Did Water Privatization in Cochabamba Work in

Cochabamba? An Ex Post Evaluation

Abstract:

This article evaluates the failure of the Bolivian government to regulate private sector

concessions in urban water supply in Cochabamba Bolivia through a policy evaluation

along logical framework lines of the 40-year concession contract awarded in September

1999 to Aguas del Tunari, which ultimately lead to the Cochabamba water riots in 2000.

This paper evaluates the policy effectiveness, transparency, sustainability, relevance of

the contract in question, and makes a recommendation for future policy improvement

based on counterfactual analysis.

7th of June, 2007

Course: M1034 Public Finance and Policy Evaluation

Course Professor: Dr. van Mierlo

Assignment: Final Paper

Max Berre i461865

Table of Contents

1. Introduction

• How did this come to pass in Cochabamba?

• Purpose of this paper

• Structure

2. Review of Literature

3. Methodology

4. Problem Analysis

• Situation in Bolivia leading to the call for privatization

5. Solution Analysis

• Why Privatization?

• The Contract

6. Logical Framework Analysis

7. Stakeholder Analysis

• Central Government

• Citizens

• Municipal Government

• Aguas del Tunari

8. Evaluation Criteria

• Efficiency

• Transparency

• Sustainability

• Relevance

9. Counterfactual analysis: Synchronic comparison Chile and Argentina

10. Results and Aftermath

11. Conclusion

12. Policy Recommendations

13. References

1: Introduction

How did this come to pass in Cochabamba?

By the mid-1980’s, economic growth in Bolivia had slowed to a virtual standstill. Growth

was anemic in fact, despite several decades of Keynesian style growth policies which had

come into common use in Bolivia. By 1985, Bolivia was locked in a crisis of

hyperinflation, and began turning to the World Bank and the IMF as a means of avoiding

a more wide-spread economic collapse. Turning to the institutions in Washington was a

recourse that would continue for 20 years. In accordance with their policies, Bolivia

privatized the railways, airlines, telephone system, and tin mines. The problem in this

instance, as it was seen from both Washington and La Paz, was that all across the

country, services were being provided by an aging and inefficient publicly-owned

infrastructure.

In Cochabamba, Bolivia’s third largest city, the public utilities authority (Servicio

Municipal de Agua Potable y Alcantarillado) SEMAPA provided Cochabambinos with

their water. By 1997, the municipal utility covered only 57% of the population, had 50%

losses in unaccounted for water, and was severely indebted. (Clarke, 2003) Since water

resources were inadequate for the city’s population given its size, a wide swathe of the

city’s less well-to-do residents were left outside of the public water system.

The solution which was proposed was a privatization plan that consisted of a 40-year

concession to provide running water for the city. The plan was accepted, and SEMAPA

was privatized over the objections of Cochabamba’s municipal government. Almost

immediately after the start of the contract, water prices across the city soared, and in

some cases doubled. The city’s residents responded by protesting in the streets. These

protests then gave way to riots, which had the final effect of canceling the concession

contract. The project failed.

Purpose of the paper

The Purpose of this paper is to conduct an Ex Post evaluation on the 1998 Concession

contract privatizing SEMAPA and the city of Cochabamba’s water supply. What

problems was this program supposed to solve, how was it supposed to solve them, and

went wrong exactly?

Structure

In this paper, the following section describes the literature, while the following section, a

methodology is briefly explained. Thereafter, section four, discusses the problem, and

sections five and six examine at the solution which was proposed. Section seven

examines the stakeholder involved while sections eight through ten represent an

evaluation of the solution. The final two sections are the conclusion and policy

recommendation.

2: Review of Literature:

This project originally flowed from the IMF document Enhanced Structural Adjustment

Facility Policy Framework Paper, 1998–2001, which primarily addressed the second

problem mentioned in the problem analysis. Although many both critical and positive

reviews of this project site this document, Enhanced Structural Adjustment Facility

Policy Framework Paper, 1998–2001 has become a confidential document since the

Cochabamba water protests of 2000, which the IMF does not grant access to. That is, the

details of what the prescribed and why it was prescribed are no longer public information.

Data and facts about the project have been gathered through second-hand sources, and

directly from the Bolivian government. What is available from the IMF however, is the

collection of letters of intent from the Bolivian government to the IMF describing their

reform objectives.

National data was available in the form of the Cochabamba Report of the 2001 census

from the Bolivian Government’s National Statistics Institute (I.N.E.). It contains poverty,

figures along with analysis. Also, the Cochabamba Report includes statistics in the

describing factors of poverty. Among these factors, the report lists water and sanitation

connectivity. Moreover, the report includes connectivity by area breakdown.

Formal literature on privatization considers it a uniformly positive enterprise. Three

books were used to examine the theoretical reasons and effects of privatization. The first

text by Dieter Bos, Public Enterprise Economics, while technical, a useful aspect

undoubtedly, advances its argument on ideological lines, speaking of efficiency,

socialism, and bloated inefficient bureaucracies. The next two were both written by V.V.

Ranamadham, Privatization and Equity, and The Economics of Private Enterprise. The

author presents a more nuanced view of privatization, examining both theory and

individual cases in order to express the patterns of what can go wrong, as well as where

there can be a welfare gain.

In order to further insight on Aguas del Tunari’s point of view, a fact sheet on the

contract and its shortfalls was published by US consortium member Bechtel, and is

considered for this paper.

3: Methodology:

This is an ex post analysis. The Aguas del Tunari Concession Contract has already been

concluded, and has a clear beginning and a clear end. The final results are also clear. Data

relating to the waster connectivity situation is available from the Bolivian government,

and from second hand sources. This retrospective analysis, allows the reader to see what

went wrong, where, how, and why.

What is not entirely clear are the plans, which in the aftermath of the project have been

made confidential.

Four criteria will be examined in order to more accurately answer the question of whether

of not the project worked, and if not, why not?

4: Problem Analysis:

The situation in Cochabamba had in essence two problems. The most immediate problem

was the local problem of a shortfall in Cochabamba’s water supply. The situation was

such that water flowed primarily into the center city, leaving the remained of

Cochabamba outside of the water system. In fact 43%, almost half of the city’s

population was without running water on the eve of the project. Furthermore, half of

SEMAPA’s water intake fell to unexplained losses before reaching their

destination.(Clarke, 2003) Aguas del Tunari later found the problem to be widespread

leakages. (Bechtel)

In response, two alternatives to SEMAPA’s system developed. The poorest residents of

the city had their water delivered by truck in canisters by water merchants known as

aguateros. This water was in excessively high cost, and of dubious quality. These water

merchants filled a gap that was left by the city’s inadequate public water system. For

some of Cochabamba’s citizens outside of SEMAPA’s system, a patchwork of local

small-scale, improvised water systems existed. Some were privately owned, and some

were owned and administered by local collectives. These most commonly consisted of

wells and pumps run and administered by cooperatives in which each household in the

service area owns one share. (Claridge, 2006)

The obstacle that these improvised systems posed to the water situation overall was an

aggregation of poorly coordinated water systems which affected both the supply and

salinity of Cochabamba’s water. Needless to mention, the water provided by these

improvised systems varied widely in price, but was cheaper than that provided by the

aguateros. (Vargas, 2002)

Overall, there was a quite wide and regressive discrepancy in water prices, and in water

quality, with two thirds of all water connections going to upper class households, while

only 5.2% of the poorest households had any running water at all. Cochabamba’s water

divide was a major segregating factor, and poverty was concentrated in non-connected

areas. (I.N.E. 2001)

Water Connections in Cochabamba

Connected Not Connected

High-income 64,3 35,6

Middle-income 33 67

Low-income 5,2 94,8

Total 43 57

District Lack Water and

Sanitary Services Poverty Rate

Cercado 34.00% 33.80%

Quilacollo 49.80% 37.70%

Punata 56.20%

German Jordan 58.50% 54.10%

Chapare 61.60%

Esteban Acre 68.50%

Tiraque 69.90%

Narisco Campero 71.60% 84.60%

Capinota 75.40% 73.90%

Arani 75.50%

Carrasco 75.90%

Ayopaya 90.70% 97.90%

Arque 91.70% 99.60%

Mizque 92.40%

Bolivar 93.40%

Tapacan 94.90%

(I.N.E., 2001)

Beyond the problems in Cochabamba relating directly to the lack of water connectivity,

there existed in La Paz a general and widespread lack of economic growth. By 1985,

growth and poverty reduction remained far below target. (IMF, 1998) With this in mind,

an Enhanced Structural Adjustment Facility arrangement was designed between the IMF

and the Bolivian government with the goal of creating growth and thereby reduce poverty

by 2002. (IMF 1998) The growth rate target was set at 6%. (IMF 1998)

There exists however, an inherent disconnect between the two problems that this project

was meant to address. While local concerns focus on water connectivity, concerns in

Washington and La Paz focus on economic growth, efficiency, and privatization. One

does not readily translate into the other, and in fact, given that the water connectivity

structure in Cochabamba included a regime of subsidized prices, it may be that the

advancement of one party’s set of objectives may be detrimental to the advancement of

those of the other. In fact, while it can be said that privatization helps to reduce the

hemorrhaging of funds from a non-profitable public enterprise (In SEMAPA’s case, the

deficit was on the order of $30 Million (Bechtel)), it can also be said that most

privatization schemes enhance only efficiency, while worsening equity, and typically

worsen distribution. (Birdsall, 2002)

5: Solution Analysis:

Why privatization?

Privatization, the transfer of ownership of public assets into private hands. According to

Bos, one of the primary reasons for the need for privatization is for the promotion of

greater efficiency.

Economically, greater efficiency is predicted because

private sector discipline will receive priority in all planning

and actions… The consideration of income redistribution or

of stabilization will no longer interfere with the

achievement of microefficiency. (Bos, 32)

Ramanadham’s work brings into play a very relevant nuance however. From the start of

this concession project, there was to be one firm, which would operate all of

Cochabamba’s water and sanitation services. Ramanadham mentions that there is no

inherent utility gain to the consumers served by this type of arrangement.

When an enterprise enjoying monopoly power, yet making

losses or low profits because of public policy objectives in

favor of all consumers, or certain groups of consumers, is

privatized, consumers will experience an unfavorable

change in their position as the enterprise begins to raise its

prices. Specific groups who previously enjoyed subsidized

services will lose that benefit, while those who suffered

from subsidizing prices might, though not necessarily, gain

relief. (Ramanadham, 20)

That is, that the possibility clearly exists for there to be no winners among the consumers

at all. Indeed, the plan was to remove subsidized prices, which since the poor were

largely outside, went largely to the middle classes (Vargas, 2001)

What had been previously attempted?

In 1995, an estimate was carried out by the central government’s National Basic

Sanitation Administration (Dirección Nacional de Saneamiento Básico), explaining that

in order to achieve 100% water coverage in urban districts, and 75% in rural districts,

$853 Million worth of projects were needed. (Vargas, 2001) In response to the water

connectivity shortages in the Cochabamba valley, the Misicuni Multipurpose Project was

proposed and implemented for both water supply and electricity generation. The project

involved the construction of a 120m dam, a 19.4km tunnel, and a hydroelectric power

plant. Also, the plan drew water and power from the Misicuni, Viscachas, and Putucuni

rivers. Its total cost was estimated to be $300 Million, a cost which lead the World Bank

to consider the Misicuni Municipal Project unfeasible. (Vargas, 2001)

As a result of the cost of the project, the Corani project a cheaper option was considered

at the cost of $90 Million. This was a “take or pay” contract in which Cochabamba was to

buy its water from Corani S.A. Corani meanwhile was to build an 11km tunnel to

transport water to the city. The Corani project was challenged by the municipal

government in the Bolivian Supreme Court on the grounds of the contract’s non-

compliance with Bolivian procurement laws, although it was widely understood that the

municipal government preferred the Misicuni Municipal Project over the Corani contract.

(Vargas, 2001)

The Contract:

In September of 1999, The Bolivian government agreed to the terms of its sole bidder

Aguas de Tunari and signed a $2.5 billion, 40-year concession to provide water and

sanitation services to the residents of Cochabamba, as well as generate electricity and

irrigation for agriculture to the surrounding rural regions. (Nash, 2002) Also included in

this contract was the completion of the partially constructed Misicuni project, as well as

the lease of the project’s main tunnel, which was to be financed by water service price

increases. (Bechtel) Modifications were made in the project, reducing its cost to $214

Million. (Vargas, 2001) Additionally, Aguas del Tunari was granted the exclusive use of

water resources in Cochabamba. (Vargas, 2001)

Aguas del Tunari was guaranteed a minimum sixteen-per-cent annual return on its

investment, which was to be annually adjusted to the United State’s consumer price index

in the terms of the contract. The contract also included an increase in prices for water

services of 35%, and a further price increase of 20% when water would be delivered from

the Misicuni project. (Vargas, 2001)

According to Bechtel, the US member of the Aguas del Tunari consortium, the

negotiations had several shortcomings, which in turn, had to be added to the pricing

structure.

• The Misicuni dam had to be built be built during the first two years of Aguas del

Tunari’s contract as an expansion of the infrastructural capacity of Cochabamba’s

water capacity.

• The municipality wanted the consortium to repay SEMAPA’s previously

accumulated debt and roll that cost into the rate structure, which was in the

magnitude of $30 Million.

• The municipality also insisted that Aguas del Tunari sign and execute a contract

for construction of a treatment plant that the consortium thought excessively

expensive and unnecessary.

• In addition, the state decided that Aguas del Tunari must pay for using the tunnel

under construction, and the municipality decided to charge the consortium for the

existing SEMAPA assets. (Bechtel)

6: Logical Framework:

Project Description Indicators Source of Verification Assumptions

Overall Objective: To improve economic growth and decelerate debt growth nationally by changing the public sector's involvement GDP Growth Figures

Purpose: To shrink water price and connectivity disparity in Cochabamba by privatizing SEMAPA

Connectivity data, Price data

cross-check sources

Private firms are inherently more efficient than public firms.

Results: Aguas del Tunari was contracted to expand connectivity and standardize prices across the city, and cut SEMAPA's de facto water subsidy

Connectivity data, Price data

cross-check sources

The inefficiency was in the water subsidy, with the subsidy gone, A del T will finance expansions in connectivity

Activities: Infrastructural improvement projects, acquisition of local improvised water systems

Connectivity data, Price data

cross-check sources

A del T will provide cost-effective connectivity expansion

Results: widespread public approval of the project Polling figures

cross-check sources

Local polling figures will accurately represent popular feelings about the privatization

What is key in this analysis is that the Cochabamba privatization plan was a local

component part of a larger national level plan. Ultimately, leaders in La Paz believed that

too much of the nation’s economy was tied up in public industries, which they saw in

turn as inherently inefficient. At the municipal level meanwhile, there was a palpable

need to expand both expand the water system and update the infrastructure of said water

system. In essence, this project was meant to address both needs within the Cochabamba

metropolitan area.

Thus the key assumptions were that the real problem was the inefficiency of SEMAPA’s

system, due to subsidy and aging, outdated infrastructure which was not suitable to the

size of Cochabamba’s population. This could be best corrected by employing a private

firm to improve connectivity.

7. Stakeholder Analysis:

Stakeholder

Interest and how

affected by

problems

Capacity and

Motivation to

cause change

Actions to

Address

Stakeholder

Interests

Citizens Against; concerned with water prices.

Organized, demonstrated, rioted

None

Municipal Government

In Favor of; due to the Misicuni Project’s inclusion.

Took legal action to block alternate contracts.

Misicuni Project was included in the concession contract.

Bolivian Government

In Favor of; wanted to reduce waste and corruption.

Introduced similar measures repeatedly, pressed forward in spite of the law.

Was pressured from outside.

Aguas del Tunari

In Favor of; is interested in the financial opportunity.

Sued to defend interests.

Sued the Government of Cochabamba in the aftermath of the contract cancellation.

Central Government:

The Central Government was in favor of this project. The Bolivian government had the

objective of bringing about economic growth through the implementation of Neo-liberal

reforms. (letter to IMF) Moreover, the central government in La Paz was under pressure

from the institutions in Washington, namely the IMF, World Bank, and IADB. The

implementation of Aguas de Tunari's program was correspond with a government plan to

present a $63 million rural development package to rural regions with funds for crop

diversification, and extending electric and telephone services to remote areas. (Finnigan,

2004)

The Citizens:

Shortly after the beginning of the project, the citizens organized the Coordinator for the

Defense of Water and Life (La Coordinadora de Defensa del Agua y la Vida), a

grassroots alliance of city residents, rural peasants from the surrounding areas, and local

students. The city residents were largely from the neighborhoods and communities which

had small-scale water fixtures, and who were afraid to lose access to their water supply,

as well as students from surrounding colleges and high-schools. In January of 2000,

protests of the project began in response to the price increases imposed by Aguas del

Tunari, where were ultimately met force by the central government.

Municipal Government:

The Municipal Government was in favor of this project, and issued a legal challenge to

its cheaper alternative, the Corani project. The widespread understanding about the

Municipal Government’s actions is that the Municipal Government expected

Cochabamba to capture a surplus from the construction of the infrastructure for the

Misicuni Project.

Aguas del Tunari:

Aguas del Tunari was the sole bidder for the concession contract. It was interested in

what it saw as a lucrative contract, which granted exclusivity and guaranteed a 16% rate

of return. In the aftermath of the cancellation of the contract, Bechtel, a member of the

Aguas del Tunari consortium sued the Bolivian government seeking compensation for

loss of the contract.

8. Evaluation Criteria and Questions:

Effectiveness: Has water and sanitation connectivity and distribution improved? If

so, was it worthwhile in terms of cost?

Effectiveness, as it relates to this project has two measures, connectivity and price.

Theoretically, we should expect an increase in prices, followed by an increase in

productivity, which can then be measured holistically by creating a weighted utility

change. In fact, figures show a slight decline in access to water during the duration and

immediate aftermath of this project in the city of Cochabamba. (Clarke, 2003) This

unmistakably demonstrates that the project was indeed not effective.

One positive aspect however of the effect of this concession contract was the sanitation

aspect. According to Clarke, Cochabamba residents saw a slight increase in the access to

water sanitation. (Clarke, 2003). While leaving a somewhat neutral balance given a slight

decrease in water access and a slight increase in water sanitation, the situation is

incompatible with a 35% price increase water. In the aggregate, it must be said that this

project was not effective.

Overall, it must be said that this project was not effective in terms of cost, achieving only

the removal of the water subsidy. More importantly, in terms of the expansion of water

and sanitation connectivity, a vital objective, the concession contract was a failure. The

concession contract managed only connectivity neutrality. That is, water connectivity

dropped, while access to water sanitation improved. According to the National Statistics

Institute, water connectivity is essentially the unchanged both in that only around half of

the city’s population has access to running water, and that the distribution is skewed

sharply towards the central parts of the city. (I.N.E.)

Transparency: Was this project transparent?

This program lacked transparency from the start. In order to implement this reform, a

bidding process was begun, violated, and ultimately circumvented so that the

privatization could go ahead. Additionally, the public was only informed about the

concession contract after it had been awarded, and public relations were poor. (Vargas,

2002)

The Aguas del Tunari consortium was the only bidder for the project. According to

municipal law however, a minimum of three bidders were needed so a public works

contract may be conceded. Furthermore, this concession contract was decided at the

national level, in violation of the 1906 Bolivian Law on Water (Ley de Auguas), outlining

the development and administration of water distribution in urban areas as the

responsibility of the municipal government. (Komives, 1999)

Originally, the bidding process for the Cochabamba concession contract was declared

null and void due to the fact that there was only one bid, in lieu of a minimum of three

bids stipulated by Bolivian law. (Vargas, 2001) Negotiations for the project began, and

Aguas del Tunari was awarded the contract in September of 1999. After the fact, the

Bolivian government passed law 2029 in October of 1999, legally allowing negotiation of

the project to begin.

The public was made aware of the contract only after was awarded, and public hearings

about the price changes were delayed and eventually cancelled. (Vargas, 2002)

Moreover, Aguas del Tunari practiced poor public relations, refusing to publicly divulge

the criteria it used to justify the price increases. (Claridge, 2006)

This program was non-transparent in that it circumvented the established legal

framework in two ways. First, the concession contract was a non-competitive bid with no

rival offers with which to compare it to. Second, this contract was non-transparent in that

The public was not informed or consulted, either about the concession contract, or about

the consequent price changes.

Sustainability: Could this project have continued financially and politically?

Typically, multi-national corporations require a larger than normal return in exchange for

taking risks involved with operating in a developing country. Realizing this need, a

guaranteed minimum profitability rate of 16% was written into the contract. Moreover, it

was hoped by the Aguas del Tunari and the central government in La Paz, that Aguas del

Tunari would take measures to increase efficiency by raising prices to end subsidy,

address the leakage problems that were causing the loss of around half of the water intake

before reaching the end-user, and unify the water system, so to take advantage of

economies of scale. (Vargas, 2001)

While it is clear that privatizing the public water system, and removing the subsidy such

that a minimum of profitability should be financially sustainable, financial sustainability

cannot be the only true measure of the this project’s sustainability. Political sustainability

stems from the following question; did people within Cochabamba see the concession

contract as successful? Clearly they did not. Transparency issues aside, the city’s

residents saw a sharp increase in water prices in exchange for no real improvement.

According to Claridge, a poll taken by the Coordinadora in March of 2000, four months

after the beginning of the project, 96% of nearly 49,000 respondents stated that they were

against the concession contract. (Claridge 2006)

With this said, it can be understood that to certain extent there was a partial trade-off

between these two types of sustainability, given that Aguas del Tunari’s pricing structure

was a component of both, and more specifically a positive component of financial

sustainability, and a negative component of political sustainability. What made the public

turn against the water privatization concession was the rate hike which ultimately

materialized. The magnitude of this price rise was on the order of an average 35% for

most city residents (Clarke, 2003), and reached a maximum of 200% for some of the

city’s residents. (WDM, 2005)

Ultimately the project was politically unsustainable. In fact, it was so unsustainable that it

lead to the organization of opposition, to widespread protests, and later riots in the city.

Relevance: Was the privatization concession contract a viable solution to the

problems which actually affected the city in terms of its connectivity problems?

This contract had two major factors undermining relevance. Firstly, the concession

contract granted exclusivity to Aguas del Tunari. This means that the incentive for an

improvement in efficiency is undermined.

Secondly, and perhaps more importantly, why should we prescribe privatization to fix

water connectivity problems? It was never certain that privatization was the answer to the

city of Cochabamba’s water connectivity problems. While privatization of an industry

that incurs financial debt that is partially caused by water price subsidy to its consumer

may have seemed to be a feasible address to problems of anemic economic growth, it

would not have solved water connectivity problems that existed in Cochabamba. In

retrospect, it can be said that another trade-off existed here in the sense that advancing

towards the central government’s goal of improving economic performance by cutting

subsidy and involving the private sector is in fact exclusive of the municipal

government’s goal of improving water connectivity because it would likely most likely

have had to take shape in a way that was not financially feasible. Moreover, a concession

contract which had been financially sustainable would not have been politically

sustainable. Since the municipal government can be assumed to be more interested in

political sustainability, while the central government can be assumed to be more

interested in financial sustainability, and advancing one interest would come at the cost of

the advancing the other. The two goals are not inherently connected, and they were

neither connected nor both addressed by this project.

9: Counterfactual Analysis:

Santiago de Chile:

In 1990, the Santiago Metropolitan Sanitary Works Enterprise (EMOS) was reformed

while being kept under public management. EMOS became a public stock corporation,

with 64% owned by the state development corporation and 35% owned by the central

government. A transparent and consistent change in prices was introduced which used

direct subsidies to offset price increases. EMOS began dealing with the private sector by

awarding service contracts under a competitive bidding framework. By 1996 52% of all

operating expenses were under service contracts. According to Rivera (1996), by 1996,

EMOS was the best -performing water utility in Chile and quite possibly the best in all of

Latin America in both financial and operational terms. By 1991, water coverage reached

100% by 1991. (Rivera 1996) In this sense, restructuring and outsourcing by EMOS

constituted a project that was effective in that connectivity reached 100% and was

sustainable in that both financially and politically, in that the outsourcing and

subcontracting of EMOS’ duties can be carried on for the foreseeable future, and that

EMOS’ performance is considered successful within Chile. Furthermore, according to

Rivera, the process was transparent as well.

The reform allowed for the transparent, gradual increase in prices, aiding both financial

and political sustainability given that there was a rate increase, but that it was gradual and

clearly explained. (Lee, 2001)

Overall, it can be directly said that this project was effective because it fostered 100%

water connectivity, and sustainable in both the financial and political sense. It was

financially sustainable because it is considered to be one of the efficiently managed water

companies from the financial point of view. (River, 1996) It was also politically

sustainable due to the impressive results it achieved. Furthermore, Rivera evaluates this

project as very transparent. Although its direct relevance cannot be ascertained, this

project can be considered an overall success.

Tucumán, Argentina 1995:

In 1995, the province of Tucumán awarded a 30 year contract to Aguas del Aconquija SA

(CAA), a subsidiary of Vivendi to supply water services to the province. Aguas del

Aconquija was chosen out of a competitive bidding process whereby the contract was

awarded to the firm which agreed to allow the largest price reduction.

As in the case of the Cochabamba concession four years later, the public became

outraged soon after the commencement of the contract by sharp increases in the water

prices charged by Aguas del Aconquija, which increased an average of 107% with a

maximum increase of 300%. The price increases in turn, resulted in a widespread refusal

to pay their water bills, which resulted in losses of approximately $1.5 million per month

leading to the suspension of the investment and the eventual unilateral abandonment of

the project on the part of Vivendi. Vivendi finally filed a $100 million suit against the

provincial government, which was ultimately struck down in the World Bank’s

International Centre for Settlement of Investment Disputes.

In contrast to the connectivity dynamics in Cochabamba, access to water in Tucumán

increased over the period of the project, while access to water sanitation remained

essentially unchanged. (Clarke, 2003) Again this does not correspond to a 107% increase

in price, which ultimately lead the project to become unsustainable.

Like the Cochabamba concession, this project can also be considered a failure in that it

did not pass the effectiveness criterion because of the disconnect between changes in

prices, and improvements in service. Moreover, the 30-year concession contract was seen

as a failure by the people of Tucumán, ultimately meaning that the contract was not

politically sustainable. This project was neither effective nor sustainable.

10: Results and Aftermath:

The Contact entered into force in November of 1999. In almost immediate response, the

citizens of the city organized the Coordinadora. The Coordinadora organized protests

which paralyzed the city of Cochabamba for months. (Vargas, 2002) In April of 2000,

after four months of protests, which then turned to riots, the executives of Aguas del

Tunari left the city of Cochabamba, and the contract which had been awarded to the

consortium was canceled by the Bolivian government. Law 2029 was repealed such that

38 of the 82 articles of 2029 were amended, and the law renamed 2066. The project

failed.

Aguas del Tunari sued Bolivia for $25 million through the International Centre for

Settlement of Investment Disputes (Stoehr). In 2006, a settlement was reached in which

Aguas del Tunari admitted no wrongdoing, and both parties dropped financial charges

against the other. (Finnigan, 2004) Privatization later returned to Bolivia, only to meet

with the same fate. In late 2003, natural gas supplies were privatized by the Sanchez de

Lozada administration, once again in circumvention of the legal framework, in that

privatization contracts circumvented congressional approval as outlined in the Bolivian

constitution.

This again lead to price increases, protests, and riots in 2005, culminating with the

resignation of President Sanchez de Lozada in June of 2005.

11: Conclusion:

This project was a failure because it did not effectively meet some of the critical criteria.

Effectiveness:

In the end, this project was not effective. It did not improve water connectivity or the

distribution thereof throughout Cochabamba. While the overall effect on connectivity

was neutral because the slight decrease in water connectivity was met with a slight

increase in water sanitation access. It goes without saying that a neutral effect does not

constitute an increase in connectivity, which was one of the main original goals of this

project. (Clarke, 2003) This neutrality was achieved however, at an increased average

cost of 35%, which was also poorly distributed. Cost increases ranged as high as 200%.

(WDM, 2005) This project ultimately failed in expanding connectivity or addressing

disparities across the Cochabamba.

Transparency:

This project was non-transparent in that it circumvented the established legal framework

for the establishment of such a project in two ways, as previously mentioned. Ultimately,

this lead to an unaccountability problem because this concession project did not represent

the wishes or interests of Cochabamba’s electorate. Circumvention of the established

legal framework in this sense became a circumvention of the democratic process in that it

came to pass despite it not being in the interests of Cochabamba’s voting electorate.

Furthermore, the public was kept in the dark about both the contract, and the

justifications of price increases (Claridge, 2006) In this way, the project’s non-

transparency is one of the factors which lead to the Cochabamba Water riots of 2000, as

well as the opposition of the Cochabamba’s municipal government. (Claridge, 2006) In

fact much of the data and original proposal from this project is considered confidential

today. Overall, transparency was poor in both the ex ante and ex post sense, and is a

reason for the failure of this project.

Sustainability:

As far as financial sustainability is concerned, it is evident that in Bechtel’s view, this

project was not financially sustainable without imposing the very large and immediate

price increases which made the project undesirable in the eyes of the consumers, and

ultimately politically unsustainable. In the end it can be said that this project was not

financially sustainable. This is so because it was not financially sustainable without

imposing the large piece increases that were ultimately imposed. This increase however

is in excess of the maximum stipulated in the concession contract in many cases. It was

only the average price increase of 35% which was held. In this sense, Aguas del Tunari

failed to maintain profitability with the confines of this contract.

As for the question of the political sustainability of this project, it must be said that public

opinion turned against the concession contract en masse. According to the

Coordinadora’s polls, the vast major of Cochabambinos were ultimately against both the

concession contract, and Law 2029 (Claridge, 2006) Also it can be said that the answer

clearly lies in the events Cochabamba water riots. This project was not politically

sustainable. As mentioned above, there exists a trade-off between financial and political

sustainability. Ultimately, the price increases lead the people of Cochabamba in to the

streets. In retrospect, the options of whether to pursue political sustainability, or financial

sustainability proved to be mutually exclusive.

Relevance:

Was privatization of Cochabamba’s water system a viable solution to the problems which

actually affected the city in terms of its connectivity problems?

In a word, no. Privatization was not the best and most relevant answer for Cochabamba’s

connectivity shortcomings. This is so because the privatization concession did not create

increased competition, which could have yielded better efficiency and ultimately

improved the connectivity situation in Cochabamba, nor did it improve the connectivity

situation directly. Additionally, it was never certain that privatization could solve city of

Cochabamba’s water connectivity problems. In fact, while privatization can solve

performance issues stemming partially from water subsidies, it cannot on its own

improve water connectivity.

12: Policy Recommendations:

Given the counterfactual analysis, a concession contract is perhaps questionable due to

the possible negative effects on public welfare and utility of an unmitigated rice increase.

A better scenario is to follow the direction of EMOS in Chile, and divide ownership

between the central and municipal governments. This would have worked especially well

a scenario such as the Cochabamba project where the central and municipal governments

are of opposing parties, creating and inherent check and safeguard against corruption and

wasteful spending by one party or the other, due to its opposition from the other.

In order to improve effectiveness and sustainability, it must be remembered that there is a

trade-off between financial and political sustainability, connected to prices for water

services. Effectiveness can be achieved by keeping the authority in public hands, while

adopting an efficiency mandate such as an arrangement similar to EMOS whereby

ownership is divided such that each party checks the influence of the other. Political

sustainability can be ensured through gradual changes in prices and tariffs, applied only

after the successful and documented implementation of expansion projects, so to create a

link between price and expansion in the public mind. Moreover, they must increment

gradually. Financial sustainability then through efficiency gains, which can in turn be

improved by leasing and purchasing expertise from the private sector much as EMOS

did. Furthermore, this process can be kept efficient through competitive bidding practices

for subcontracts. In this specific case, it should be said that SEMAPA had 50%

unexplained losses resulting from leaks and illegal connections.

Transparency can be improved by involving the municipal authorities and if possible the

public on an a priori basis. Additionally, it is vital to make any information about the

process, and any changes, particularly changes in price public on a continual basis. Any

changes should be accompanied by a public awareness campaign.

As for relevance, it must be said that the project has to address the immediate problems at

hand. Economic performance can be improved by diversifying the ownership structure.

Water connectivity can be improved by expanding water connectivity and improving

water transfer efficiency.

What this misadventure in Cochabamba represents is a failure in policy. In the future this

can be avoided by avoiding concession contracts, and by meeting the criteria more fully

with better plans such as the EMOS plan involving public ownership restructuring,

outsourcing and subcontracting, while maintaining the water authority under public

ownership.

13: References:

Vargas, Claudia, and Nickson, Andrew: The Limitations of Water Regulation: The

Failure of the Cochabamba Concession in Bolivia (2001) Superintendencia de Aguas, La

Paz, Bolivia

Komives, Kristen: Designing Pro-poor water Concessions, Early lesions from Bolivia

(1999) The World Bank, Private Sector Development Department, Washington D.C.

[Bolivian] National Statistics Instute Political, Social, and Economic Analysis Unit

(I.N.E. Unidad de Análisis de Políticas Sociales y Económicas): National Census of

Population and Home 2001, Cochabamba (Censo Nacional de Poblacion y Vivienda

2001, Cochabamba) (2001)

Finnigan, William: The New Yorker, 2002-08-04 “Leasing the Rain”

June C. Nash: Social Movements: An Anthropological Reader. (2002) Blackwell

Publishing

Clarke, George R.G. et al: Has Private Participation in Water and Sewerage Improved

Coverage? Empirical Evidence from Latin America (2003)

IMF: Enhanced Structural Adjustment Facility Policy Framework Paper, 1998–2001

(Sumary) (Aug. 25,1998), Washington D.C.

Stoehr, Jacob: Searching for Truth and Water: Deconstructing Cochabamba’s “Water

War” (Year unknown)

Bechtel: Cochabamba and the Aguas del Tunari Consortium (Year Unkown)

CNN.com 2000-10-03 "Bolivian Tension Mounts as Roadblock Deadline Looms"

Lee, Terrence: IMPROVING THE MANAGEMENT OF WATER SUPPLY AND

SANITATION SYSTEMS IN LATIN AMERICA (2001) Economic Commission for Latin

America and the Caribbean

World Development Movement: Dirty Aid, Dirty Water: The UK Government’s push to

privatise water and sanitation in poor countries (2005)