bidding process were the partners AQUA DE COLOMBIA and SERAGUA, which formed SERAQUA TUNJA S.A. E.S.P. and started operating in November 1996. These operators had the technical support of the Spanish company Fomen- to de Construcciones y Contratos S.A. (FCC), majority shareholder of SERAGUA, with a vast background and specialization in comprehensive water management worldwide. In turn, AQUA DE COLOMBIA was fully sold to the Spanish company PROACTIVA, whose entry further strengthened the technical and business man- agement in the city of Tunja and continues to this day. 2.8.2. Condition of the Infrastructure Based on the background regarding the start of PSP in Tunja, one of the major problems faced by the new concessionaire was the condition of the infrastructure in light of the demanding contractual targets. The main challenge was to optimize the supply, since with network losses of 65 percent of the water supplied by the source, the Teatinos dam levels showed a signi�cant de�ciency and kept the city in a state of sanitary alert. Even the city’s 173 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector deep wells, built by the municipal administration in 1995 to provide an alternative to the critical situation, were operating poorly due to lack of maintenance. The distribution system was in a very bad structural state, as a result of many years without any network renewal, which also caused complex health problems in the city since in some cases the population was supplied with non-drinking water. There was no control over system pressure, causing constant breakdowns and unsustainable water waste. The city’s water and sanitation networks posed serious construction problems in many stretches and sections, as a result of the community’s spontaneous but unquali�ed participation as an unavoidable re- sponse to the requirements not met by the municipal administration. The most signi�cant indicators at this time were: (i) six hours per day, on average, of service in the rainy season and two hours per day in summertime; (ii) lack of knowledge about the condition of the networks – for example, there was only one drawing for the entire system which had not been updated; and (iii) overpressure and pipe breaks. 100 As for sanitation, the situation was equally critical. In view of the discharge requirements of the communities of Tunja and due to almost total lack of col- lection systems, there were open discharges on tracks, roads, ditches and plains, accompanied by the resulting public health problems. The new operator’s broad technological knowledge was very positive for the operating conditions of the systems and it may be considered one of its major added values. In a short space of time it was possible to overcome the city’s de�- ciencies and the company was consolidated as an ef�cient operator widely sup- ported by the population. Over �ve years (1997 to 2001) the water and sanitation coverage increased from 85 and 78 percent to 100 and 98 percent, respectively. The use of high-density polyethylene for water networks, with no previous mass use in Colombia, facilitated the installation of large sections of pipes in a short period; this would not have been feasible with the technologies traditionally used in the country. The investments contemplated in the PRME also included the optimiza- tion, equipment and implementation of the water treatment plant, thus restoring its designed installed capacity and consequently ensuring the water’s physical, chemical and bacteriological quality according to the standards of Decree 475 of the Ministry of Health. Potable water is once again being supplied to the residents of Tunja, which lacked such an essential basic service during previous decades. 100 Document “Reseña SERAQ.A�, prepared by the Company’s Communications Department. 174 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia The supply is also improved with work on the deep wells, which are sporadically used when there are failures in the quality of the dam’s water. During 1998 and 1999, Phase I of the “Water Master Plan “ was imple- mented. The project included investments for approximately COP$ 24 million in collectors and 12 km of interceptors and infrastructure works in the city’s water and sanitation systems. The project execution began in 1999 and is currently be- ing implemented under an inter-institutional agreement between the Ministry of Environment, Housing and Territorial Development, the municipality of Tunja and SERAQA TUNJA. Phase II consisted of the intervention in the water networks under the unaccounted for water – UFW – program, developed in �ve phases during 1999, 2000 and 2001 to provide full coverage to the city of Tunja. Under this program, the city was divided into 24 strategic districts with autonomous supply, duly monitored through macro metering, static and dynamic pressure control, recon�guration of reading routes and assessment of microm- eters, con�rmation of property status of each user and determination and adjust- ment of the unaccounted for water index. The target is bringing it down to less than 30 percent. The results were soon evident because, with only 35 percent of the city divided into sections, there was a 13 percent reduction in the need for extraction from the dam. 2.8.3. Investments and Their Impact SERAQA’s revenues ef�ciently cover the average operating, administrative and investment costs of the service, but they cannot, nor could they at the time the agreement was signed, fully cover the extensions and expansions required by the system. This was the main reason to include in the �nancial closing of the business the proportional amounts of US$ 22 million to be contributed by the municipality of Tunja and the specialized operator. Obviously, this amount was discounted from the tariff investment component and, therefore, the business became socially and politically feasible. The contributions made by the National Government have been those re- quired by the municipality to ful�ll its contractual obligations. That is, the com- pany has not bene�ted from contributions other than those originally expected. Tables 29 and 30 show the value of the investments made by the Munici- pality of Tunja and SERAQA in the period 1996 to 2005: 175 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Table 28. Investments of TUNJA Municipality from 1996 to 2005 Basic Works Length (Km) Value in ‘000 Pesos 1. Interceptors 15,6 11,863,484 2. Collectors, separation structures and 11 4,856,112 rainwater channels Sub Total 16,719,596 3. Wastewater treatment 3.1 PTAR Doña Limbania 45,516 3.2 PTAR Tunja 2,211,572 3.2.1 Plot acquisition 581,352 3.2.2 Availability for �rst module of 120 Ips 1,630,220 Sub Total 2,257,088.73 TOTAL 18,976,684 Table 29. Investments of SERAQA TUNJA from 1996 to 2005 Works Length (Km) Value in ‘000 Pesos Expansion water works 44,74 2,107,302 Renewal waterworks 41,12 2,294,908 Expansion sanitation 16,18 2,045,630 Renewal sanitation 13,01 2,442,183 Equipment 2,643,954 Other investment works 8,618,647 TOTAL 20,152,627 The case of Tunja is undoubtedly one of SERAQA’s major achievements. This city presented a major “shortage� against which the inhabitants and authori- ties of the municipality complained in 1996 and which had put the city at a high sanitary risk in the neighborhoods and communities. This same place today has the same or even lower production volume than in 1997; with an additional 42 percent of the population now being supplied. This is an important example of how a specialized operator’s management optimizes water services, not always with high investments, but with speci�c ac- tions within the system. 176 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Figure 56. Growth of Users while Maintaining the Water Treatment Volume (production) RATIO BETWEEN PRODUCTION AND USERS 12.000 40.000 35.000 10.000 30.000 8.000 25.000 6.000 .000 20 15.000 4.000 10.000 2.000 5.000 0 - 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Produced water volume Billed water volume Number of drinking water connections Source: Seraqa Tunja S.A. E.S.P. Figure 57. Unaccounted for Water Index in Tunja NON REVENUE WATER 6.000.000 60% 5.000.000 50% 4.000.000 40% 3.000.000 30% 2.000.000 20% 1.000.000 10% 0 0% 1 2 3 4 5 6 7 8 9 10 Non-revenue water volume (by difference) % non-revenue water (NRW) Source: Seraqa Tunja S.A. E.S.P. The reduction of leaks, as shown in Figure 57 is the “unavoidable� effect of a management scheme for unaccounted for water implemented technically, 177 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector including active pressure control, network division into sectors, and fraud control, among other similar measures. The specialized operators have managed to reduce the average leaks in Colombia to levels that, as in Tunja, are no longer excesssively high and are at the expected level for old systems or systems badly deteriorated, as was the case of the pipelines in Tunja until SERAQA took over. There is still room for major improvements; however, this must be compared with the invest- ment levels required considering other system requirements in order of priority. Tunja’s service indicators reflect the operator’s achievements. Service con- tinuity grew from 14 hours per day, on average, in 1997, to 24 hours in 2002; this clearly shows a bene�t experienced by the community. As to the coverage, there has been sustained growth over the last few years, as a response to the high in- centive implied in the addition of new users. Figure 58. Evolution of the continuity factor in Tunja and water and sanitation coverage COVERAGE AND CONTINUITY IN TUNJA Hours 40.000 30 35.000 25 30.000 20 25.000 20.000 15 15.000 10 10.000 5 5.000 - 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of drinking water connections Number of sanitation connections Number of average service hours (est.) Source: Seraqa Tunja S.A. E.S.P. 2.8.4. Evolution of Tariffs In Tunja, unlike other capital cities in the country, there is no socio-economic stratum 6 (high), which decreases the potential for cross subsidies. Thus, the municipality must contribute the subsidies for the poorest communities (see Table 30). 178 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia Table 30. Subsidies by stratum in Tunja, as approved by the Municipal Council for the year Stratum Fixed Charge 20 m3 Consumption Subsidy Subsidy 1 62% 55% 2 40% 40% 3 5% NO Before 2006 the subsidies were contributed by the business, i.e., charged to the pro�ts of the company SERAQA. For the year 2006, the Municipal Council approved the creation of a Solidarity Fund of COP$ 720 million (approximately US$297,011 in 2006) to be distributed. The reported average tariffs, based on the average annual bill, are seen in Figure 59. Figure 59. Average Annual Bill in Tunja (1997 – 2006) AVERAGE BILL IN TUNJA 35000 30000 25000 20000 15000 10000 5000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 series 1 7.517 10.872 12.836 14.110 15.167 26.040 26.918 30.422 33.523 32.327 Source: Seraqa Tunja S.A. E.S.P. As mentioned in the previous section, the concession scheme has favored the city because the investment contributions have not been charged to the tariff. 179 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector 2.8.5. Financial Performance Figure 60. Operating Income and Costs of SERAQA TUNJA FINANCIAL PERFORMANCE 18.000 2,00 16.000 1,80 14.000 1,60 12.000 1,40 10.000 1,20 8.000 1,00 6.000 0,80 4.000 0,60 2.000 0,40 - 0,20 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (2.000) 0,00 Total revenues Total operating expenses Net result Working ratio (operating income / expenses) Source: SERAQA TUNJA S.A. E.S.P. As in the other cities where a specialized operator was associated, SE- RAQA has focused its efforts on increasing its revenues based on the increase of the billing base (increase in water and sanitation coverage), ef�cient business management in collections, cut-offs of non-paying users, timely reconnection, and reduction of operating costs. The ratio of operating costs to income shows a downward trend, representing higher pro�tability for the operator. 2.8.6. Lessons Learned SERAQA TUNJA is a clear example of the bene�t inherent in the change of ap- proach of the country’s water and sanitation system management. The lack of a specialized operator, under any type of arrangement, including the transforma- tion of a public operator, can represent an advantage for the users in any city. The proper and ef�cient provision of public utilities in a city does not necessarily represent any advantage for the city’s economy, but having inef�cient operators linked to local political elements can imply a drawback. 180 The World Bank Colombia 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia The transfer of technology from a foreign or domestic specialized opera- tor represents an important professional growth for the employees, to the extent that, as in Tunja, given the high competence of SERAQA’s employees, the operator did not need foreign of�cers. This, in addition to being an advantage for the city, since it generates specialized technical employment, represents an advantage in terms of personnel costs, which substantially reduces the cost of service provision for the operator and contributes to the sustainability of the business. The resources committed by the municipalities or, otherwise, by the Na- tional Government, are absolutely necessary to undertake the business of sanita- tion management without increasing tariffs considerably. In this sense, cities and populations must have a well-structured technical support that expedites access to these resources. The case of Tunja has been an example of this situation where the operator, due to its knowledge of the system, has contributed with the mayor to a successful management of the resources. 181 2. Case Studies Based on Private Sector Participation in the Provision of Water Supply and Sanitation in Colombia 3 Assessing the Effect of Private Participation in Water Supply and Sanitation Scott Wallace. The World Bank 183 O ver the last two decades, most countries in Latin America underwent structural reform programs that promoted different types of private sec- tor participation such as privatization, concession, and private management of previously state-owned enterprises (SOEs). Although these reforms substantially affected the provision of infrastructure services in the region, it should be noted that they were unequal across sectors. For example, while the telecommunication and electricity sectors have been broadly privatized, private participation in water supply and sanitation (WSS) has been limited and concentrated. Colombia is a good example of private expansion in the WSS sector. This chapter analyzes the impact of private participation in the provision of WSS. The analysis contributes to the literature of private participation in infrastruc- ture (PPI) in different ways. First, the chapter presents the methodology proposed by Andres, Foster, and Guasch (2006) to WSS, performing a systematic analysis that combines operational indicators such as output, input, ef�ciency, quality, coverage, and prices to �nancial indicators such as operational costs and revenues. This com- plete analysis allows us to address the effects of privatization from the perspective of consumers and �rms. Second, the chapter evaluates the introduction of private participation at the local level, taking into account the fact that within the same utility private participation expanded to different cities in different years. Third, it organizes an unbalanced panel of 118 cities (77 utilities) that experienced some form of private intervention between 1995 and 2006. The results suggest that pri- vate participation is associated with higher levels of output, productivity, ef�ciency, and quality of services. Average tariffs also seem to increase as a consequence of private participation. One distinguishing aspect of the Colombian experience is that private sector participation increased employment in contrast with most of the 185 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector evidence reported by previous studies in privatization (such as Andres et al. [2008] and La Porta and López-de-Silanes [1999]). We divide the period of study in three different phases: solely public par- ticipation, transition between public and private, and a private participation pe- riod, comparing the evolution of several indicators across phases. The idea of such a methodology is to use the �rm’s initial performance as a “counterfactual� to evaluate the interventions that followed. In this way, we are able to isolate and measure the effect of each intervention on the indicators ana- lyzed. The exercise is performed for both levels and growth rates of each indicator. In addition to measuring the direct effects of private participation, this procedure helps us in understanding if private intervention was also capable of affecting the indicators’ original trends. Our results show that private participation is associated with signi�cant expansion of water and sanitation services across time. The number of water connections increased on average by 20.7 percent between the public and the transition period and by 9.6 percent after the transition period. Sewerage con- nections followed a similar pattern, increasing by 22.6 percent and 14.5 percent, respectively. The overall coverage improvement for water and sanitation added up to 23.3 percent and 31.3 percent respectively. Quality, ef�ciency, and labor productivity measures also changed during the period of analysis. Continuity, measured by the average hours of service a day, had no signi�cant change between the �rst two periods, but improved considerably after private participation took place. The overall effect was an average increase of almost 130 percent in continuity. The percent of non-billed water decreased by 12 percent between the public and the transition periods, and by 6.3 percent between the transition and private periods. Labor productivity, measured by number of con- nections per employee improved over 36 percent during the whole period. Most of these �ndings are consistent with previous work in ownership change and private participation. The single exception is the evolution of number of employees. Employment levels increased signi�cantly during the whole period of analysis, contradicting the traditional idea that private participation is associ- ated with an increase in unemployment. The amount of systematic empirical studies of the impact of changes in ownership on WSS still very small, probably due to the dif�culty of securing ap- propriate data. Most of the work on this topic, including studies supporting this project, consists of case studies. 186 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation This chapter contributes to this literature in different ways. First, we per- form a systematic analysis of private participation for WSS that combines opera- tional indicators such as output, input, quality, coverage and prices to �nancial indicators such as operational costs and revenues. This complete analysis allows us to address the effects of privatization from the perspective of both consum- ers and �rms. Second, we consider the introduction of private participation at the local level, taking into account the fact that within the same utility private participation reached different places in different years. Third, we organized an unbalanced panel of 118 cities (77 utilities) that experienced some form of private intervention between 1995 and 2006. All locations are within the same country so that utilities are subject to the same macroeconomic and regulatory environ- ment, and likely to be affected by similar exogenous factors. The rest of the chapter is organized as follows: Section 4.1 summarizes the relevant literature; Section 4.2 describes the empirical approach and the data used; Section 4.3 presents and analyzes the results found; Section 4.4 presents some additional considerations; and �nally, Section 4.5 summarizes the �nal re- marks of this chapter. 187 Edwin Huffman. The World Bank 3.1. Literature Review Theoretical literature in ownership changes and the role of government own- ership of productive resources can be summarized in two main branches: The Social View (Shapiro and Willig [1990]) and the Agency View (Vickers and Yar- row [1988]; Shleifer and Vishny [1994]). The �rst view states that under certain circumstances, such as natural monopoly markets, pro�t maximizing and welfare maximizing outcomes might diverge. In this case, government ownership is ex- pected to maximize social welfare in order to solve the potential inef�ciency. In contrast with this idea, Vickers and Yarrow (1988) point out that SOE’s managers lack the adequate incentives and monitoring to pursue social interest, while Shle- ifer and Vishny (1994) stress that political interests are not necessarily in line with ef�cient outcomes. Therefore, according to the Social View, private participation is associated with an ef�ciency loss, higher prices, and lower output, while it pro- motes ef�ciency and reduces costs according to the Agency View. In our empiri- cal analysis we will test which of the two models applies to WSS in Colombia. A growing number of studies attempt to evaluate the effects of private participation and ownership changes to SOEs. Megginson and Netter (2001) pro- vide an excellent survey of the literature on the topic. Most of the studies, howev- er, concentrate on sectors such as transportation (for example, Ramamurti [1996] and Laurin and Bozec [2000]), telecommunications (for example, Ros [1999] and Ramamurti [1996]), manufacturing (for example, Frydman et al. [1999] and Boar- man and Vining [1989]) and electricity (Andres et al. [2006]). Galiani et al. (2005) is one of the few comprehensive references studying the case of outcomes of private participation in water and sanitation, in particular for 188 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Latin American countries. This study focuses on the effect of privatization of water provision in Argentina on childhood mortality. Private participation is estimated to have reduced childhood mortality by 8 percent, on average. Ehrlich et al. (1994) provide good evidence of productivity differences be- tween state-owned and privately owned �rms. Using a sample of 23 comparable international airlines of different (and in some cases changing) ownership cat- egories over the period 1973-1983, they developed a model of endogenous, �rm- speci�c productivity growth as a function of �rm-speci�c capital. This model is used as a basis for their �xed-effects regressions estimating a cost function in a simultaneous framework with input-demand equations. The study suggests that private ownership leads to higher rates of productivity growth and declining costs in the long-run, and that these differences are not affected by the degree of market competition or regulation. Boardman and Vining (1989) used data from the 500 largest manufactur- ing and mining corporations in the world outside the United States, as com- piled by Fortune magazine in 1983. They classi�ed these �rms as SOEs, Mixed Enterprises or Private Companies, and used four pro�tability and two ef�ciency measures. Their results provide evidence that large industrial mixed and public enterprises perform substantially worse than private ones. They also conclude that partial privatizations may not be the best strategy, since, according to their indicators, these perform quite similarly to SOEs. Galal et al. (1994) compare the actual post-privatization performance of 12 large �rms, mostly airlines and regulated utilities in Britain, Chile, Malaysia, and Mexico, with the predicted performance of those �rms that had not been divested. Using this counter-factual approach, the authors document net welfare gains in 11 of the 12 cases considered, which is equal, on average, to 26 percent of the �rms’ pre-divestment sales. They �nd no case where workers were signi�- cantly worse off, and in three cases, workers signi�cantly bene�ted. La Porta and López-de-Silanes (1999) �nd that the former Mexican SOEs in their study rapidly �lled a large performance gap with industry-matched pri- vate �rms that existed prior to divestment. The former SOEs, which were highly unpro�table before privatization, became very pro�table afterwards. Output in- creased by 54.3 percent, in spite of a reduced level of investment spending, and sales per employee roughly doubled. The privatized �rms reduced both blue and white-collar employment by half, but those workers who remained were paid signi�cantly more. The authors attribute most of the performance improvement to productivity gains resulting from better incentives, with at most one-third of the improvement being attributable to lower employment costs. 189 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector The positive effects of private participation are not a consensus in the literature. Villalonga (2000) performs a multi-sector analysis in 24 Spanish �rms and �nds no ef�ciency gain from privatization.101 The author argues that factors such as business cycles and foreign ownership are more important determinants of ef�ciency. Frydman, Gray, Hessel, and Rapaczynski (1999) compare the performance of privatized and state �rms in the transition economies of Central Europe, and explicitly try to control for selection bias. Their study is based on a panel of over 200 privatized and state-owned �rms in the Czech Republic, Hungary, and Po- land. In particular, their �ndings show that in the context of Central Europe, privatization has no bene�cial effect on any performance measure in the case of �rms controlled by insider owners (managers or employees), but that it has a very pronounced effect on �rms with outsider owners. Their study also indicates that when privatization is effective, its effects vary considerably depending on the performance measure under examination. In particular, their �ndings show that while the effect of privatization on revenues is very large for some types of owners, ownership change has no signi�cant effect on cost reduction. Finally, by obtaining �rm �xed-effect estimates of the various effects of privatization and using different types of control groups, as well as by controlling for changes in the macroeconomic environment, the study attempts to deal with most kinds of selection biases that could potentially affect the results. Parker et al. (2001) is one of the few studies addressing the impact of private participation on the performance of water and sanitation utilities. The authors evaluate how successful privatization and regulatory reforms were in improving water and sewerage industries in England and Wales. Despites the re- duction in labor usage, they �nd no evidence that privatization improved produc- tivity growth. On the other hand, output prices and economic pro�ts increased signi�cantly after the reforms. Methodologically, Andres et al. (2006) is the work most closely related to this case study. The authors study the effects of privatization on the performance of 116 electric utilities in ten Latin American countries. The study suggests that ownership changes generate signi�cant improvements in labor productivity, ef- �ciency, and quality of the services during the transition between public and private. Gains after two years of private ownerships are much more modest. 101 Measured by rate of return on assets. 190 The World Bank Colombia María Clara Ucros. The World Bank 3.2. Empirical Approach 3.2.1. Methodology In order to effectively isolate the impact of private participation in WSS, each util- ity should be compared with its public “counterfactual�, i.e. an identical �rm, in a similar location, exposed to the same environment, but that remained completely operated by the government. However, such a “counterfactual� is extremely hard to identify. For this reason, the literature proposes the use of pre-private informa- tion of the same �rm as a close approximation of the ideal counterfactual. The methodologies for the estimation of the effect of private participation can be divided in two main branches: comparison of means and medians and econometric evaluation. The �rst method was originally proposed by Megginson et al. (1994) and applied to a number of subsequent studies. It makes use of signi�cance tests in order to compare the difference in mean and medians of a selected indicator before and after ownership change takes place. The second methodology follows the literature of program evaluation (see Heckman et al. [1985]) and treats private participation as a policy intervention. It proposes the introduction of a dummy variable for the period of intervention, which is frequently interacting with other variables of interest. The signi�cance of the dummy indicates the effect of private participation. It is still unclear in the literature which methodology is superior. For this reason, this paper follows the two approaches and analyzes the sensitivity of the results to the methodology applied. 191 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector The sample of cities is split into three periods of analysis, as described in the timeline below. The transition period (T) is de�ned as starting one year before the date of the beginning of private operation and �nishing one year after; the public period or period before privatization (B) is de�ned as the 4 years before the beginning of T; and a period after private participation (A) is de�ned as the 4 years after the transition. Figure 61. Time line for transition from public to private participation Figure 1: Time line B T A -5 -4 -3 -2 -1 0 1 2 3 4 5 || Beginning of Private Participation This division of periods, originally proposed by Andres, Foster, and Guasch (2006), helps us to separate short and long run effects of private participation. Most of the �rms experienced some kind of reform in order to become more at- tractive to the private sector. In addition, a number of adjustments took place im- mediately after private introduction. Therefore, comparing the information before and after private intervention without taking into account the period of transi- tion would produce biased results. In addition to the comparison in levels as traditionally done in the litera- ture, we allow for the possibility of �rm speci�c time trends. Some indicators, such as number of connections, are expected to grow naturally with population. In this case, a comparison in levels would overestimate the effect of private sec- tor participation. Finally we relax the hypothesis of a constant time trend and compare how private participation impacts the evolution, or growth rate, of the indicator analyzed. The graphs shown in Figure 61 illustrate the different exercises performed. As we see, a comparison of changes in levels (in blue), shows a modest variation in the number of connections between B and T, and a large improvement between A and T. However, by taking into consideration the natural trend in connections (magenta), we notice that the effect of private participation is slightly larger during transition than after private participation. Finally, when we relax the hypothesis of constant trend and allow growth rate to vary across periods (red), we attribute most 192 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation of the variation of the number of connections to the transition period. The average growth rate in A is similar to the one in our counterfactual path.102 Figure 62. Estimation with and without �rm speci�c trend – Average number of water connections 30000 30000 Public Transition Private Public Transition Private 25000 25000 Water Connections 20000 20000 15000 15000 -5 0 5 -5 0 5 Year with respect to privatization Year with respect to privatization counterfactual trend trend with effect of private 30000 30000 Public Transition Private Public Transition Private 25000 25000 20000 20000 15000 15000 -5 0 5 -5 0 5 Year with respect to privatization Year with respect to privatization original data with growth original data without trend counterfactual trend We select a number of performance indicators103 and analyze the changes between periods for both levels and growth of each indicator. In the �rst ap- proach, three tests are performed in order to evaluate the signi�cance of the changes. We use a paired T-test to compare means between groups, a paired 102 Counterfactual path assumes �rms would continue growing as in B in the absence of private intervention. 103 These indicators are described in details in the data section. 193 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Sign-test to compare medians and a Wilcoxon Sign-Rank test to compare the indicator’s distributions in each period. For the second approach, we start presenting a simpli�ed version of model: where yit represents the indicator of interest, for city i at time t. The dummy PRIVATEit indicates the participation of the private sector. Hence, , our coef�- cient of interest, captures the effect of privatization on the outcome analyzed. In order to account for unobservable city’s characteristics that might systematically affect the outcome, we introduce city �xed effects de�ned by Di. One common critique to this kind of models is that if privatized �rms are systematically differ- ent (say, potentially more pro�table), would be biased upwards. As pointed out by Frydman et al. (1999), adding �xed effects may reduce the selection bias of �rms in the sample. The focus of our study is to identify both transition and post-transition effects of the private participation. For this reason we decompose PRIVATE in two dummies: TRANS indicating the transition period (one year before private partici- pation until one year after), and AFTER indicating the period after transition (two to �ve years after the beginning of private intervention). So, the �rst model to be estimated is: In order to account for the indicator time-evolution we propose a second speci�cation of the model that includes city-speci�c time trends: City-speci�c time trend starts in the beginning of the pre-private period for each �rm. This speci�cation will help to identify most of our conclusions for the vari- ables displaying trends (for example, number of connections). However, it relies on the assumption that trends among the three periods of analysis are the same. 194 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation In order to relax this assumption, we will run a third set of equations similar to the �rst model, but using the annual growth in each indicator. In this case, we will be able to identify average changes in growth between the periods. Given the fact that we are using a semi-logarithmic functional form of these models for each of the indicators, it should be remembered that the percent impact in each indicator is given by eb −1 (Halvorsen and Palmquist [1980]) when interpreting the coef�cient estimates of the dummy. In order to correct for potential non-spherical errors, a Generalized Least Square (GLS) approach would be appropriate. However, the GLS estimation re- quires knowledge of the unconditional variance matrix of , 1 , up to scale. Hence, we must be able to write 1 = m 2C, where C is a known GxG positive de�- nite matrix. In this case, as this matrix is not known, we will follow a Feasible GLS (FGLS) approach that replaces the unknown matrix 1 with a consistent estimator. We present both OLS and FGLS sets of results. 3.2.2. Data and Variable Choice This research requires the construction of a panel of key indicators for the water and sanitation utilities. For this, we combined the information from Colombia’s infrastructure information system (Sistema Único de Información, SUI) to sta- tistical reports from the Water and Sanitation regulatory agency (Comisión de Regulación de Agua Potable y Saneamento Básico, CRA). In addition, we consulted ADERASA (Association of Water and Sanitation Regulatory Entities of the Ameri- cas) benchmark studies and utilities’ of�cial reports to their investors. Finally, we applied a detailed survey to �ve of the main water companies104, serving a total of 21 municipalities. Special attention was given to ensure consistency and compa- rability of the information over time and across utilities. Instead of choosing the utility as the object of analysis, we chose to per- form our evaluation at the city level. The main justi�cation for this unusual sub- division is the fact that private sector participation, even within the same utility, reached different locations in different years. Our �nal sample consists of an un- balanced panel of 118 locations (77 utilities), that received some form of private intervention between 1995 and 2006. The sample represents approximately 26 percent of the population in Colombia. 104 Compania de Acueducto y Alcantarillado Metropolitano de Santa Marta S.A., Triple A de Bar- ranquilla S.A. E.S.P/ AAA Atlántico S.A. E.S.P, Sera. Q. A. Tunja, Conhydra S.A. E.S.P. and Aguas de Cartagena S.A. E.S.P. 195 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector The study focuses on different indicators of output, employment, labor productivity, quality of services, ef�ciency, coverage, prices, and �nancial aspects. Table 31 lists all the variables adopted for each analysis and Table 32 presents their summary statistics. Most of these indicators have been analyzed in previous works for dif- ferent samples. Andres, Foster, and Guasch (2006) used equivalent indicators of output, employment, coverage, labor productivity, quality, and prices to analyze the effects of private participation in electricity distribution in Latin America. Ros (1999) and Rumamurti (1996) studied similar indicators to evaluate ownership changes in telecommunication. Finally, Parker (2001) considered output, employ- ment, quality, and prices when evaluating water and sanitation companies of England and Wales. A number of studies, such as Meggison (1994) and Anuatti- Neto et al. (2005) focus on the analysis of �nancial indicators of performance for a multi-sector analysis of privatization. As output indicators we use the number of connections, the volume of wa- ter produced and the volume of water billed. Since one of the main expectations of the governments is that private participation (private investment, in particular) promotes a faster expansion of services, we used number of connections and volume of water indicators to measure the impact of private participation in this respect. The number of connections provides a good indication of the expansion of service at the extensive margin. The volume of water combines both extensive and intensive expansion. Theoretical predictions about changes in output are am- biguous, since larger output might not be the pro�t maximizing outcome for the privatized �rm. The Agency View theory on government ownership predicts that SOEs al- locate resources inef�ciently, over-employing workers, under-investing in capital and adopting inef�cient technologies. According to this theory, therefore, we would expect labor productivity, measured by output per worker, to increase, employment to decrease, and production loss105 to decrease with private participation. Quality and price indicators, on the other hand, are important tools to assess consumers’ perspective on private participation. The Social View predicts an increase in prices and a possible reduction of quality after private inter- vention. The Agency View, in contrast, argues that depending on the level of competitiveness, variations in both directions are possible. Previous empirical studies such as Andres, Foster, and Guasch (2006), and La Porta and Lopez-de- 105 Measured by percent of non revenue water and percent of metered connections (metering level). 196 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Silanes (1999) report an increase in quality and cost of services after private sector participation took place. Table 31. De�nition of the Variables Output Indicators: Total number of water connections Total number of sewerage connections Volume of water produced (m3 /year) Volume of water billed (m3/year) Volume of water billed per connection. Employment Indicator: Total number of employees Labor Productivity Indicators: Number of total connection per employee Volume of billed per employee Ef�ciency Percentage of non revenue water Proportion of connections metered Quality: Continuity (average hoursof services/day) Prices: Average tarifs for Water services- Stratus 4 Average tarifs for Sewerage services- Stratus 4 Average tarifs for Water services- Stratus 1 Average tarifs for Sewerage services- Stratus 1 Financial Revenues per m3 Operational Expenditures per m3 Labor Expenditures per m3 Revenues per Connection Operational Expenditures per Connection Labor Expenditures per Connection Revenues/Operational Expenditure Labor Expenditures/Operational expenditures 197 Table 32. Summary Statistics Variable N Mean Median SD Min Wax Population 118 85763.78 29517.18 166769.5 1935.458 1243591 Water connections 101 14801.52 4650.83 29046.29 25 183710 Sewerage connections 89 14062.33 3447 27577.72 20 177449 Volume of water produced (m3/year) 98 8692985 2119281 20600000 332 166000000 198 The World Bank Colombia 3 Volume of water billed (m /year) 97 4309531 896881.3 10700000 291 86300000 Volume of water billed per connection 94 732.2 181.23 5331.22 3.22 51859.93 Number of employees 106 176.43 101.25 202.93 8.33 1070 Percentage of non billed water 89 51% 45% 20.80% 11% 98.50% Percentage of metered connections 48 74% 86% 28.19% 1% 100% Collection ef�ciency 35 68.99% 75.60% 23.55% 10.50% 97.52% Volume of water billed per employee (m’Avorker) 89 34718.67 12427.85 72340.38 53.36276 585294.1 Total connections per employee 91 130.1 72.19 168.04 1 1315.6 Continuity 50 15.99 18.93 7.6 2.91 24 Coverage water (%pop served/pop) 103 79.70% 81.45% 16.65% 33% 100% Coverage sewerage (%pop served/pop) 88 62.43% 67% 28.22% 4% 96.10% Opex per m3 billed (1000 pesos 1998) 69 26.6599 1.40935 143.5101 0.0117 1188.401 Opex per water connection (1000 peso 1998) 74 3909.372 240.6895 24600 0.13648 211000 3 Revenues per m billed (1000 pesos 1998) 68 41.86867 1.84962 231.0154 0.04726 1896.66 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Revenues per water connection (1000 pesos 1998) 74 62.42.052 302.604 39400 0.20992 338000 Variable N Mean Median SD Min Wax 3 Sales expenditures per m billed (1000 pesos 1998) 62 5.19024 0.32518 24.22262 0.01106 188.6709 Sales expenditures per water connection (1000 pesos 1998) 71 680.363 45.77606 4067.13 2.295 34300 Average tariff water (S4) (pesos 1998) 79 13209.23 13256.14 3767.928 5264.367 22207.13 Average tariff water (S1) (pesos 1998) 82 6171.26 5769.28 3105.98 1130.42 19370.45 Average tariff sewerage (S4) (pesos 1998) 71 7072.53 6694.77 3167.69 2493.52 18293.47 Average tariff sewerage (S1) (pesos 1998) 72 4405.49 3923.96 2496.765 1575.55 15417.02 Note: each observation is the average for the available �rm information from 5 years before the change in ownership to 5 years after 199 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Edwin huffman. The World Bank 3.3. Results 3.3.1. Mean and Median Analysis In this section we present the results of the Means and Median Analysis. We split the research between changes in levels and changes in growth for each indicator. Note that for some variables, like prices and �nancial indicators, changes in levels provide a more relevant analysis, while for others, like productivity and output, changes in growth lead to more accurate conclusions. We present level results for all the indicators strengthening the most relevant analysis. The results for the level analysis are presented in Table 3 and the results for growth rates are presented in Table 4. In order to perform a meaningful comparison across �rms of different sizes, we normalized the level of all indica- tors to 100 in the year of the beginning of private participation. We �ltered the normalized indicators to avoid the effect of outliers. Our �lter discarded observa- tions that lie more than three standard deviations above or below the mean for each indicator. Columns (1) to (3) show the descriptive statistics of each indicator for the three periods of analysis: Solely public (B), referring to the 4 years before transition; Transition (T), a 3 year period starting one year before the beginning of private participation and ending one year after; and Private (A), consisting of 4 years after the transition. Columns (4) to (6) reflect the differences between periods. Column (4) presents the average changes between (T) and (B), Column (5) describes the changes between (A) and (T) and Column (6) compares (A) and (B). Finally, (7) to (9) presents the results for the signi�cance tests in differences. 200 The World Bank Colombia Table 33. Mean and Median Analysis in Levels Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B (1) (2) (3) (4) (5) (6) (7) (8) (9) Connec. W (total) mean 87.44 101.19 111.93 12.39 9.39 27.38 4.96 7.31 5.25 (t-stat) median 88.38 100.11 108.13 10.05 7.61 24.93 3.29 5.96 3.18 (z-stat) sd 9.45 3.8 12.58 9.34 10.27 18.81 0 0 0 (P sign-test) N 14 72 67 14 64 13 Connec. S (total) mean 82.83 100.9 112.2 15.69 11.2 27.42 5.52 5.15 6.17 (t-stat) median 85.89 100 109.41 13.31 9.9 22.06 3.06 4.77 2.93 (z-stat) sd 10.71 7.42 20.28 9.85 15.98 14.74 0 0 0 (P sign-test) N 12 60 56 12 54 11 Volume Prod. mean 105.55 101.03 101.87 -2.3 0.52 -0.87 -1.46 0.25 -0.75 (t-stat) median 103.44 100 98.82 -7.57 -2.22 -6.19 -1.68 -0.16 -0.89 (z-stat) sd 21.15 9.46 18.37 22.73 15.76 22.43 0.34 0.6 0.54 (P sign-test) N 11 65 61 12 59 12 Volume Billed mean 106.39 102.01 112.87 -4.36 8.22 4.78 -0.92 2.84 0.58 (t-stat) median 104.45 100.37 107.95 -4.82 3.78 0.98 -0.71 2.43 0.53 (z-stat) sd 18.97 6.87 25.89 15.69 21.05 24.35 0.22 0.17 1 (P sign-test) N 11 62 56 11 53 9 Volume per connec. mean 120.96 100.51 103.06 -19.29 0.53 -11.89 -424 0.19 -1.91 (t-stat) median 115.65 100 97.46 -13.58 -3.98 -17.2 -2.85 -1.26 -1.78 (z-stat) sd 18.06 6.78 25.17 15.06 20.15 19.72 0.01 0.13 0.11 (P sign-test) 201 N 11 61 54 11 52 10 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B Employees mean 91.67 102.45 122.24 8.26 13.2 14 1.94 4.26 2.27 (t-stat) 202 median 89.61 100.91 115.38 15.42 7.21 8.32 1.82 3.67 2.12 (z-stat) sd 26.55 7.74 38.41 21.27 27.36 28.83 0.23 0 0,06 (P sign-test) N 25 84 83 25 78 22 Percentage of non mean 109.54 101.05 92.89 -9.55 -6.82 -13.08 -2.12 -3.06 -2.3 (t-stat) billed water median 104.39 100 91.75 -2.95 -7.6 -10.59 -1.76 -2.88 -1.92 (z-stat) sd 21.84 5.83 16.02 18.03 15.74 21.27 0.21 0.02 0.42 (P sign-test) N 16 56 52 16 50 14 The World Bank Colombia Percentage of metered mean 102.96 101.56 110.72 -2.49 7.35 3.83 -0.41 3.82 0.31 (t-stat) connect median 100.3 100 106.99 -1.5 5.09 2.89 -0.51 3.64 0.67 (z-stat) sd 14.91 3.51 12.59 15.86 8.38 26.8 1 0 1 (P sign-test) N 7 22 20 7 19 5 Ef�ciency of Collection mean 105 103.63 111.49 -3.46 3.42 0.07 (t-stat) median 105.7 100.51 105.37 -2.96 4.45 1.13 (z-stat) sd 4.07 6.93 21.74 4.62 14.55 0.17 (P sign-test) N 4 15 10 3 9 Coverage W mean 91.95 100.35 107.37 7.67 5.63 17.48 3.27 4.43 3.12 (t-stat) median 94.06 100 105.06 6.51 3.83 11.76 2.8 4.12 2.69 (z-stat) sd 8.83 3.32 12.04 8.76 10.07 20.13 0.01 0 0.02 (P sign-test) N 14 71 67 14 63 13 Coverage S mean 87.89 99.95 108.82 10.64 7.66 15.89 3.56 3.35 3.32 (t-stat) median 91.95 99.88 103.78 7.39 4.12 8.88 2.98 3.18 2.93 (z-stat) Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector sd 11.43 7.03 22.9 10.33 16.83 15.88 0.01 0.02 0 (P sign-test) N 12 60 57 12 54 11 Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B Continuity mean 123.35 200.15 83.34 3.1 (t-stat) median 100.72 139.37 31.65 4.47 (z-stat) sd 35.49 152.31 142.19 0 (P sign-test) N 38 28 28 Volume Billed/ mean 116.02 100.07 101.52 -14.89 0.01 4.8 -1.65 0.01 0.25 (t-stat) Employees median 114.31 100 97.78 -12.76 0.96 12.62 -1.185 -0.21 0.78 (z-stat) sd 27.88 13.81 35.33 25.49 2873 53.44 0.72 0.78 1 (P sign-test) N 8 58 53 8 51 8 Total Connec./Employee mean 85.89 103.28 113.14 14.82 9.9 27.87 5.99 6.88 6.18 (t-stat) median 86.41 100.63 109.87 12.52 8.97 23.96 3.3 5.52 3.18 (z-stat) sd 9.74 7.09 15.39 9.25 11.6 16.24 0 0 0 (P sign-test) N 14 74 66 14 65 13 Average tariff W (S4) mean 83.07 99.13 122.63 16.95 21.77 36.16 2.61 3.69 2.61 (t-stat) - Pesos median 82.43 100 116.54 18.86 16.21 25.53 2.32 3.54 2.27 (z-stat) sd 25.72 6.46 34.6 26.11 34.28 51.84 0.04 0 0.09 (P sign-test) N 15 40 32 15 32 13 Average tariff W (S1) mean 72.63 102.24 151.57 24.1 48.63 79.98 5.82 3.63 4.21 (t-stat) - Pesos median 72.85 100 110.73 23.52 8.33 59.62 3.41 3.9 3.06 (z-stat) sd 18.71 8.29 76.84 16.03 74.49 65.8 0 0 0 (P sign-test) N 16 41 32 15 31 12 Average tariff S (S4) mean 88.93 101.04 125.54 11.52 22.48 33.99 1.27 2.77 1.7 (t-stat) - Pesos 203 median 81.24 100 109.5 18.17 6.39 17.69 1.58 2.98 1.89 (z-stat) sd 27.76 4.8 42.37 27.74 42.92 63.22 0.11 0.03 0.11 (P sign-test) 3. Assessing the Effect of Private Participation in Water Supply and Sanitation N 10 34 31 10 28 10 Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B Average tariff S (S1) - mean 69.65 104.96 161.19 31.25 55.73 95.07 6.18 3.64 4.51 (t-stat) Pesos median 65.16 100.47 126.87 33.96 17.77 55.66 2.93 3.98 2.66 (z-stat) sd 15.62 11.11 83.08 16.76 81 63.23 0 0 0 (P sign-test) N 11 36 28 11 28 9 3 Opex per m mean 83.06 102.05 125.43 14.47 14.2 27.62 2.08 2.87 1.85 (t-stat) median 88.03 99.57 110.57 24.14 6.29 21.25 1.6 3.07 1.36 (z-stat) sd 21.09 29.85 58.12 20.84 30.47 36.52 0.5 0 0.21 (P sign-test) N 9 45 40 9 38 6 204 The World Bank Colombia Opex per connection mean 106.41 105.08 137.44 -3.64 13.25 6.94 -0.47 2.41 0.52 (t-stat) median 104.77 99.75 109.33 -3.42 3.55 -1.93 -0.46 2.05 0.17 (z-stat) sd 31.15 30.38 69.21 24.51 34.32 35.12 0.75 0.33 1 (P sign-test) N 10 46 44 10 39 7 3 Revenue per m mean 78.74 100.07 132.57 17.52 16.97 33.51 3.99 3.18 3.02 (t-stat) median 83.83 98.84 118.76 15.69 13.31 27.66 2.67 3.1 2.2 (z-stat) sd 15.9 26.47 68.08 13.15 34.99 27.15 0 0.03 0.03 (P sign-test) N 9 50 46 9 43 6 Revenue per connection mean 100.84 102.39 133.15 -1.19 15.61 17.91 -0.3 3,2 1.98 (t-stat) median 97.3 99.09 116.78 1.57 10.41 21.65 -0.05 2.96 1.35 (z-stat) sd 21.75 26.27 58.26 12.66 31.96 23.98 0.75 0.01 1 (P sign-test) N 10 51 48 10 43 7 3 Labor Exp per m mean 132.4 108.42 132.58 -32.15 17.38 -40.81 -0.94 1.97 -1.48 (t-stat) median 83.15 101.66 110.54 11.41 5.14 -21.16 -0.68 1.71 -1.2 (z-stat) Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector sd 105.11 29.64 75.33 89.9 52.83 61.39 1 0.4 0.37 (P sign-test) N 7 44 37 7 36 5 Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B Labor Exp per mean 161.62 112.97 130.24 -57.77 13.4 -67.09 -1.56 1.62 -2.1 (t-stat) connection median 118.42 100 104.52 -12.22 1.21 -21.52 -1.86 0.99 -2.02 (z-stat) sd 111.51 35.97 70.82 97.77 51.08 71.56 0.45 0.42 0.06 (P sign-test) N 7 44 39 7 38 5 Revenues/Opex mean 101.3 96.38 99.7 -3.46 3.75 -2.81 -0.74 1.3 -0.47 (t-stat) median 95.7 98.19 100.42 4.23 1.81 -5.37 -0.7 0.83 -42 (z-stat) sd 23.07 12.82 25.94 21.86 20.77 24.91 0.83 0.68 1 (P sign-test) N 22 60 53 22 52 18 Labor Exp/Opex mean 125.35 99.1 94.68 -25.06 -4.51 -25.82 -2.2 -1.54 -2.18 median 118.93 100 97.98 -14.76 1.39 -13.13 -2.42 -1.45 -2.7 sd 48.2 14.64 22.73 49.57 19.12 47.21 0.02 0.76 0.02 N 19 53 43 19 43 16 205 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Table 34. Mean and Median Analysis of Growth Rates Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B (1) (2) (3) (4) (5) (6) (7) (8) (9) Connec. W (total) mean 4.85% 3.40% 3.78% -0.57% 0.02% -1.92% -0.39 0.02 -1.51 (t-stat) median 4.15% 2.40% 2.68% -0.03% -0.62% -1.67% -0.16 -0.45 -1.71 (z-stat) sd 3.17% 4.94% 5.39% 5.4% 6.88% 4.58% 1 0.53 0.09 (P sign-test) N 14 72 67 14 64 13 Connec. S (total) mean 3.51% 4.07% 1.88% 3.71% -2.36% -1.88% 1.82 -1.4 -1.72 (t-stat) median 3.63% 2.89% 2.28% 2.02% -1.31% -2.03% 1.8 -1.26 -1.51 (z-stat) 206 The World Bank Colombia sd 2.23% 9.47% 6.94% 7.08% 12.41% 3.62% 0.04 0.68 0.23 (P sign-test) N 12 60 56 12 54 11 Volume Prod. mean 0.74% 0.52% 0.16% -3.31% -0.07% 0.33% -0.94 -0.04 0.08 (t-stat) median -1.07% 0.00% -1.99% -4.25% 0.61% -1.64% -0.76 0.25 -0.09 (z-stat) sd 11.01% 11.14% 7.1% 11.13% 14.1% 13.68% 0.75 0.79 1 (P sign-test) N 11 65 61 10 59 11 Volume Billed mean 0.28% 1.70% 2.74% -1.65% 1.40% 2.95% -0.73 0.88 0.82 (t-stat) median -1.49% 0.00% 1.68% 1.41% -0.60% 1.65% 0 0.36 0.53 (z-stat) sd 6.85% 7.6% 10.7% 7.45% 11.60% 10.78% 1 0.78 1 (P sign-test) N 11 62 56 11 53 9 Volume per connec. mean -4.94% -1.73% -2.41% -1.54% -0.34% 4.98% -0.8 -0.22 1.52 (t-stat) median -5.28% -2.21% -2.43% 1.65% -0.46% -0.10% -0.53 0.01 0.74 (z-stat) sd 4.71% 7.69% 8.83% 6.37% 11.41% 10.35% 1 0.68 1 (P sign-test) N 11 61 54 11 52 10 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B (1) (2) (3) (4) (5) (6) (7) (8) (9) Employees mean 1.75% 6.57% 2.56% 2.87% -5.74% -1.90% 1.34 -3.18 -0.61 (t-stat) median 1.01% 3.85% 0.77% 5.75% -1.32% -3.24% 1.49 -2.53 -1.02 (z-stat) sd 9.94% 12.26% 11.11% 10.65% 15.93% 14.42% 0.23 0.14 1 (P sign-test) N 25 84 83 25 78 22 Percentage of non mean 0.69% -0.44% -2.95% -3.21% -3.15% -6.86% -0.84 -1.54 -1.67 (t-stat) billed water median -0.05% -0.66% -2.87% -4.44% -2.49% -0.15% -1.55 -1.61 -1.04 (z-stat) sd 1.46% 7.68% 11.7% 15.27% 14.4% 15.36% 0.08 0.11 1 (P sign-test) N 16 56 52 16 50 14 Percentage of metered mean 9.14% 2.48% 2.75% -8.03% -0.08% -9.62% -2 -0.08 -2.25 (t-stat) connec median 7.18% 0.12% 2.61% -8.46% 0.00% -8.09% -1.69 0.62 -1.75 (z-stat) sd 10.05% 5.39% 2.52% 10.62% 4.53% 9.55% 0.45 1 0.38 (P sign-test) N 7 22 20 7 19 5 Ef�ciency of Collection mean 1.45% 3.86% 0.07% -0.28% -2.07% -1.02 (t-stat) median 1.30% 0.19% 0.49% 1.57% -2.31% -0.89 (z-stat) sd 5.78% 9.19% 7.52% 6.31% 6.08% 0.51 (P sign-test) N 4 15 10 3 9 Coverage W mean 2.87% 1.84% 2.32% -0.67% 0.13% -1.62% -0.47 0.16 -1.28 (t-stat) median 1.70% 1.09% 1.44% -0.26% -0.56% -1.29% -0.35 -0.38 -1.64 (z-stat) sd 3.73% 4.53% 5.31% 5.25% 6.63% 4.54% 1 0.45 0.09 (P sign-test) N 14 71 67 14 63 13 207 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B (1) (2) (3) (4) (5) (6) (7) (8) (9) Coverage S mean 1.28% 2.24% 0.18% 3.69% -2.16% -1.65% 1.84 -1.37 -1.57 (t-stat) median 1.37% 0.96% 0.42% 1.97% -1.19% -1.83% 1.8 -1.22 -1.42 (z-stat) sd 2.40% 9.53% 5.89% 6.96% 11.49% 3.48% 0.04 0.5 0.22 (P sign-test) N 12 60 57 12 54 11 Continuity mean 41.09% 19.03% -22.81% -224 (t-stat) median 12.27% 12.71% -2.70% -2.41 (z-stat) sd 58.35% 18.47% 53.84% 0.06 (P sign-test) 208 The World Bank Colombia N 38 29 28 Volume Billed/ mean 3.05% -0.19% 0.72% -12.43% 1.43% 0.55% -1.78 0.49 0.06 (t-stat) Employees median 0.65% 0.00% 0.16% -8.90% 0.05% -3.60% -1.68 0.31 -0.7 (z-stat) sd 15.67% 16.52% 14.57% 19.77% 20.71% 25.26% 0.29 1 0.29 (P sign-test) N 8 58 53 8 51 8 Total Connec./ Employee mean 4.60% 5.95% 2.75% 1.86% -3.03% -2.07% 1.43 -2.73 -1.94 (t-stat) median 3.90% 3.62% 2.63% 2.03% -1.92% -2.20% 1.48 -2.83 -1.78 (z-stat) sd 2.54% 8.4% 6.34% 4.85% 8.91% 3.84% 0.42 0.05 0.09 (P sign-test) N 14 74 66 14 65 13 Average tariff W (S4) mean 9.36% 2.99% 6.97% -2.26% 3.92% -7.73% -0.38 1.8 -1.78 (t-stat) - Peso median 8.53% 0.19% 6.68% -7.61% 4.01% -4.63% -1.02 1.89 -1.43 (z-stat) sd 10.8% 12.52% 10.40% 22.7% 12.30% 15.66% 0.3 0.37 0.27 (P sign-test) N 15 40 32 15 32 13 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B (1) (2) (3) (4) (5) (6) (7) (8) (9) Average tariff W (S1) mean 10.93% 7.36% 8.19% -0.67% 3.58% -2.33% -0.08 1.58 -52 (t-stat) - Peso median 13.62% 0.37% 5.34% -11.50% 4.15% -3.23% -0.63 1.68 -0.63 (z-stat) sd 13.98% 14.33% 12.55% 30.32% 12.64% 15.52% 0.3 0.07 0.77 (P sign-test) N 16 41 32 15 31 12 Average tariff S (S4) mean 7.43% 4.81% 1.76% -5.02% 1.97% -4.01% -0.89 1.02 -0.73 (t-stat) - Peso median 8.12% 0.42% 2.58% -6.77% 2.43% -4.92% -0.76 1.57 -76 (z-stat) sd 19.1% 10.02% 13.47% 17.9% 10.21% 17.31% 0.75 0.08 0.75 (P sign-test) N 10 34 31 10 28 10 Average tariff S (S1) mean 14.97% 11.19% 10.30% -9.99% 3.25% -5.42% -2.05 1.12 -0.89 (t-stat) - Peso median 14.93% 0.87% 8.35% -4.91% 5.28% -8.44% -1.69 1.84 -0.77 (z-stat) sd 13.63% 21.07% 11.57% 16.19% 15.41% 18.27% 0.55 0.09 0.5 (P sign-test) N 11 36 28 11 28 9 3 Opex per m mean 11.35% 3.60% 4.96% -0.28% -1.46% -5.57% -0.04 -0.29 -0.91 (t-stat) median 9.54% -0.26% 5.66% -5.12% 6.13% -0.23% -0.18 0.38 -0.52 (z-stat) sd 7.12% 31.30% 8.45% 23.06% 30.08% 15.01% 1 0.26 1 (P sign-test) N 9 45 40 9 38 6 Opex per conn ection mean 0.34% 5.31% 7.22% 2.45% 2.21% 9.1% 0.36 0.44 1.65 (t-stat) median -1.11% -1.87% 4.32% 5.88% 5.42% 16.5% 0.15 1.67 1.69 (z-stat) sd 10.3% 30.24% 11.3% 21.2% 30.9% 14.5% 0.75 0.2 0.45 (P sign-test) N 10 46 44 10 39 7 209 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Variable Mean Difference Teste Results B T A T-B AT A-B T-B AT A-B (1) (2) (3) (4) (5) (6) (7) (8) (9) 210 3 Revenue per m mean 12.56% 1.78% 4.79% -2.36% 0.58% -6.87% -0.56 0.12 -1.09 (t-stat) median 15.19% 0.82% 5.96% -3.55% 3.35% -9.25% -0.77 0.76 -0.94 (z-stat) sd 7.42% 27.22% 13.5% 12.73% 31.24% 15.4% 0.5 0.54 0.68 (P sign-test) N 9 50 46 9 43 6 Revenue per connection mean 3.53% 1.97% 6.27% -1.88% 3.11% 5.53 -0.5 0.071 1.23 (t-stat) median 1.93% 0.26% 6.34% -1.67% 1.35% 7.27 -0.36 0.82 1.35 (z-stat) sd 10.24% 26.14% 13.91% 11.87% 28.82% 11.82 1 0.54 0.45 (P sign-test) N 10 51 48 10 43 7 The World Bank Colombia Labor Exp per m3 mean 12.23% 4.23% 4.74% -20.99% -1.59% -19.17% -2.6 -0.28 -1.3 (t-stat) median 13.76% 0.00% 6.98% -24.06% 4.63% -11.66% -1.86 0.75 -1.21 (z-stat) sd 12.51% 31.03% 17.45% 21.34% 34.71% 32.10% 0.45 0.24 0.37 (P sign-test) N 7 44 37 7 36 5 Labor Exp per connection mean 6.13% 5.31% 4.46% -21.78% -1.00% -13.31% -2.98 -0.14 0.79 (t-stat) median 10.95% -2.33% 7.07% -23.14% 9.42% -12.21% -1.86 1.18 -0.67 (z-stat) sd 10.83% 38.25% 16.7% 19.3% 43.1% 32.93% 0.45 0.14 1 (P sign-test) N 7 44 39 7 38 5 Revenues/Opex mean 3.97% -1.65% -3.31% -6.91% -0.17% -8.18% -2.42 -0.07 -2.44 (t-stat) median 4.91% -1.08% -0.38% -8.46% 1.26% -5.29% -2.49 0.36 -2.24 (z-stat) sd 8.97% 20.67% 12.63% 13.40% 17.70% 14.24% 0.05 0.68 0.03 (P sign-test) N 22 60 53 22 52 18 Labor Exp/Opex mean -3.39% -6.25% -2.71% -2.20% 3.96% 1.38% -0.57 1.28 0.41 median -3.52% -3.87% 1.17% 2.94% 5.41% 6.98% 0.76 2.13 0.67 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector sd 13.42% 23.02% 11.52% 16.73% 20.36% 23.31% 0.16 0.01 0.21 N 19 53 43 19 43 16 3. Assessing the Effect of Private Participation in Water Supply and Sanitation A. Output Indicators The number of water connections, our �rst output indicator, changes signi�cantly during the whole period. It increases on average 27 percent compared to the period before private participation. The �ndings are more modest when we take into account the evolution of growth rates. The number of water connections faced a positive trend even before private participation took place. No signi�- cant changes in growth rate happened between B and T, and T and A, but when comparing the initial and �nal periods we notice a small reduction in the rate of expansion. The number of sewerage connections increases signi�cantly in all phases of the analysis in levels. It varies on average 15.7 percent between B and T and 11.2 percent between T and A. The growth analysis con�rms a positive change in rates of expansion during the transition period, but this result does not persist in the A period. The third indicator, the volume of water produced, had no signi�cant change over the period of analysis. One possible explanation for the puzzling stagnation is that the expansion in services was counteracted by a decrease in water losses, so that the new demand was covered without having to increase production. Further analysis is necessary in order to justify this conjecture. The volume of water billed did not change signi�cantly in levels during the transition, but it increased by almost 8.3 percent after private participation took place. The variation was much smaller than the increase in water connections, suggesting that the expansion of services at the extensive margin was counter- balanced by a reduction at the intensive margin. This result is con�rmed by the reduction of approximately 11.9 percent in the average volume per connection – since average volume per connection is measured through the volume of water billed. This suggests that the increase in the water billed was not proportional to the increase in number of connections. The analysis in growth rates, however, did not support the idea that private participation affected the trend in which these indicators evolved. B. Number of Employees Most of the work in ownership changes shows that SOEs were oversized in personnel, and both transition and private participation are associated with signi�cant reductions in the number of employees. The results for Colombia do not support this prediction. The number of employees increased by 8 percent between the public and transition period, and by 13 percent after the transition period ended. 211 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector This unusual result could be linked to the evolution of WSS in Colombia. The constitution of 1991 decentralized the responsibilities of water and sanitation pro- vision to the municipal level. During this process, many cities that were previously associated to regional utilities lacked specialized employees. Transition and Private Participation, in this case, could be associated with restoring utilities’ personnel. C. Ef�ciency The �rst ef�ciency indicator, the percent of non-billed water, decreased consistently, particularly in the second phase when losses were reduced by approximately 9.8 percent on average. The analysis in growth rates con�rms that the reductions in losses were greater after the transition. Overall, the amount of unaccounted for water was 13 percent smaller than before the participation of the private sector. The percent of metered connections, our second indicator, did not change signi�cantly during the transition period, but it increased approximately 7.35 percent between A and T. Finally, the percent collected of total bills decreased between public and transition, but it started recovering back after private partici- pation took place. As supported by the Agency View theory, private participation is surely as- sociated with ef�ciency in performance of WSS utilities. D. Coverage Coverage, measured by the ratio between population reached by water or sanita- tion services and total population in the area provides a good picture of how the services expand net the natural growth in population In the case of Colombia, coverage improved signi�cantly across all periods. The coverage of water services improved by 17.4 percent overall while the gains for coverage of sewerage services were on average 15.8 percent higher over the whole period. Private participation also affected the trends of expansion between public and transition periods, but these changes did not persist in the long run. E. Quality Quality is represented by continuity and measured by the average number of hours of water services per day. This indicator increased on average more than 80 percent between transition and private participation periods. The sample size prevents other comparisons. 212 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation F. Labor Productivity The results on productivity gains are ambiguous. Despite the increase in the num- ber of employees, connections per employees increased consistently by a total of 27.7 percent over previous levels. Labor productivity did not change signi�cantly when measured by cubic meters per employee. As the volume billed remained constant between B and T, the increase in the number of workers resulted in an initial loss of productivity. As volume of billed water started expanding, produc- tivity levels were reestablished. G. Prices The tariff system for WSS in Colombia is set in a way such that consumers are cross-subsidized. Residential subscribers are divided into 6 different strata ac- cording to their income level. Stratum 4 is the neutral stratum and does not receive or pay subsides. Strata 5 and 6 cross subsidize the consumption of Strata 3, 2 and 1 (1 being the poorest). For each stratum, consumers must pay a �xed charge plus a basic tariff per cubic meter consumed up to 20 m3. A complemen- tary tariff is charged for additional consumption up to 40 m3 and above this level, a third tariff value is implemented. Our real prices indicators consist of a constructed monthly charge based on the consumption level of a typical household in the stratum. We chose to analyze strata 4 and 1. Stratum 4 gives a neutral perspective of how real prices evolved, and stratum 1 indicates how the poorest consumers were relatively affected. Average tar- iffs combine the �xed charge with an average consumption of 20 m3 per month. Average tariffs increased signi�cantly for both services and strata be- tween the transition and the private participation periods. A typical consumer of stratum 4 paid 53.5 percent more for water services and approximately 46.4 per- cent more for sewerage services between B and A. For stratum 1 the price level increased even more, on average 158 percent for water services and 181 percent for sewerage services between B and T. The analysis in trends showed a faster growth in prices after transition. It is puzzling that tariffs increased signi�cantly more for low income consumers. This seems to be a pattern also followed by �rms that did experience private intervention. H. Financial Costs and revenues per output increased signi�cantly between T and A. Our esti- mates show that the magnitude of the variation was similar for the two indicators 213 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector so that the ration revenues per operational expenditures did not change signi�- cantly. These results work against the idea that an increase in tariffs is associated with higher pro�ts to the privatized company. The rise in sales expenditures sug- gests that utilities expanded their services to more costly consumers. Rises in tariffs and average revenues seem just enough to compensate larger average costs. Labor expenditures per unit of output decreased signi�cantly between B and T, but increased between T and A. The aggregate effect is negative. The share of labor expenditures in the Operational expenditures also decreased with private participation, indicating a more ef�cient use of labor. Figure 63 reports the tendencies of the relevant indicators. The vertical line indicates the beginning of private participation. Figure 63. WSS indicators Output Efficiency 80 100 120 140 160 60 80 100 120 140 -5 0 5 -4 -2 0 2 4 6 year gap year gap Connec. Water Connec. Sewer % metered connec % non rev Vol. Produced Vol. Billed Collection efficiency Number of employees Continuity 160 400 140 300 120 200 100 100 80 0 -5 0 5 -5 0 5 year gap year gap 214 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Figure 63 (Cont.): WSS indicators Coverage 120 110 100 90 80 70 -5 0 5 year gap Cover Water Cover Sewer Labor Productivity 140 120 100 80 60 -5 0 5 year gap Connec / emp Vol. Billed / emp Prices 50 100 150 200 250 -5 0 5 year gap Tariff W S4 Tariff S S4 Tariff W S1 Tariff S S1 215 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Figure 63 (Cont.): WSS indicators Financial I 200 150 100 50 -5 0 5 year gap OPEX / cubic meter OPEX / Connection Revenue / cubic meter Revenue / Connection Revenue / OPEX Financial II 250 200 150 100 50 -5 0 5 year gap Labor Exp/cubic meter Labor Exp/Connection Labor Exp/OPEX 216 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation 3.3.2. Econometric Analysis In this section, we further develop the previous analysis estimating several speci- �cations for the indicators in both levels and rates of growth. For each set of in- dicators, the coef�cients for the two main dummies are presented: Transition that has a value equal to one from one year before private participation until one year after, and After that has a value equal to one for four years after the transition period. We estimate three different models: Model 1 uses log level as dependent variable and control for �rm speci�c �xed effect, Model 2 equals Model 1 plus �rm speci�c time and Model 3 uses log growth as dependent variable. Table 35 below present the most relevant model for each indicator ana- lyzed. The complete set of results (all indicators - all models) is presented in the appendix. Columns (1) and (2) present the estimates for the log levels without the �rm-speci�c time trends; columns (3) and (4) show the estimates with the city-speci�c time trends. OLS estimates are qualitatively similar but quantita- tively larger than FGLS predictions. Unless indicated otherwise in the text, we will mainly discuss the results from FGLS estimation. Table 35. Regression Analysis Dependent Variable Model 1 Model 2 OLS FGLS OLS FGLS (1) (2) (3) (4) Connec. W (total) Transiton 0.01 0.025*** (.0321) (.0079) After 0.053 0.031*** (.0429) (.0123) N 276 343 Connec. S (total) Transiton 0.081*** 0.062*** (.0207) (.0119) After 0.092*** 0.071*** (.0279) (.0126) N 230 287 Volume Prod. Transiton 0.061 0.012 (.0621) (.011) After 0.106 0.059*** (.0777) (.011) N 249 311 217 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Dependent Variable Model 1 Model 2 OLS FGLS OLS FGLS Volume Billed Transiton 0.054 0.014 (.0611) (.0556) After 0.139 0.055*** (.0811) (.0167) N 215 271 Volume per connec. Transiton 0.034 -0.122*** (.0742) (.0187) After 0.139 -0.149*** (.0843) (.0189) N 209 263 Employees Transiton 0.182*** 0.139*** (0.054) (.0174) After 0.170*** 0.187*** (.0639) (.0179) N 336 418 Percentage of non Transiton 0.317*** -0.061** billed water (.0796) (.0226) After 0.246*** -0.118*** (.0904) (.0227) N 218 271 Percentage of metered Transiton 0.013 -0.002 connec. (.0473) (.0134) After -0.009 0.048*** (.0588) (.0254) N 90 113 Ef�ciency of Transiton 0.14 -0.042** Collection (.2145) (.0182) After 0.29 -0.023 (.2484) (.0195) N 36 50 Coverage W Transiton 0.045 0.078*** (.0295) (.0109) After 0.097** 0.113*** (.033) (.0109) N 273 339 218 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Dependent Variable Model 1 Model 2 OLS FGLS OLS FGLS Coverage S Transiton 0.063** 0.062*** (.027) (0.0128) After 0.066*** 0.112*** (.0312) (.0129) N 232 290 Continuity Transiton 0.048 0.299*** After (.0554) (.0154) N 88 117 Volume Billed/ Transiton -0.129* -0.059** Employees (.0763) (.0287) After -0 061 -0 023 (.1031) (.0308) N 191 244 Total Connec./ Transiton 0.041** 0.042 ** Employee (.0171) (.007) After 0.057** 0.0458** (0238) (0073) N 269 337 Average tariff W (S4) Transiton 0.213** 0.136*** - Pesos (.0943) (.0246) After 0.126 0.292*** (.1211) (.0254) N 127 162 Average tariff W (S1) Transiton 0.165* 0.325*** - Pesos (.0933) (.0407) After 0.176 0.588*** (.1189) (.0431) N 123 160 Average tariff S (S4) Transiton 0.177* 0.131 *** - Pesos (.0983) (.0367) After 0.185 0.226*** (.1222) (.0374) N 107 137 219 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Dependent Variable Model 1 Model 2 OLS FGLS OLS FGLS Average tariff S (S1) Transiton 0,155 0.393*** - Pesos (.0958) (.0469) After 0.198* 0.723*** (.1189) (.0501) N 113 145 3 Opex per m Transiton 0.219** 0.269*** (.1107) (.0467) After 0.366*** 0.307*** (.1281) (.0468) N 149 194 Opex per connection Transiton 0.003 -0.009 (.0931) (.0432) After 0.105 0.012 (.1084) (.0433) N 168 215 3 Revenue per m Transiton 0.083 0.154*** (.0973) (.0331) After 0.169 0.333*** (.1117) (.0332) N 154 204 Revenue per Transiton 0.005 0.018 connection (.0827) (.0094) After 0.116 0.147*** (.0946) (.0128) N 173 224 Labor Exp per m3 Transiton 0.023 -0.017 (.1541) (.0966) After 0.063 0.132 (.1765) (.0967) N 132 171 Labor Exp per Transiton -0.064 -0.161** connection (.1328) -0.0698 After 0.0165 -0.155** (.1502) (.0698) N 146 187 220 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation Dependent Variable Model 1 Model 2 OLS FGLS OLS FGLS Revenues/Opex Transiton -0.032 -0.002 (.0463) (.0212) After -0 019 0.042* (.0567) (.2101) N 230 288 A. Output Indicators It is intuitive that output variables present a natural trend off growth relate with population and income growth. For this reason, we chose model 2 and model 3 as the best models to represent the real impact of private intervention. Within Table 35, Table 5 shows improvements in both the transition and pure private periods. The average level of the number of water of connections rose by 2.5 percent with respect to its natural trend, and the average rise after the transition was 3.1 percent with respect to the solely public trend. For sewerage, the second model showed gains of 6 percent during the transition period and 7.1 percent afterwards. Private participation resulted in a signi�cant increase in the growth rate of expansion of sewerage connections. According to the �rst model the volume of water produced decreased by 4.7 percent during transition and by 6 percent during the post transition. Volume of billed water did not change systematically during this period, while the average volume per connection decreased. Based on this evidence we can conclude that private participation had an important role in expanding services at the extensive margin. However, at the intensive margin output decreased signi�cantly. Two fac- tors help to explain this contraction: �rst, the overall improvement in the network and the reduction of losses in the system; second, the increase in real tariffs and the consequent reduction in individual demand. B. Number of Employees The �rst model is consistent with the previous analysis predicting a signi�cant ex- pansion in the number of employees. The water and sanitation sector hires or hired on average 13.9 percent more in transition as compared to before the private par- ticipation and 18.7 percent more after transition as compared to before private participation. Growth rates in employment were signi�cantly higher during the transition but the effect of private participation in growth disappeared afterwards. 221 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector C. Ef�ciency An important reduction in distributional losses can be observed due to change in ownership. One might assume that in order to improve performance, the �rms would improve maintenance and investments in the network. The results of the analysis support this assumption: the total drop in non-billed water was 5 percent during the transition, followed by a decrease of 12 percent in losses when compared to pure public levels. The percent of metered connections did not experience signi�cant changes during the transition period, but increased by almost 4.8 percent after private participation took place. Finally, the collec- tion of revenues seemed to worsen during the transition: �rms experienced an average drop of approximately 4.2 percent during this period. During the post transition, however, average levels recovered and returned to their level at the solely public administration. In accordance to the Agency View predictions, private participation had a positive role in overall ef�ciency. The impacts from private intervention in WSS were more intense in the post transition period, supporting the idea that long- run ef�ciency gains prevailed instead of those related to transitional adjustments as found by Andres, Foster, and Guasch (2006) and Andres et al. (2008). D. Coverage Given the population’s natural growth, it is interesting to analyze the change in coverage in order to identify whether the expansion of the network was driven by the natural increase of households or by the net increase of the number of connections. The results suggest that there was a signi�cant net expansion of services. The average increase in coverage of water services was 8 percent during the transition, while the average increase was 11.5 percent in the period after. For sewerage, the average increases were 6.3 percent and 11.4 percent re- spectively. After controlling for time trends, the results remained signi�cantly positive and particularly stronger for the transition period. This evidence sup- ports the effectiveness of private investments in the expansion of water and sanitation provision. It also disproves that pro�t maximization strategies of the private utilities are associated with output reduction and the exclusion of small or higher cost consumers. In further analysis (available upon request) we verify that network expansion in WSS was more intense among middle and low income residential consumers. 222 The World Bank Colombia 3. Assessing the Effect of Private Participation in Water Supply and Sanitation E. Quality The estimates demonstrated important improvements in the duration of services due to the change in ownership both during the transition and after. Controlling for time trends, the average number of hours of service a day increased 34.8 per- cent during transition. The small sample size prevents us, however, from identify- ing the effects during the post transition period. F. Labor Productivity Labor productivity is de�ned as the ratio between units of output and numbers of employees. By construction, this indicator is also likely to evolve according to a natural trend. The results for output and number of employees clearly influenced the labor productivity indicators. The increase in number of employees overcame the changes in billed water, such that the volume per employees decreased on average 5.9 percent between B and T. If we consider average connections per employee as our indicator of pro- ductivity, the results change radically. The models indicate a substantial increase in labor productivity. More precisely, average level of connections per employee increased 4.2 percent during transition and 4.8 percent during the post transition period. Growth rates of productivity rose by 25 percent during transition, and increased 16.8 percent afterwards according to this indicator. The gains of productivity evidenced by the connections per employee in- dicator are consistent with the predictions of both the Agency and Social Views. Nevertheless, the opposite movements of our two productivity indicators prevent us from drawing de�nite conclusions about the role of private intervention. G. Prices The estimates from the �rst model suggest that real prices increase signi�cantly for all services and strata. The analysis in levels showed an average increase of more than 40 percent in services for consumers of stratum 4 after private partici- pation and an average increase of more than 73 percent for the poorest consumer in the post transition period. These results seem consistent with the traditional �ndings in the literature that private participation is associated with higher costs for consumers. As we carefully analyze the second model, the existence of a posi- tive and steep time trend in prices becomes clear. After controlling for trends, the effect of private participation on prices becomes non signi�cant. 223 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector H. Financial The estimates of the �rst model con�rm the results found in the means and me- dians analysis: both revenues and expenditures increased signi�cantly during and after the transition to private. However, the econometric approach reveals that the increase in revenues overpassed the change in costs in the post transition period, such that the revenues per operational expenditures ratio increased on average 4.3 percent. These indicators are consistent with the association between private par- ticipation and signi�cant increases in pro�ts. Nevertheless, it is worthwhile to re- mark that these indicators ignore investment expenditures and that the additional revenues could in fact be partially �nancing the expansion of services observed. 224 The World Bank Colombia María Clara Ucros. The World Bank 3.4. Additional Considerations So far, the study has focused on understanding the average effect of private participation, using the individual local provider of services as the object of our analysis. One possible critique to this approach is the fact that it attributes equal weight to all �rms independently of their size and their representation in the sector. In other words, it is possible that our results are mainly driven by �rms in small cities, and that private intervention has no effect in the majority of con- sumers. It is also possible that our results are driven by the larger cities in our sample while the small ones did not bene�t from private sector participation. In order to verify the robustness and generality of the results in the pre- vious section, we re-estimated the �rst and second models of the econometric analysis using different samples. Table A1 (Appendix) displays the results found. Columns (1) and (2) repeat the estimates of previous sections using the equal weight full sample as benchmark. Columns (3) and (4) present the results of a weighted estimation of models 1 and 2, using the city’s population as weight variable. Columns (5) and (6) estimates exclude small and medium small cities from the sample. These results represent the effects of private intervention for �rms with more than 75,000 habitants. Finally, Columns (7) and (8) describe the results excluding large cities (cities with more than 300,000 habitants). The results in Table A1 (Appendix) support the robustness of our previous estimates. Changes in the sample have small effects in the magnitude, but do not affect the direction and signi�cance of private participation coef�cients for most indicators. 225 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Another source of concern about the quality of the results found is the fact that the private participation dummies are potentially endogenous. If, for example, private sector participation is correlated with �rm performance or po- tential performance, even after controlling for city speci�c effects, the results associated with private participation might simply be a reflection of �rms’ char- acteristics in the period. The general approach suggested by the literature to solve this type of problem is the use of Instrumental Variables, but no proper instrument has been found yet in our context. Andres and Cunha (2007) compare public utilities, pri- vate utilities and utilities that underwent private intervention during 1995 and 2006 in Colombia. The study �nds that the �rms that experienced private par- ticipation initially performed similarly and in some cases even worse than those that did not. Although not conclusive, this evidence corroborates the one found in our analysis. 226 The World Bank Colombia María Clara Ucros. The World Bank 3.5. Final Remarks of this Chapter This chapter analyzed the effects of private participation on indicators of output, employment, ef�ciency, quality, labor productivity, coverage, prices, costs and revenues for 118 cities served by 77 water and sanitation utilities in Colombia. The main contribution of this analysis is to expand the analysis proposed by Andres, Foster, and Guasch (2006) and Andres et al. (2006) to the water and sanitation sector in Colombia. It adds a systematic evaluation of private partici- pation to WSS, thus contributing to the natural resources literature. This study combines both �nancial and non-�nancial performance indicator analysis, exam- ining the impacts of private intervention on both levels and growth rates of each indicator. Like Andres et al. (2006), we separate short-term and long-term effects of private participation, a distinction ignored by previous work on the topic. The results found are summarized in Table 36. Private sector participation is associated with higher levels of output, employment, ef�ciency, labor productivity, quality and coverage after the transition period. Number of connections, cover- age, and percent of non-billed water and labor productivity also show signi�cant changes in levels between the public and the transition periods. This observation indicates that pre-private reforms were effective in WSS in Colombia, and that most of their results persisted or even intensi�ed over time. The analysis taking into ac- count city-speci�c time trends leads to more modest but still signi�cant results. Price levels were also signi�cantly affected by private participation. Consumers of both services, stratum 1 and stratum 4, experienced increases in average tariffs. Nevertheless, correcting for trends mitigates the effect of private participation on 227 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector tariffs during and after the transition period. The revenues and expenditures indicators displayed a positive variation in levels during the period, but the trend analysis sug- gests that private participation reduced the speed at which these indicators evolved. Changes in revenues per output were larger than those in operational and sales ex- penditures. Further analysis is necessary to understand if the net revenues gains were reverted in pro�ts or investments in the expansion and quality of services. In order to verify the robustness and generality of our results we repeated the estimation procedure for different sub-samples. Weighting the observations by population, excluding small cities from the sample, and excluding highly popu- lated cities leave the effects of private intervention in WSS unchanged. While extremely relevant for WSS in Colombia, the process of private par- ticipation is far from being homogeneous across utilities. A future step in our re- search will be to investigate the impact of different forms of private participation on the performance of water and sanitation utilities. Table 36. Summary of the Results Results Transition Post Transition Connection Volume Sold Number of employees Labor productivity (connec/employee) Ef�ciency Continuity Coverage Average Prices Operational Expenditures per Output Revenues per Output Labor Exp per Output 228 The World Bank Colombia Appendix Table A1: Additional Analysis Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) Connec. W (total) Transiton 0.137*** 0.026*** 0.157*** 0.041 *** 0.138*** 0.037*** 0.185** 0.073*** (.01355) (.0079) (.0148) (.0148) (.0158) (.0122) (.0177) (.0144) After 0.203*** 0.031*** 0.237*** 0.037*** 0.216*** 0.032** 0.246*** 0.063*** (.0136) (.0123) (.0149) (.0106) (.0161) (.0151) (.0177) (.0152) N 343 343 435 435 182 182 373 373 Connec. S (total) Transiton 0.139*** 0.062*** 0.176*** 0.056*** 0.192*** 0.068*** 0.164*** 0.078*** (.0141) (.0119) (.0196) (.0118) (.0218) (.0153) (.0238) (.0163) After 0.23*** 0.071*** 0.302*** 0.049*** 0.288*** 0.064*** 0.279*** 0.05*** (.0142) (.0126) (.0196) (.0138) (.0219) (.0182) (.0239) (.0178) N 287 287 373 373 178 178 311 311 Volume Prod. Transiton -0.046** 0.012 -0.076*** 0.012 -0.073*** 0.023 -.089*** 0.008 (.0179) (.011) (.0218) (.0219) (.0274) (.0215) (.0244) (.0247) After -0.059*** 0.059*** -0.089*** 0.04* -0.082*** 0.052** -0.093*** 0.069** (.0177) (.011) (.0219) (.0234) (.0273) (.0246) (.0246) (.0271) N 311 311 403 403 176 176 341 341 Volume Billed Transiton -0.022* 0.014 0.028 .067*** -0.051 0.028 -0.068*** -0.018 (.011) (.0556) (.0277) (.0676) (.0345) (.0322) (.0232) (.0295) After 0.015 0.055*** 0.091*** .159*** -0.028 0.089** -0.012 0.017 (.0111) (.0167) (.0278) (.0208) (.0351) (.0384) (.0232) (.0305) 231 N 271 271 335 335 169 169 271 271 Appendix Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) Volume per connec. Transiton -0.122*** -0.027 -0.149*** 0.003 -0.167*** -0.127 -0.252*** -0.102*** (.0187) (.0252) (0.0278) (.0284) (.0366) (.0358) (.0324) (.0384) After -0.149*** -0.794 -0.158*** 0.067** -0.186*** 0.058 -0.247*** -0.059 (.0189) (.0253) (.0279) (.0306) (.0368) (.0441) (.0326) (.0396) N 263 263 329 329 168 168 267 267 Employees Transiton 0.139*** 0.033** 0.043** -0.125*** 0.136*** -0.038 0.113*** -0.055** (.0174) (.0147) (.0193) (.2513) (.0329) (.0428) (.0231) (.0246) 232 The World Bank Colombia After 0.187*** -0.002 0.083*** -0.061** 0.182*** -0.022 0.175*** -0.012 (.0179) (.1383) (.0204) (.0251) (.0357) (.0451) (.0242) (.0256) N 418 418 507 507 178 178 442 442 Percentage of billed Transiton -0.051** -0.026 -0.039* 0.008 -.016 0.027 -0.061** -0.009 water (.0226) (.0198) (0.0238) (.0227) (.027) (.0247) (.0259) (.0357) After -0.118*** -0.064*** -0.119*** -0.017 -0.078*** 0.019 -0.139*** -0.052 (.0227) (.0199) (.0238) (.0243) (.027) (.0306) (.026) (.036) N 271 271 344 344 185 185 279 279 Percentage of metered Transiton -0.002 -0.022 -0.018 -0.073*** 0.015 -0.053* 0.069*** -.096*** connec. (.0134) (.0145) (.0219) (.0245) (.0278) (.0276) (.0256) (.0207) After 0.048*** -0.014 0.075*** -0.064** 0.097*** -0.04 0.133*** -0.117*** (.0254) (.0151) (.0261) (.0258) (.0332) (.0319) (.0267) (.0223) N 113 113 142 142 90 90 102 102 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) Ef�ciency of Collection Transiton -0.042** 0.005 -0.057*** -0.03 -0.71* -0.051 -0.158 -0.079 (.0182) (.0095) (.0172) (.0236) (.0369) (.0313) (.1314) (.1566) After -0.023 0.049*** -0.006 0.034 -0.026 -0.005 -0.089 -0.048 (.0195) (.0147) (.024) (.0333) (.0403) (.0369) (.1354) (.1567) N 50 50 72 72 57 57 31 31 Coverage W Transiton 0.078*** 0.026*** 0.054*** 0.057*** 0.068*** 0.039*** 0.049* 0.024* (.0109) (.0077) (.0163) (.0063) (.0199) (.0126) (.0158) (.0137) After 0.113*** 0.037*** 0.119*** 0.069*** 0.126*** 0.059*** 0.112*** 0.019 (.0109) (.0078) (.0171) (.0076) (.0209) (.0146) (.0166) (.0146) N 339 339 196 196 124 124 139 139 Coverage S Transiton 0.062*** 0.057*** 0.048*** 0.015* 0.043** 0.172* 0.028** -0.067*** (0.0128) (.0119) (.0163) (.0084) (.017) (0.009) (.0137) (.0109) After 0.112*** 0.065*** 0.121*** 0.016* 0.093*** 0.019 0.04*** -0.105*** (.0129) (.0129) (.0165) (.0084) (.0179) (.0144) (.0141) (.0121) N 290 290 232 232 134 134 171 171 Continuity Transiton 0.299*** -0.001 -0.278*** 0.33 -0.296*** -0.023** 0.259 (.0154) (.0046) (.029) (.7047) (.0403) (.0094) (.6317) After 0.301 0.542*** 0.214 (.7049) (.0736) (.6348) 233 N 117 117 116 116 58 58 88 88 Appendix Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) Volume Billed/ Transiton -0.058** -0.059** -0.111*** 0.044 -0.156*** 0 164 -0.212*** -0.101*** Employees (.0292) (.0287) (.0463) (.0518) (.0363) (.0584) (.0353) (.0544) After -0.103*** -0.023 -0.103** 0.021 -0.194*** -0.006 -0.186*** -0.175*** (.0292) (.0308) (.0465) (.0581) (.0374) (.0698) (.0356) (.0645) N 244 244 316 316 151 151 260 260 Total Connec/ Transiton 0.148*** 0.042*** 0.172*** 0.043*** 0.159*** 0.04*** 0.201*** 0.065*** Employee 234 The World Bank Colombia (.0123) (.007) (.0173) (.0101) (.0183) (.0122) (.0252) (.0173) After 0.225*** 0.0458** 0.256*** 0.033*** 0.244*** 0.288** 0.262*** 0.041** (.0125) (.0073) (.0173) (.0113) (.0182) (.0141) (.0253) (.0184) N 337 337 439 439 182 182 377 377 Average tariff W (S4) Transiton 0.136*** 0.021 0.157*** -0.034 0.132*** -0.005 0.093** -0.156*** - Pesos (.0246) (.0214) (.0361) (.0396) (.046) (.0442) (.0372) (.0528) After 0.292*** 0.047** 0.381*** -0.038 0.388*** -0.031 0.219*** -0.147*** (.0254) (.0215) (.0385) (0.0399) (.0506) (.0515) (.0395) (.0539) N 162 162 230 230 136 136 168 168 Averagetariff W (S1) Transiton 0.325*** -0.091*** 0.441*** -0.028*** 0.439*** -0.068 0.439*** 0.064 - Pesos (.0407) (.0075) (.0442) (.0333) (.0536) (.0519) (.0455) (.0471) After 0.588*** -0.087*** 0.852*** -0.159*** 0.904*** 0.1** 0.608*** 0.149*** (.0431) (.0076) (.0486) (.0337) (.0579) (.0543) (.0475) (.0497) N 160 160 226 226 137 137 169 169 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) Average tariff S (S4) Transiton 0.131*** 0.039*** 0.218*** 0.057 0.182*** 0.08 0.175*** 0.011 - Pesos (.0367) (.0122) (.0444) (.0524) (.0507) (.0555) (.0383) (.0641) After 0.226*** 0.052 0.476*** 0.073 0.467*** 0.051 0.233*** 0.084 (.0374) (.0126) (.0457) (.0525) (.0518) (.0599) (.0393) (.0649) N 137 137 193 193 127 127 134 134 Average tariff S (S1) Transiton 0.393*** -0.046 0.453*** -0.252*** 0.456*** -0.034 0.552*** 0.157*** -Pesos (.0469) (.0399) (.0376) (.048) (.0643) (.0643) (.0421) (.0483) After 0.723*** -0.022 0.952*** -0.131*** 1.04*** 0.18** 0.808*** 0.266*** (.0501) (.0418) (.0476) (.0473) (.0675) (.0751) (.043) (.0484) N 145 145 203 203 124 124 146 146 3 Opex per m Transiton 0.269*** -0.05 0.155*** -0.224** 0.305*** -0.179** 0.373*** -0.024 (.0467) (.046) (.0453) (.0954) (.0747) (.0815) (.0447) (.0479) After 0.307*** -0.042 0.207*** -0.183* 0.334*** -0.155 0.498*** 0.093* (.0468) (.0502) (.0506) (.0994) (.0787) (.0973) (.0467) (.0523) N 194 194 236 236 139 139 183 183 Opex per connection Transiton -0.009 -0.143*** -0.074* -0.383*** -0.021 -0.294*** 0.627 -0.976 (.0432) (.0522) (.0449) (.0787) (.0567) (.0629) (.0438) (.0635) After 0.012 -0.106** -0.108** -0.27*** 0.037 -0.173*** 0.12** 0.044 (.0433) (.0524) (.0464) (.0818) (.0629) (.0799) (.0501) (.068) N 215 215 280 280 142 142 228 228 235 Appendix Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) 3 Revenue per m Transiton 0.154*** 0.008 0.173*** -0.188** 0.177*** -0.098 0.24*** -0.016 (.0331) (.0084) (.028) (.0875) (.0377) (.081) (.0404) (.0164) After 0.333*** -0.013 0.401*** -0.212** 0.382*** -0.176* 0.437*** -0.013 (.0332) (.0163) (.035) (.0949) (.0466) (.0945) (.0462) (.04) N 204 204 246 246 144 144 193 193 Revenue per connection Transiton 0.018 -0.06 0.006 -0.314*** -0.002 0.299*** 0.038*** -0.062 236 The World Bank Colombia (.0094) (.0268) (.0331) (.0697) (.0402) (.0522) (.013) (.0383) After 0.147*** 0.006 0.182** -0.169** 0.229*** -0.178*** 0.165*** 0.081* (.0128) (.03) (.0388) (.0721) (.0484) (.0674) (.0274) (.046) N 224 224 283 283 148 148 231 231 Sales cost per m3 Transiton -0.017 -0.067 0.439*** -0.131** 0.579*** -0.008 0.599*** 0.319*** (.0966) (.057) (.0489) (.0678) (.0516) (.0646) (.0351) (.0623) After 0.132 -0.104 0.583 *** -0.216*** 0.672*** -0.112 0.761*** 0.267*** (.0967) (.0603) (.0489) (.0728) (.0586) (.0718) (.0438) (.0678) N 171 171 210 210 126 126 173 173 Sales cost per Transiton -0.161** -0.024 0.178*** -0.347*** 0.232*** -0.209*** 0.457*** 0.334*** connection -0.0698 (.0677) (.0504) (.0611) (.0595) (.0755) (.0397) (.0835) After -0.155** -0.026 0.23*** -0.358 *** 0.339*** -0.211** 0.571*** 0.372*** (.0698) (.0678) (.0554) (.0677) (.0727) (.0859) (.0563) (.087) N 187 187 236 236 123 123 201 201 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Dependent Variable full sample weighted regression Pop>75k Pop>300k mode 1 model 2 model 1 model 2 model 1 model 2 model 1 model 2 (1) (2) (3) (4) (5) (6) (7) (8) Revenues/Opex Transiton -0.002 0.019 0.036*** 0.001 0.089** 0.008 0.007 -0.039** (.0212) (.0183) (.0141) (.0187) (.0356) (.0284) (.0157) (.018) After 0.042* 0.055** 0.161*** -0.024 0.202*** -0.023 0.019 -0.056** (.2101) (.0242) (.0234) (.0237) (.04) (.0414) (.0196) (.0237) N 288 288 366 366 154 154 315 315 237 Appendix Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Table A2: Regression Analysis Dependent Model 1 Model 2 Model 3 Variable (in logs) OLS FGLS OLS FGLS OLS FGLS (1) (2) (3) (4) (5) (6) Connec. W Transiton 0.048* 0.137*** 0.01 0.026*** -0.133 -0.97 (total) (0.0278) (.01355) (.0321) (.0079) (.3578) (.134) After 0.096*** 0.203*** 0.053 0.031*** -0.335 -0.23 (0.0317) (.0136) (.0429) (.0123) (.2303) (.1343) N 276 343 276 343 218 282 Connec. S Transiton 0.074** 0.139*** 0.081*** 0.062*** 0.137 0.198*** (total) (.0345) (.0141) (.0207) (.0119) (.4161) (.0722) After 0.085** 0.23*** 0.092*** 0.071*** -0.105 0.228*** (.0396) (.0142) (.0279) (.0126) (.4537) (.0759) N 230 287 230 287 174 219 Volume Prod. Transiton 0.235*** -0.046** 0.061 0.012 -1.765* -2.094 (.0704) (.0179) (.0621) (.011) (.9518) (.168) After 0.394*** -0.069*** 0.106 0.059*** -1.531 -0.194 (.0759) (.0177) (.0777) (.011) (.6606) (.1679) N 249 311 249 311 76 114 Volume Billed Transiton 0.019 -0.022* 0.054 0.014 0.507 0.081 (.0599) (.011) (.0611) (.0556) (1.115) (.2431) After 0.074 0.015 0.139 0.055*** -0.684 0.749*** (.0679) (.0111) (.0811) (.0167) (1.118) (.2376) N 215 271 215 271 87 127 Volume per Transiton 0.034 -0.122*** 0.034 -0.027 0.823 -0.055 connec. (.0742) (.0187) (.0721) (.0252) (.7212) (.147) After 0.139 -0.149*** 0.135 -0.794 0.544 0.664*** (.0843) (.0189) (.098) (.0253) (.6267) (.1413) N 209 263 209 263 38 65 Employees Transiton 0.182*** 0.139*** 0.145*** 0.033** 0.534 0.315** (0.054) (.0174) (.05) (.0147) (.3464) (.1724) After 0.170*** 0.187*** 0.118* -0.002 -0.01 0.071* (.0639) (.0179) (.0665) (.1383) (.4041) (.1704) N 336 418 336 418 150 209 238 The World Bank Colombia Appendix Dependent Model 1 Model 2 Model 3 Variable (in logs) OLS FGLS OLS FGLS OLS FGLS (1) (2) (3) (4) (5) (6) Percentage Transiton 0.317*** -0.051** 0.024 -0.026 -0.392 0.425 of non billed (.0796) (.0226) (.0621) (.0198) (.7503) (.2853) water After 0.246*** -0.118*** -0.796 -0.064*** -0.314 0.424 (.0904) (.0227) (.0832) (.0199) (.7784) (.2849) N 218 271 218 271 61 90 Percentage Transiton 0.013 -0.002 -0.535 -0.022 -1.58* -1.284** of metered (.0473) (.0134) (.039) (.0145) (.867) (.5279) connec. After -0.009 0.048*** -0.076 -0.014 -0.543 -0.757 (.0588) (.0254) (.0519) (.0151) (.1052) (.5396) N 90 113 90 113 37 65 Ef�ciency of Transiton 0.14 -0.042** -0.065 0.005 0.983** -0.729** Collection (.2145) (.0182) (.0845) (.0095) (.3076) (.3506) After 0.29 -0.023 -0.043 0.049*** -0.925*** (.2484) (.0195) (.0905) (.0147) (.3506) N 36 50 36 50 12 20 Coverage W Transiton 0.045 0.078*** 0.024 0.026*** -0.199 -0.162*** (.0295) (.0109) (.0415) (.0077) (.4077) (.0356) After 0.097** 0.113*** 0.084 0.037*** -0.502 -0.403 (.033) (.0109) (.0552) (.0078) (.4231) (.057) N 273 339 273 339 162 216 Coverage S Transiton 0.053** 0.062*** 0.067*** 0.057*** 0.089 0.522*** (.027) (0.0128) (.0178) (.0119) (.5328) (.1542) After 0.066*** 0.112*** 0.071*** 0.066*** -0.526 0.146 (.0312) (.0129) (.0238) (.0129) (.5599) (.1582) N 232 290 232 290 121 159 Continuity Transiton 0.048 0.299*** 0.022 -0.001 -0.028 -0.868 (.0554) (.0154) (.0239) (.0046) (.4702) (.075) After N 88 117 88 117 52 74 Volume Billed/ Transiton -0.103 -0.058** -0.129* -0.059** -1.522 -1.109** Employees (.0861) (.0292) (.0763) (.0287) (.8955) (.5126) After -0.058 -0.103*** -0.061 -0.023 -1.905** -0.955* (.095) (.0292) (.1031) (.0308) (.8894) (.5068) N 191 244 191 244 57 86 239 Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector Dependent Model 1 Model 2 Model 3 Variable (in logs) OLS FGLS OLS FGLS OLS FGLS (1) (2) (3) (4) (5) (6) Total Connec/ Transiton 0.061** 0.148*** 0.041** 0.042*** -0.015 0.256*** Employee (.0275) (.0123) (.0171) (.007) (.2731) (.116) After 0.078** 0.225*** 0.057** 0.0458** -1.792 0.168*** (.0312) (.0125) (.0238) (.0073) (.2966) (.1181) N 269 337 269 337 210 267 Average tariff Transiton 0.213** 0.136*** 0.231 0.021 -0.553 -1.025*** W (S4) - Pesos (.0943) (.0246) (.1397) (.0214) (.7191) (.3129) After 0.126 0.292*** 0.073 0.047** 0.374 -0.122 (.1211) (.0254) (.1943) (.0215) (.3991) (.3139) N 127 162 127 162 74 98 Average tariff W Transiton 0.165* 0.325*** 0.275* -0.091*** -0.743 -0.779*** (S1) - Pesos (.0933) (.0407) (.1639) (.0075) (.5592) (.1554) After 0.176 0.588*** 0.075 -0.087*** 0.312 -0.148 (.1189) (.0431) (.2362) (. 0076) (.6234) (.1363) N 123 160 123 160 84 112 Average tariff S Transiton 0.177* 0.131*** 0.289* 0.039*** -1.191 -0.9*** (S4) - Pesos (.0983) (.0367) (.1658) (.0122) (.7298) (.2617) After 0.185 0.226*** 0.212 0.052 -1.21 -.598*** (.1222) (.0374) (.2227) (.0126) (.8064) (.2175) N 107 137 107 137 59 80 Average tariff S Transiton 0.155 0.393*** 0.156 -0.046 -1.026* -0.692*** (S1) - Pesos (.0958) (.0469) (.1430) (.0399) (.517) (.1997) After 0.198* 0.723*** 0.118 -0.022 -0.421 -0.09 (.1189) (.0501) (.1875) (.0418) (.5566) (.2209) N 113 145 113 145 83 107 3 Opex per m Transiton 0.219** 0.269*** 0.208* -0.05 -1.358 0.189 (.1107) (.0467) (.1177) (.046) (.9274) (.1796) After 0.366*** 0.307*** 0.201 -0.042 -0.704 0.289 (.1281) (.0468) (.1448) (.0502) (1.1514) (.2178) N 149 194 149 194 82 113 240 The World Bank Colombia Appendix Dependent Model 1 Model 2 Model 3 Variable (in logs) OLS FGLS OLS FGLS OLS FGLS (1) (2) (3) (4) (5) (6) Opex per Transiton 0.003 -0.009 -0.062 -0.143*** 1.444 2.031*** connection (.0931) (.0432) (.0895) (.0522) (.8996) (.3076) After 0.105 0.012 0.019 -0.106** 0.718 1.651*** (.1084) (.0433) (.1115) (.0524) (.9785) (.3095) N 168 215 168 215 66 103 Revenue per m3 Transiton 0.083 0.154*** 0.102 0.008 0.111 0.259 (.0973) (.0331) (.1022) (.0084) (.6428) (.1102) After 0.169 0.333*** 0.006 -0.013 0.794 0.2302 (.1117) (.0332) (.1257) (.0163) (.7498) (.2331) N 154 204 154 204 92 121 Revenue per Transiton 0.005 0.018 0.048 -0.06 -1.197 -0.424* connection (.0827) (.0094) (.0738) (.0268) (.9994) (.2396) After 0.116 0.147*** 0.081 0.006 -0.321 -0.404* (.0946) (.0128) (.0927) (.03) (1.13) (24) N 173 224 173 224 79 113 3 Labor Exp per m Transiton 0.023 -0.017 0.105 -0.067 -0.695 0.748** (.1541) (.0966) (.1471) (.057) (0.89) (.3826) After 0.063 0.132 0.129 -0.104 -0.185 -0.819** (.1765) (.0967) (.1851) (.0603) (1.079) (.3823) N 132 171 132 171 61 88 Labor Exp per Transiton -0.064 -0.161** 0.043 -0.024 -0.594 -0.291 connection (.1328) -0.0698 (.1141) (.0677) -1.277 (.2492) After 0.0165 -0.155** 0.109 -0.026 -0.071 -1.522*** (.1502) (.0698) (.1485) (.0678) (1.345) (.2433) N 146 187 146 187 45 72 Revenues/Opex Transiton -0.032 -0.002 -0.031 0.019 -1.144** -0.075 (.0463) (.0212) (.0398) (.0183) (.6142) (.0727) After -0.019 0.042* -0.095 0.055** -1.207 -0.322** (.0567) (.2101) (.0597) (.0242) (.7932) (.1319) N 230 288 230 288 95 136 241 References ADERASA (2007) “Base de datos e indicadores de gestión para agua potable y alcantarillado – Ejercicio Anual de Benchmarking 2006, datos año 2005,� Asociación de Entes Reguladores de Agua Potable y Saneamiento de las Américas, February 2007. 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