Reducing regulatory barriers to private - sector participation in Latin America's water and sanitation services

The lack of an appropriate regulatory environment is a principal factor behind inadequate water and sanitation services in many parts of Latin America. Many governments recognize the need to improve cost recovery and accountability in services - and increasingly see private sector participation as a tool for improving efficiency and attracting commercial sources of investment finance. Consultants interviewed representatives of private companies that recently contended for contracts to provide water and sanitation services in four Latin American cities (Buenos Aires, Caracas, Mexico City, and Santiago). These private operators identify the regulatory conditions they look for deciding whether to participate in a bid. On the basis of the interviews, the authors identified nine conditions. (1) Specify key terms and conditions of regulation in the contract, leaving little discretionary power to the regulating authority. In particular, specify the key aspects of regulation (such as price, quantity, and quality) in the contract. (2) Spell out credible procedures for the fair resolution of disagreements about contractual or regulatory matters. (3) Carefully specify credible technical objectives which the contractor will be expected to achieve under the contract. (4) See that government tariff policies support the principle of cost recovery for water services - and that tariff adjustment formulas adequately reflect changes in costs, inflation, and the exchange rate. (5) If historical collection rates do not indicate consumers'willingness to pay for services such as tariffs that reflect the cost of service, allow an adequate period of time to phase in higher tariffs - and give the operator adequate protection from nonpayers (either the right to cut off service or recourse to another source of payment). (6) Review public works law, contract law, and accounting practices and, if necessary, amend them in advance to ensure that they accommodate and protect any long-term investments foreseen under build-own-transfer or concession-type arrangements. (7) Eliminate unnecessary and bureaucratic administrative requirements that make bidding expensive. (8) Make a contract and expected profits big enough to warrant the high fixed cost of bidding. (9) Provide the education and outreach needed to inform consumers and secure the support of labor interests. In addition, the firms interviewed said that host countries would be better able to attract private-sector providers if they: (a) used reputable outside technical, legal, and financial advisors; (b) allowed local and foreign banks that finance investments to review and comment on proposed contracts and participate in negotiations; and (c) reduced the cost of bidding for small contracts.