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Explaining variegated institutional trajectories after neoliberal reforms:

Water services privatization and multi-level political struggle in three Latin

American cities

Pierre-Louis Mayaux

Sciences-Po/CERI

pierrelouis.mayaux@sciences-po.org

Paper presented to the 21st IPSA World Congress, Santiago de Chile, July 12-16 2009.

Introduction

Latin America is usually presented as a region that experienced sweeping neoliberal reforms

throughout the eighties and the nineties. Resulting changes have often been conceptualized by political

scientists as a shift away from a “Producer State” to a “Regulatory State” (Jordana & Levi-Faur, 2004;

Meseguer, 2005; Bortolotti & Perotti, 2007). Within the multifaceted process of what appeared as

State retrenchment, utilities privatization attracted special attention from political economists as it

represented an unprecedented transfer of assets and/or control over operational activities from public

hands into private hands. Between 1990 and 1998 (the peak period of reforms), utilities privatization is

estimated to have generated total (private plus linked government) investments of US$236.5 billion in

Latin America, almost half of all the investment in developing countries (Estache, Gomez-Lobo &

Leipziger, 2000). Between 1990 and 2007, 1245 projects involving the private sector reached financial

closure (PPIAF, 2008).

In the water sector, private sector participation (PSP) has been more limited than in other utility

sectors, even though it generated US$14.7 billion of private investment in Latin America over the

period 1990–99 (Foster, 2005). In 2000, at the peak of private participation in water services, 15% of

urban Latin Americans were serviced by a private operator. However limited in breadth, PSP in the

water sector, generally involving large international companies, implied a significant shift away from

the traditional, mostly State-owned and municipality-centered organization of the service. Besides,

although undoubtedly the most controversial issue, private sector participation was only part of a

wider set of reforms of water sectors that included the setting-up of central regulatory agencies, the

autonomization and corporatization of existing public operators, the progression towards tariffs

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ensuring full cost recovery, and the reduction of cross-subsidies, whether socio-economic or

geographically-based (Breuil & Nackla, 2003; Jaglin, 2005).

Therefore, in much the same way as what would have occurred in political economies as a whole (see.

Cerny, Menz & Soederberg, 2005), institutional arrangements and actual management practices in the

water sector would have become more similar than previous to reforms, when decentralized systems

were locked in their own specific “low-level equilibrium” (Foster, 2005) with opaque decision-making

and politically-based investment choices.

However, contrary to many scholars‟ expectations (whether hoped-for or feared), current Latin

American institutional arrangements in the water sector appear not less, but rather more diverse that

they used to be at the beginning. Many large concession contracts have been cancelled (including

those of Buenos Aires and La Paz-El Alto) paving the way for re-municipalization, whereas others

have been consolidating. Meanwhile, public-private arrangements themselves have been diversifying.

Concession contracts are no longer seen as a panacea, whereas “affermage” and above all management

contracts no longer appear as second-best options. Chile encouraged full divesture of assets whereas

public-private joint ventures have been widely implemented in Colombia (see Annex 1 for an outlook

of different types of contracts). We illustrate this diversity qualitatively by analyzing three cities

whose water services experienced very variegated institutional trajectories despite having undergone

equally-minded pro-market reforms at the outset. How to account for the fact that similarly-oriented

neoliberal market reforms eventually led to an increased diversification of existing institutional

arrangements? How to explain that the water sector in Latin America now seems institutionally more

diverse than previous to neoliberal reforms?

Three institutional trajectories in the era of neoliberal reforms

In Cartagena, the long-standing multi-utility Empresa Publica Municipal de Cartagena (EPMC) was

unbundled in 1992. Once the water service was insulated, a public-private joint venture called Aguas

de Cartagena (ACUACAR) was set up in 1995. 50% of Acuacar is owned by the municipality of

Cartagena, 45.9% by the Spanish operator Aguas de Barcelona, the remaining share being held by

local private investors. In addition to the joint venture, two contracts were signed: a leasing contract

between the municipality and Acuacar, and a management contract between the municipality and

Aguas de Barcelona. Under this scheme, the municipality retained full responsibility for funding

investments (e.g. for network expansion, building of new purification and treatment plants, sanitation

of the city neighborhood, etc.). However, after two additional contracts were signed in 1998 and 1999

within the framework of two loans provided by the InterAmerican Development Bank (IDB) and the

World Bank, Aguas de Barcelona came to contribute to investments. Cartagena water service is

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therefore a tale of incremental change and gradual institutional consolidation (which by no mean

discards conflicts and competition, as we shall see later), whereby the institutional arrangement has

become more and more hybrid1. Economic performances (in terms of coverage, productivity,

unaccounted-for water or profitability) have improved markedly.

In Campo Grande, the original institutional arrangement was different insofar as, since 1979, the water

distribution company was owned by the State of Mato Grosso do Sul of which Campo Grande is the

capital. After a complex and conflictive process, the service was re-municipalized and in 2000 the

municipality granted a concession to a consortium called Aguas Guariroba SA., led by Aguas de

Barcelona (Agbar). However, the first five-year period of the contract proved highly disappointing for

the municipality, as the Spanish operator fell far short of meeting any of its contractual objective

(Inecon/Fundação Getulio Vargas, 2008), and corruption and personal misbehavior by Aguas de

Barcelona top executives filled local media. As a consequence, the contract was cancelled in 2005.

However, instead of returning to public provision, the municipality called in national private investors

to substitute for Agbar, namely the groups Bertin and Equipav. As for now, the concession

arrangement appears more stabilized. As in a classic concession contract, Aguas Guariroba is fully

responsible for all investments (including an ambitious program in sanitation). More importantly,

tariffs are expected to cover the full cost of the service, the balance of the contract is guaranteed by the

regulator, and neither subsidy nor pro-poor redistribution schemes have been designed, aside from a

social tariff. Therefore, despite the first years‟ acute crisis, water services in Campo Grande have been

moving towards water commodification and consolidation of an extensive private participation.

In La Paz El Alto, the municipal public utility SAMAPA was replaced in 1997 by a concession

awarded to Aguas del Illimani (AISA), a consortium led by the French Suez group. During the first

years, the arrangement seemed to take roots. For nearly a decade the La Paz–El Alto concession was

heralded by donor organizations, the state and the commercial water industry alike as an emblematic

„pro-poor‟ water concession under the private sector model.

However, powerful social discontent broke out in El Alto against AISA at the end of 2004. A large,

tough and long social mobilization ensued that eventually called for contract cancellation. Suez was

eventually expelled on “friendly” terms in January 2007. It was replaced by a provisional arrangement

in which the central State has a leading role. Here, contrarily to what happened in the two other cities,

a failed attempt to commodify water services prompted a social backlash that led to subsequent

reappropriation of the service by social organizations, although the future of the service is still fraught

with uncertainty.

1 For a general conceptualization of the process of public policies hybridization, see: Lascoumes and Lorrain,

2007

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Therefore, pro-market reforms led to the incremental consolidation of a public-private joint-venture in

Cartagena (hybridization), a jerky but eventually effective implementation of a private concession in

Campo Grande, (commodification) and a social backlash in La Paz El Alto (reappropriation). How

can one account for these discrepancies?

To address this question, we first present our general “political” hypothesis, pointing to the limits of an

alternative hypothesis rooted in the institutional economy (section 1). We then turn to show how the

hypothesis applies to each of our three cases (sections 2, 3 and 4). We then briefly summarize the main

findings (section 5).

1. Water service management: coordination games vs. multi-level

political interactions

To account for discrepancies in water services institutional arrangements, many analyses are grounded

in the institutional economy (Guash, Laffont & Straub, 2005; Spiller, 2008; Barraqué, 2008). This

shared disciplinary background does not impede substantial disagreements over which institutions

matter most and how exactly they matter on the service organization. However, these analyses all tend

to view water sector organization as primarily a matter of collective action involving a wide range of

actors. In this view, the stability (or fragility) of any given institutional arrangement primarily relies on

the structure of material incentives the actors face and the way it promotes, or hampers, cooperation.

Most institutional economic analyses emphasize two key institutions in providing the appropriate

carrots and sticks: the contract and the regulation.

The economic model of the contract is expected to bring into line the principal‟s public interests (e.g.

coverage expansion, affordability for the poor, quality improvements, sustainability) with those of the

private agent (payments to shareholders, risks mitigation, transparency of the objectives, clarity and

credibility of the institutional framework). In turn, independent, external regulation is a

complementary way to achieve coordination. The setting-up of an independent regulatory agency

(which has been performed at the national level in Colombia and Bolivia and at the municipal level in

Campo Grande) is expected to provide a credible « stick » for public hands. With regard to external

regulation, an ongoing debate focuses on the trade-off between credibility and flexibility. As opposed

to a British-inspired line of argument that stresses the need for formal rules to be standardized and

enforced by an independent body, some observers drawing on the French experience place more

emphasis on informal, day-to-day regulation between the local public authority and the operator

(Breuil, 2005; Lorrain, 2007). Some also insist that regulation should be careful to take users‟ interests

into account, through institutionalized channels of participation (Mitlin, 2003).

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In these views, discrepancies in institutional trajectories are therefore chiefly explained by differences

in contracts (e.g. more or less balanced, more or less realistic, more or less tailored to the local

context), and regulation (e.g. more or less independent, credible and effective).

These analyses undoubtedly provide a good deal of valuable insights. Water service management is

certainly partly a collective action problem, in which all parties would be better off cooperating in

achieving a number of objectives (such as funding investments to expand coverage, reducing

unaccounted-for water or designing innovative, less costly technical solutions for the poor). However,

water management is very far from being just that. Beyond revolving around problems of information

asymmetry, transaction costs and moral hazard, it is often about constructing a collective interest

where it does not exist at the outset (Botton, 2007). In urban contexts plagued with high uncertainty

(partly due to weak institutionalization) and acute distributive issues, actors‟ preferences are rather

likely to be incommensurable. Water service organization is therefore essentially a political process

whereby actors‟ preferences are (re)shaped during the reorganization process as well as the day-to-day

operation of the system (De Gouvello, 2001).

More specifically, the underlying assumption of this contribution is that the introduction of the private

sector cannot be merely seen as an expression of State retrenchment. Rather, it should be looked upon

as a public policy and a political strategy in itself, which seeks to favor a more indirect form of

government (Polanyi, 1944; Pierre, 1998; Hibou, 2000). Privatization, far from downplaying the role

of the State, rather implies the deployment of new activities (see. Weiss, 2003; Levy, 2006), especially

in the field of regulation (Majone, 1997), that can prove to be as challenging as direct provision. In

the water sector, even after the operator has been corporatized, public authorities still have to design

technical norms, adjust tariffs, exert effective monitoring, carry out urban planning and long-term

service projection, extract all necessary information for yardstick regulation, etc. These activities may

require as much institutional capacity as the “productive” ones (Rees, 1998). Therefore, whatever the

type of operator ownership, public authorities still retain numerous and challenging tasks to perform.

Now, institutional consolidation requires that these tasks be performed in a way that allows for a trade-

off between public preferences (whatever their order) and the operator‟s interests (whether public or

private).

Our core argument is that, with regard to Latin American water services, no single level of

government can ensure such a political trade-off by its own. Minimal multi-level cooperation is

therefore essential for institutional stability, while conflict among levels is likely to lead to

institutional disruption.

This said, the multi-level game is not only a matter of power clash among interests, whereby proper

material incentives would suffice to induce cooperation. To be sure, all levels need having some

resources so as to enjoy some bargaining power and induce other levels into seeking cooperation.

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However, perceived common interests also have to be constructed so that ideas, shared values

and discursive interactions are as essential as the structure of material incentives. We therefore

draw many insights from the newly developing “discursive institutionalism” literature (see Campbell

and Pedersen, 2001; Hay, 2006; Schmidt, 2009) to explain why different levels of government may or

may not engage in cooperative relations.

In addition, by comparing three institutional trajectories over time, we elaborate a dynamic vision of

public policies, as a chain of decisions and effects in interaction (Hassenteufel, 2008).

This “political” hypothesis seems more able to deal with the otherwise puzzling empirical anomalies

of our case. In La Paz-El Alto, the 1997 concession contract had been widely heralded as a model of

“pro-poor” contract: poor neighborhoods were expected to rapidly benefit from PSP thanks to

ambitious expansion objectives and ad hoc innovative partnerships with non-profit organizations. On

the other hand, the contract was also careful to ensure Aguas del Illmani a satisfactory rate of return on

investments. In effect, economic performances achieved by AISA with regard to levels of investment,

productivity and service quality were among the best in Bolivia. However, it did not prevent AISA

from being expelled after less than ten years of operation.

In Cartagena, by contrast, the institutional arrangement has stabilized despite not being a model of

“good governance” in any way: lines of responsibility are blurred, contracts are piled up, and

regulation is split between two national agencies, supervisory bodies at the national and departmental

level and local citizens‟ watchdog committees.

As for Campo Grande, the first five years of private operation have been filled with improvisation,

underdeveloped municipal regulatory capacity, underinvestment and very poor operational

performances. However, rather than transferring the service back into public hands (which would have

been an option as former State-owned SANESUL was becoming fairly efficient), the municipality

decided to go on with private participation.

According to us, such empirical anomalies are better explained by the essentially political nature of

water service management, especially the degree of cooperation achieved between local, national and

international level of governments. However, we do not mean that multi-level fragmentation is the

only key line of political interactions within water services. There is for instance no doubt that the

operator‟s strategy vis-à-vis the diversity of its beneficiaries, or users‟ capacity to engage in collective

action also matter.

Nevertheless, we emphasize the importance of multi-level political interactions (conflictive vs.

cooperative) in determining water services institutional trajectories. Given that cooperation can be

achieved in a number of ways, no single equilibrium is to be expected. Rather, institutional

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stability or disruption should depend upon contextual multi-level interactions, as institutions

are not the product of economic optimums but are chiefly political trade-offs.

Let us now turn to operationalize this analytical framework to our different cases.

2. Cartagena: the gradual emergence of a multi-level governance

Since 1961, the city of Cartagena had its own multi-utility company, the Empresa Pública Municipal

de Cartagena (EPMC). The EPMC was in charge of a wide range of public local services: roads,

water and sanitation, public lighting, parks, fire prevention, and even sometimes the organization of

local elections. Throughout the 1960s, 70s and 80s, Cartagena water services were typically

considered by mayors as a tool of clientelistic distribution. Until the introduction of elections for

mayors in 1986, the head of the water company changed as frequently as twice a year, in response to

changes in the mayor appointed by the national government. After 1986 there was more stability, but

not enough to ensure good management. “Political” basis for investment decision-making meant that

long-term planning of basic service provision was made impossible. This situation also meant that the

city lost credibility with the World Bank because of the absence of serious long-term planning for

basic service provision (Nickson, 2002; Beato & Diaz, 2003).

People from poor outlying neighborhood, mostly of African-Colombian descent, had therefore little

hope to be some day connected to the municipal network, and got their water at a much higher cost.

However, such “low level equilibrium” of clientelistic water service provision (Foster, 2005) gradually

became unsustainable, on both structural and ideational grounds. With regard to structural change,

water demand increased dramatically throughout the 1980s as a consequence of the economic

development of the city, coupled with the rural exodus prompted by the armed conflict in the outback.

In the meantime, the financial situation of the company worsened markedly: water losses exceeded

50%, and current revenue did not even cover operating costs, producing a financial deficit that was a

growing drain on municipal finances, as well as reducing opportunity for clientelistic rent-seeking.

At the same time, national and international policy agenda were changing along two lines. On the one

hand, following the Rio Earth Summit and the Dublin World Water Summit of 1992, access to water

and basic sanitation became an international priority. At the national level, the Colombian constitution

of 1991 relayed this concern by setting access to basic services high on the agenda. On the other hand,

arguments on “State failures” were on the rise, consistent with the consolidating “Washington

consensus”. In the wake of the 1989 British water privatization and the Chile pro-market

“modernization” from 1988 on, the idea that the introduction of the private sector would bring high

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efficiency gains, cash flows for investments and less “politicized” management was gaining

momentum. Contracting out to the private sector was actively supported by international donors,

especially the World Bank through its source of loan and equity financing for private sector projects in

the developing world, the International Finance Corporation (IFC), working in line with the 1993

Water Resources Management Policy Paper.

Compelled to negotiate? The absence of a hegemonic actor

There is no doubt that the World Bank actively supported the introduction of the private sector in

Cartagena water services. The Bank had some leverage to exert its influence: beside the heavy

indebtedness of the EPMC, it was providing technical assistance at the national level for the drafting

of the law 142 on domiciliary public services (AT-PAS program). Besides, a country loan approved a

technical assistance component in Cartagena that made it possible to opt for private participation and

prepare the bidding conditions. At the time the intervention of the World Bank was conducted on a

rather ad hoc basis. It would only later be streamlined and nationally-integrated within the 1999

Entrepreneurial Modernization Program (EMP).

However, the Colombian central State retained a substantial room for maneuver, partly due to its

specific political and economic situation in the region. On the one hand, its macroeconomic situation

was at the beginning of the nineties among the most stable in all Latin America. Steady economic

growth (a 5% average between 1990 and 1994), as well as limited inflation and a positive balance of

payments until 1992 was making it less dependent on international loans. On the other hand, despite

the armed conflict and the creeping informalization of the economy due to large economic inflows

from drug resources, the Colombian State retained some institutional capacity. As a result of a long

history of high political centralization, efficient administrative enclaves were operating, most

especially the Departamento Nacional de Planeacion, DNP, a technical Minister directly set

under the authority of the executive. Consultants hired by the DNP, together with the Ministry of

Economic Development, designed the public-private joint venture scheme together with the

municipality.

Lastly, contrary to what occurred in many other settings, the water and sanitation infrastructure

belonged to the municipality of Cartagena and not to the State. As a consequence, central government

did not have any legal authority to privatize the company assets. It had to act indirectly, providing

incentives with advices, technical assistance and financial support. At the same time, even if it did not

have much of an institutional capacity, the city of Cartagena had been granted more autonomy through

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a far-reaching decentralization process. Large fiscal decentralization had been designed and was

protected by the 1991 constitution and various laws (law 60 in 1993, law 142 in 1994), thereby

reducing national government‟s discretion in transfer allocation. Therefore, little could be altered

through the mere political will of the central State.

Why cooperation instead of deadlock?

Given the impossibility for any actor to one-sidedly impose its view, a long “war of attrition” might

have been expected. How, then, account for the fairly cooperative process that ensued? Two main

explanations are worth taking into account.

The first one relates to the material incentives provided by the Colombian State and international

donors (most especially the World Bank and the Inter-American Development Bank). The government

was willing from the start to support with non-reimbursable funds provided that there was a structural

change in the delivery of public services. The World Bank and the IDB were willing to grant loans in

exchange for reforms. All of them could also credibly promise to provide technical assistance and

advices.

A second important vector of cooperation has to do with ideational convergences around what might

be termed a “French” conception of water services. Local and national institutional actors agreed that

water and sanitation were a basic public service (which implied affordability for the poor, priority

given to coverage expansion, and possibility for cross-subsidies), as stated in the 1991 constitution and

the 1994 law on domiciliary services. At the same time, they were all sensitive to the fact that current

situation was unsustainable, that previous attempts to reform the public operator had failed, and that

the introduction of the private sector could bring high efficiency gains, thereby helping to build a local

public service.

The Cartagena trade-off: a public-private joint-venture with continuous national and

international inputs

With the 1995 contract a mixed economy company named Acuacar came into force, with the District

(municipality) of Cartagena owning 50% of the shares. Acuacar then signed a 26-year lease contract

with the Municipality of Cartagena for the management of water and sanitation in the city. Acuacar

executive committee includes five members: two representatives of Aguas de Barcelona, two of the

mayor, and one of local private investors. Decision-making for strategic decisions requires agreement

of four members, thereby compelling Aguas de Barcelona and the municipality to agree. In addition, a

management contract was signed between Acuacar and Aguas de Barcelona. Full responsibility for

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new investments still befell the District, which also retained responsibility for pension payment of the

former water company staff. However, this arrangement, while satisfying Aguas de Barcelona, rapidly

proved unsustainable as the District did not have the appropriate resources to fulfill its mission.

Therefore new ad hoc arrangements were designed, with all actors contributing financially. In 1998

and 1999, two important loans were granted, respectively by the IDB (US$ 24, 3 million) and the

World Bank (US$ 85 million) within the framework of a master plan on water and sanitation agreed

upon in 1995. In total, between, 1995 and 2004, US$ 236 million have been invested, US$65 million

or 27% in water supply and US$171 million or 73% in sanitation. The funding chart up to 2004

summarizes the different inputs:

The IDB loan is paid back by Acuacar over time. Some of the World Bank loan is paid back by

Acuacar (US$ 15 million) but most part is repaid by District.

Besides, in order to have a more accurate view of the different inputs, it should be remembered that a

large part of the District income itself comes from fiscal transfers within a fully integrated scheme

named “General Participation System” (GPS) in 2001. En 2005, GPS was contributing to almost half

of the District total budget. Besides, such transfers come with conditionality. As such, out of the US$

95 million that was transferred the same year, a minimum 17% had to be spent in the water and

sanitation sector.

Local water services also benefit indirectly from other national policies, such as cross-subsidies

schemes (estratificación- stratification). Under stratification, Colombian neighborhoods are divided up

in six segments. The three lower income segments (segments 1, 2 and 3, all being domestic users)

must be subsidized: 50% of the rates are subsidized for segment 1, 40% for segment 2, and 15% for

segment 3.

On the other hand, segment 4 pays the economic cost just like the official sector. Segments 5 and 6,

including industrials and businesses, make a 20% contribution.

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This cross-subsidies scheme did a lot to minimize commercial risks for Acuacar. This adds to the facts

that 1) Acuacar pays back its international loans through a share of its operational income, and not a

share of the loan itself, 2) Aguas de Barcelona is allocated a fixed lump-sum within the framework of

the management contract, 3) its initial input is gradually paid back through a reversion fund.

Therefore, risk transfers to the private operator have been very limited in Cartagena.

This resulted in marked performances improvement, as seen in the table below:

Indicators 1994 2008

Water system coverage 67% 99.9%

Sewage system coverage 56% 82.86%

Employees per 1000 connections

(water system)

7.1 2.3

Users with meters 97.8%

48% 99.5%

Water not accounted for

65% 41%

Service continuity

7 hours 24 hours

Source: Pinzon, Luis A., 2002

Poor households have been the prime beneficiaries of these improvements, as 80% of connections

were concentrated on segments 1 and 2 (which make up 61% of the local population), which are the

poorer segments of the population. Besides the water tariff structure in Cartagena does have a strong

pro-poor element. The standing charge for households in the highest (6th) strata is over ten times

greater than that for households in the lowest (1st) strata (Nickson, 2002).

The consolidation of a hybrid scheme

As can be seen, the institutional trajectory of Cartagena water services has been marked by the gradual

consolidation of a highly hybrid arrangement. In contrast to recommendations derived from the “good

governance” literature, responsibilities and jurisdictions constantly overlap. Planning, regulation and

investment funding are shared among various levels according to ad hoc arrangements.

This poses a number of substantial problems: transaction costs are high, information dissemination is

tricky, and some actors bear more risks than others. More specifically, the arrangement can be

undermined by local political instability: the terms of office of the mayor is short - three years - and

not renewable. Besides, corruption scandals made the turn-over even more dizzy: between 1992 and

2008, no less than eight mayors followed one another! Not all mayors had the same quality of

relationship with Aguas de Barcelona top executives.

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Besides, the weakness of national regulation (one body, the SSPD, has about fifty employees to

supervise more than 1500 water operators in urban areas, let alone electricity and telecommunication

services) has only been partially made up by the “internalization” of regulation inside the company

(the District and Aguas de Barcelona having to take decision jointly). If it theoretically allows for

convergence between public and private interests, it is at the cost of transparency. Here probably lies

the key issue for the future: in the case of Cartagena water services, a pragmatic, cooperative multi-

level governance system has allowed for the stabilization of a public-private arrangement and for

impressive improvements of service performances. However, this endogenous institutional change

came at a cost: that of not fully insulating the service from opaque, traditional bribe-seeking decision-

making2.

3. La Paz-El Alto: the local backlash against a top-down privatization

In La Paz-El Alto, a municipally-owned company, the Servicio Autónomo Municipal de Agua Potable

y Alcantarillado (SAMAPA), had been set up in 1972 by the then authoritarian regime. By the mid-

1990s, Samapa operational and financial indicators were far from being satisfactory, though less

critical than those of many operators in the region (such as the EPMC in Cartagena). At the time the

contract was awarded coverage was 87 percent for in-house water connections and 48 percent for

sewer connections. There were 4.9 employees per 1000 connections, and unaccounted for water made

up around 42% of total production (SAMAPA, 1996; Komives & Cowen, 1998). However, these

overall figures concealed large discrepancies between the relatively affluent neighborhoods of La Paz

(especially the centre and the southern area) and poorer neighborhoods of El Alto, where only 50% of

the population had access to pipe water and 31% to sewerage.

This sharp inequality was first due to El Alto demographic boom. The city had leaped from only

11 000 inhabitants in 1950 up to 600 000 in 1997 (rapidly catching up with La Paz), growing at an

average rate of more than 5% annually in the 1990s, especially as the result of the closing of State

mines in the Altiplano. Besides, most newcomers were poor migrants, and the city was spreading fast

horizontally. Therefore universalization of coverage was made more costly, and investment needs

posed a formidable challenge to Samapa.

2 Virtually all interviewees acknowledged that extensive political and economic bargaining continued. Also see.

Navarro-España (2001)

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The privatization process: a strategic alliance between the national and the international level at the

expense of the local level

Although SAMAPA had been borrowing from a variety of money-lenders, the World Bank had been

particularly active in trying to strengthen SAMAPA‟s institutional capacity from the beginning of the

1990s. Among the instruments it used were three major lines of credits: a “social investment fund”

running since 1985, some no-interest loans provided by the International Development Association

(IDA, 2134-BO credit line), and a water and sanitation project focused on large urban areas (2187-BO

credit line). As a result of the structural challenges it faced and of mismanagement, SAMAPA had

contracted debts of about US$ 47 million, over a total capital of US$ 162 million. After some years

spent at trying to corporatize3 the public arrangement, the World Bank conditioned the release of a

future national credit to the introduction of the private sector in the Bolivian capital (Laurie & Crespo,

2007).

However, the World Bank was far from being the only key player, as the administration of the then

president Gonzalo Sanchez de Lozada (1993-1997) was all too willing to push for PSP. It was then

completing a major privatization program under a scheme termed “capitalization”. In 1995 and 1996,

major utility companies were sold (in the electricity, telecommunications and transportation sectors),

as well as petroleum and gas companies. Grown in the United States, Gonzalo Sanchez de Lozada

(nicknamed Goni) was surrounded by a small bunch of technocrats who had previously served him at

his think-tank (the Milenio Foundation), and many of whom were now crowding the Capitalization

Ministry4. This Ministry, whose working language was English, was funded by the World Bank.

Following social neoliberal goals, Goni administration aimed to enhance free market principles and

private sector entrepreneurship while bringing the poorest members of society into the market through

decentralization and multicultural legislation. The concession awarded to a French-led consortium

(Aguas del Illimani) led by Lyonnaise des Eaux (currently part of the Suez group) had therefore a

strong “pro-poor” component (as we shall show later).

However, the Goni administration also considered privatization in a primarily top-down fashion. In

much the same way as decentralization, privatization was paradoxically looked upon as a way to

strengthen the central State political authority. In Sanchez de Lozada‟s words, “[we] were very

conscious of the fact that if you cease power, you get stronger, you get power, in the sense of

increased governability.” (quoted in Grindle, 2000). In line with its predecessor Victor Paz Estenssoro

3 Corporatization is a more encompassing terms than privatization. It refers to the legal and managerial

autonomization of the operator (whether public or private), and its submission to market rules. A corporatized

entity's status includes a hard budget constraint or financial bottom line, which often makes the organization

fully accountable for its financial performance. 4 For an interesting account of the decision-making process under Goni, see: Grindle, Merilee S., Audacious

Reforms. Institutional invention and Democracy in Latin America, The Johns Hopkins University Press, 2000

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(leader of the 1952 national revolution), and while resorting to totally opposite means, Goni was

concerned to assert the Bolivian State authority, thereby stiffening the traditional paradox of a weak

State with strong centralization tendencies (Crabtree, Molina & Whitehead, 2008). Technically and

economically, strengthening the State implied that the poorest sectors had the opportunity to integrate

national market through high-quality and standardized basic services. Institutionally, it translated into

an effort to assert the authority of the sectoral regulatory agency, the Water Superintendency (later to

be named Basic Sanitation Superintendency, -SISAB) while still maintaining a close de facto control

over its activities. It also meant that, contrarily to what was otherwise proclaimed, municipalities could

be bypassed if they were hampering the process of national integration under free-market principles.

The government was comforted in its very “top-down” policy style (see. Richardson & all., 1982) by

the deep weaknesses of the El Alto and La Paz municipalities. Since 1985 mayors had been directly

elected in Bolivia. In 1988, El Alto became an autonomous municipality, under the pressure of its

inhabitants hoping to gain more control over the use of public spending, especially in infrastructure.

However, in this case, decentralization served both to devolve responsibility to El Alto marginal areas

under the guise of autonomy, and to maintain elite space in La Paz and protect political coalitions

(Kohl, 2002). The 1994 Popular Participation law later gave a big push towards the municipalization

of the country through large fiscal transfers, although these transfers were detrimental to the largest

cities, including La Paz and El Alto (Faguet, 2004).

As a result of these reforms, Bolivian major municipalities had not acquired much political legitimacy

by the late 1990s. In La Paz and El Alto, especially, political „capture‟ by local elites only intensified

the traditional patrimonial style of government and pushed political reform and disenchantment to the

fore in the late 1990s. As a matter of fact, only in La Paz and El Alto, more than 10 mayors were

removed from office, many on charges of corruption, between 1988 and 2003 (Mamani, 1997; Arbona

& Kohl, 2004).

In El Alto more specifically, the impression was widespread that the populist-style party Conciencia

de Patria (CONDEPA) that administered the city was heavily corrupt. A 1996 audit of municipal

accounts in El Alto found that receipts for almost 25% of total city spending were missing (Ministerio

de Hacienda, 1996). However, population resentment did not end with the dismissal of Condepa, as

the city hall got sacked and burnt a number of times, especially during the social unrest of 2003.

Therefore, the 1997 privatization was carried out without any participation from a delegitimated local

level. Local social participation did not make up for this lack, as the El Alto Federation of

Neighborhood Committees (FEJUVE) was also marginalized. Political, technical and financial

resources were heavily unbalanced, and State values and norms (e.g. strengthening the authority of the

political center) impeded effective multi-level cooperation.

15

1997-2004: the concession (apparent) stabilization

Consistently with the concession “pro-poor” motivation, objectives set for AISA were ambitious:

„mandate to extend‟ clauses meant that 71 752 new branch pipes in El Alto were expected to be

executed only for the first four years of operation, which practically meant to extend in-house water

connections to virtually all unconnected households within the area service. Level standards (set in a

1992 regulation) were high: metered in-house water and sewer connections were the only acceptable

type of service (as compared for example to unmetered stand posts). As a result, coverage was greatly

expanded during the first five years, and productivity ratios were markedly improved, as shown in the

table below.

Indicators SAMAPA 1996 AISA 2002

Number of employees 640 419

Number of connections (water) 144 475 223 755

Number of connections

(sewerage)

88 408 150 910

Employees per 1000

connections (water system)

4.4 1.9

Employees per 1000

connections (sewerage system)

7.2 2.8

Source: Superintendancia General. Sistema de Regulacion Sectorial. Gestion 1997-2003

In the meantime, in still un-served areas, innovative technical and participatory strategies were set up.

They included users‟ contribution to works (so as to reduce their connection fee) and diversified

partnerships with donors, NGOs and aid agencies. A much commented component of these strategies

was a simplified, less costly “condominial” technical system, already used in some Brazilian cities as

the standard system, and expected to reduce connection fees markedly.

These “pro-poor” specific strategies coupled with ambitious objectives led to La Paz-El Alto

concession being heralded as a best practice case for private sector participation.

However, some problems were already under way. In particular, the weakness of the SISAB with

regard to the transnational company led to an important contract renegotiation in 2001, much at the

advantage of the operator and at the expense of the users. It allowed AISA rate of investment to

drop significantly, from US$ 12.9 million between 1997 and 2001 to about US$ 3.3 million

between 2001 and 2004 (Drees-Gross, 2005). It also contained a sharp increase in connection

16

fees. Besides, the agenda for coverage expansion in the poorest, most remote areas (for which

contracts expansion objectives did not apply formally) was left undecided.

The SISAB also appeared unwilling to regulate AISA under the new water law adopted after the

Cochabamba “water war”5 and much less favorable to private investors. This regulatory capture (a

complex web of information asymmetry, ideological convergences and inter-personal ties) added up to

the top-down privatization process to completely undermine the fiction of a neutral State. On the

contrary, after nearly two decades of neoliberal reforms, the Bolivian State started to lose political

legitimacy at a great pace by appearing totally aligned on market interests at the expanse of its poor

citizens.

However, service was still expanding, and AISA was ranked among the most efficient

company of the country.

2004-2007: the State/local society conflict and the eviction of AISA

At the end of 2004, the El Alto FEJUVE led street protests, asking to cancel the previous rise

of connection fees and speed up coverage expansion. It also accused AISA of extra-profit.

However, although the FEJUVE leaders were originally not contemplating AISA departure,

the conflict soon amplified and radicalized, as it became entangled into a wider rejection of

State legitimacy. This radicalization was helped by the fact that no institution was able to

mediate between the users and the State: municipalities had very little legitimacy, the SISAB

was captured both by the State and by the operator, and AISA, showing no willingness to

negotiate and wanting to stand by the 2001 agreement at any cost, just confirmed its close

alignment with the State.

From this point on, the trajectory of the public-private arrangement became conditioned by

the outcome of a much wider struggle between local society and the State. This helps to

understand why, after just two meetings with AISA, the leaders of the Fejuve decided to

directly confront the State and ask it to break the contract. After much procrastination, the

political struggle finally ended with the departure of AISA on “friendly” terms in January

5 In September 1999, a concession contract was signed in Cochabamba (the third city of the country) with an

American-led Consortium (Aguas del Tunari, led by Bechtel). It was cancelled hardly seven months after, in

April 2000, following massive social unrest, known throughout Bolivia as “the water war”. Contrary to many

expectations, The Cochabamba water war did not diffuse to La Paz El Alto. However, it did have some indirect

impact, as it fostered a wait-and-see attitude from Suez-led AISA with regard to investments, and as

Cochambino activists shared knowledge and expertise with the El Alto Fejuve.

17

2007. On the Bolivian side the agreement was negotiated by the new “water minister” within

the Evo Morales government, former Fejuve leader Abel Mamani.

Therefore, the choice of the Bolivian State to dictate privatization from above came up against

Bolivian political reality: weak institutionalization and little legitimacy of local governments,

insufficient resources at the national level to exert effective regulation and make up for local

shortcomings. It addition, with regard to political values and representations, it came up

against a strong society traditionally defiant of the State, and especially so after two decades

of neoliberal market reforms met with limited success.

In this complicated and uncooperative setting, AISA greed had far-reaching consequences, as

it rapidly locked the company in a wider fight between local society (especially the Fejuve)

and the Bolivian State.

The analysis of the Bolivian water privatization shows that it was part of a wider, long-

standing effort to build the Bolivian State through indirect rules. It is therefore not only one

contract, but a whole neoliberal market-based form of State construction that has failed in

Bolivia somewhere between 2000 and 2005, of which the AISA eviction is nothing but an

episode.

4. Campo Grande: conflictive municipalization under scarce resources

Historically, Brazil differs from Colombia and Bolivia in that, from the 1960s onwards, an

effective centralized water policy was designed and implemented by the Union under the

military regime. As a modernization program from above consistent with the then-dominant

Developmentist policy paradigm, the Plan Nacional de Saneamento (PLANASA) was

primarily concerned with network expansion, geographic cross-subsidies, economies of scale

and institutional capacity. It therefore set up water companies at the level of the States: 27

State-owned water companies (Companhias Estaduais de Saneamento Basico- CESB)

emerged as a result of voluntary agreements with municipalities that temporarily ceded their

constitutional right of service provision to the state authorities in return for an attractive

investment financing package (World Bank, 2001). Over the period 1970-96, loans from the

Unemployment Benefit Fund (FGTS), the main financial instrument of PLANASA, amounted

18

to R$ 15 billion. Between 1970 and 1990, PLANASA expanded coverage from 45% to 95%

for water and 24% to 42% for sanitation among urban residents.

However, with the end of the military regime and priority given to democratization and

municipalization of public policies, PLANASA gradually came to exhaustion during the

second part of the 1980s.

The ambiguities of the legal framework

One of the most prominent features of the Brazilian water governance over the recent period has been

its ambiguities with regards to the allocation of responsibility for service provision. The 1988 Federal

Constitution does not clearly assign responsibility to either municipalities or states. The 1995

concession law (n°8987) challenged the de facto monopoly of the States by compelling the process of

contract renewal with municipalities to be competitive, but it did not settle the ambiguity (Motta,

2004).

The following twelve years (during which the Campo Grande concession came into force) were

marked by regular attempts at the Union level to have a comprehensive water law adopted. Legal

clarification was made a national priority to attract investors, but it came up against powerful vested

interests from the States. It was not until January 2007 that President Luiz Inácio Lula da Silva signed

a new federal water and sanitation law (law 11.445/07 for basic sanitation) that outlines federal

policies in the sector. However, this law still leaves large areas of uncertainties, especially with regard

to provision in large cities.

At the national level, water policy is now placed under the umbrella of the National Secretary for

Environmental Sanitation (NSES), within the Ministry of Cities set up in 2003. However, its role is

fairly limited when it comes to strategic planning, service regulation and funding. The NSES basically

coordinates sector policies, set broad guidelines, provide data and technical assistance. Therefore, the

specific Brazilian context of water governance has kept producing unprecedented wrangling between

national, state, and municipal officials.

The road to privatization: State/municipal competition under scarce resources

At the beginning of the 1990s, the Brazilian political economic backdrop changed dramatically as a

major program of Desestatização (State retrenchment) was conducted by the Union. In the water

sector, priority shifted to utilities self-financing through tariffs and coupled with institutional

flexibility, including the participation of the private sector. In 1992, a Sanitation Sector Modernization

Program was launched with a World Bank funding. The program was part of the structural adjustment

19

policy and aimed at reducing the participation of the Union in the funding of water services. From the

second part of the 1990s, under the presidency of Fernando Henrique Cardoso, investments started to

fall sharply. Between 1996 and 1997, loans provided by the FGTS were halved, from about US$ 300

million to US$ 150 million. Between 1998 and 2002, the Union share of GDP dedicated to water and

sanitation fell from 0.19% down to 0.07%. As a consequence, self-financing became by far the major

source of funding by the utilities. In 2004 it accounted for 51% of all financing, a remarkably high

share by Latin American standards.

A memorandum on Economic Policy addressed to the IMF (13/11/1998) shows the Union

commitment to stimulate private sector participation. The government-owned Caixa

Econômica Federal (the second largest bank of the country) and the National Development

Bank (BNDES) implemented the same year a joint program to stimulate public-private

partnerships in the water sector. However, these efforts were met with relatively little success:

in September 2003, only 40 municipalities had their service delegated to private operators,

representing a population of approximately 6.177.468 inhabitants.

Nonetheless, financial drain on sub-national levels was heightened by the Brazilian Fiscal

Responsibility Law (LRF) passed in May 2000. The LRF stemmed from a concern by the Union to

limit some of the excesses of fiscal federalism. It limited expenditures (including payments to

subcontractors) and public debt contracting at the federal, state, and municipal levels. It was enforced

through strict penalties, including prison terms for public officials who violate its provisions. The

Union‟s move to limit sub-national resources provided a strong pressure for private sector

participation.

In 1979 the State of Mato Grosso had been divided up into a Northern and a Southern State.

The original concession contract granted to the State company was transferred onto the two

subsequent companies including SANESUL, the company of the newly-created State of Mato

Grosso do Sul. As all other CESBs, SANESUL designed cross-subsidies between categories

of users (industrial and commercial subsidizing residential users) and, more importantly,

between the State capital Campo Grande and smaller cities and rural areas.

A number of factors led SANESUL to rethink its operational strategy, starting in 1995. In August

1995, the company's contract with Campo Grande expired and needed being renewed. At the

same time, SANESUL was under pressure both from the Union (as part of a debt renegotiation

agreement with the Treasury and a bridging loan with the Caixa Econômica Federal) and the

World Bank (loans by the BIRF under the Modernization Program of Sanitation Sector of Brazil)

to devolve control of services to individual local authorities, with a view to increasing the

20

attractiveness of concessions to the private sector. However SANESUL resisted this pressure and

instead carried out a wide-ranging restructuring program that helped it classify among the most

efficient State company of the country (Sabbioni, 2007). It was especially reluctant to let of go of

the Campo Grande concession as it represented 44% of its operating revenues.

However, from 1998, the municipality of Campo Grande was decided to take back the control of

the service, although it was well-aware that it would lack the financial and institutional

capacity to face investment needs on its own. Two motivations underlay this decision. On the

one hand, the mayor hoped to get a political gain from stopping subsidizing secondary urban

centers and rural areas, thereby limiting tariff increases. On the other hand, public services

had become a stake in the strong political rivalry opposing the two most prominent political

figures of the State: one, from the Worker party (PT) was the governor of the State. The other

was the mayor of Campo Grande (who has now turned governor). The mayor of Campo

Grande was especially concerned to strengthen the identity of the recently created, fast-

growing “dark city” (cidade morena). Taking back urban services was part of this concern.

As a consequence, and because of the ambiguities of the legal framework, a legal soap

opera ensued, with water services changing hands seven times between 1998 and 2000.

The political struggle ended up with the victory of the municipality which finally took back

the service. However, it had to assume all the debts contracted by SANESUL. To investments

needs estimated to more than 160 US$ million dollars were therefore added more than 200 US$

million dollars in debts, a heavy burden for a municipality with a mere 128 US$ million budget.

Delegating to a private operator therefore appeared as a financial as well as an institutional

necessity.

Complete municipalization and the “learning by mistaking” period

In October 2000 a 30-year, US$ 217 million water and sewage concession was awarded to a

consortium led by Aguas de Barcelona. It started to operate under the name of Aguas

Guariroba. Reflecting a common situation in Brazil, in Campo Grande universal coverage

was almost achieved in drinking water by the end of the 1990s (96%). However, access to

municipal sewerage was dramatically under-developed, as a mere 25% of the population had

access. The traditional saying according to which sewerages are invisible works and are

therefore politically not profitable was verified with particular accuracy in Campo Grande.

21

Conflictive responsibility transfer to the municipality meant that the municipal administration

of Campo Grande was on its own to regulate and carry out strategic planning for the service.

No national regulatory agency exists for water urban services. Besides, as a result of the

transfer, much information had not been passed on from SANESUL to the municipality. As a

consequence, neither the operator nor the municipality had good knowledge of the network

parameters and consumption patterns. The municipality was therefore poorly prepared to

effectively monitor such an experienced operator as Aguas de Barcelona. It tried to do so by

setting up a formally autonomous regulatory agency, the Agência de Regulação dos Serviços

Públicos Delegados de Campo Grande- AGREG.

The concession contract reflected therefore the strong bargaining power of Aguas de

Barcelona. It also reflected the widespread view in the Brazilian “pioneer front” that water is

primarily an economic service. As such the contract did not contain strong pro-poor elements,

except a social tariff that is actually much higher ($ 0.78 for water and sewerage until 20m3)

that what the highest income pay in Cartagena ($ 0.53).

The first five-year period was very hard. Aguas Guariroba started to operate under the

requirements of a 144 US$ investment plan over length of concession. However, it soon turned out

that things were not going on as planned. Aguas Guariroba posted an immediate R$ 1.46 million loss

and began operating a 20% monthly deficit (Hall & Lobina, 2002). At the investment rate stated in

2003-2004, total investment over length of concession would have amounted to a mere US$ 105

million. Facing massive breaches of the contract, the municipality reaction was wavering.

In December 2003 the municipal government finally put Aguas de Guariroba under

administration for 90 days. Investigations found undue costs of around US$ 2 million.

Corruption and malpractice reports filled the local media. As Aguas de Barcelona was

showing no sign of making any substantial effort, the municipality eventually cancelled the

contract in 2005. Agbar had to sell its shares in Aguas de Guariroba to local investors Bertin

group and Equipav for US$ 26 million.

22

Towards the stabilization of a local arrangement?

It is still pretty soon to assess the stability of the current institutional arrangement. The

Bertin/Equipav consortium launched a major investment program in sanitation. The “Sanear

Morena program aims to invest more than US$ 80 million so as to connect 238 000 people to

sewerage. Objectives for 2010 were met in 2008. In 2008, Aguas Guariroba was elected the

most efficient sanitation company with regard to environmental management.

Monitoring by the AGREG is made on a more regular basis, helped by a new cultural

proximity. Information is of better quality since the 2003 investigation. It now looks as if the

arrangement was stabilizing despite the fact that the municipality receives little help from

upper levels of government when it comes to service regulation, planning, additional funding

or technical assistance.

5- Concluding remarks

As this paper tried to show, neoliberal reforms in Latin America did not ultimately lead to

institutional convergence. Some ten or fifteen years after the introduction of market reforms,

one city (La Paz-El Alto) experienced a social backlash that prompted a return to full public

provision (a traditional faire arrangement), whereas another one (Cartagena) stabilized around

a highly hybrid form of supply (a faire avec arrangement) and the third one (Campo Grande),

after some institutional disruption, eventually stuck to a traditional private concession (faire

faire)6. Therefore, political economic changes in Latin America should not be reduced to a

shift away from the Producer State to a Regulatory State, but appear to involve much more

complex and multifaceted dynamics.

In order to account for such discrepant trajectories leading to respectively faire, faire avec and

faire faire arrangements, the politics of contracting out should not be analyzed simply as a

coordination game between a principal (e.g. the municipality) and its agent (e.g. the operator,

whether public or private). Contracting out, rather than being looked upon as an adjustment

process towards an economic optimum, should be viewed primarily as a political trade-off

shaped by actors‟ power (resources) and ideas (that impact the way actors perceive their

interests).

6 This typology is drawn from Schmidt (2009)

23

More specifically, with regard to water services, we focused our analysis on the impact of

multi-level political interactions on public-private institutional trajectories. The underlying

assumption is that, in Latin American water services, no single level of government can

ensure a stable political trade-off by its own. The causal mechanism is therefore the degree to

which resources and ideas of every level hamper or foster cooperation among levels. The

more effective the cooperation, the more likely it will be for the arrangement to stabilize. This

does not mean that multi-level political struggle is the only variable that affects public/private

arrangements, but rather that there is at least a clear causal link between the two that needs

being explored further.

Besides, it should be emphasized that power relations among levels and their tendency to

engage in cooperative vs. conflictive interactions are to a large extent the product of national

histories. The gradual emergence of a multi-level governance in Colombia is rooted in the

country (relative) institutional stability, its far-reaching decentralization that made the local

level a veto player to be reckoned with, and the traditionally weak polarization of its

institutional politics (political contest having been rejected outside the sphere of institutional

politics). The winding road to municipalization in Campo Grande is the product of traditional

Brazilian up-and-down as to which sub-level favor over the other, and of the Union fear of

going “too far” in decentralizing and its concern to limit sub-national policy discretion. The

social backlash in El Alto is a consequence of the structural limits of a “weak State with a

strong Society”, marked by a weak institutionalization of local governments and the capacity

for social organizations to directly challenge national policies. In Bolivia more than

elsewhere, local organizations should be analyzed as a form of local government in its own

right.

Lastly, the difficult stabilization of institutional arrangements in Latin American cities should

not be viewed in “evolutionist” terms, as featuring institutional “laggards” with respect to

cities of advanced political economies. On the contrary, it evidences challenges that are

specific to Latin American polities, politics and policy-making, and shows the way different

political economies in the region try to confront them. Within Latin American political

economies, weak institutionalization, contentious politics and the lack of economic resources

cannot be thought of separately from very contemporary policy-making attributes such as

multi-layered government, contracting-out and participatory arrangements.

24

Table 1: allocation of key responsibilities for private sector options

Increasing private participation

Service

contract

Management

contract

Affermage Lease Concession BOT-type Divesture

Asset ownership Public Public Public Public Private Private/public Private

Capital Investment Public Public Public Public Private Private Private

Commercial risk Public Public Shared Shared Private Private Private

Operation/maintenance Private/public Private Private Private Private Private Private

Contract duration 1-2 years 3-5 years 8-15 years 8-15 years 25-30 years 25-30 years Indefinite

Source: Adapted from Walter Stottman (2000)

25

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