February 2007 · Number 102 40737 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. ARGENTINA The Salta Water Public-Private Partnership Gustavo Saltiel and Nicole Maywah Introduction households are considered poor--a surprising 50% of the The 1990s saw a big drive to increase private sector province's population. participation in water services especially in Latin America. While there is currently less enthusiasm Prior to 1982, a national public utility company provided for the use of concessions and other public-private water and sanitation (WSS) services in the main urban partnerships (PPPs), it is still instructive to inquire as areas. After that, service provision responsibilities were to why certain partnerships succeeded where others did transferred to provincial governments. Each province not. The case of a water concession in the province of enacted its own provincial law defining water sector Salta, Argentina provides an example of a successful principles and objectives and the means to achieve them. PPP that survived despite its location in a poor province Currently, most provinces have a combination of both and a severe economic crisis. This paper posits that the private and public service providers and cooperatives; Salta Water PPP's longevity is at least in part due to eight other provinces have concessions for main urban the spirit of cooperation between various levels of the area services. government and the private operator. That cooperation is embodied by three contributing factors including: The public entity General Water Administration coordination across government levels and ministries, Authority (Administración General de Aguas de Salta, practical measures to extend service to the poor and a AGAS) provided WSS in 43 of Salta's 58 municipalities flexible contract. Stable financing from the Provincial with a 76% coverage rate for water and 68% for Government was another key factor. Most notable is sewage before Salta's water sector reform process that this approach is in direct contrast to the 1990s trend began in 1996. Poor management and a number of where reforms focused on improving sector efficiency other factors contributed to relatively low coverage and and reducing the drain on public resources. The use of a performance including the sale of land without access local private operator instead of a large international firm to basic public services (water and electricity), political is also of interest. These lessons can be applied to future groups that encouraged residents to connect illegally PPP schemes or other interventions in the water sector. to the network in order to force AGAS expand the network, and, as is the case with many publicly-owned General Background utilities in developing countries, a lack of investment in rehabilitation and maintenance which resulted in Located in northwestern Argentina, the Salta Province, deteriorated infrastructure and low-quality service. one of 23, covers 155.488 km2 or 5.6% of Argentina's territory. With an estimated population of one million (about 2.9% of the total population of country), Salta has Water Sector Reform some of the most difficult social problems and lowest Salta's Water Sector Reform started in early 1996 development in Argentina. Around 40% of Salta's urban when the Provincial Legislature delegated the power to 1 - This paper draws on a case study prepared by Gustavo Saltiel in 2003 for the Inter-American Development Bank, as well as interviews with Salta Government officials and SPASSA staff, mainly Daniel Nallar (ENRESP) and Jose Luis Guarch (SPASSA). define the rules and procedures for concessioning State Box 1. The PPP's Performance : some of the concession's water companies to the Provincial Executive Branch of achievements: government. By December that year, the water company · Coverage increased from 76% to 96% for water supply was put up for sale, the concessionaire selected, and the and from 54% to 84% for sanitation contract finally awarded in 1999. · The number of municipalities served by the conces- sionaire increased from 43 to 56 in 2005 Some municipalities opposed the idea of a PPP. In a · The percentage of population affected by service inter- strategic move, instead of just using its legal authority ruptions decreased from 32% to 8% to force municipalities to enter into concessions, Salta's · Annual billing increased 56% from $ARG 33 million to Provincial Government conducted a series of public $ARG 51 million meetings with local authorities to publicize the benefits · Revenue collection reached 90% by combining billing of joining the concession. The newly created regulator's with the electricity distribution company board of directors played a key role in gaining local · The total volume of water produced increased from 130 government support by steering a number of public million m³ per year to 165 million m³ per year hearings with municipal authorities and user organizations. · 95% of collected wastewater is treated · A toll-free customer service line with capacity to re- WSS services were granted to the private concessionaire, ceive 300 calls per hour was introduced Aguas de Salta S.A. (ASSA). ASSA, later called Finally, a clear indicator of this PPP's accomplishments is SPASSA, was selected through an international public that it is financially healthy and continuously contributes to tender. This company was controlled by MECON, S.A., the investment program. an important construction company that had expanded to electricity generation, toll roads and oil extraction. both the concessionaire and regulator recognized the In order to fulfill the technical assistance requirements need to engage local governments since services are contained in the bidding documents, MECON, S.A. delivered locally. Therefore, a strategy was designed signed a contract with the Brazil's Parana State public to build bridges between these stakeholders which utility (SANEPAR). Later, the shares were transferred included the afore-mentioned public meetings with the to Latin Aguas, S.A. that operates two other water municipalities and user organizations. Through some concessions in Argentina. of these arrangements, SPASSA provides technical assistance (engineering, supervision, and general After the contract was effective, ASSA began to service documentation for works) to municipalities; in turn, the additional municipalities along with the original 43 it municipalities and user organizations provide unskilled received. In some cases, the concessionaire initiated workers and materials to extend the systems. In some negotiations with the municipality while in others, local cases the concessionaire entered into arrangements authorities approached the operator. with user organizations, but without the municipalities' participation. Since some of these arrangements The Government's Commitment and Coordination encountered difficulties from political interference or Salta has well-developed coordination between from bankrupt contractors, the concessionaire now provincial (including the regulator) and municipal requires the municipality to be part of the arrangements. governments. A Joint Working Commission handles One hundred twenty agreements were signed between difficulties in implementing the contract which supports June 1999 and July 2002--85% of these were directly productive relationships between stakeholders. with municipalities while the others were with user organizations. Finally, a direct relationship between the Local Governments and Users concessionaire and local governments contributed to The PPP's main stakeholders are the Provincial improving the communities' understanding, and likely Government (the granting authority), ENRESP (the acceptance, of the PPP. regulator), Aguas de Salta (the concessionaire) and the users. Neither the regulatory framework nor the Regulating the PPP concession contract provided for the involvement of The regulator of the partnership has been adaptable in municipalities, but once the concession was granted, its supervision contributing to the overall government 2 · February 2007 · Number 102 cooperation across levels and ministries to make the partnership work. Box 2. Subsidies - One important aspect of the government's support for the partnership is the funding it has committed for subsidizing low-income The Ente Regulador de los Servicios Públicos (ENRESP), customers directly. The government uses a formula an autonomous decentralized entity with legal standing to determine a household's eligibility for the subsidy in the province, was created under the purview of the which considers income, housing characteristics, Provincial Ministry of Employment and Development household size and number of students. The and is independent of the Provincial Ministry of application process includes controls to ensure that Infrastructure and Public Services. The multi-sectoral only low-income households benefit from the subsidy ENRESP covers WSS, electricity and urban transport program. Additionally, the government participated and is financed mostly through a charge of 2% included in financing the investment plan and approved tariff in the billing of the water and electricity operators. This adjustments that allowed the concessionaire to reach financing arrangement grants the regulator autonomy financial equilibrium despite political opposition for from political authorities. Since the regulator's resources such moves. come from different service providers, the regulator's financial state does not depend on the fate of any structured as well as the partnership's overall particular operator. That is, if one provider fails, the development. The Provincial Government and the regulator will survive since it will continue to work with regulator have been consistent in maintaining the others. Its main responsibilities involve: pre-eminence of this objective and their actions have supported the concessionaire in achieving it. In contrast · Tariff setting, monitoring and enforcement to other PPPs which also have a universal coverage · Monitoring and enforcement of water quality stan- goal, Salta's objective to extend service to the poor dards (service continuity, pressure, quality parameters, was concretized using practical tools such as a targeted etc.) and sewage effluent quality subsidy plan sponsored by the government and a menu · Inspection and supervision of compliance with the of permissible service levels. The Provincial Government investment plan (which includes a description of contributes to achieving this goal by co-financing the how service quality and efficiency objectives will be investment plan and consumption subsidies from its own achieved) budget as well as approving tariff adjustments that allow · Sanctioning of the concessionaire in cases of non- the concessionaire to reach financial equilibrium. In compliance fact, the Provincial Government has approved a series of · Primary adjudication of conflicts between WSS con- tariff increases since the 2002 crisis in order to maintain sumers or third parties and the concessionaire funding for expansion of coverage while simultaneously guaranteeing the allocation of fiscal resources to continue The regulator is entitled to allow service provision under subsidizing poorer consumers. In short, there is a different standards in remote or isolated areas where virtuous cycle of improved service leads to increased service is deemed unprofitable. In cases when standards support to the PPP which results in political willingness cannot be met due to technical or economic conditions, to grant tariff increases. In contrast, tariffs in most of the regulator can grant temporary waivers allowing the the other Argentine water utilities have remained frozen concessionaire to provide service under lower standards. since the crisis. This innovative feature solves some problems in other concessions where uniform standards provided weak A Flexible Contract incentives for investment in poor areas and triggered endless legal disputes between the government and The concession contract has evolved as a partnership service providers. between the concessionaire and the provincial government. It is flexible for three reasons. First, it Universal Coverage and Practical Implementation of Pro- explicitly allows for its renegotiation and provides poor Measures a framework that creates an enabling environment for collaboration between the concessionaire and the Universal coverage was one of the sector reform government. Second, it is possible to incorporate priorities which influenced the way the PPP contract was new priorities arising from the consumer and local February 2007 · Number 102 · government participation during the decision making the flexible contract permits renegotiation, review/ process into the contract. Third, as mentioned earlier, revision of priorities and varying quality of service the contract allows the concessionaire to negotiate with avoiding the trap of endless court battles and disputes the regulator on the levels of service to be provided in that other PPPs have experienced. order to supply unprofitable areas. Although frequent renegotiations are not part of an advisable long-term Lessons Learned from the Salta Water PPP include: policy, in this case it allowed the partnership to endure 1. A water PPP can successfully use a local private the ravaging 2001/2002 macroeconomic crisis. partner which, in turn, can increase its capacity through the partnership. The Concessionaire: A Local Provider 2. Expansion of services to the poor requires practical The provincial government's decision to ignore the measures such as targeted subsidies, flexible regulation traditional paradigm of only permitting companies with and government (provincial and/or federal) participation significant previous experience in WSS to compete in in the funding for the investment programs. the bidding process has allowed a strong local utility 3. Flexible service quality regulation is useful in avoiding services provider to develop. The Province believed interminable disagreements while still expanding the that a local company could be more responsive and network especially to unprofitable or poor areas. flexible to its particular political context than a larger 4. Municipal Government and user involvement is international company with more experience; however, strongly correlated with successful results. technical assistance from a qualified regional water service provider in the beginning of the partnership was References required. Later the concessionaire developed its own Ministry of Economy and Finance. September 2005. expertise--a major contributor to its success in obtaining Panorama Económico Provincial. Salta. Dirección additional concessions in Argentina and Peru. Nacional de Programación Económica Regional. Subsecretaria de Programación Económica. Secretaria Conclusions and Lessons Learned De Política Económica. http://www.mecon.gov.ar/ A number of considerations embedded in the contract peconomica/dnper/default1.htm. and the Government's continuous commitment to make the Salta Water PPP sustainable in the long-term have Saltiel, Gustavo. 2003. La Participación del Sector contributed to its survival when others in Argentina failed. Privado en los servicios de agua y saneamiento en Coordination across government levels and ministries, la provincia de Salta en Argentina. Inter-American practical pro-poor measures to expand service and a Development Bank. Sustainable Development flexible contract were major reasons why this concession Department. Washington DC. http://idbdocs.iadb.org/ succeeded. The Provincial Government's stability and wsdocs/getdocument.aspx?docnum=352823. continuous finance of subsidies and the investment program have also been factors in the concession's Salta Public Services Regulator (Ente Regulador de los success. Similarly, a number of experiences on Servicios Públicos). Memorias 1998, 1999, 2002, 2003, 2004. Colombia's Caribbean coast, supported through the Bank- financed Water Sector Reform Project, demonstrate that a Salta Water Services Company (Sociedad Prestadora de project can achieve results with stable long-term financing. Aguas Salta. S.A.). Auditoria General de la Provincia de Salta. Informe Definitivo. Expte N°242-1069/2005. Ente The Provincial Governments' decision to make the PPP Auditado. work led it to take actions that facilitate an enabling environment for the partnership. There is considerable About the Authors cooperation between the Provincial and Municipal Gustavo Saltiel is a Senior Water Engineer and Nicole governments as well as with the regulator. The use of Maywah is a Junior Professional with the Sustainable practical methods to expand service to the poor includes Development Network for the Latin America and Caribbean subsidies and choice in level of service provided. Finally, Region of the World Bank. "en breve" is produced by the Knowledge Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac · February 2007 · Number 102