Governance and Public Private Partenership - The Aguas de La Rioja Case

8/6/2019 Governance and Public Private Partenership - The Aguas de La Rioja Case

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Universidad del CEMA

Doctorate in Business Administration

The Governance of Public - Private Partnerships

The case of Aguas de La Rioja SA

Author: Mr. Juan Ignacio Recabeitia (MBA)[email protected]

Director of the monograph: Dr. Rodolfo Apreda

Buenos Aires, February 15, 2011


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ABSTRACT

The purpose of this study is to identify some suggestions for improvement in the

implementation of public service concessions from the analysis of the water servicesand sanitation concession in the province of La Rioja (Argentina).

This analysis was done from the point of regulatory governance applied to public-

private partnerships following the conceptual framework proposed by Kuo-Tai Cheng

(2006).

From this perspective, we identify some problems for which some solutions are

proposed, concluding that for a successful PPP is a prerequisite the existence of a well-

developed public governance and a change of perspective from a contracting -

contractor relationship to a partner to partner one.

Introduction

In this paper we will examine the conditions required for good governance in the case of

Public Private Partnerships (PPP) from the analysis of the particular case of the

provision of drinking water utilities and sanitation concession in the province of La

Rioja (Argentina).

For this analysis will appeal to the methodology proposed by Kuo-Tai Cheng (2006) in

his work "Researching Regulatory Governance for Privatization of Public Utilities:

Issues and Reflections".

In that paper he proposes an analysis methodology for structuring complex governance

arrangements in the case of PPP, arguing that the institutional analysis of theprivatization policy and regulatory governance provides a better response than the

traditional notion of "New Public Management" for the deficiencies in privatizing

public services It also establishes that four key variables to develop an effective

regulatory system are: degree of delegation of decisions to an independent agent, degree

of independence of the agent, procedural rules and ex post monitoring.


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Section 1 we will define the concepts of governance, public-private partnership and

regulatory governance; present the theoretical framework for analysis and then present

the case to analyze.

In Section 2, we will identify some defects that occur in the regulatory structure of thecase from the point of view of the methodology adopted.

In Section 3, we will make some proposals to avoid the defects mentioned in the

previous section for cases similar to the analyzed.

Keywords: regulatory governance, privatization, transparency, accountability,

participation

Section 1

Governance

The term governance covers a wide range of issues which depend on the perspective

adopted. Apreda (2007) cites some examples, noting differences between government

and governance.

For example, those identified by Gerry Stoker in the sense that the term government

refers to the formal aspects of state including the monopoly of legitimate coercive

power while the term governance is linked to the forms and styles of government that

take advantage of blurred boundaries and overlapping between the public and private

sector, a perspective that pays attention to how the private sector is involved in the

production of services and strategic decision-making processes.

Another perspective is that of Bob Jessop that relates the term governance to the

concept of structure for coordination between interdependent activities among multiple

stakeholders and self-organization ways.

He also quotes Robert Keohane who emphasizes the growing importance of procedures

and proposes three as necessary for an acceptable system of governance: accountability,

participation, and persuasion.

Finally, Francois-Xavier Merrien identifies three prerequisites for the study of

governance in the current political context: the existence of a crisis of governance; that

this indicates that the traditional state model is in crisis and finally, the focus of


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discussion passes through the ways of managing societies in terms of effectiveness and

efficiency.

According to Mohr (2004), the governance perspective challenges the traditional notion

of state sovereignty. The powers of the state have been displaced by supranationalentities, for sub-national authorities and by institutions and organizations that influence

the political elite.

For the purposes of this work, we will adapt the definition of Apreda, understanding

governance as the field of study and application which three main tasks are:

1. The search for principles, rules, procedures and best practices that enable the

efficient management in a permanent changing institutional context

2. The design, implementation and monitoring mechanisms to establish the

representation, the commitments and responsibilities, management of conflicts

of interest, the definition of counterbalanced controls and incentives and

performance standards of all relevant stakeholders.

3. The distribution and exercise of authority in decision-making.

Public-Private Partnerships

The growth of social demands on public services traditionally provided by the states

made them to reach the limit of its financial capacity for these purposes. This

phenomenon, jointly with the view that the public sector was an inefficient

administrator, led the development of Public Private Partnerships (PPP) in late 1979 as

a more palatable alternative to the outright privatization (Mohr, 2004).

A conceptualization of PPP is equated to a network of public and private actors that

come together to form a cooperative and interdependent working relationship to provide

better project management and financial solutions. This view of the PPP assumed the

share of risks and responsibilities.

This challenges the traditional concept of state (autonomy, centrality, hierarchies)

introducing the concept of cooperative work, where private actors are involved not only

in implementing state policies, but also have a degree of participation in decision

making.


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Sharing in some way the decision making also means sharing the responsibility to

respond to social or economic problems that are generated between power dependent

actors That means to share risks.

These shared responsibilities and risks generate little clarity in determining who mustanswer for decisions and outcomes (public accountability).

Regulatory Governance

There is a particular challenge when designing governance schemes for activities that go

from the pure state level to the PPP relationship were confluence the regulatory,

bureaucratic aspects, peculiars of the public sphere, with the market mechanisms of the

private sector.

According to Kuo-Tai Cheng (2006) in connection with the privatization and regulatory

governance, there are several challenges ahead.

First, it is necessary to disaggregate governance mechanisms for the regulation of public

utilities which have entered the market mechanism (having previously been state owned

enterprises and monopoly). Secondly, it is necessary to explore the paradox of

liberalization and privatization on the one hand and "re-regulation" or regulation on the

other. However, Cheng said, many aspects of privatization and regulation are not

obvious enough to be observed and these not observed aspects are often the most critical

in the process.

He also notes that research related to privatization and regulation is multidisciplinary,

studies on the subject found in a variety of academic disciplines such as political

science, economics, sociology, organizational theory, the management and even cultural

studies.

Finally, he indicates that it is more difficult to investigate the regulatory mechanisms inthe context of developing countries because the regulatory governance is relatively new

to them and generally seen as the product of the post-privatization.

Cheng notes that the key variables to develop an effective regulatory system are:

1. The extent to which decisions are delegated to an independent agent rather than

being taken by the main (political)

2.

The nature of the structure of governance, to determine the degree ofindependence from the political process agent,


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3. The rules that specify the procedural framework, such as requirements for

accountability, consultation processes, the ability of political principal to

overrule the agent, the relative autonomy of financial resources

4. The magnitude of ex post monitoring, e.g. legislative oversight, judicial review,reviewing citizen complaint procedures.

Concludes that it is necessary to recognize that the problem is to move between a

narrow concept of the instruments and regulatory procedures and a wide political scope.

A theoretical framework for analysis

Cheng identifies a number of interrelated issues that represent the main characteristics

of a system of governance for PPP. These aspects are:

Clarity of Roles

When identifying the need to implement a policy of privatization and regulation the first

step is to clarify the policy objectives and the roles of the participants, in particular the

relationship between the government's proper agencies and regulatory agencies. This

tends to clarify roles and functions that are characteristic of regulatory agencies and

which of the ministries or other government agencies.

Appears here a delicate balance between rigidity and flexibility with regard to socio-political objectives of the policies of PPP (that are not easy to define and vary with the

societys preferences) and with respect to decision making If left too much discretion in

the hands of regulators, it could endanger these goals, as the decisions of the agencies

can not meet the expectations of society.

Moreover, the democratically elected government is in a better position to make these

judgments and therefore the legislative framework should provide clear guidance in this

area, eliminating or minimizing the extent of administrative discretion.

Participation

This criterion concerns the extent to which interested parties are allowed to participate

in the process of privatization and regulation.

One can see that "participation" and "involvement" may be more mere phrases those

real solutions. Participation has become fashionable in the current debate about the

quality of modern society, as many interest groups do not participate in makingdecisions and there is a large gap (potentially dangerous) between rulers and ruled.


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Participation exists when all stakeholders contribute effectively to the process of

privatization and regulation, improving the quality of decisions and increasing the

likelihood that agencies receive support and cooperation of businesses, consumers and

others.

Participation or at least relevant stakeholders consultation is as important as

determining the economic and social issues, so that accurate assessments can be made.

Without it, there is no guarantee that decisions are truly representative of the public

interest. It is also significant that the agencies give reasoned basis for its decisions to

ensure fairness. Ultimately, the benefits of participatory processes must be confronted

with the administrative costs of implementation.

Independence of the regulator from political power

If the Regulatory Agency has a direct relationship with the government, it could be

argued that their decisions are more likely to be compatible with the objectives of

government.

Moreover, the delegation of power to set standards or the independence of these

specialized institutions ensures political fairness, promoting confidence in the

privatization and regulatory regime, avoiding political interference.

Keep regulatory intervention beyond the political will to help ensure that agencies are

free to carry out their functions in the manner they consider best meets the stated

objectives.

The delegation in politically independent bodies is an important mean by which

governments can commit to policies that would not be credible in the absence of such

delegation. This also ensures greater continuity and stability in policy formulation and

implementation. Independence is even more necessary if it is a highly specialized field

that requires expertise.

Accountability

Cheng refers here to the accountability of control agencies before the political power

and society. Considers it desirable that the decisions of regulatory agencies could be

challenged, if it believes are unfair or show incompetence, but it couldnt be to an extent

which made ineffective regulation. This challenge can encourage greater openness in

decision-making process and ensure that there would be fewer opportunities for abuseand capture.


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The lack of control and accountability would create the opportunity for inconsistency

and unpredictability in decisions, causing uncertainty among the actors who are affected

by those decisions. It could also undermine the investment potential and the confidence

of the actors and affect their ability to formulate long term business objectives.

Transparency

Cheng notes that it is clear that transparency is closely related to the notion of

accountability, although the two are not identical.

Transparency is about the following aspects:

Public availability of the most important documents

Publication of important decisions

Clear and open access to participation

Definition of the extent to which institutional mechanisms of transparency are

ethically desirable or even necessary in the process of privatization and

regulation.

Transparency means that the policy objectives are clearly expressed, which brings as a

corollary that clear expectations must be cultivated in the minds of the public in whose

name the regulation is established.

Cheng also said that in the broadest sense, transparency requires that citizens can

influence the way public services are provided, based on their opinions or preferences,

as well as learn about the decisions that are made. In other words, when the agency

makes decisions, do it in a reasonable manner, taking into account all relevant issues

and ensure that they provide a fair and equal treatment to all those affected by the

decision.A mechanism of transparency is important in itself, since the requirement of regulatory

agencies to explain their decisions should reduce the likelihood of injustice or

incompetence

In addition, transparent decisions made by agencies must meet public interest

objectives, but doing so should be open and consistent approaches to ensure that there is

stability and predictability of decision making. It also means that companies can be

reasonably sure that "ground rules" will not change suddenly, either through a change in


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the overall legal and regulatory framework, or through a change in the way that

regulators behave within this framework.

The Case of Aguas de La Rioja SA

Chronology

The provision of water and wastewater services in the city of La Rioja was from its

inception until 1980 made by the National Government through the company Obras

Sanitarias de la Nation and its predecessors.

In 1980 through the issuance of the Act N 18586 these services were transferred to the

provinces. From then until 1988 the services in the city of La Rioja were provided by a

state agency, the Direccin Provincial de Servicios Sanitarios (Sanitary Services

Provincial Direction).

In 1988, was established the Empresa Provincial de Obras Sanitarias of La Rioja

(EPOSLAR) by provincial Act N 5146 as a legal person under public law with autarky.

In 1994 and 1995 were authorizing the sale or privatization of EPOSLAR by different

mechanisms1.

Only in the year 1996 through the Act N 6281 were established the regulatory

framework for the provision of water and sanitation services in the province. This

regulatory framework is of particular interest since it was the rule (along with the

concession contract) that defined the terms of governance of Aguas de La Rioja SA in

its different stages.

In 1999, after failing the EPOSLAR privatization process, was created by Act N 6763

Aguas de La Rioja SA (ALARSA) as a corporation of the federal Act N19550. By the

same law is given in concession for 30 years the provision of water and sanitation

services in the cities of La Rioja, Chilecito and Chamical.

ALARSA partners were the provincial government (99%) and EPOSLAR (1%).

ALARSA incorporated documents contained a transitional provision which authorized

its board to hire a private management for a period of 6 months, with option to purchase

all the shares that were in state hands.

The private management of ALARSA was extended to the year 2002 when occurs the

sale of 100% equity to two companies, Latinaguas SA (10% stake) and Aguas del1 Provincial Acts N 5977 and 6057


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Sudoeste SA (90% of the shares). Both companies, according to the prosecutor's

impeachment2 were chaired by the same person.

In 2007 the economic emergency is issued by the Act N 8211 which in practice frozen

public utility rates. As a result, ALARSA enters in a state of financial distress andrequires financial assistance from the Provincial State.

This financial assistance (granted by decree N 1011/09) was conditional on the creation

in the ALARSA structure of a department with the function of manage the financial

resources (UCI), been chaired by a person proposal by the Province. Similarly, the same

instrument provides that the Ente nico de Control de Privatizaciones (EUCOP

Regulatory Agency) conduct an audit of the last 3 years.

Following the findings and reports by the UCI and the audit ordered, the intervention of

the service during 90 days was decided, as provided in Article 13 of the Regulatory

Framework. At the expiration of the intervention (January 2010) was decided the

termination of the concession contract and created Aguas Riojanas SAPEM 90% share

of the Provincial Government and 10% employee participation.

Finally, in October 2010, the General Prosecutor makes a criminal impeachment against

the ALARSA board members, denouncing a series of fraudulent acts allegedly

committed during the term of the contractual relationship between ALARSA and the

Provincial State.

Facts contained in the prosecutors impeachment

The most relevant aspects included in the prosecutor's impeachment are:

Signing of a technical assistance contract with a company apparently linked

(Latinaguas Operaciones y Servicios SA), when one of its shareholders of

ALARSA (Latinaguas SA) had the technical background necessary for theprovision of service.

Contracts with other companies for legal and accounting advice when the

contract with Latinaguas Operaciones y Servicios included them.

Maintenance contract with another company (UNISER SA) appears to be related

(as its president was in some moment president of ALARSA) and which

2 See prosecutors impeachment in anexe


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representative was at the same time member of the supervisory board of

ALARSA.

Financial assistance agreement with UNISER SA for witch ALARSA delivery

one and a half million pesos to cover accrued liabilities by UNISER in theexecution of works. This financial assistance is contemporary with ALARSAs

application for financial assistance from the provincial government for the

maintenance of public service.

Payment by ALARSA of UNISERs expenditures on account of contributions

when the object of ALARSA did not involve investments of this type.

Making unreasonable and unnecessary expenses, including payment of certain

non-ALARSA cars, cellular telephones, rents and services for people not

connected with the company.

ALRSA investment in companies allegedly related, funded in part with tax

deferrals

For the purposes of this paper, we consider these issues as an example of flaws in the

regulatory system, whether ultimately occurred or not as stated in the impeachment.

The mechanisms of control in regulation

Regulation of PPP that related the Provincial State with ALARSA was materialized by

the following instruments:

The Regulatory Framework for the provision of water and sanitation services

The Concession Agreement

Federal act for commercial companies and related legislation

The regulator (EUCOP)

We will see below witch control and governance elements and mechanisms exist in

those instruments.

Regulatory Framework

The Regulatory Framework is a piece of legislation which basically establishes the

conditions under which it must provide the service: who is the holder, in witch way the

service provision of the service may be delegated, which conditions must meet the


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service, who set the tariff regime, which are the quality standards, who monitors

compliance with the provisions of the Regulatory Framework.

It also establishes the rights and obligations of providers and users of the service, the

property regime and the sanctions regime.

In the case of the province of La Rioja, the regulatory framework was established by

provincial act N 6281 in 1996. Its objectives, as specified in Article 4 are as follows.

Establish a regulatory system to ensure a quality and efficient provision and a

fair and reasonable price for the regulated service.

Promote proper maintenance of facilities and the optimization and cheaper

services.

Regulate the actions and responsibilities of providers and adequately protect the

rights and responsibilities of owners and users of the service and monitor

compliance with the obligations of those involved.

Promote the efficient delivery of service, according to quality standards that are

established.

Protect public health, water resources, environment and rational use of natural

resources involved.

To encourage the establishment of effective procedures for preventing and

resolving conflicts.

We will see in the next section, to what extent the regulatory framework provisions are

appropriate to forming an efficient regulatory framework of governance.

Concession Agreement

The concession contract defines the rights and obligations of the concessionaire and the

grantor, sets goals to be met by the concessionaire in terms of investment, quality and

service coverage.

It also establishes a system of sanctions in case of failure to meet targets or minimum

levels of service quality.

Corporations Act

There are two aspects of interest in the federal act for commercial companies on thegovernance of a PPP.


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First, it should be noted the provisions to the management bodies (Art. 255 to 279) and

control (art. 280 to 298). Basically, these provisions place the responsibility of the

administration in the persons of the directors (elected by the shareholders) and the

responsibility of the audit in the persons of the trustees (also elected by the

shareholders).

Second, in Article 299 paragraph 5 provides that the company must be subject to the

audit of the Control Authority of her settlement when operating concessions or public

services.

Regulator

The regulator, which as we saw above is a key component of regulatory governance, in

the case under study presents the following background:

In December 1995, the Act N 6120 approving the budget for 1995 of the provincial

government, Article 22 required that:

"Create in the field of the Treasury Department the "Single Privatization Control

Entity" with scope above all privatizations performed and that will be performed by the

Provincial Executive .-

Entitle the Executive Branch for by Decree, in General Agreement of Staff, determineresponsibilities, structures and other instances of the entity created. "

Decree N 145/95 3 established powers, structures and other aspects of this entity.

In 1999, the Act N 6786 amended this article in the sense that one of the agency board

members should be appointed by "the first electoral minority representation in

parliament, and for the political party's proposal".

Later in 2000, Act N 7010 was sanctioned, which states that the entity created by Act

N 6120 will be an "independent agency of the Provincial Government will have

operational, technical and economic financial autonomy" and set attributes,

organization, etc. However, this act was vetoed and we didnt found records indicated

that the issue has been re-addressed in the provincial legislature.

We can see that a key to regulatory governance was created and organized with little

careful. In addition to this chronology is the fact that there isnt an electronic repository

of decrees and other documents of the Executive of the Province of La Rioja, which

3 We can not found it in the web


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makes it difficult to make a deeper analysis of the structure, formation, functions and

other Regulatory Agency relevant aspects.

Fortunately, there is a paper (Azpiazu et al, 2008) dealing with regulatory problems

within the Argentina that we used as reference for the analysis of the EUCOP.

Section 2

Matters not covered in the regulation

e will compare the four basic instruments of governance of ALARSA case with the

requirements of the institutional analysis model proposed by Cheng: Clarity of Roles,

Participation, Independence of the Regulator of Political Power, Accountability and

Transparency

Clarity of Roles

Cheng said that is a key issue that policy objectives and roles of participants are clearly

established. It also notes the need for balance between the Regulatory Agency and

Political Power in terms of discretion in making decisions.

In the Regulatory Framework there are a number of objectives (Article 4, see above)

that can be assumed as to achieve policy objectives regarding the provision of sanitary

services.

The Concession Agreement states in its Article 2 (Object of the concession) that the

granting of the concession is to provide the service as specified in the contract itself and

in the Regulatory Framework, there is no reference by which to discover what the

political objectives were for who decided to implement the concession. Nor any of the

issues covered in the Concession Agreement, express political objectives.

Moreover, with regard to clarity of roles, one example is enough to see that so clearlydoes not exist: the power to set rates.

Normally this is an issue that is in the hands of the Regulatory Agency, as it is one of

the prerogatives of the economic regulation of the PPP. In the case under analysis, the

Regulatory Framework (Art. 12 incise d) on the one hand gives the holder of the service

(the provincial executive) power to fix rates, and in the other the Regulatory Agency to

establish the allocation of the tariff regime (Art. 43).


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This confusion of roles (in the same rule there are two figures who have concurrent

powers), was clear in the Concession Agreement, the EUCOP acts as a technical

reviewer of the proposals of the concessionaire and approval rests with the grantor (the

Provincial Executive)

In conclusion, the clarity of roles between the regulator and political power was not well

established, or rather, as discussed under "independent regulator" the real decision-

making capacity was in the executive branch, with the other parties having a minor role.

Participation

The Regulatory Framework establishes the obligation to hold a public hearing on the

occasion of a tariff adjustment and gives to EUCOP the power to convene for other

cases where it deems fit. Users can petition for a hearing is made public, but such a

request is for consideration by the regulator. There are no mechanisms to consider the

possibility of forcing a public hearing (for example, a request supported by a certain

proportion of users.)

In practice, within 7 years of the concession, was conducted one public hearing in

November 2009, a couple of months before the termination.

This demonstrates the lack of participation of stakeholders in decisions (even only on an

advisory non-binding role).

Another key stakeholder in the PPP under analysis is the legislative branch.

Participation usually goes through the following:

Participation in the appointment of directors of the regulatory agency.

Award or approval of substantive law (regulatory framework, concession

agreement, tariff changes, goal setting, structure of the regulator).

This is a way of indirect participation of the citizenry, beneficiary or not of the service.

In this case, the participation of the legislature has been very poor. Basically only the

dictates of the law establishing the regulatory framework, since in practice the rest of

the questions were plainly delegated to the executive (the sale of Aguas de La Rioja, the

concession, the formation of EUCOP, etc.). From the formal point of view there was a

special committee of privatization who was the link between the legislative and the


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executive in all matters concerning these issues4, has not been possible to find evidence

that suggest that this committee effectively worked.

Regulator independence

In the case under review, from the formal point of view, we can see that theconformation of the Regulatory Agency (EUCOP) went through various vicissitudes

and that finally its conformation and organization was in practice in the hands of one

component of Political Power (Provincial Executive).

This defect is apparent in the following facts:

1. The EUCOP born in an article in a budget act which in turn delegated to the

Provincial Executive the definition of all important aspects.

2. Just 4 years later, an act (N 6786), which comprises representatives of the

first minority to EUCOP directory, was passed.

3. When the Legislature passed an act (N 7010) refounding the regulator, the

Executive vetoed it and did not treat anymore.

Some examples of the lack of independence between the EUCOP and the Executive are:

The Decree N. 775/00 regulating the operation of EUCOP provided that in

the event that the agency's annual balance has losses, it would be "intervene

immediately" (Art. 30). In practice, far from being underfunded, the EUCOP

generated since its inception in December 1995, a savings fund. However, in

2000, the Executive resolved, perhaps relying on the final provisions of the

same Article 30 that left available to the Executive any surplus in excess of

10% - take the EUCOP autonomy in the use of funds. To do so, provided

that the rate of supervision and control, to be paid additionally providers of

privatized public services (60%) and users (40%) (Act N. 6200, Section 17),

instead of being charged for company and turned to EUCOP for

administration, was "entered by general revenues to the operating account

that the Ministry of Finance and Public Works established (Decree No.

775/00, Art 21). Thus, forcing the body to be economically dependent on the

amount that the Ministry will allocate according to their requests for funds

(Azpiazu et al.)

4 Provincial Act N 5949


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While board members EUCOP enjoy stability (5 years) in their functions, in

2000 was removed from office the director nominated by the largest

minority represented in parliament (as defined in Act N 6786) without

following the procedure established5.

Accountability

At this point it should be consider two situations:

1. How is accountable the Regulatory Agency before the political power and

society in the decisions taken

2. How (and to whom) is the concessionaire accountable for their decisions.

In the first case, the lack of independence of EUCOP (according to what was seen in theprevious section) adds to the fact that all of its decisions are appealable to the Executive,

who has the last word in the proceedings. Then, if the Entity is not able to make

decisions independently and ultimately, seems pointless to be held accountable. And

indeed it is not expected to EUCOP board members are accountable to political power

(nor the executive or the legislature), beyond what is established in general for

provincial public servants.

As seen in addressing the issue of participation, there is no specific mechanism ofaccountability to society by the EUCOP.

Regarding the accountability of the concessionaire, the concession law establishing

guidelines and goals related to public service concession (technical goals). This aspect,

although improved, did not believe it is key one.

This is because here we are interested in how the legal entity which is the

concessionaire is accountable for the decisions adopted within the broad area of

discretion granted the contract. It clearly indicates that is a contract of results, not

means. In its Article 7 states that "The powers of regulation and control under the

GRANTOR shall be exercised so as not to interfere or obstruct the service or the

substitution of EUCOP in the duties of the concessionaire, in particular, the

determination of the media that will produce the results required and committed to this

AGREEMENT. The regulation is aimed at controlling the implementation of

quantitative and qualitative goals of the service. The GRANTOR shall not take into

5 Source: draft resolution file 4842-D-2000, Chamber of Deputies, Parliamentary Procedure No. 111Date: 11/08/2000


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account in meeting the goals by the concessionaire, the amount of investment made by

it. "

So from the standpoint of contract, the concessionaire is accountable for the results

achieved against the targets set, have absolute freedom to choose the means it deemsappropriate Obviously, within the legal framework, primarily the Act N 19550.

But we believe that herein lies a major failure of this PPP, the concessionaire receives

substantial assets belonging to the state (all facilities, buildings, machinery, etc.

necessary for a service), which is compounded by the intangible the concession itself (a

contractually established monopoly for 30 years, a captive customer base and the right

to a compulsive billing and collection) that are not incorporated into the company's

assets and therefore are invisible to the law and controls established for commercialcompanies by it but have a decisive influence on economic and financial management

of the concessionaire.

Before whom the concessionaire is accountable for the use of this ability to maneuver?

From a contractual point of view, it is accountable only for results, from the point of

view of the law of commercial companies is supposed to be under permanent control of

the Control Authority of its settlement6, although in the case under review any evidence

hasnt been found that such control was exercised.

This weakness in accountability is the one that would have allowed the concessionaire

to perform the resource management questioned in the prosecutor's impeachment,

basically, contributions and payments to other companies allegedly involved, in the

absence of a mechanism (outside the Act N 19,550) to ensure that the application of

these funds (from public) were applied for the maintenance and improvement of the

service concessioned. In theory the administrative control of the company should have

done it, but we face a corporation with a shareholder who exercises total control and has

the ability to manage at their discretion what ultimately is public property.

Transparency

Throughout the process of formation and operation of the PPP can be seen a total lack

of transparency. None of the points made by Cheng (cited above) are even partially

established.

6 Federal Act N 19550, article 299 incise 5


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o public availability of documents, examples of that are that can not be found on the

web nor the decrees of the Provincial Executive or how to get them, not corporate

balance sheets are available, and the EUCOP lacks even a website.

As noted above, the sole mechanism provided for civil society participation has beenused only once.

Section 3

Below we present a series of proposals aimed at addressing the problems identified in

Section 2 as follows:

1. Clarity of Roles and Independence of the Regulatory Agency

2. Participation Mechanisms

3. Accountability

4. Transparency

Clarity of roles and independence of the Regulatory Agency

The first distinction to be made in cases like the analyzed is between political and

Regulatory Agency (in this case the EUCOP).

We understand that it is possible to draw a parallel between the two figures and those of

the shareholders on the one hand and directory in the case of corporations in the other.

Thus, political power would be comparable to shareholders as long as civil society

representative who is the final receiver of the profits (and losses) resulting from the

PPP. As such, its primary role as Cheng says, is to establish policy objectives so that the

Regulatory Agency (comparable to the directory) has a frame of reference as clear as

possible to make decisions.We are facing a "trust chain" where each link has a specific function. We view the latter

as a waterfall, where the top level provides the necessary elements for the lower level to

be able to carry out their duties (including the delegation of sufficient discretion):


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Thus, in the highest part we have the Society which desires and needs have to beinterpreted by the political and translated into policy objectives and the roles of the

participants.

It should be remembered here that the political power in societies that have adopted the

republican representative system is divided into three branches, two of them who should

be actively involved in the operation of a PPP (executive and legislative), leaving the

third (judicial) as the ultimate safeguard of the rights of the parties.

It is imperative that these roles are clearly defined in a specific law (commonly known

as the Regulatory Framework) and is also necessary that this definition is the result of a

consensus of society, expressed through their representation in the legislature.

This need arises from the fact that the horizon of a PPP is long-term (typically 20 or 30

years) so its basic structure can not be subject to changes in political leadership.

The Regulatory Framework should focus on clearly defining who are the actors and

their roles, what are the policy objectives to be achieved, the mechanisms ofparticipation and accountability and transparency minimums.

Unlike the case of the regulatory framework under analysis, should not contain

technical matters such as service goals, the tariff regime, the property regime and the

sanctions regime. All these issues must be dealt with by the Regulatory Agency, and

that, unlike the Regulatory Framework, are liable to alter in the short and medium term,

to the beat of the macroeconomic reality.

Society

Political Power

Regulatory Agency

Concessionaire


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The structure, form of integration, defining competencies, etc. of the Regulatory

Agency should also be subject to a law that emerged from the consensus for the same

reasons outlined above. Regulatory Agency is for the PPP which the Board is to the

Corporations.

It is therefore essential that its members (directors) must meet high requirements

(technical competence and ethical integrity) and be appointed by consensus within the

legislature. We do not believe that the mechanism should be filling positions in the

direction of the Regulatory Agency for "majority" and "minority" as this ends resulting

in the transfer of political discussions of parliament to the Agency directory .

From the point of view of the independence of the Regulatory Agency, we believe that

its resolutions against the concessionaire should not be appealed before the politicalpower. From the administrative point of view, their decisions should be final.

As noted in Section 1, this allows that government policies are credible and ensure

greater continuity and stability of policies and their implementation.

However, this would result, if the concessionaire feels that the decision of the Agency is

not just, in only one alternative: argue its case before the courts.

This is highly inconvenient, introducing an obstacle to a scheme that must be agile. The

alternative we propose is that of arbitration.

The contract should include a mechanism for arbitration to an arbitral tribunal appointed

by agreement between the Regulatory Agency and the Concessionaire. The

establishment of this court may be varied depending on the issue in dispute and its

resolutions be accepted as final by the parties.

This is a modern solution to disputes that arise at the corporate level, although in

Argentina there is a mechanism that until now hasnt had great development.

We believe that the sanctions mechanisms contained in the Regulatory Framework and

Concession Agreement for the case under review, in addition to being completely

ineffective, are out of place in a PPP. A PPP is a partnership, a partnership between

public and private sector, where risks and decisions are shared. It's so absurd to think of

a sanctions regime here as in a partnership between individuals. If the shareholders of a

corporation have differences, negotiate and reach an agreement or separate, no penalties

apply.


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Recall that one of the key components of a system of governance is given by persuasion

(Keohane 2001), separating the processes of communication and negotiation of the use

and threat of force or punishment.

We believe that separate the political issues from the implementation and techniquesones facilitate the use of this mechanism for conflict resolution.

Regarding the role of the concessionaire, we believe that a key issue is the allocation of

risks. We saw that in a PPP the public and private sector share risks and decisions. In

the case under study is a brutal transference of risk from public to private sector

(contract results, not means) that we believe beyond reason.

In fact, in a corporate enterprise the entrepreneur take risk that offsets the benefits that

hypothetically will receive. If things go wrong, he ultimately terminates the operation

and bears the costs of their decision. But in the case of the PPP in general and in

particular in the one under analysis, the operation should continue whatever the

economic, political or natural disaster scenario that may arise.

Before society, the state is responsible for the provision of public services regardless of

the costs associated with any scenario that may arise.

Shifting this responsibility to the concessionaire is plainly absurd. And yet, this

condition is accepted as it is known that ultimately the state will come in relief of the

concessionaire if necessary.

We understand that this creates a huge agency problem with the following

consequences:

1. encourages the concessionaire to make less risk forecasts

2. creates a false expectation in the society about the real responsibility of the

concessionaire

3. leads to the resolution of contract by the state in an arbitrary manner (under the

pretext of default by the concessionaire)

The solution we see is to establish contractually established not only the risks the

concessionaire has to deal with but the mechanisms for addressing the risks that he does

not cover and how to establish when the border between the two situations is crossed.


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A practical example for the case under consideration would be given by the availability

of water sources. Given that this availability depends on rainfall, there may be

extraordinary drought conditions that are beyond what is reasonably expected to

contract. To do this in the contract must clearly define when an extraordinary drought

situation should be considered and which the mechanisms to implement in front of it

are.

Participation Mechanisms

As outlined in Section 1, Cheng states that there is participation where all stakeholders

contribute effectively to the process of privatization and regulation.

The key concepts we believe are "all stakeholders" and "effective contribution." We

believe that this does not mean that all parties are involved in all stages, but all have a

stake in the moment they are in a position to make an effective contribution.

In the case under analysis, the mechanism of hearing was established as a "solution" to

the participation requirement, leaving at the sole discretion of EUCOP which in practice

resulted in their non-use.

On the other hand, the public hearing is generally view as a time when the

concessionaire is accountable to users, such as sitting on the dock.

We believe that this has nothing to do with the concept of participation outlined above.

Therefore, we propose a structure for participation, where the different actors make their

entrance at the time and circumstances under which everyone is able to make an

effective contribution.

At a basic level, the participation of society as a whole is through the political

mechanisms of representation. The next level is given by the participation of

representatives of society (in the legislative and executive) in the definition of policiesand roles and accountability mechanism that we will see below.

The third level is established for technical and implementation issues. Here what is

sought is that the decisions taken by the Regulatory Agency are the result of accurate

assessments, with the participation or at least the consultation ofrelevant stakeholders7

7

It is not the whole society, is part of it that, for the case under consideration, has the ability to make aneffective contribution. For example, user groups, professional associations, chambers of commerce, etc.according to the issue to resolve.


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so as to ensure that decisions are representative of the public interest , fair and well

founded.

Accountability

Following Cheng, we believe the key is the accountability of the Regulatory Agencybefore the Political Power.

Following the fiduciary network model proposed above, we believe that the same string

taken in ascending way shows accountability among stakeholders.

Clearly, the political power is accountable to the Society, according general institutional

mechanisms. We will not stop at this point.

Accountability of the Regulatory Agency against political power, is the key to the wholemechanism. It is therefore imperative, like previously seen, a definition and separation

of roles and responsibilities, powers and independence well established.

Our proposal is to implement a mechanism for accountability of the board of the

Regulatory Agency similar to that in corporate governance. There must be a plan of

action proposed by the Agency and approved by the Legislature, updated annually and a

yearly report also shows the degree of compliance with the plan, and any corrective

action plan to conduct.

The purpose of this mechanism isnt that the political power to review the technical

aspects witch are the responsibility of the Regulatory Agency, but monitoring progress

in meeting political objectives that were established to the Agency. Following the trust

chain model would be similar to the memory and balance that the board submits to the

shareholders.

At concessionaire level accountability should be to the Regulatory Agency with target

indicators that ideally should take the form of a scorecard with dimensions adapted to

the particular case. Following the proposed model would be similar to the accountability

of senior management of a corporation performs in front of the directory.

For the problem of discretionary management of resources and their possible diversion

of corporate purpose, we believe the solution is the proper functioning of the

mechanism established under Federal Act N 19550 for state control of commercial

companies providing public services or are holders of concessions. The fact that in this


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case, these mechanisms have not been effectively applied not makes us think it is

necessary to develop other alternatives.

Transparency

In the case under analysis there are none of the elements required for make transparencya reality.

As noted above, the most basic is the public availability of the most important

documents. From the current parameters (web access), including executive decrees are

not public.

For the case under review the most important issue to us is the lack of public

information generated by the EUCOP. We believe it is imperative the existence of a

website where find all documents and records of the concession, annual reports,

decisions and their justification.

It is also a key, as noted by Cheng, who are public policy objectives and the

construction of clear expectations in the minds of the public. To do this, we consider it

essential that the technical provisions contained in the contract and other documents are

appropriate translated to plain language so that they can be easily understood by all

concerned.

Conclusions

From the institutional analysis of key variables of the governance structure, as proposed

by Cheng, we could make a diagnosis of ALARSA concession that gives us a key

conclusion: the probability of success of this concession was slim.

The main argument to support this claim is found in the huge institutional weakness of

the provincial government in terms of public governance. While this is an aspect notanalyzed in this work, to examine the key variables of governance of the concession we

found that key areas such as public acts and public resolutions, the independence of

institutions, participation, etc. were practically nonexistent.

The question is: is it possible to successfully implement a concession (or other PPP)

where the public governance is not developed? We believe the answer is a resounding

no. A state that lacks the internal governance mechanisms has no possibility of

partnering with the private sector.


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This partnership, rather than the traditional contractual relationship of the Contracting

State and the Private Contractor - mere contract of adhesion, which involves sharing

risks and decisions and negotiate on an equal footing, in good faith, as true partners, is

only possible if the State has institutional mechanisms and appropriated human

resources.

A clear example in our opinion is given by the chapter on sanctions which appears in

the Regulatory Framework and in the Concession Agreement. What is proper in

construction contracts, is totally out of place in a partner relationship.

We understand that it requires a deep change of mentality when facing a PPP. We

believe it is futile to focus on the so-called "economic regulation" in which government

agents seek to limit private profit and the private looks the chicane that allows him tojustify their actions and maximize their profits.

If the way chosen is the PPP is essential to walk the path of persuasion Kehoane

pointing us when he says that liberal democratic institutions must meet standards of

governance and should encourage participation and persuasion instead of relying on

coercion and bargaining based on interests.

But this persuasion, negotiation is only possible when the rules are clear, predictable;

when one takes into account and consider the views, needs and desires of all interested

parties; when the expectations of those parties are realistic and when decisions are

explained and justified.

aybe an ideal, a utopia. Maybe so, but we believe that every step of progress in this

direction will allow us to live in a better society.

References

Apreda, Rodolfo (2007); Corporate Governance, Buenos Aires, La Ley

Azpiazu, Daniel et al (2008), Agua y energa: mapa de situacin y

problemticas regulatorias de los servicios pblicos en el interior del pas,

Buenos Aires, FLACSO.

Cheng Kuo-Tai (2006), Researching Regulatory Governance for Privatization of

Public Utilities: Issues and Reflections,Journal of National Taipei University of

Education, Vol 19, N2, pag 133-160.


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Kehoane, Robert (2001), Governance in a Partially Globalized World, The

American Political Science Review, Vol 95, N1, pag 1-13.

Mohr, Alison (2004), Governance through public private partnerships:

Gaining efficiency at the cost of public accountability? , Proceedings of theSummer Academy, Inter-University Research Centre for Technology, Work and

Culture (IFZ).[Date accessed: November 12, 2010] Available at:

http://www.ifz.tugraz.at/index_en.php/article/articleview/658/1/30/

[Date accessed: November 19, 2010]. Available at:

http://www.noticiasnoa.com.ar/newnoa/index.php?option=com_content&view=

article&id=11988:el-estado-denuncio-a-aguas-de-la-rioja&catid=18:politica

OECD (2005), Guidelines on Corporate Governance of State-owned Enterprises

, Paris, OECD Publications.

United Nations Economic Commission for Europe (2008), Guidebook on

promoting good governance in public-private partnerships , New York and

Geneva, United Nations Publications.

Documents

Governance and Public Private Partenership - The Aguas de La Rioja Case