Luigi Manzetti Washington, June 3, 2005

1. Joint Conference of the Inter-American Development Bank and the World BankPOLITICAL ECONOMY OF SERVICE DELIVERYPrivate Utility Supply in a Hostile Environment:Lessons from Experience of Water/Sanitation and Electricity Distribution Utilities in Three LAC Countries Luigi Manzetti Washington, June 3, 2005

2. Presentation • Cases • Difficult Environments for Service Delivery • Lessons • Final Considerations

3. Cases • AES Corporation-EdeEste (Dominican Republic-electricity distribution) • Interagua Cía. Ltda. (Ecuador-water/ sanitation) • Unión Fenosa (Colombia-electricity distribution) • AAA-Sociedad de Acueducto, Alcantarillado y Aseo de Baranquilla S.A. (Colombia-water and sanitation)

4. Difficult environments • The Colombian Caribbean coast • Low income and indigent population • Culture of nonpayment and fraud no limited to the poor • Political clientelism and corruption • Large number of refugees fleeing from guerrilla warfare resulting in rapidly growing slums • Existence of “red areas”, of difficult management, not always under control of state security • With the exception of security concerns most issues are shared in the Dominican Republic and Ecuador

5. Poverty and Indigence Levels in Colombia by City, 2003 Source: AAA

6. General lessons • Utility reform must provide quick and tangible benefits for users • Companies and government must create the conditions so that the poor can pay • Companies must make poor communities feel that they are part of the solution • Companies must understand the environment and behavior of the poor in order to turn them into customers • Politics matter. Private utilities can only survive in poor institutional and economic environments if politicians are willing to cooperate

7. Lesson 1: Utility reform must provide quick and tangible benefits for users • Successful examples (AAA and Interagua) • Improved appreciably both the quality and the availability of service within a relatively short period of time • Also succeeded in improving customer service and enhancing their credibility • The poor are willing to pay when they are provided with good quality service • But companies must first convince customers through facts (quality improvement) in order to overcome the negative legacy of previous government ownership • Cultural biases • Hostility towards the company

8. Service trend in Puerto Colombia, 1997-2004

9. Service trend in Soledad, 1997-2004

10. Lesson 2 :Making utilities more affordable and easier to pay • Flexible tariff rates (Colombia) • Heavily discounted rates affordable for poor communities (Colombia and Ecuador) • Incentives for customers to pay on time (Colombia and Ecuador). • Easy means for customers to pay their bills (Colombia water) • Improved quality and accessibility of service (Colombia and Ecuador) • Improved customer service and billing procedures (Colombia and Ecuador) • Fraud and theft charges dropped if client agrees to pay (Colombia water)

11. Lesson 3: Making poor communities feel that they are part of the solution • The Colombian cases addressed cultural, historical, and political characteristics of their service areas • An innovative element of the Colombian approach was the emphasis on building trust: • Paying for services rendered would improve community and individual well-being • Community based organizations needed to be involved and had to be treated as stakeholders • Communities had to recognize the benefits of cooperation • The Company needed to demonstrate commitment and provide support for community initiatives

12. Using community-based intermediaries • Selection • Respected within the community • Could deliver community compliance   • Roles • Articulating community needs/problems during program design • Making message believable • Leveraging trust to deliver and collect • Explaining the mechanics of service delivery and setting up self-policing functions • Trained in order to perform the tasks assigned to them within the program

13. Company role • Companies promoted an environment of social responsibility through: • town meetings • training programs • educating people through public workshops about the importance of paying to assure good service • Basic message (“sales pitch”) • “we’re all on the same boat”—the company can only do well if customers are getting better service and paying regularly, which then allows companies to expand service and invest in the community.

14. Government support is key   • Provided necessary subsidies to help companies offset infrastructure costs and low rates • Including capitalization of debts from energy purchases • But also refused blanket rate increases to absorb losses (Colombia electricity) • Authorized adjusting quality of service to collections ratio • Municipal governments dealt with land tenure issues to legalize squatters’ residency status • Regulatory institutions stepped in to legitimize the process by guaranteeing its transparency and fairness (Colombia electricity)

15. Lesson 4: When customers are missing, they must be created • Improving community life • Legalizing consumers • Making utilities harder to steal and easier to monitor and fighting back illegal activities. • Balacing carrot and stick approaches

16. Improving community life • Gain credibility and trust through efforts to show commitment toward “social responsibility” • Investment in local school programs and parks (Colombia). • Support for local soccer teams (Colombia). • Help for community associations (Colombia). • Assistance for Non-Governmental Organizations (NGOs) operating at the local level. • Emphasis on local employment (Colombia). • Development of educational programs on conservation and safety procedures (Colombia and Ecuador). • Legalization of residency (Colombia).

17. Legalizing customers • Unsafe illegal connections replaced by safe ones • Payment plans for upfront cost of connection and meter • Mapping of streets and dwellings to identify each consumer • Issuance of service contracts and bills • Can constitute proof of residency to receive municipal and other services

18. Prevention, monitoring, and control • Installation of meters that are difficult to tamper with • Meters placed in visible spots for easy monitoring • Corrupt workers dismissed (Colombia and Ecuador) • Illegal connections cut off (Colombia electricity) • Cooperation with police and local communities to identify and prosecute offenders (Colombia electricity) • Media campaign (Colombia and Ecuador) • Explain that illegal activities harm both the company and the community • Expose wrongdoing • Inform about the legal consequences of fraudulent behavior

19. Balancing carrot and stick approaches • Persuasion far preferable to sanctions, although both are necessary • Monitoring and policing costs will always be higher than programs geared at voluntary cooperation.   • AAA estimated $1 million in community programs equal or better for cooperation than $10 million for prosecution of delinquent payers and fraudulent behavior • Courts are too slow, unreliable, and costly • Many judges and police officers are reluctant to enforce the law • Interagua preferred to put pressure on large users through informal channels to avoid political backlash

20. Payment arrears by government institutions, Interagua 2001-2004 Source: Interagua

21. Lesson 5: Politics matters • The most difficult problems to solve are political • High political discretion within government institutions allows political executives to have a disproportionate influence in the decision-making process • Consequently, if the political executive supports the role of the private enterprise, things can get solved and improvements accrue over time   • Otherwise, if the mayor, governor, or president is not strongly committed, private companies face an uphill battle • Positive results in Colombia and Ecuador and poor results in Dominican Republic clearly illustrate this point

22. Limiting political opportunism • International arbitration • Transitional subsidies may be unavoidable • Avoid sharp rate increases associated with privatization • Careful and transparent staging • Clear regulatory framework • Clear jurisdictional lines • Company strategy: avoid short-term deals; build trust and legitimacy instead • Multilaterals can help • Address social and cultural obstacles to increase legitimacy of reforms • Timely and ongoing post-transaction support

23. Final considerations: Some problems are hard to solve… • Macroeconomic conditions • Difficult adjustment to shocks • Political clientelism • Pervasive and perhaps exacerbated by political competition • Political cycles • Inevitable in democracies—need to build bridges with all forces

24. …But other problems can be dealt with • Purchasing power • Making payment easier and focusing subsidies on the poorest • Cultural attitudes • Tying payment to good service—a “social partnership” • Legal statutes and law enforcement • Minimize recourse to the courts • Regulatory agency behavior • Building cooperation with regulators and governments • Company image • Provide quick and tangible benefits • Corruption within the company • A managerial issue • Standard commercial problems • Making utilities harder to steal and easier to monitor • Fighting back fraud, corruption, and theft