Go with the flow: Improving water supplies and realigning subsidies are key to keeping pace with growth

Water problems made the headlines in Peru in early 2012 when local protests halted progress on a major mining project in the northern city of Cajamarca. More than 2000 locals gathered to voice their concern that the new mine, owned primarily by the US-based Newmont Mining, would pollute the water supply and negatively affect a local aquifer. While protests have since calmed, Peru’s water issues remain in the spotlight.

While, as a whole, Peru has an abundant supply of water, most of it is in the interior of the country in the Amazon basin, far away from where the majority of Peruvians live on the dry and arid coastline. Lima, the capital, is the second-largest desert city in the world, after Cairo. However, the Rímac River, Lima’s primary water source, flows at only 29 cu metres per second (cm/s), compared to the Nile’s 2830 cm/s.

Most Latin American urban centres have 24-hour access to a water supply, but Lima is limited to 21 hours per day. The shortage is exacerbated by the city’s rapid growth – far too fast for infrastructure development to keep pace. Rural areas also suffer from shortages. A 2007 study by the National Statistics and Information Technology Institute and the National Register of Municipalities revealed that of the country’s 1628 municipalities, half did not have access to a continuous water supply. In total, around one-third of the population lacks access to either potable water or sanitation services. There is thus a slew of activity in the sector to try to balance out supply and demand.

REFORM: The national water supply is handled by a network of 50 water and sewer service operators (Empresa Prestadora de Servicios de Saneamiento, EPS), which can be public, private or public-private partnerships. Reforming the way they operate is part of the supply solution, although there is no universal agreement on exactly how to do this. Santiago Alvarado, the national director of sanitation for the Ministry of Housing, Construction and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento, MHCS), told OBG there has to be more scale and more autonomy among the EPS, which are currently regulated by the National Superintendency of Sanitation Services ( Superintendencia Nacional de Servicios de Saneamiento, SUNASS). Whatever the details of the solution to distribution, it is clear that the water network needs funding to repair infrastructure and expand coverage.

TARIFF CHANGES: Integral to increasing the availability of funds to the utilities sector is an increase in tariffs. According to Polo Aguero, an engineer and CEO of SEDAPAL (the EPS that covers Lima and surrounding areas), 1 cu metre of water in Peru costs around $0.80, making it the cheapest water service in Latin America. While tariffs in Lima were scheduled to increase by 2.3%, or an average of PEN0.25 ($0.09), between March and April 2012, this will hardly be enough to support efforts to bring water infrastructure up to date. Rather, a reform of the entire tariff system is in order, according to SUNASS, which approved a restructuring of charges in August 2011.

The distribution of subsidies seems to be the most pressing issue. Under the current system, subsidies are rewarded both excessively and inefficiently, with 90% of SEDAPAL customers receiving water and sanitation services at a subsidised price. This is the result of a consumption-based subsidy policy in which customers that use less water can buy it at a cheaper price. This practice is based on the faulty logic that poorer families tend to consume less water. The new tariff system, which was approved by SUNASS, will replace consumption-based subsidies with income-based ones. Every EPS will be required to sort their clients into one of three groups – very poor, poor and not poor – as determined by the System of Home Focalisation. Families in the first two categories will receive a subsidy on the bottom tier consumption, which covers the minimum amount of water needed to provide adequate water and sanitation services to a family of five, as determined by the World Health Organisation.

Initially, each EPS was given just six months to make the switch to the new tariff system, but in light of a lengthy implementation process, this deadline appears to have been extended without a specific target date. The Ministry of Economy and Finance (Ministerio de Economía y Finanza, MEF) and Ministry of Social Inclusion will first have to cooperate on organising a survey of all current EPS customers to determine their income levels. This data will then be integrated into the EPS billing systems. SEDAPAL is due to run the first pilot of the new tariff system in 2013. EMFAPA, the EPS responsible for the Tumbes region, is also likely to be part of the pilot phase. Leaders hope the new tariff system will result in a cross-subsidy that charges more to those that can afford to pay to support minimal consumption for those that cannot.

PLUGGING THE LEAKS: Another important component of boosting system revenue is repairing ailing water management infrastructure. Aguero told OBG that by end-2011, around 34.7% of water that had left the system was not paid for. The goal, according to Alvarado, is to reduce this amount to around 20-25%. Repairing outdated water mains and pipes, as well as installing new meters will require each EPS to invest heavily, which will be difficult in light of the limit on debt that they are allowed to access in a given year. For example, SEDAPAL needs around $2.5bn to fund repairs to the network; however, the MEF limits EPS loans to $1.5bn annually.

PRIVATISATION: Leaders from the private sector and some lawmakers argue that the best solution is total privatisation of all EPS. There are a number of reasons this proposal is not likely to be implemented, however. First, in their current state the providers are not profitable, so finding interested investors could present a challenge. Second, modernisation needs would require the private owner of an EPS to make significant up-front investments to improve the network infrastructure. A private operator would likely want to recoup these investment costs as soon as possible, which could lead to a spike in tariffs that would be unpopular. For the moment, Alvarado told OBG that the MHCS believes “a public company with good management that enjoys economies of scale could also be a solution.”

NEW PROJECTS: While privatisation may not be an option, concession agreements to operate the EPS are. ProInversión, a government agency that promotes investment, plans on awarding concession agreements for the operation of 16 SEDAPAL residual water treatment plants. As of February 2012, there were six interested bidders from Spain, Mexico, Portugal and Peru. ProInversión’s committee on Sanitation and Irrigation Projects (Pro Agua) planned to have the final version of the concession contracts completed by July 25, 2012.

The Chira residual water treatment plant is another important project taking place in Lima. The Chira consortium, formed by Acciona Agua from Spain, and Graña y Montero from Peru, was awarded a concession agreement in November 2010, which granted them the right to construct the plant and treat around 25% of Lima’s residual water supply. The plant is scheduled to begin operations in early 2014. Outside Lima, ProInversión is evaluating the potential for a concession agreement in Pucallpa, located near the banks of the Amazon River. This project would be aimed at improving and extending coverage of sanitation services. As of February 2012, the Pucallpa project was still in the early stages.

GOVERNMENT PROGRAMMES: In addition to these collaborations with the private sector, there are also several government programmes aimed at improving Peru’s water situation. Agua Para Todos (“Water for Everyone”) is a programme administered by the central government, aimed at promoting investment in the sector. At the time of writing, however, Agua Para Todos was facing charges of corruption. René Cornejo, the minister of housing, construction and sanitation, told local press that several irregularities had been discovered in the programme, including projects that were left incomplete, exorbitant costs and work performed by outside contractors that was not permitted under the programme’s guidelines.

The National Programme for Rural Water and Sanitation is essentially a rural version of Agua Para Todos. The organisation, which is also managed by the central government, engages in a variety of water-related projects in rural areas. It has completed 311 projects in 17 regions, serving 162,428 people. In 2012 the group has targeted increasing potable water coverage in rural areas from 39% to 43% and sanitation coverage from 21% to 26%.

CLIMATIC CHALLENGES: According to Alvarado, “Other countries have found ways to profitably operate water delivery systems. Peru must do the same.” What may make this effort more of a challenge, however, are dramatic climatic changes that create mounting pressure on Peru’s water resources.

Heavy flooding in the interior of the country in early 2012 forced leaders at the MHCS to recognise the inadequacies of the current sanitation systems. On the coast, there is the exact opposite problem, as the Rímac River’s low season is showing levels 20% down in recent years. As Peru’s lawmakers struggle to devise a solution to the water dilemma, the environment will not wait.