Water Privatization in Nicaragua
Contents
I. Nicaragua's Debt and the Attack on the Public Sector
II. Access to Potable Water in Nicaragua
III. State Provision of Water and Sanitation Services
IV. The Case for Privatization
V. What Does Privatization Mean?
VI. Privatizing Water Services in Nicaragua
VII. Concerns with the Privatization Process
VIII. Access Not Privatization
I. Nicaragua's Debt and the Attack on the Public Sector
Nicaragua is one of the most indebted countries in the world on a per capita basis. By virtue of the country's indebtedness, the international community has stripped Nicaragua's government of its power to make financial decisions: Credit relations are power relations. Nicaragua owes other governments, multi-lateral institutions and banks money. These creditors have the power to ensure that the debts are re-paid. They use this power to demarcate the acceptable limits within which Nicaragua's government is permitted to act. As long as more money keeps flowing out of Nicaragua than goes in, the system is working, for the creditors.
For Nicaraguans the process does not work so well: Schools must be closed; health facilities must cut back on staff and stores of medicine; public utilities must be sold to private operators; social security is no longer secure; the country must practically give away its labor; can no longer tax imports; must stop growing food to plant coffee to export, and when the value of that coffee collapses go hungry, because you can't eat coffee, and can no longer afford the food you've been forced to import. This is structural adjustment, or poverty alleviation as the program is now known.
Much has been written about the problems associated with structural adjustment programs promoted by the World Bank and International Monetary Fund. Despite the attention that structural adjustment has received and the widespread resistance to the continuation of the policies, structural adjustment remains a reality for most of the Third World. In Nicaragua the process has been truly devastating. After 10 years of adjustment, the majority of Nicaraguans are poorer and less in control of their destiny.
The latest round in the attack on the public sector involves the privatization of Nicaragua's water and sewerage systems. To be sure, the public provision of water and sanitation service in Nicaragua has not been great. However, much of this weakness stems from the constant pressure the public sector has been under since the implementation of IMF-sponsored structural adjustment programs. The state is constantly pressed to lower its expenditures, cut its personnel, and sell off whatever it can to the private sector. As a result there has been general erosion of state capacity to regulate, plan, and invest: in short, to govern. The privatization of water service in Nicaragua is just one more step in the transformation of the state into a service provider for international capital.
While the privatization of other sectors such as electricity and communications have been protested, water privatization will likely meet with widespread resistance in Nicaragua, as it has in Bolivia, Ghana, and Canada. Demonstrations took place in June of 2001 as part of an effort to block IMF mandated increases in water tariffs. As the state prepares to sell the management services of its two most profitable water systems in Leon and Chinendega, further protest is likely.
In this report we provide background to help make sense of the current situation. We first provide some basic information on the current status of providing potable water in Nicaragua. We then look briefly at the history of state provision of water services, and in some detail at the current process of privatization.
II. Access to Potable Water in Nicaragua
Like much of Latin America, access to potable water in Nicaragua is reasonable and improving in urban areas, but remains a challenge in rural areas. The difficulties arise from limited infrastructure for water services, limited infrastructure for sewerage services, and environmental degradation which has seriously affected the water quality of lakes, streams, aquifers, and other natural sources for water.
At the national level, 54% of the population is connected to a water system and an additional 12.5% have easy access to piped water. Thirty-three and half percent, or one-third of the population - is without water services. There is, however, quite a difference between urban and rural areas. In urban areas 88.25% are connected to water services and another 6.75% have easy access to piped water, which means 5% are without water service. In rural areas, only 14.4% of the population are connected to a water system with another 19% having easy access to piped water. Over two-thirds of the rural population is without access to water services.
In rural areas, because two-thirds of the population is not connected to water services, people either have to walk very long distances to access a public water pump, purchase water from a tanker, or rely on water from wells, streams, and/lakes. The dependence on untreated water from lakes, streams, aquifers – becomes a health problem due to environmental degradation. In rural areas polluted water results from agricultural run-off, untreated human waste, and, near the Caribbean coast, mining operations.
Basic infrastructure for sewerage systems in Nicaragua is limited. In urban areas only 32% of the population is connected to a sewage system. However, sewage treatment is almost non-existent. In Managua, for example, with 1.5 million people, over 50% of the population is connected to sewerage, but there is no facility to treat the waste. As a result, nearly 32 million gallons of "raw sewage" is dumped into Lake Managua every day.
In rural Nicaragua the situation is much worse, seriously complicating access to potable water supplies. There is no sewage system in rural Nicaragua. Fifty-six percent of the rural population relies on latrines and septic tanks. Forty-four percent are completely without sewerage service. Health problems are, predictably, serious as a result. The mortality rate in Nicaragua from sickness linked to diarrea is 73 deaths per 1000 habitants. Most of these are children under the age of 5. While cholera incidents are much lower today than during the period 1992-1995, outbreaks still occur.
The scope of the degradation of water sources in Nicaragua is grave. Water accounts for an equivalent of 10% of Nicaragua's land area, yet almost all water sources are degraded. Salvador Montenegro, director of the Nicaraguan Center of Water Resources Investigation (CIRA) told La Prensa in January of 2002, "At the last, everything depends on water. However, far from regarding these great bodies of water as key elements for development, they have been degraded to serve merely as garbage and human waste sinks. The sad fact today is that every single one of Nicaragua's water sources finds itself subjected to some process of degradation."
III. State Provision of Water and Sanitation Services
Until 1955 there was no national program for the delivery of potable water in Nicaragua. Between 1955 and 1967 efforts to expand water and sanitation services were divided among individual municipalities, but coordinated with the Departmento Nacional de Servicios Municipalies (SERMUNIC). It was not until 1967, with the creation of the Departmento Nacional de Acueductos y Alcantarillados (DENACAL), that a national office was established for the sole purpose of overseeing water and sanitation services. DENACAL would work alongside several municipal water companies operating in larger cities, such as the Aguadora de Managua.
Following the revolution in 1979, the new government created the Instituto Nicaragüense de Acueductos y Alcantarillados (INAA) by placing DENACAL and all of the municipally operated companies under one structure. The Sandinista government took some steps to expand water services to rural areas. INAA, in coordination with the Dirección de Aceuducto Rural worked to expand water services to rural areas, reaching seventeen percent of the rural population between 1982 and 1990.
These efforts were extremely hamstrung by the U.S. funded Contras who destroyed more than $1.4 billion in infrastructure during the same period. Resources for the Sandinista government were constrained by the cost of the war (which took up to fifty percent of the government's revenue), the United State's economic embargo, and the blocking of multi-lateral development assistance.
Following the electoral defeat of the Sandinistas in 1990 Nicaragua was once again welcome at the World Bank and IMF – provided, of course, that the new government followed the prescriptions of these institutions. Accordingly, Nicaragua underwent a dramatic restructuring of its economy including a far-reaching privatization of state enterprises. Nicaragua's debt burden and continued dependence on external sources of financial capital have left the government with little option but to follow the policy recommendations of the IMF as closely as possible. Between 1990 and 1995 over 300 state enterprises were transferred to the private sector.
Since 1995 the process of privatization has involved far fewer sectors, but increasingly sensitive ones. The IMF has pushed for the privatization of the phone company (ENITEL), the electrical company (ENEL), and the water utilities (INAA [now ENACAL]). Each one of these has been a difficult process. But the case of water may by the toughest one so far.
In 1991, the INAA would begin a process of decentralization. Though escaping the privatization pressures that effected almost all other public sector enterprises for most of the 1990s, INAA would be targeted for privatization in 1997. The privatization of INAA services in Leon and Chinendega became one of the benchmarks of a structural adjustment agreement between the government of Nicaragua and the International Monetary Fund (IMF). Since 1997 INAA, and thus state provision of water services, has undergone far-reaching reform in preparation for privatization. It is important to understand this process in order to understand the potential impact of privatization and the process as it stands today.
IV. The Case for Privatization
Access to safe and affordable drinking water is limited now, and there are clearly signs that the situation could get much worse. It is also clear that currently the state water company, ENACAL can not afford to meet these needs. In February of 2002, ENACAL was unable to come up with a mere $17 thousand to fix a broken pump in a Masaya neighborhood, leaving residents dependent on water brought in on tanker trucks.
Why is ENACAL broke? Here we get into the case that the IMF and the Inter-American Bank make for privatizing water services. ENACAL is broke, according to economists at these institutions, because it is inefficient. The case for inefficiency rests on several pieces of evidence: ENACAL does not charge enough for its services (it subsidizes certain communities for largely political reasons), which creates costs that must be made up by the state or by expanding public debt. ENACAL is a monopoly, and thus, there is little accountability for poor service provision. Because ENACAL is so inefficient, it is does not have the resources needed to expand infrastructure and supply other needed services.
ENACAL, based on these arguments, is simply a tool for political games. It is shielded from the costs of its behavior because the state will keep it afloat regardless of its behavior.
On the other hand, a private company would have to operate efficiently to stay profitable. By staying profitable, a private company would generate the resources needed to expand infrastructure. By expanding infrastructure the company is expanding its market, and it must do a good job to keep customers.
Like so much of neo-liberal thought, this works great, in theory. Yet, as we discuss in the next section, water service provision is by its nature a monopoly. Under such a situation private companies have even less incentive to be responsive to local communities than public companies. Indeed, under such circumstances profit not efficiency is the goal, and the two are not the same thing. Treating them as identical is purely an ideological device.
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V. What Does Privatization Mean?
Privatization programs vary dramatically in degree of control granted to private companies. In water provision this varies from subcontracting specific tasks such as drilling wells or improving connections (service contracts), to the full transfer of the water system to a private company (full divestiture). The full transfer of a water system to a private company is quite rare, and service contracts are so common as to be uncontroversial. The kinds of arrangements that are more typically associated with privatization (and more controversial) are management contracts, leases, and concessions.
In each of these arrangements the basic infrastructure (pipes, aqueducts, treatment facilities) of the water and/or sewerage systems remain public property. What is privatized, or sold to the private company, is the income made from the use of these assets. The degree of control the company has over income, or fees for water use, varies depending on the responsibilities the company has taken for improving and maintaining infrastructure. The program proposed in Nicaragua is simply a management contract, but more far reaching privatization is envisioned for the future.
It is important to emphasize that privatization does NOT in any way mean the introduction of competition into the provision of water and sanitation services. While there is competition when the companies bid for the contracts, once the contract is granted the private company enjoys a monopoly status. Water and sanitation infrastructure is expensive to build. It would be incredibly wasteful and probably unworkable for multiple companies to each build their own systems and then compete for business. Unlike tracking electricity on a shared line, tracking water usage through shared piping would be impossible. Thus, water utilities by their very nature are monopolies. This fact has important ramification for the privatization process.
It has been demonstrated by dozens of studies in the United States and Britain that there is NO difference in economic efficiency between public and private water utilities. Thus, the argument that the World Bank and IMF make that the private sector is inherently more efficient is simply false and not borne out by evidence. To the extent that water utilities are inefficient this results from them being a natural monopoly, privatizing them, as noted, does not change this status. There is, however, a significant difference between private and public ownership when it comes to motivations. The private sector is motivated by profit. Left to its own devices a private company enjoying a monopoly status will increase rates for water continually. Public sector providers are held responsible to the communities in which they operate simply because they are political entities.
As a result of the need to protect consumers from private companies taking advantage of monopoly status, privatization processes must involve the development of adequate mechanisms to regulate fee structures and service quality. In the United States this is a well-known system for dealing with natural monopolies. Privately owned utilities are typically tightly regulated regarding fees they can charge and the quality of service they provide. The effort to construct adequate regulatory environments in "developing" countries has been difficult, in large part because other aspects of structural adjustment programs have seriously eroded state capacity to regulate.
Finally, in order to sell off parts of water utilities to the private sector, the utility must be made attractive or marketable. Thus, it is often the case that utilities raise their fees in order to show a better bottom line to the bidders. The IMF has essentially mandated this process by requiring public service providers to achieve "full cost recovery. Because public owned utilities are held accountable to local communities by political leverage, they will often subsidize service provision, especially in poorer areas where it would be politically difficult to charge full rates where people could not afford it.
The IMF has gone after the practice of subsidizing rates, claiming that it leads to extreme inefficiencies and adds to public debts. That it is the only way to make the current system work for the poor is irrelevant to the institution. Full cost recovery has been felt in Nicaragua in the privatization of both the electric and water based utilities. ENEL raised rates 64% between 1998 and 2001 prior to being sold. The INAA raised Managua water rates 30% in June 2001 under pressure from the IMF, and is being required by the IMF to continue to adjust tariffs by 1.5% a month.
VI. Privatizing Water Service in Nicaragua
The privatization of water and sewerage systems in the Third World is a fairly new development. According to a study done by the UN Economic Commission for Latin America, as of 1998 throughout Latin America, only in Argentina, had "management responsibility for major water supply and sanitation systems been passed on to private companies. Over the past four years this has changed with increased pressure from the IMF for water privatization and full cost recovery. In the year 2000 alone, the IMF made water privatization and full cost recovery a condition in 12 of 40 stand-by and debt re-structuring agreements.
In 1999-2000 the privatization of the water system in Cochabamba, Bolivia brought this process to the world's attention. Management of the water system in Cochabamba had been turned over to a subsidiary of the U.S. based company Bechtel. The company proceeded to immediately raise fees for water by one hundred percent. The community mobilized under the leadership of union organizer Oscar Olivera and after nearly a year of struggle was able to block the contract – Bechtel left Bolivia, though it is currently trying to sue the government for lost profits.
The privatization process in Nicaragua has developed slowly through several stages. As noted, in 1991 INAA began a process of de-centralization. This initially involved transferring responsibility for managing municipal water systems back to mayors in Matagalpa and Jinotega.
In 1998, an alternative plan won favor that promoted the creation of small private businesses that would run the municipal water utilities in the two cities. In both cities, there are now new private water utility businesses owned by individuals who were previously high-level bureaucrats in the state-owned utility. The private businesses are accountable to a Board of Directors that includes representation from the state-owned utility, the mayors of the major municipalities in the two departments, and a representative from civil society. In both Matagalpa and Jinotega, the civil society member of the board is a member the grower's association and part of the landowning elite. In both cities there is a major water infrastructure rehabilitation project funded by the German government that is upgrading the ability of the utilities to capture, treat, and distribute water.
Following the privatization and new infrastructure investment in Matagalpa and Jinotega, the price of water in the two cities has increased at a more rapid rate than in the rest of Nicaragua. And, it is clear that the new investment in rehabilitation will continue to raise fees even higher. For those who can afford the market price of water, there will be improved and expanded.
At the national level a major restructuring of state provision of water and sanitation services was undergone in 1998. The INAA was split into two separate entities as part of the effort to "modernize" the agency and prepare it for privatization. Management of the physical infrastructure for providing water and sanitation services was turned over to the newly created Empresa Nicaragüense de Acueductos y Alcantarillados (ENACAL). The regulatory aspects of water and sewerage provision (the setting of tariff levels and quality requirements) remained with the Instituto Nicaragüense de Acueductos y Alcantarillados (INAA).
The goal in making this division was to pave the way for privatizing ENACAL's operations over time by creating an independent regulatory body (INAA). Though "independent" the long arm of the IMF can be seen in INAA’s mission to set fees in accordance with "full-cost recovery." Indeed, INAA's budget is based on a 3.5 percent fee attached to billings for water and sanitation. Currently INAA is responsible for regulating ENACAL's operations, as well as the local operations in Jinotega and Matagalpa discussed above.
The following year, 1999, the Inter-American Development Bank (IADB) offered a loan program to assist Nicaragua in privatizing parts of its water service provision. This program to "Modernize the Management of Water and Sewerage Services" is the first major step toward the privatization of the water and sanitation systems in Nicaragua. The loan involves three components:
Leon and Chinendega:
The water systems in the departments of Leon and Chinendega are collectively known as ENACAL Occidente (ENACAL West). ENACAL Occidente serves 400,000 people, which represents only sixteen percent of ENACAL's users nationally. However, according to the IADB, the water systems in Leon and Chinendega supply a substantial portion of ENACAL's operating surplus, which provides resources used to subsidize investment in other, poorer regions.
The use of resources from profitable sectors to subsidize poor communities in other areas is referred to as a "cross-subsidy." If the water systems in Leon and Chinendega are turned over to private sector management, it is unlikely that the firms will allow for the continuation of these cross-subsidies to other regions. Indeed, the IADB sees this cross-subsidy as a "deficienc[y] of the earlier rate structure." Under pressure from the IMF, the INAA is supposed to adjust rate structures for ENACAL to "correct" for this deficiency i.e. change rates to achieve full-cost recovery from each division of ENACAL.
Marginal Settlements in Managua
Managua has a population of approximately 1.5 million. Off these, 400,000 people live in marginal settlements with insecure or non-existent land titles, and under conditions of extreme poverty. Many of the people who live in these settlements receive water through unauthorized connections with the city's water system.
The modernization program being promoted by the IADB would provide money to regularize water connections for 4,000 households (approximately 5% of the total) in these marginal settlements. Concerns with this aspect of the program are related primarily to the ability of these families to pay for water once they are on meters. In addition, the program includes money to back "micro-loans" for making the connections. Loans to the families. In other words, the families will have to borrow money from this program to make the final connection to the water system.
Modernization of Management Systems
This aspect of the program (which is also tied to the management contracts for Leon and Chinendega) involves improving aspects of ENACAL's operations to make the utility more efficient (and thus more marketable). The IADB is offering $8 million to ENACAL to hire a private firm to upgrade its computer system, extend the number of connections covered by meters and provide technical assistance to improve planing and communication within ENACAL.
One of the goals is to further the de-centralization of ENACAL, making the regional systems more autonomous, and thus easier to sell. One of the efficiency gains to be made by modernizing the management system is to reduce the work force at ENACAL, because its current rate of "6.6 employees per 1000 connections" is too high. A "more efficient" figure would be roughly 4 employees per 1000 connections: Put another way, more efficient means firing 1000 people.
The program laid out by the IADB is expressly targeting an increasingly expansive role for the private sector in the provision of water and sanitation services. The goal is to achieve this by starting with a limited privatization program to avoid political conflict. The loan agreement states that:
Considering the current technical and political obstacles to a national privatization process, it will be necessary to design mechanisms for participation by an international operator that: i) will be politically acceptable; ii) will produce tangible short-term results; and iii) could facilitate greater private sector participation over the medium term. The service/management contract represents the first step in [a phased-in strategy] with the aim of creating more favorable conditions for privatization at the national level. At the end of the three-year business strengthening program it is expected that the introduction of a private operator by means of a relatively unconflictive (sic) contractual mechanism will ideally have allowed private sector participation to gain greater acceptance among the interested groups.
In other words, the long-term goal is the privatization of national water and sanitation services in Nicaragua.
VII. Concerns with the Privatization Process
The privatization of water and sanitation services is a source of serious concern for activists in Nicaragua. This past June (2001) hundreds of people protested when the INAA, under pressure from the IMF, raised water tariffs 30% in Managua. A number of national organizations, such as Movimiento Comunal and the Coordinadora Civil helped to organize the protest, and with the help of the Nicaraguan Human Rights Commission, brought a suit against the INAA for raising the fees without sufficient warning.
Price hikes in general, and the lack of subsidies for the poor, are the biggest concerns with the privatization process. As noted the IMF is currently pressing INAA to implement "full-cost recovery" pricing for water and sewerage services thereby eliminating subsidies all together. While ENACAL is technically allowed to subsidize poor communities, it must make up this difference by charging more in other communities. Such "cross-subsidies" will not take place under a private company.
To put this in perspective consider that the IADB estimates that the "market for water and sewerage services in the marginal communities of Managua could tolerate combined fees of $6.78 a month ($3.57 for water, $3.32 for sewerage). Now consider that salaries for public school teachers are between $60-70 a month; for free trade zone workers, $60-90. In other words, the fee levels the IADB is promoting constitute 8 to 11 percent of these salaries. Consider families where parents are unemployed, or employed only in informal sectors where incomes may be much lower – a situation fairly common in marginal settlements. Where are they going to cut back to pay for water at this level: Food, clothing, medicine? If they are cut off from water services for failure to pay, where are they going to get water? Water is not simply another commodity like a pair of tennis shoes, or cup of coffee. It essential for life, and should not, therefore, be governed by the vagaries of the market.
Another concern with privatization is accountability. The program funded by the IADB requires that the contract go to an international service provider. Indeed, all of the companies pre-qualified to bid for the contracts are transnational consortiums (see below). What kind of accountability will such firms have to communities in Nicaragua? In Boliva Bechtel raised water fees by over 100% in a week. In Nicaragua, when phone company operations in Chinendega were privatized recently the company cut off phone service to the fire department and the Red Cross offices for non-payment.
Imagine Bell telephone doing that to a fire department in the United States, or in Switzerland, where this consortium is based. Transnational companies only have a bottom line to concern themselves with. Within the econometric models that are mistaken for the world by IMF bureaucrats such dispassionate objectivity inspires efficiency, but in the flesh and bone world were we live such objectivity leads to increasing impoverishment.
Accountability in the water privatization process in Nicaragua lies with INAA. It is to be a partner with the private firm in setting fees and overseeing water quality. However, the INAA is itself under intense pressure from the IMF for full-cost recovery. There is no truly "independent" regulatory body that will promote universal access to water at affordable rates in Nicaragua, and at the moment, no intention of creating one.
Finally, there is a serious need for expanding water and sanitation services to rural areas and providing sewage treatment facilities for those urban sewerage systems already in place. The privatization process will do nothing to help make this happen. Here the logic of the program is truly maddening. The IADB argues that ENACAL suffers from the same bad practices that "yypically affect utilities in developing countries." That is, "a combination of low rates and poor operational efficiency have kept cost recovery rates down, leading in turn to investment levels inadequate to meet the sector's development needs in terms of coverage and quality of service."
This is only a problem if one assumes that the public sector should not subsidize the "the sector's development needs." If the United States was forced to develop under these guidelines, we would still be dumping raw sewage into the country's lakes and streams as we were thirty years ago when the Federal government stepped in and subsidized the construction of municipal sewage treatment facilities around the country. Water and sewage infrastructure will not be expanded by the private sector! Leaving Nicaragua dependent on foreign government aid to achieve this is no model for meaningful "development."
VIII. Access Not Privatization
The goal for the future of water service in Nicaragua must be expanding access at affordable rates. We have argued above that the private sector will not achieve this goal. The private sector can not be relied on to expand infrastructure where it is most needed: i.e. communities that can not afford to pay for the expansion. The private sector can not be relied on to keep rates affordable. Indeed, the opposite effect is typically seen: privatize and rates go up dramatically, with little change in the actual service provided.
It is also the case that the public sector will not be able to achieve this under current parameters. Nicaragua's debt burden guarantees this. As long as the country is forced to export most of its financial resources, there is no hope of the state maintaining existing infrastructure, much less expanding it. All new expansions of infrastructure currently under way in Nicaragua are co-financed with bi-lateral aid (Japan and Germany).
In short, it is hard to imagine any centralized, national level water provider, public or private, able to grapple with the problem of access in the current environment. The cancellation of Nicaragua's foreign debt would help tremendously, by freeing up resources for an integrated water strategy encompassing the need for new infrastructure and grappling with the high degree of degradation of water sources. But debt cancellation will not guarantee that such a plan will emerge.
Long-term solutions will require the maintenance of systems to deliver clean and affordable water as a public responsibility. It will further require an integrated strategy of management that goes beyond whom owns the rights over pipes and aqueducts. Agricultural practices must change, industrial dumping must be contained, and a major effort must be undergone to expand sewage treatment. Expanding access to degraded water is obviously no solution.
But all talk of sustainable solutions sound hollow as long as the public sector remains under the thumb of international financial institutions requiring continual de-regulation and privatization. Without adequate regulations to protect water sources and a strong public commitment to expanding infrastructure, the crisis of access to safe, clean, affordable water looms larger ever day.
