Aguas Del Tunari in Bolivia

Teaching Case: Aguas del Tunari in Bolivia: The Water War
Suzanne von der Porten, 2007
Aguas del Tunari in Bolivia: The Water War

Suzanne von der Porten, B.Sc., MBA September 2007 ABSTRACT
In February and April of 2000, tens of thousands of citizen protesters seized the streets of their home city Cochabamba, Bolivia to protest the privatization of their water and sewer system by Aguas del Tunari, a subsidiary of US-based Bechtel Corporation. Aguas del Tunari had been the sole bidder to buy and operate the citys water system, and won the contract. The price of water to consumers was raised immediately, resulting in protests by the citizens of Cochabamba. This case describes both the economic and moral dilemmas of the privatization of water.
In February and April of 2000, tens of thousands of citizen protesters seized the streets of their home city Cochabamba, Bolivia to protest the privatization of their water and sewer system by Aguas del Tunari (Tunari Waters). The company had been the sole bidder to buy and operate the citys water system, and signed a contract with the government on September 3, 1999. 1 Since the beginning of the private operation of the water system on November 1, 1999, the water bills of patrons rose by anywhere from 35 200%.2,26 Aguas del Tunari, a consortium of companies registered in the Cayman Islands, includes US-based Bechtel Corporation, Abengoa of Spain, and four companies from Bolivia. One of the Bolivian companies is owned by the prominent Bolivian politician Samuel Doria Medina of one of the governing parties.1 Bechtel, with majority interest in the consortium, owns 50% of International Water3, which in turn owns 55% of Aguas del Tunari.4 The 40-year contract with the Bolivian government promises a 15-17% return on investment per year to the company, and guarantees that water rates would increase in accordance with the US Consumer Price Index.1,2 Since privatization, both the quantity of reported water use and rates went up. Water patrons in Cochabamba refuse to pay. Protest has erupted on the grounds of the
monopoly-like contract, unexplained increases in consumer costs, and the confiscation of wells and community built water houses. Poorer communities in Cochabamba that had previously pooled money, resources and labour to built their own water systems were required by law to hand them over to Aguas del Tunari. The collection of rain water, without permission of the superintendent of water to do so, was made illegal.1 It is now late April 2000 and the government of Bolivia must decide what do to: either honor the contract or heed the wishes of the general populace to re-nationalize the water system. The city has been overrun with both citizens protesting over unaffordable prices, as well as violent military opposition to the protests with one person shot dead and 175 injured.5 The city faces a looming water shortage, an ever-growing population, pressure from international lenders as well as Aguas del Tunari to keep the water system in private hands, and international pressure over the moral issue of who should control water. Bolivia in 1999 South Americas poorest country, Bolivia, is landlocked and boasts both Andean peaks and lush jungles. It is divided into nine departamentos, and has a 79% literacy rate.6 Bolivias population (1998) is 7,826,352, which has tripled from 1950 to 1998.7 The country currently has a population growth rate of 2%, and 70% of the population live below the poverty line.6,8 The country is considered to have one of the worst levels of health and mortality in South America, including the lowest life expectancy at birth and the highest infant mortality.9 As a percentage of contribution to GDP (1995), the structure of Bolivias economy is 16.9% agriculture, industry 33.1%, manufacturing 19.0%, and services 50.0%.10 Cochabambas Water Situation Cochabamba, Bolivias third-largest city has approximately 600,000 inhabitants, with about one million in the surrounding area.7 Set in a dry, high-altitude environment, water sources are difficult to come by. Shortages in the city have been a problem for
decades, in part because of abundant agriculture in the area in addition to residential and industrial uses. The Misicuni Project, a plan to bring an added water supply to Cochabamba and surrounding area, has been proposed and re-proposed by three different presidents, has not yet come to fruition.1 The elaborate and expensive plan was to build a dam to store seasonal rain water, along with a tunnel to carry that water through a mountain, and finally an aqueduct bringing water to the city.11,12 The distribution of water as a communal resource in Bolivia dates back to Incan times.1 Like most Latin American countries, both water and sewerage has traditionally been owned and operated by the state.13 On October 29, 1999, in response to loan condition recommendations set by the World Bank, the Bolivian National government passed Law 2029 which eliminated the guarantee of water distribution to rural areas. It was this same Law 2029 that made autonomous community water systems illegal, decreed that people must obtain permission from the superintendent of water to collect rainwater, as well as eliminated the right of local townships to collect water taxes or determine new well locations. 1 Role of the World Bank and International Monetary Fund Poor countries like Bolivia are often the recipients of foreign loans when they are in need of developmental capital. Typically they turn to organizations like the World Bank who often lend money in conjunction with the International Monetary Fund (IMF) and in some cases with regional development banks such as the Inter-American Development Bank. The mission of the World Bank is global poverty reduction and the improvement of living standards in poor countries.14 By the middle of 1998, Bolivia had a total external debt stock of $4.8 billion USD.15 As a part of the renegotiation of this debt, Bolivia signed loans from the World Bank and IMF, accompanied by particular conditions for how the country must manage their countrys policy and spending. These conditions are known as structural adjustment programs (SAPs), and are arguably prepared in a collaborative manner by the country and the lender. The SAPs must be adhered to by the borrowing country to receive their loans.16 On August 25, 1998, the World Bank, IMF, and Bolivian
authorities prepared and released the intended policy framework for the country. This document outlines the intended structural reforms for the country, including:17 1. Intensified social programs with spending on education, rural and social development. 2. Targets for increased spending on health care. 3. Promotion of rural development, primarily farming. 4. Housing and basic services including increased access to drinking water. The document also outlines intended public sector reforms for the Bolivia:17 5. Fiscal decentralization and better coordination among levels of government. 6. The intention to privatize all remaining public enterprises.18 In June 1999, the World Bank issued a recommendation to Bolivia, in the form of a report on the water situation in Cochabamba. They recommended that there be no public subsidization of water service that would hold down increases in the price of water.1 The intention of stopping government subsidization was to allow the price of water to reflect its true market price. According to John Briscoe Senior Water Adviser at the World Bank, there is a cost associated with providing services like water supply or irrigation. As with other services, users should pay for the cost of those services to ensure among other things accountability to users and financial sustainability.19 This advice was heeded in Cochabamba under the new privatization rules, but failed to reflect the peoples ability to afford the water. Since privatization, water bills have skyrocketed by as much as 35% to 200%, in one example $14.75 to $21.96 USD per month (almost 50% increase).20 Such increases are unaffordable to urban and rural Cochabamban families where the minimum wage is $41 USD per month. Rate Hikes and the Contract Significant rate increases have caused alarm among inhabitants of Cochabamba, and is one of the many factors that has led to the en masse protests. Both the local and international communities have called the rate hikes into question. Were they reasonable
hikes to expand and provide better water service, or did they unnecessarily gouge an already poor population? According to the Bechtel Corporation, it was the governments demands that forced them to charge higher water rates than the tariff structure they would have used. They claim that the governments negotiating committee (1) insisted that the Misicuni dam be built in the first two years of the contract, (2) wanted Aguas del Tunari to pay the debts of the current government-owned water company SEMAPA21, (3) insisted that the consortium agree to construct a treatment plant and (4) that Aguas del Tunari pay for existing SEMAPA assets. According to Bechtel, the Aguas del Tunari consortium insisted on a progressive rate structure which places smaller rate increases on the poor (+10%), and would increase more substantially for high-volume users (+106%).
11
(See Appendix A for the rate structure used by Aguas del Tunari. See Appendix B
for the standard rate structure used by SEMAPA in Cochabamba. See Appendix C for an analysis of rate increases derived from residential water invoices.) Many Cochabamban families said that although they have not changed their consumption in those few months, their water bills have indicated that they were using significantly more water.1,20 Some water bills indicated that consumption has increased from 5 cubic meters to 20 cubic meters per person in a month.1 This aspect is addressed by Bechtel in the Protest section of their explanation of the events during the Cochabamba Water War:
By this time [date/time not indicated], many people accustomed to using every ounce of water that arrived from the municipal water utility found themselves using more as a result of increased supply and availability. Thus, although water rates had not changed dramatically for most users, the change in consumption resulted in substantially higher bills for many users.22
An additional aspect that has fueled the fire of public discontentment has been the way in which the contract was negotiated. The contract between Aguas del Tunari and the government of Cochabamba was signed on September 3, 1999, and came into effect on November 1, 1999 without public input, and was set up as a monopoly on the water market in the city. The contract was accused of being monopoly-like on several accounts. Aguas del Tunari was the only bidder on the Cochabamba water system, and won the contract without competition. Typically, multiple bidders allow the government to choose the company that is able to provide the best service at the lowest cost. After winning the
contract, a clause was written in that making it so that the contract itself superseded any other contract, law, or decree.23 The contract was written as a 40-year lease on Cochabambas water and sewerage system.8 Another aspect of the contract was the dollarization of water bills. This meant that people still would pay in their local currency, bolivianos, but if the boliviano dropped in value relative to the US dollar, patrons would have to make up the difference. The contract guaranteed the Aguas del Tunari an average 16% return on investment regardless of service or quality.1 The consortium ultimately set water tariffs at the price that they deemed necessary in order to receive financing from both national and international banks.11 Economics of Privatization Pros Governments often privatize national industries with the belief that it will make them better or more efficient. This improved effectiveness or organization can take the form of one of the following:24 1. Increased efficiency due to the fact that private companies have an incentive to operate more efficiently for more profits. Driven by the market, a private company would look for the least cost per unit of service provided. 2. Private companies may improve service. Since a private company is driven by profit, they have an incentive to add more people to their customer base. In the case of water, expanding the catchments area of piped-water users would increase potential profits, where a government-managed company may lack incentives to expand. 3. Private companies are assumed to have an incentive to innovate. This means that profit-motive may bring them the motivation to come up with improved service, technology, or level of quality. 4. Governments sometimes look to privatize industries when they are low on capital, and want to upgrade an aging system like water/sewerage. Private companies
tend to have a better borrowing capacity and may have a better chance of raising capital via loans. 5. Incentive for conservation. Forcing water users to pay the price of treating and delivering water can cause them to consider the relative cost of using more water, thus creating an incentive for customers to conserve water usage.26 Cons In a market economy, certain basic conditions must be in place for the market to efficiently set prices in a manner that is in the interest of the public. One is that markets must be competitive, that is, have more than one company selling a product or service to avoid the high prices and economic inefficiency associated with monopolies.25 Water distribution systems are unique in that they create a natural monopoly. It would be inefficient to have two competing water distribution systems in a single city, since this would require putting, redundantly, two pipe systems side by side to service the same areas, thus making it a natural monopoly. Usually run by the government, the water rates are then set by one or more departments or committees. When water is owned, operated and monopolized by a private company, tariffs must still be set and monitored by government since companies may have an incentive to raise rates for profit. Some countries may have a greater capacity for implementing effective forums or committees to regulate water rates increases. Another basic condition of market economies is the internalization of costs. This means that producers (companies) must internalize all costs and pass them on to consumers in the price of the product/service. (In turn, competition controls what percentages of these costs are passed on to consumers.) When privately-owned enterprise is an unchecked monopoly, or owns a significant percentage of the market share, there is an incentive to externalize costs. This point begs the question of whether a state-run company would be less likely to pass on costs directly to consumers. Other arguments against privatization of water include the following: 1. Legally, corporations must prioritize the interests of their shareholders over the interests of patrons/consumers and other stakeholders, in this case the
citizens of Cochabamba. This could potentially force the profitability of the company to supersede the importance of quality and affordable water being distributed to the populace. 2. As a limited resource, the quality and availability of water is affected by the actions of all users, in terms of both quantity used and contamination. To allocate its use to all users via the market system and the use of resource rights, contracts with all holders of water rights must be written in order for that system to work. The transaction costs of actually doing this would be prohibitive, and therefore inherently inefficient.26 3. Water, unlike many other commodities, is necessary to all life. If it is owned, or in the private hands of individuals or corporations, this presents a moral dilemma. What if water is too expensive for the poor? Should people have to pay for water? Is access to water a human right? People often view water differently than other resources since it is imminently essential to life.26 4. Since water is traditionally a textbook example of a public good,27 water is unlikely to ever represent a real market. To qualify as a public good, a resource must be indivisible (the good cannot be divided up so as to exclude other potential customers), as well as be non-rival (the consumption of the resource by one person does not prevent the consumption by another). In a real market, users are able to negotiate the price of water via users shopping for the lowest cost supplier of water, and providers seeking out the highest willingness to pay for water. Since, as a public good, a water market could therefore not be efficient via market forces, prices would simply be determined at the administrative/managerial level of the private company.26 Without a regulatory body, monopoly-set prices are inherently inefficient since they produce less quantity than the market demands, and at a higher price.
Decision Time for the Bolivian Government Amid protests, international pressure, stalled corporate water operations and moral dilemmas, the Bolivian government must make a decision about the water crisis. Should they hold strong, change the laws, revise the contract or revoke the contract with Aguas del Tunari? The government and country are faced with several short- and longterm risks. For instance, if they chose to cancel the contract, they may be sued by the consortium, and face a trial with the World Bank ICSID (International Centre for Settlement of Investment Disputes) over lost profits. Dishonoring the contract could also discourage future private investment in Bolivia by foreign banks and corporations looking for a secure investment. On the other hand, if the contract is upheld and the water continues to be run privately, the government stands to face potentially escalating civil unrest and discontent. They face pressure from the international community over the moral question of the ownership of a vital resource. What is the best course of action?
Appendix A: An Abstract of the Residential Water Tariffs used by Aguas del Tunari28 Consumer Category Range of monthly consumption (in cubic meters) 1 to 12 13 to 15 1 to 12 13 to 16 1 to 12 13 to 25 1 to 12 13 to 25 26 to 50 Range of monthly invoice (Bolivianos) 1999 (BEFORE) 10.5 11 to 12 18.5 19.5 to 22.0 32.5 33.5 to 46 52.5 54 to 69 71.5 to 104 Range of monthly invoice (Bolivianos) January 2000 (AFTER) 10.8 11.8 to 13.6 18.2 19.9 to 25.1 29.1 31.5 to 59.8 51.9 55 to 92.3 95.7 to 175.8 Difference in month invoice (Bolivianos) Range in % +2.9% +7.3 to +13.3% -1.6% +2.1 to 14.1% -10.5% -6 to +30% -1.1% +1.9 to +33.8% +33.8 to +69%
Residential 1 Empty Plots with connection Residential 2 Poor Housing Residential 3 Economy Residential 4 Luxury
Notes: The sources of all rate information provided by Bechtel are not indicated in the publication from which this appendix was sourced. R1: 4% of all customers, of which 99% consume 12 cubic meters or less. R2: 29.6% of all customers, or which 86% consume between 12 and 16 cubic meters. R3: 30.3% of all customers, of which 80% consumer between 12 and 21 cubic meters. R4: 16.5% of all customers, with a wide range of consumption. Tariffs are in Bolivianos (6 Bolivianos to 1 USD). Commercial and Industrial Rates not included making up the additional 20% of the customer base.
Appendix B: Water Rate Structure used by SEMAPA (2007)12 Customer Category Residential 1 (one tap) Residential 2 (poor) Residential 3 (middle class) Residential 4 (2 floors or more) Commercial 1 (e.g. Restaurants) Commercial 2 Industrial (e.g. Factories) Cost per 12m3 of water in Bolivianos 15.50 28.00 50.50 82.50 117.00 136.00 105.50
Notes: Prices not adjusted for inflation. The criterion for how household incomes were categorized was not provided. An average household in Cochabamba uses 12m3 per month.
Appendix C: Increase in Water Bill Prices According to the Democracy Centre29 THE FACTS In response to Bechtels claims, SEMAPA ran a computer analysis on water rates, using actual rate figures for Bechtels company, Aguas del Tunari. The analysis used actual water consumption figures for April to December 2001, and calculated two sets of water bills. The first set uses the rates in effect before Bechtel took over and the second set calculates water bills using the actual rate increases imposed by Bechtels company in January 2000. Analyzing the data in this way allows for a clean comparison of water bills based on the exact same levels of water consumption, not increased use as Bechtel claims.29
WATER BILLS TOTAL BY USER CATEGORY SEMAPA VS. BECHTEL (AGUAS DEL TUNARI) 29
USER CATEGORY
INCREASE $ (%)
(R1) Empty land (R2) The very poor (R3) The poor (R4) Middle class + Commercial users TOTAL
$44,191 $762,740 $1,415,454 $1,363,547 $1,531,530 $5,117,462
$64,854 $1,092,308 $1,976,697 $2,145,621 $2,440,446 $7,719,926
$20,663 (47%) $329,568 (43%) $561,243 (40%) $782,074 (57%) $908,916 (59%) $2,602,464 (51%)
(Source: SEMAPA computer records) (Methodology: SEMAPA used its actual billing records for April-December 2001 for water use and charges and applied the rate hikes imposed by Aguas del Tunari in 2000 based on the same level of water consumption per customer. The water rates charged by SEMAPA during this time are the same used prior to Aguas Del Tunaris price hikes.)29
Endnotes
1
Olivera, Oscar. (2004). Cochabamba! Water War in Bolivia. Cambridge, Massachusetts: South End Press. 2 Leasing the Rain. (2002). Frontline. PBS. [Video recording]. 3 Bechtel Enterprises Holdings, Inc. and Edison S.p.A. has 50 percent interest in International Water Limited (IWL), development services company owned by Bechtel Enterprises. Retrieved September 11, 2007 from http://www.bechtel.com/newsarticles/162.asp. 4 Bechtel Corporation. (2005). Bechtel Perspective on the Aguas del Tunari Water Concession in Cochabamba, Bolivia, Retrieved June 25, 2007 from http://www.bechtel.com/newsarticles/65.asp. 5 Multinational Monitor. (2000). The Fight for Water and Democracy: An Interview with Oscar Olivera. Retrieved on August 15, 2007 from http://multinationalmonitor.org/mm2000/00june/interview.html. 6 Reed, John M. Population Trends: Bolivia . (1998) U.S. Department of Commerce. Retrieved June 25, 2007 from www.census.gov.ipc/prod/ib-9801.pdf. 7 World Factbook. (1998). Central Intelligence Agency . Retrieved June 26, 2007 from http://www.umsl.edu/services/govdocs/wofact98/35.htm. 8 Leasing the Rain. (2002). Frontline. PBS. [Video recording]. 9 Reed, John M. (1998). Population Trends: Bolivia . U.S. Department of Commerce. Retrieved July 1, 2007 from www.census.gov.ipc/prod/ib-9801.pdf, p.3. 10 World Bank Statistics. (2006). Bolivia at a Glance. Retrieved July 1, 2007 from http://devdata.worldbank.org/AAG/bol_aag.pdf. 11 Bechtel Corporation. (2005). Cochabamba and the Aguas del Tunari Consortium. Retrieved August 10, 2007 from http://www.bechtel.com/newsarticles/65.asp. 12 von der Porten, Suzanne. (2007). Interview. [Interview with Rodolfo Garcia, Head of Medidores Department, SEMAPA, Cochabamba, Bolivia, May 10, 2007]. 13 De Royere, Alexandra and Wells, Louis, Aguas Argentinas: Settling a Dispute, Harvard Business School, October 30, 2006. 14 The World Bank. (2007). About Us. Retrieved June 20, 2007 from http://www.worldbank.org. 15 European Network on Debt & Development. (2006). Breaking the Chains of Debt. Retrieved on August 15, 2007 from http://www.eurodad.org/whatsnew/articles.aspx?id=354. 16 Stiglitz, Joseph, E. (2002). Globalization and Its Discontents. New York: W.W. Norton & Company. 17 International Monetary Fund. (1998) Bolivia Enhanced Structural Adjustment Facility Policy Framework Paper, 19982001. Retrieved July 10, 2007 from http://www.imf.org/external/NP/PFP/Bolivia/INDEX.HTM. 18 International Monetary Fund. (1998) Bolivia Enhanced Structural Adjustment Facility Policy Framework Paper, 19982001, http://www.imf.org/external/NP/PFP/Bolivia/INDEX.HTM, p.2. 19 UNESCO Courier. (1999). Who Pays the Piper? Who Calls the Tune? Retrieved on June 20, 2007 from http://www.unesco.org/courier/1999_02/uk/dossier/txt21.htm. p. 1. 20 Democracy Centre. (2002). Bechtel vs. Bolivia, Cochabambas Water Bills from Bechtel. Retrieved June 25, 2007 from www.democracyctr.org/bechtel/waterbills/index.htm. 21 SEMAPA, or Servicio Municipal de Agua Potable y Alcantarillado was the existing municipal water company. 22 Bechtel Corporation. (2005) Cochabamba and the Aguas del Tunari Consortium. Retrieved June 24, 2007 from http://www.bechtel.com/newsarticles/65.asp, page 4. 23 Olivera, Oscar. (2004). Cochabamba! Water War in Bolivia. Cambridge, Massachusetts: South End Press. p.10 24 von der Porten, Suzanne. (2007). Interview. [Interview with Dewees, Don, Environmental Economics Professor, Economics Department, University of Toronto, May 30, 2007]. 25 Korten, David C. (2001). When Corporations Rule the World. San Francisco: Kumarian Press, Inc. and Berrett-Koehler Publishers Inc. 2nd Edition. 26 Dellapenna, Joseph W. (2000). The Importance of Getting Names Right: The Myth of Markets for Water. William and Mary Environmental Law and Policy Review, Vol. 25, p. 317-377.
27
Chapman, Duane. (2000). Environmental Economics: Theory, Application and Policy. Massachusetts: Addison-Wesley. 28 Bechtel Corporation. (2005) Cochabamba and the Aguas del Tunari Consortium. Retrieved June 21, 2007 from http://www.bechtel.com/newsarticles/65.asp, page 6. 29 Democracy Centre. (2002). Bechtel vs. Bolivia, Cochabambas Water Bills from Bechtel. Retrieved June 25, 2007 from http://democracyctr.org/bolivia/investigations/water/waterbills-global.htm.
This case was prepared from published sources and is intended to be used as the basis for class discussion rather than to illustrate the effective or ineffective of handling of a management situation.

Aguas Del Tunari in Bolivia

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Teaching Case: Aguas del Tunari in Bolivia: The Water War

Suzanne von der Porten, 2007