SEDAPAL: the exception to Peruvian privatization program

At the eve of the decade of 1990, the paradigm about state intervention in economy changed, and
Latin American States vision about private investment and the role of the government on the
economy shifted dramatically. All over the continent liberal ideas were accepted and applied leading
even to constitutional changes, like the Peruvian case. In fact, in 1993, a new Constitution was
passed, including liberal influenced measures such as the stabilization of foreign investment and
currency exchange liberty. Likewise, Latin American states decided to incorporate private
investment in the development of network industries and the provision of public services. The
change involved the privatization of an important amount of public owned companies, mostly in the
fields of telecommunications and electricity. Likewise, water and sanitation companies were also
privatized, but to a lesser extent, particularly in Peru, in which, no water company was privatized
until 2005.
1
In fact, the attempts for privatizing water and sanitation companies in Peru have been
scarce, in contrast to telecommunications and electricity industries, which were privatized and
liberalized during the first half of the nineties. The biggest example of the failure of privatizing water
companies in Peru is SEDAPAL, the state owned company that provides water and sanitation
services to Lima and its Metropolitan Area. Between 1992 and 1995, the government attempted to
privatize the company, however, the attempt did not succeed, and ever since, no other attempt has
been made to privatize the company.

The purpose of this work is to analyze the reasons that justify the failure of the privatization of
SEDAPAL and why until today there have been no other attempts to privatize the company. To such
purpose, we will analyze the ideas underlying privatization processes of water services and Latin
America, its application in Peru, as well as the ideas against the privatization of the company, in
order to find out why SEDAPAL has not been privatized.

Privatization of water companies in Latin America

Latin America was seen by multinational organizations, basically the World Bank (WB) and the
International Monetary Fund (IMF), as a test ground for privatizations. According to Badia this
situation was due to three reasons: the existence a large middle class attractive to private
investment, a vast amount of low funded and largely indebted public companies and the broad
application of neoliberal policies imposed by multilateral credit agencies (ed. Delcls 2009). In fact,
the Washington Consensus, which was the nave given by John Williamson to the principal set of
policies considered necessary by the WB the IMF, and the Inter American Bank of Development
(IABD) for the economic recovery of Latin America, influenced economic policies in almost all the
countries of the region. Some of the principles established in the Washington Consensus were the
liberalization of direct foreign investment, the privatization of public companies and the deregulation

1
In 2005 the local water supply company of one of the smallest departments in Peru (Tumbes)
was privatized. It remains to be the only one today.


of markets to promote competition (Pease & Romero 2013) All of these changes occurred in Peru,
along with some other liberalization measures, as an example of coercive isomorphism.

Additionally, public policies related to the ownership of water companies were also altered by the
Washington Consensus, by the application of some key principles (Castro 2007):

Water resources must be allocated through the market.
Water services must be considered as economic goods
2
.
Water services must be provided by private operator, who are intrinsically more efficient than
public ones.
Water services are not a natural monopoly In any case, it is better to allow a private
monopoly rather than a public monopoly.
Water users must be converted into consumers/clients.

As a consequence, and due to the importance of the WB the IMF and the IABD to Latin American
countries economies
3
, these principles were adopted domestically, resulting in the privatization in
large scale of public owned water companies. In fact, Latin America is the region that has awarded
the largest amount of water privatization contracts in the World (McGranahan & Budds 2003).

However, the results of these privatization processes in some cases were not as good as expected,
and some of the reasons that justified the change of ownership had changed over time. As a matter
of fact, 30% of the water companies privatization contracts signed by Latin American governments
were terminated by 2009 (Delcls 2009):

The most relevant cases of contract termination happened in Argentina, were the privatized water
company of Tucuman lost its concession only after two years of the signature of the contract due to
social resistance movements motivated by the increase of the tariffs and the alleged corruption
found in the awarding process. The same situation happened in Bolivia, specifically in Cochabamba,
were the company, Aguas de Tunari, was expelled for similar reasons (Rentsch & Lanz 2006).
Likewise, the most important contract of the region, the privatization of the Buenos Aires water
company, was terminated in 2006, after the company, Aguas Argentinas, went into insolvency due to
the financial crisis of 2001.

The privatization of Peruvian water companies

Due to coercive isomorphism, Peru was not an exception to the application of liberal policies related
to the Washington Consensus during the nineties. 1993 Constitution opens the possibility to

2
See Dublin Statement on Water and Sustainable Development, 1992
3
Most of the privatizing schemes in Latin America during the first half of the nineties were funded
by loans given by the WB, the IMF and the IABD. In Peru, for example, a social compensation
program, which included privatizations, was funded by the IMF.


privatize companies and many laws were passed to that purpose
4
. During the first half of that decade
the telephone company was privatized and most of the electricity companies suffered the same
destiny.(Pease & Romero 2013). However, water companies were not privatized, even disregarding
that the specific law that a specific frame for water privatization was created and an Independent
Regulatory Agency (IRA), SUNASS, was established as an effort to solve the credible commitment
issue
5
. Additionally, the property scheme of water companies was modified and all of them passed
from a central entity to the ownership of provincial governments, except SEDAPAL, which is still
owned and ran by the Government, in order to facilitate the incorporation of private actors in this
industry.

SEDAPAL is an extremely important company for the Government, by 2009 it provided water services
to 7.7 million people in Lima
6
and its Metropolitan Area (ed. Ore 2009). Today, only some of its
activities have incorporated private investment, through the concession of two waste water
treatment and one drinking water treatment plant that provide services to SEDAPAL exclusively.

Actually, the Government attempted to privatize SEDAPAL before 1995, specific laws were passed to
promote the privatization of the company and a tender was initiated. However, privatization,
understood as the transfer of the companys shares to a private entity, was not planned. Instead, a
thirty years concession contract, in which SEDAPAL would maintain the property of the companys
assets was drafted with the advisory from the WB. It is important to note that the concession
contemplated the signature of a loan agreement of US$ 300 millions with the WB. The approval of the
loan was conditioned to the improvement of SEDAPALs overall efficiency, including the reduction of
personnel and the increase of the tariffs. These conditions forced the Government to prepare
SEDAPAL to the privatization process, and, in many ways, SEDAPALs performance improved before
the tender. However, the tender was cancelled by the end of 1994 and no attempt to privatize the
company has been made.

The arguments in favor of the privatization of SEDAPAL.

Controversy has always surrounded the privatization of SEDAPAL, since the origin of the idea in the
early nineties. Several actors argue in favor and against the privatization of the company, exposing
different ideas, influencing the actions taken by public officers. Arguments in favor of the
privatization of SEDAPAL are strongly influenced by the liberal policies stated in the Washington
Consensus, as well as political views on the role of the State in the nations economy
7
. Supporters of
SEDAPAL's privatization argue basically that there are economic reasons that justify the
privatization of the company. In fact, Perus most important diary, El Comercio, is a strong supporter

4
For example, General Law of Sanitation Services 1994 and Frame Law for the Growth of Private
Investment, 1991.
5
Today, SUNASS regulates the municipal owned water companies as if they were private. Its
functions include tariff regulation, standard setting and approval of investment plans.
6
Population in Lima amounts approximately 9 million people.
7
Feigenbaum & Hamnets economic perspective to justify privatization.


of SEDAPALs privatization and has published several editorials supporting the idea. Besides their
ideological orientation, they provide some other reasons to justify this measure, specifically related
to the economic situation of the company and its performance rates (El Comercio 2013). They
criticize strongly the high debt ratios of the company, around US$ 1.2 billion, the poor performance
rates, more than 40% of the water is lost in the pipelines, and stress the fact that since the
privatization process began, tariffs of privatized services such as telecommunications and electricity
dropped 8% and 2% respectively, in contrast to water tariffs, which were increased in 47% during the
same period, without a corresponding increase in the coverage of the service.

As a consequence, from the supporters point of view, the privatization of the company is the only
valid solution for those problems, since private companies have proved to be more efficient in the
Peruvian context, as well as internationally. Also some NGOs support the idea of privatizing
SEDAPAL
8
, stressing the fact that other privatized water companies in Latin America, such as Aguas
Andinas de Santiago (Chile) have achieved much better performance and economic rates than
SEDAPAL in similar conditions.

The arguments against the privatization of SEDAPAL

Supporters of public ownership of SEDAPAL have different backgrounds and pursue different
objetives. Among them it can be found work unions, NGOs and political parties, all of them oppose
not only to the privatization of SEDAPAL, but to the whole neoliberal system applied as a result of
the diffusion of the Washington Consensus. Their motivations, in most of the cases are based an
ideological background related to socialism and state intervention in economy
9
. Among their
arguments can be found:

The privatization of SEDAPAL will mean the loss of a vast amount of benefits for the workers
of the company as well as massive firings.
The users of water companies should not be considered as merely clients of the company,
but as right holders to receive water and sanitation services.
Water is considered as a human right and not as an economic good, as set forth in the Dublin
Principles. (ed. Ore 2009)
Private companies do not have incentives to make investments in non-profitable areas of the
city, consequently, coverage increase is not assured.
Water access has important externalities regarding health and environment, therefore, state
control is needed to avoid harms to society.
Water is considered, under Peruvian Constitution as a public service, which means, the
obligation of assuring universal access, which could only be fulfilled by the Government.

8
Such as Contribuyentes por respeto. See: <http://www.respeto.pe>
9
FENTAP proposes the change of the Constitution, in order to finish with the neoliberal system,
that responds only to the interest of multinational companies and economic groups.


The privatization of the company would imply the increase of the tariffs, in favor of
multinational companies.

These arguments are strongly defended by those who support them, for example, the largest water
companies union, FENTAP, has a strong presence all over the country and a continuous and active
life. Likewise, SEDAPAL workers union, SUTESAL, has organized strikes against every attempt of
incorporating private investment, in any way, into SEDAPALs activities. Additionally, these unions,
with the support of foreign and domestic NGOs, such as OxFam, coordinate with other actors
against water privatization in the whole country, and even with human rights protection
organizations in Bolivia, that were involved in the strikes that lead to the termination of the
concession contract of Aguas de Tunari in Cochabamba.

Apparently, their efforts have been rewarded, according to a recent survey, 54% of the habitants of
Lima are against the privatization of the company (El 46% de limeos 2013). As a consequence, no
political party, even the most liberal ones, has strongly proposed the privatization of SEDAPAL in the
last years. Their interests are related exclusively to gaining votes for the next election, supporting
such an impopular measure would mean an electoral disaster.

Additionally, there is opposition from non organized population, who do not trust the promises of
politicians who try to implement reforms. Latin American countries population is particularly
distrustful with politicians. Many reasons may justify this situation, but, the most important is the
level of inequality in the region. Surveys show that in countries were inequality is larger,
privatizations are less likely to occur, due to the lask of confidence in private companies and
government officials (Milln 2006).

As a conclusion, has any idea prevailed?

In the Peruvian case, privatization processes occurred basically to a shift in the governments ideas
about private ownership of network industries. The change was institutionalized due to the
requirements of multilateral credit agencies, who conditioned the approval of loans to policy
changes in order to favor privatization processes. This coercive isomorphism was accepted in Peru
and privatization processes occurred, except in water companies, specifically SEDAPAL. This
companys privatization, that may me considered as tactical (Feigenbaum & Hamnet 1998), failed,
because of public opposition to the privatization of this specific company. Ideas about the
importance of water to the human development, a fear to the increase of tariffs and mistrust on
private companies interests are the major motifs of the opposers. Even twenty years after the first
attempt of privatizing SEDAPAL, peoples views remain the same.

Consequently, it is arguable that Peruvian legal frame, as a consequence of the success of the
diffusion of the Washington Consensus policies, has already set forth the legal measures necessary
for the privatization of SEDAPAL. Ideas from abroad were adopted by politicians and incorporated to
Peruvian legal system. However, these ideas were not spread to the public to a extent in which they


would imply a social change on the views and expectations of the government.
10
Even, as a result of
privatizing other industries, water privatization has more opposition from the public.

Finally, we considered that formally, institutional change due to coercive isomorphism has occurred
successfully, however, in practice, the reform has not occurred because principles related to private
water provision are not accepted by the population and no self-interested political party is willing to
implement such measure, and assume its cost, even if they ideologically agrees with the
privatization of SEDAPAL.





10
It cannot be considered the privatization process in Peru as a case of systemic privatization,
since the purpose of politicians was not to promote a social change, but to comply constantly with
WB and IMFs requirements.