Joint Conference of the Inter-American Development Bank and the World Bank

 POLITICAL ECONOMY OF SERVICE DELIVERY

Private Utility Supply in a Hostile Environment:Lessons from Experience of Water/Sanitation and

Electricity Distribution Utilities in Three LAC Countries

Luigi ManzettiWashington, June 3, 2005

 

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Presentation

• Cases• Difficult Environments for Service Delivery• Lessons• Final Considerations

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Cases• AES Corporation-EdeEste (Dominican

Republic-electricity distribution)• Interagua Cía. Ltda. (Ecuador-water/

sanitation)• Unión Fenosa (Colombia-electricity

distribution)• AAA-Sociedad de Acueducto,

Alcantarillado y Aseo de Baranquilla S.A. (Colombia-water and sanitation)

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Difficult environments• The Colombian Caribbean coast

– Low income and indigent population– Culture of nonpayment and fraud no limited to the poor– Political clientelism and corruption – Large number of refugees fleeing from guerrilla

warfare resulting in rapidly growing slums– Existence of “red areas”, of difficult management, not

always under control of state security• With the exception of security concerns most

issues are shared in the Dominican Republic and Ecuador

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Poverty and Indigence Levels in Colombia by City, 2003

Source: AAA

0

10

20

30

40

50

60

70

80

Percentages of poverty

Percentages of indigence

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General lessons

1. Utility reform must provide quick and tangible benefits for users

2. Companies and government must create the conditions so that the poor can pay

3. Companies must make poor communities feel that they are part of the solution

4. Companies must understand the environment and behavior of the poor in order to turn them into customers

5. Politics matter. Private utilities can only survive in poor institutional and economic environments if politicians are willing to cooperate

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Lesson 1: Utility reform must provide quick and tangible benefits for users

• Successful examples (AAA and Interagua)– Improved appreciably both the quality and the availability of

service within a relatively short period of time– Also succeeded in improving customer service and enhancing

their credibility

• The poor are willing to pay when they are provided with good quality service

• But companies must first convince customers through facts (quality improvement) in order to overcome the negative legacy of previous government ownership– Cultural biases– Hostility towards the company

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Service trend in Puerto Colombia, 1997-2004

Indicador Unit Mar-97 Dec-97 Dec-01 Dec-02 Dec-03 Jul-04 Quality NTU 18 0.8 0.4 0.4 0.5 0.5 Production prd M3/month 320,000 456,996 300,082 302,139 303,226 278,773 Meters Unit 0 1,600 6,663 7,132 7,542 7,645 Losses % 70% 62% 41% 39% 40% 42% Aqueduct subscribers Users 4,167 5,803 7,229 7,793 8,470 8,556 Aqueduct coverage % 69% 71% 78% 79% 83% 83% Sewer system subscribers

Users 2,136 2,218 3,308 3,597 3,690 3,737

Sewer system coverage % 42% 45% 57% 57% 57% 57% Invoicing $prm/motnh 30 49 189 214 271 294

(millions of pesos) Collection $prm/motnh 5 40 167 192 243 296

(millions of pesos) Collection efficiency % 17% 82% 88% 90% 90% 100% Source: Sociedad de Acueducto Alcantarillado y Aseo de Baranquilla S.A. (2004)

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Service trend in Soledad, 1997-2004Indicador Unit 2001 2002 2003 2004* Quality NTU 11 0,41 0,58 0,40 Production prd M3/month 613,200 3,765,90

5 3,891,69

2 3,894,71

1 Meters Unit 0 30,579 34,600 36,248 Losses % 70% 67% 63% 60% Aqueduct subscribers Users 33,377 64,090 69,846 70,106 Aqueduct coverage % 58% 69% 71% 76% Sewer system subscribers

Users 26,939 58,452 62,698 63,003

Sewer system coverage % 45% 63% 67% 68% Invoicing $prm/motnh 240 1,515 1,560 1,791

(millions of pesos) Collection $prm/motnh 36 1,028 1,340 1,525

(millions of pesos) Collection efficiency % 78% 91% 94% 85% Source: Sociedad de Acueducto Alcantarillado y Aseo de Baranquilla S.A. (2004)

(*) Data from January to July only.

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Lesson 2 :Making utilities more affordable and easier to pay

• Flexible tariff rates (Colombia)

• Heavily discounted rates affordable for poor communities (Colombia and Ecuador)

• Incentives for customers to pay on time (Colombia and Ecuador).

• Easy means for customers to pay their bills (Colombia water)

• Improved quality and accessibility of service (Colombia and Ecuador)

• Improved customer service and billing procedures (Colombia and Ecuador)

• Fraud and theft charges dropped if client agrees to pay (Colombia water)

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Lesson 3: Making poor communities feel that they are part of the solution

• The Colombian cases addressed cultural, historical, and political characteristics of their service areas

• An innovative element of the Colombian approach was the emphasis on building trust:– Paying for services rendered would improve

community and individual well-being– Community based organizations needed to be involved

and had to be treated as stakeholders– Communities had to recognize the benefits of

cooperation– The Company needed to demonstrate commitment and

provide support for community initiatives

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Using community-based intermediaries• Selection

– Respected within the community– Could deliver community compliance  

• Roles– Articulating community needs/problems during

program design– Making message believable– Leveraging trust to deliver and collect– Explaining the mechanics of service delivery and

setting up self-policing functions• Trained in order to perform the tasks assigned to

them within the program

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Company role• Companies promoted an environment of social

responsibility through:– town meetings– training programs – educating people through public workshops about the

importance of paying to assure good service• Basic message (“sales pitch”)

– “we’re all on the same boat”—the company can only do well if customers are getting better service and paying regularly, which then allows companies to expand service and invest in the community.

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Government support is key  • Provided necessary subsidies to help companies

offset infrastructure costs and low rates– Including capitalization of debts from energy purchases– But also refused blanket rate increases to absorb losses

(Colombia electricity)• Authorized adjusting quality of service to collections

ratio• Municipal governments dealt with land tenure issues

to legalize squatters’ residency status• Regulatory institutions stepped in to legitimize the

process by guaranteeing its transparency and fairness (Colombia electricity)

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Lesson 4: When customers are missing, they must be created

• Improving community life • Legalizing consumers• Making utilities harder to steal and easier to

monitor and fighting back illegal activities. • Balacing carrot and stick approaches

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Improving community life

• Gain credibility and trust through efforts to show commitment toward “social responsibility”– Investment in local school programs and parks (Colombia).– Support for local soccer teams (Colombia).– Help for community associations (Colombia).– Assistance for Non-Governmental Organizations (NGOs)

operating at the local level.– Emphasis on local employment (Colombia).– Development of educational programs on conservation and

safety procedures (Colombia and Ecuador).– Legalization of residency (Colombia).

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Legalizing customers

• Unsafe illegal connections replaced by safe ones• Payment plans for upfront cost of connection

and meter• Mapping of streets and dwellings to identify

each consumer• Issuance of service contracts and bills

– Can constitute proof of residency to receive municipal and other services

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Prevention, monitoring, and control• Installation of meters that are difficult to tamper with

– Meters placed in visible spots for easy monitoring• Corrupt workers dismissed (Colombia and Ecuador)• Illegal connections cut off (Colombia electricity)• Cooperation with police and local communities to

identify and prosecute offenders (Colombia electricity)• Media campaign (Colombia and Ecuador)

– Explain that illegal activities harm both the company and the community

– Expose wrongdoing– Inform about the legal consequences of fraudulent behavior

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Balancing carrot and stick approaches • Persuasion far preferable to sanctions, although both are

necessary• Monitoring and policing costs will always be higher than

programs geared at voluntary cooperation.  – AAA estimated $1 million in community programs equal or

better for cooperation than $10 million for prosecution of delinquent payers and fraudulent behavior  

• Courts are too slow, unreliable, and costly– Many judges and police officers are reluctant to enforce the law– Interagua preferred to put pressure on large users through

informal channels to avoid political backlash

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Payment arrears by government institutions, Interagua 2001-2004

Period Penitentiary of the Coast

University of Guayaquil

ESPOL

May-01 25,000 200 5,000 Oct-01 25,000 53,700 21,300 Oct-03 76,350 21,500 14,500 Oct-04 42,300 9,900 7,200

Cumulated debt (US$)

4.7 million 995,000 No debt

Source: Interagua

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Lesson 5: Politics matters• The most difficult problems to solve are political

– High political discretion within government institutions allows political executives to have a disproportionate influence in the decision-making process

– Consequently, if the political executive supports the role of the private enterprise, things can get solved and improvements accrue over time  

– Otherwise, if the mayor, governor, or president is not strongly committed, private companies face an uphill battle 

• Positive results in Colombia and Ecuador and poor results in Dominican Republic clearly illustrate this point

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Limiting political opportunism• International arbitration• Transitional subsidies may be unavoidable

– Avoid sharp rate increases associated with privatization• Careful and transparent staging

– Clear regulatory framework– Clear jurisdictional lines

• Company strategy: avoid short-term deals; build trust and legitimacy instead

• Multilaterals can help– Address social and cultural obstacles to increase

legitimacy of reforms– Timely and ongoing post-transaction support

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Final considerations: Some problems are hard to solve…• Macroeconomic conditions

– Difficult adjustment to shocks• Political clientelism

– Pervasive and perhaps exacerbated by political competition

• Political cycles– Inevitable in democracies—need to build

bridges with all forces

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…But other problems can be dealt with• Purchasing power

– Making payment easier and focusing subsidies on the poorest• Cultural attitudes

– Tying payment to good service—a “social partnership”• Legal statutes and law enforcement

– Minimize recourse to the courts• Regulatory agency behavior

– Building cooperation with regulators and governments• Company image

– Provide quick and tangible benefits• Corruption within the company

– A managerial issue

• Standard commercial problems– Making utilities harder to steal and easier to monitor– Fighting back fraud, corruption, and theft