C. A Water Supply Joint Venture in Cartagena, Colombia

Luis Alfonso Pinzón
Acuacar
Colombia

Background

For 35 years prior to private sector participation in 1995, the water utility in Cartagena was publicly owned, operated and managed. The end of this period was characterised by low water supply and sanitation coverage. Sanitation services were especially poor in the poorer neighborhoods, where local water supply sources were becoming contaminated and presenting a major public health risk. The weaknesses of the Cartagena utility were not uncommon in Latin America:

• Chronic inefficiency;
• Excessive political interference;
• Poor maintenance and service delivery;
• Weak commercial and financial management that precluded re-investment.

The bill for updating the existing water supply and sanitation system was estimated to be US $230 million.

The local government responded to the crisis in Cartagena by liquidating the water utility and establishing a new legal framework for promoting private participation (Law 142 of 1994). This was an important landmark, as it was previously illegal for the private sector to play a role in the water supply sector. With the technical assistance of consultants and the World Bank, which presented the District Government with a number of Private Sector Participation (PSP) models to choose from, the District eventually awarded a 25-year concession to a mixed-capital company. The terms of the contract included management and operation of the water supply and sanitation system, with shared investment and re-investment responsibilities. Assets remained the property of the municipality. Additional terms included performance targets, which were set to require improvements in the quality of service, reductions in unaccounted-for-water, and improved rate of tariff collection.

The transfer of water supply and sanitation services occurred in three stages:

1. Executive level (Mayor and Central Government) political decision-making (7 months)
   • Selection of the appropriate PSP model;
   • Call for bids.
2. Competitive bidding and selection (4 months)
   • Concession awarded to Aguas de Barcelona (AGBAR), a Spanish company with approximately 10 major urban water supply contracts around the world
3. Contract and Transfer of services (7 months)
   • Establishment of a retirement programme;
   • Contract negotiations and signing and transfer

To date, one of the principal criticisms of this process has been that it was accomplished too swiftly. Many people say that more time was needed to study different options, especially since the municipal government changed during negotiations. Another very sensitive subject continues to be attrition of the labor force, which was reduced from 1,300 employees to under 350.

Structuring Of The Mixed-Capital Company

Total value of the initial investments in Acuacar, the new mixed-capital company, was $8.8 million, with ownership divided between the District of Cartagena (50%), Aguas de Barcelona (46%), and local private investors (4%). The new firm established a governing Board of Directors, comprised of 5 members (two nominated by the District, two by AGBAR and one by the local shareholders) and presided over by the Mayor. Decisions by the firm call for an 80% majority ruling and implementation supervised by a General Manage nominated by AGBAR. In addition to the water quality performance and efficiency targets, Acuacar also shared responsibility with the District for financing new investments. Although the operator inherited the existing tariff at the time of service transfer, in 1996 a cost recovery rate was implemented. Other contract obligations include responsibility for technology transfer, including systems and software, specialized personnel, and employee training in Colombia and Spain.

In return the private operator is permitted to levy a management fee calculated as a percentage of revenues.

Performance And Achievements

Today Acuacar performs up to 8,000 analyses on water quality and service each year so that the company has the capacity for immediate detection of any problems with the drinking water supply. Overall, the quality has improved significantly, with major reductions in key indicators, such as organic matter, turbidity and color. At the same time, production capacity has increased from 165,000 cubic meters per day (cmpd) to 270,000 cmpd, and service coverage has increased from 67% of the population to 85% of the population (110,000 new users). In addition, 72% of the population is now served with sanitation, up from 56% in four years.

Other achievement benchmarks include network expansion (for example, new hardware) and uninterrupted service. With 95% of the connections metered (up from 45%), the operator is having an impact on end-use efficiency and revenue generation. Management efficiency is reflected in the increased number of payment points, integrated information systems for users, and document management. The implementation of GIS technology for the city helps technical and commercial staff monitor performance and service delivery. Finally, the Acuacar concession was the first water supply and sanitation system in Latin America to receive ISO 9002 accreditation for total quality systems.

Investment And Financing

Investments for water supply and sanitation expansion (1996-1998) was divided between partners in the following manner:

Additional financing for Acuacar was provided by the Inter-American Development Bank with counterpart financing from the municipality ($24.3 million + $16.2 million = $40.5 million), and by a loan from the World Bank for $117 million. The latter will finance a wastewater treatment facility and submarine outfall pipe to help mitigate environmental degradation.

Lessons And Conclusions

The following are the major lessons from the Acuacar experience.

1. Legal and regulatory frameworks have to be clearly established.
2. Political and institutional commitment and endorsement are required from the highest levels.
3. Participation of international agencies enhances credibility and is very important during the entire process.
4. Since changes and improvements cannot be accomplished overnight, it is necessary to find an experienced private operator with demonstrated commitment and dedication.
5. Efficiency gains resulting in cash generation can be re-invested to further improve the system.
6. Both technical and financial feasibility should be carefully analysed so that water prices will be consistent with the investment Programme, consumption patterns, and user capacity to pay.
7. Risks should be carefully and jointly assessed with the public sector so that measures can be taken to mitigate them.
8. The project needs to be insulated from political interference, and responsibilities related to activities in water supply and sanitation need to be unified.
9. The model must have transparent corporate rules, providing discipline and accountability before customers and shareholders.

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