A tale of two cities

Introduction

BOGOTA, Colombia — Residents of the low-lying areas of Bogotá used to perform a rather strange ritual before going to work.

They would dress in old, ragged clothes and rubber boots and wade through the flooded and muddy streets of their neighborhoods until they reached friends’ homes on dry land, where they would change into their suits and dresses for work.

The cause of this rush-hour costume change was too few drainage sewers. What few sewers existed in those neighborhoods often backed up because the pipes were below the level of the Bogotá River.

“Many times I could not go to work because I had to stay home and help my family dry the flooded house,” said Hernando Contreras, a member of the Local Administration Board of Bosa, a neighborhood close to the river. “In the last year, we have not seen this problem anymore.”

Many who lived in mountaintop communities surrounding the city did not fare much better. They had no access to tap water and had to collect rainwater in buckets and pans.

Bogotá is a fast-growing city of 7 million people spread across a broad plateau, the Sabana de Bogotá, which sweeps up the forested slopes of the Andes, 2,600 meters (8,500 feet) above sea level. High forest-green mountains, covered in part by native woods, frame the Sabana. The Colombian capital gets most of its water from tropical highlands about 4,000 meters (13,000 feet) above sea level, which act as a natural sponge, sucking moisture out of the clouds and mists — a unique ecosystem called a páramo. The water drains to rivers and lakes and from these is channeled down into the city.

Each year, the city’s population grows by about 180,000, including people seeking jobs or refuge from war-torn rural areas. Many settle in ever-expanding slum areas on the southeastern slopes of the sprawling metropolis, sometimes on land as many as 400 meters (1300 feet) higher than Bogotá. Others invade the flatlands to the west, areas below the level of the river that have no access to public services.

For the public utility, keeping pace with such rapid and disorderly growth and meeting the difficult challenges posed by a high-altitude city has been costly.

By 1993, Bogotá’s sewer and water company, the Empresa de Acueducto y Alcantarillado de Bogotá (or EAAB), was practically bankrupt. Staffed with political cronies who often changed with each new government, it didn’t have the professional management needed to run a large utility. The utility was also crippled by union featherbedding and contracts it couldn’t afford. Hundreds of other water utilities across Colombia and Latin America suffered from similar problems. So in the early 1990s, the World Bank began recommending privatization as the only solution to bad public management. The most alluring argument was that privatization would provide easy access to private capital.

In 1994, Colombia drafted the Public Services Law, by which private operators or community organizations could run public utilities. The government also began lowering subsidies to the poor to make Colombia’s utilities more viable.

What happened next rattled the foundations of World Bank policy and challenged the privatization mantra that only big water multinationals had the expertise and capital to deliver clean drinking water efficiently and at affordable prices. In the conviction that water belongs to the people, the city of Bogotá bucked the privatization trend, refused World Bank money and transformed its public utility into the most successful in Colombia.

But in Colombia, Bogotá, which had elected politicians determined to reform the city’s administration, is rather unique. Cartagena, a city of 870,000 on the Caribbean coast, was the first to privatize its water, followed by other large cities such as Barranquilla, with 1.2 million residents, and smaller ones like Santa Marta, Palmira, Tunja, Cartago and Monteria. All of these cities have signed concession contracts with private firms run by multinational water companies. About 50 towns have signed contracts with private national companies.

Cartagena privatized its municipal water company at the end of 1994, with the assistance of the World Bank, which not only structured the deal but helped fund the process.

“Following many years of chronic inefficiency, political interference and poor quality of service, the Mayor of Cartagena decided to liquidate EPD, the public municipal water and sewerage utility of Cartagena,” according to a September 2001 report by the World Bank, appraising a proposed $40 million loan to Colombia for water reform.

The Spanish company Aguas de Barcelona, a partially owned subsidiary of the French water giant Suez, won the 20-year contract and held 44.81 percent of the newly formed company, called Aguas de Cartagena, or Acuacar. The municipal district of Cartagena owned 50 percent of the shares, and 5.19 percent were held by local private shareholders.

It didn’t take long for Acuacar to turn a profit.

A local watchdog group, called the Honest Cartagena Corporation, bought shares in Acuacar at the outset in order to have an insider’s view of the company and to assure there were no “dirty games,” said director William J. Dau.

Acuacar started with only $4 million in capital — $2.4 million of that invested by the Spanish company. The district of Cartagena was obligated to finance expansion of the water and wastewater systems, under terms of the contract.

Dau noted that, within six years, Acuacar’s reports to shareholders showed the Spanish company had recovered its entire investment. Shares valued at 10,000 pesos ($12) in 1994 were worth 60,683 pesos ($22) by December 2002, according to Acuacar general manager John Montoya.

The company also improved the waterworks by dramatically expanding the coverage and improving the reliability of the service.

Cartagena’s water privatization effort, however, soon became immersed in allegations of contract irregularities and a lack of transparency. The controversy also washed over the World Bank, which was a major lender to Cartagena’s privately operated water utility, providing $85 million — the largest share of the company’s financing — from 1998 to 2000 for various expansion programs.

The World Bank’s Department of Institutional Integrity and attorneys general in Cartagena and Bogotá are investigating the allegations.

The road not taken

Bogotá decided to take a different route. In the late 1990s, Colombia’s capital underwent a political revolution, with voters electing new independent and progressive governments. Against World Bank advice, the current and previous mayors of Bogotá, Enrique Peñalosa (1998-2000) and Antanas Mockus (2001-2003), decided the public’s interest would be better served by strengthening the city’s water and sewerage company, the EAAB, rather than by privatizing it.

The EAAB has become the most successful utility in Colombia. The country’s National Planning Department rated it in 2002 as the best utility in Colombia in providing water and sewerage coverage. Its rating of 78.37 out-performed all the other 148 utilities in Colombia. Second was another public utility, EPM of Medellin, Colombia’s second-largest city; a small utility in Girardota, operated by a private Colombian firm, was third; and Acuacar of Cartagena was a distant fourth.

The Bogotá utility stands as an example of a crippled utility that turned itself around. In 1993, 78 percent of the people of Bogotá had clean drinking water and 70.8 percent had sewers. By the end of 2001, 95.2 percent had water services and 86.7 percent had sewers. In just eight years, despite massive migration, war and other violence, Bogotá reduced by 75 percent the number of households without running water and those without sanitation by more than half, according to the utility’s 2001 annual report.

The EAAB’s success came despite continued pressure to privatize from the World Bank. In August 1998, utility officials and Bogotá’s then-mayor, Enrique Peñalosa, met in Washington with World Bank officials to discuss new credit to finance expansion plans. Representing the Bank were Krishna Challa, director of the financial division, and Thakoor Persaud, in charge of the Colombian projects.

According to Carlos Sandoval, then finance secretary of Bogotá who was present at the meeting, the bank’s officials explained that their policy was to approve new loans to those water utilities that dismantled subsidies and privatized.

Humberto Triana, the EAAB’s head of planning who also attended the meeting, said bank officials argued that private companies were more efficient than public companies, which they said were slower and more cumbersome in making decisions. They also said it was easier for poor countries to get fresh capital for such projects from the private sector. The bank officials added that tendering contracts to private firms to run water systems would enhance competition and lower costs.

“[Mayor Peñalosa] said he firmly believed that the state had an obligation to the inhabitants of the shanty towns to offer them water and sanitary services and that no private company would accomplish this task,” Sandoval recalled.

“The discussion was tough,” Peñalosa told ICIJ. “The people we talked to in the bank clearly put pressure on us to privatize the EAAB.”

Peñalosa said in the meeting that if the World Bank continued to place so many conditions on new credits the utility would find alternative sources. And so it did. EAAB has not signed any new loans with the bank since the meeting. In 1996 it had signed a $145 million credit with the World Bank.

Still, the World Bank insists EAAB should be privatized. Menahem Libhaber, the World Bank’s chief water and sanitation engineer in Latin America, told ICIJ that while he concedes EAAB is a “very good company, very highly respected,” it needs to be privatized to reduce costs.

“The salaries are huge, the employees get a lot of benefits — health and education — which is OK. I’m for socialism. But this is very expensive — people cannot pay the water bill,” he said. “The company needs private sector involvement.”

Despite Colombia’s economic recession, which began in 1999, 91 percent of customers pay on time, said EAAB’s general manager Astrid Alvarez. Higher rates in Bogotá are due to better coverage in poor areas and the higher cost of getting water from high altitudes far away from the city. Furthermore, when Cartagena’s public utility was closed down, the government agreed to pay the pensions of retired workers. That allowed Acuacar to shrug off an important financial burden that Bogotá’s utility must shoulder.

“To say that Bogotá’s tariffs are too high has a touch of political opportunism more than economic or technical merit,” Alvarez told ICIJ.

Bogotá’s water utility would be a major prize for private investors. The EAAB has $1.5 billion in assets and is the largest landowner in Bogotá. If privatized, all these lands could be developed and built upon. That would include the unique tropical highlands, the source of most of Bogotá’s drinking water.

In May 2002, Eduardo Pizano, Colombia’s former development minister and a possible candidate for mayor of Bogotá, urged the EAAB to borrow more money to reduce water bills. Pizano’s proposal received the backing of the Potable Water Regulatory Commission, the regulatory body that oversees the utility. Some Bogotá officials, speaking privately to ICIJ, said that if EAAB was forced to reduce rates it could increase borrowing and weaken the utility financially. That, in turn, could increase the pressure for water privatization.

Alvarez said Bogotá’s rates are higher than in other cities because the utility reaches a higher percentage of people than any other in Colombia. She noted that neither Pizano nor the regulators acknowledged that water bills were being raised all over the country because of a new law reducing subsidies to the poor.

In fact, Bogotá’s rates are only slightly above those of Cartagena. In 2001, the average Bogotá rate per 15 cubic meters of water was 2,163 pesos (79 cents). In Cartagena, it was 2,102 (77 cents), according to the EAAB.

Unlike private companies who pay big dividends, EAAB reinvests its income. In 2001, the EAAB spent about $180 million in public works, mostly in poor neighborhoods. That represented 40 percent of all water-sector investment in Colombia. Despite the large investments, the utility has maintained a healthy balance sheet. The Colombian subsidiary of the international credit rating agency Duff and Phelps awarded the utility a AA+, the second-highest debt rating.

The key to the EAAB’s improvement from a decade ago has been a clear vision of the importance of keeping it strong and public, Peñalosa, the former Bogotá mayor, said.

“The EAAB is an amazing company by international standards: it has achieved high coverage of water and sanitation services to a city that has grown in a very disorderly and illegal manner into places that are difficult to reach; it has awarded huge subsidies to the poor; and it has done all of this with its own means, with hardly any resources of the national and local budgets,” he told ICIJ.

EAAB officials acknowledge that success has not come without a certain amount of hardship for the poor. Rates for the poorest sectors have risen 422 percent in the last seven years while those for the richest have risen only 83 percent. This is partly because the Colombian government began in 1995 to cut subsidies by which the poor paid only about 5 percent of the real cost of their water.

Still, today in Bogotá there is a 78 percent subsidy for the poorest and 24 percent for the middle class. The subsidies are financed partially by the wealthy, who pay 87 percent to 167 percent more than the real cost of their water. By 2005, as required by law, only the two poorest strata of Colombian society will receive subsidies of 50 percent and 40 percent, respectively, in their water bills.

As the water bills increased, so did customer complaints. In 1999 and 2000, when some of the steepest rate hikes took effect, complaints rose to almost 200,000 a year. In 2001, though, they dropped to 150,000.

Water is a difficult service to regulate, said Peñalosa, and the cost of delivery differs from one area to another. It is more costly to pipe water to a neighborhood in the mountains, for example, than in the downtown area. And that explains part of his opposition to privatization.

“If a new neighborhood settles 50 meters higher than the reach of the water, a private company would say it is not included in the original deal,” he said, “and hence the city would have to negotiate with them, every new condition, which would be too costly for the city.”

Water conservation has also been a major EAAB priority. A campaign begun in 1997 to save water has reduced consumption to an international low. Average consumption has stabilized at about 109 liters per person per day. By comparison, the average per person consumption in the United States is 578 liters per day and in the United Kingdom 334 liters a day. Israel has a similar consumption rate to Bogotá’s, at 120 liters per person per day. The low use reduced the need for major investments to improve and expand treatment plants, tunnels and pipes to transport more water from sources far in the mountains and to treat it. In 2001, the EAAB’s operational profit was around $60 million, which was re-invested in public works to reach marginal areas of the city.

Among its main projects, the EAAB invested $38 million in fiscal year 2000 to construct water tanks, a treatment plant, pumps and 37 kilometers of pipelines to give potable water to 350,000 additional people. The EAAB’s goal is to reach 100 percent of the Bogotá population by 2010.

EAAB is also building the Cundinamarca Channel, which will take the runoff and sewage from hundreds of neighborhoods in west Bogotá and lift it through an elevation plant to the level of the Bogotá River. The project should end the flooding of streets in low-lying areas. No more forced dressing in the homes of friends on higher ground.

Ironically, Bogotá’s water utility started out in 1888 as a private company. It became a public utility in 1914 at a time when politicians believed the people should control vital resources such as water. Now, the private companies want it back.

Said Alvarez, the utility’s general manager: “There are huge private interests after this company.”