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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
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 Not Connected Connected High-income Middleincome Low-income Total
District Cercado Quilacollo Punata German Jordan Chapare Esteban Acre Tiraque Narisco Campero Capinota Arani Carrasco Ayopaya Arque Mizque Bolivar Tapacan
64,3 33 5,2 43
35,6 67 94,8 57
Poverty Rate 33.80% 37.70%
Lack Water and Sanitary Services 34.00% 49.80% 56.20% 58.50% 61.60% 68.50% 69.90% 71.60% 75.40% 75.50% 75.90% 90.70% 91.70% 92.40% 93.40% 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 noncompliance 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:
Source of Verification
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 Results: Aguas del Tunari was contracted to expand connectivity and standardize prices across the city, and cut SEMAPA's de facto water subsidy Activities: Infrastructural improvement projects, acquisition of local improvised water systems
Connectivity data, Price data
Private firms are inherently more efficient than public firms. The inefficiency was in the water subsidy, with the subsidy gone, A del T will finance expansions in connectivity A del T will provide cost-effective connectivity expansion
Connectivity data, Price data
Connectivity data, Price data
Results: widespread public approval of the project
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: Actions to Address Stakeholder Interests None
Interest and how affected by problems
Capacity and Motivation to cause change
Organized, Against; concerned demonstrated, with water prices. rioted In Favor of; due to Took legal action the Misicuni to block alternate Project’s inclusion. contracts. Introduced similar measures repeatedly, pressed forward in spite of the law.
Misicuni Project was included in the concession contract.
In Favor of; wanted to reduce waste and corruption.
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 nontransparency 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)