Analysis of Inter-American Development Bank Loan Document for Nicaragua titled: Modernize the Management of Water and Sewerage Services #1049/SF-NI

(Loan was approved December 8, 1999. Most of the loan will not be disbursed until contracts are signed with private sector companies)

1.    According to the loan document it appears that of the $21 million loan granted by IDB for this water project:
•    $8 million goes to an international operator to modernize service management in Managua
•    $4 million goes to an international operator as a management contract for water supply and sewerage systems in Leon and Chinandega
•    $1.5 million goes to various consultancies for technical assistance

This leaves about $6 million (that is not going to international firms) for a pilot project to rehabilitate and regularize water supply and sewerage and increase connections in poor neighborhoods in Nicaragua.

According to these figures, Nicaragua is taking on more debt primarily to pay international firms. The rate of return (profit) required by private firms is greater than that of the public sector. Many major water companies in Latin America have sought a profit ratio in the range of 20-30 percent.

1.    IMF loan conditions have required Nicaragua to raise water and sewerage tariffs by 1.5% monthly. IDB loans documents indicate that water tariffs will be raised to levels where "average total costs are covered." This appears to go even beyond the common requirements of "full cost recovery" which usually refer to operation and maintenance costs. Average costs would also include capital costs. This appears to contradict a poverty reduction mission. How will the social costs of such extensive tariff raises – costs in public health and access to affordable water – be addressed under such a program? NGOs would argue, instead of tariff raises which hurt the poor, cross subsidies, a guaranteed water lifeline, and a progressive tariff structure with a steep block curve (so that hedonistic users and the largest users -- agriculture and industry pay more) would be socially responsible policy.

2.    Although Leon and Chinandega account for only 16 percent of all users in the country, they generate a considerable amount of ENACAL’s operating surplus, providing resources for operations in other regions. How is it rationalized that the most profitable portion of ENACAL will be passed to private international operators? This would appear to be a classic case of "cherry picking" Because Leon and Chinandega subsidize other areas, won’t the private sector contract impact negatively on the financial viability of ENACAL?

3.    How have civil society organizations been involved in the decision-making process leading to private sector contracting or privatization? Will all bidding documents (RFPs, transaction report, etc.) be transparent and available to the public? Why is the IDB promoting international operators rather than other alternatives, such as decentralized municipal-level management? What is the time line and process for the selection of international operators?

4.    The loan documents indicate that there are plans to reduce illegal connections in the marginal settlements of Managua and regularize service delivery in these areas. How will access to affordable water be ensured for those who may have previously used illegal connections? How has the community been involved in the planning of this program?

General concerns about water privatization:

1.    The history of privatized public services appears to indicate that there is a negative impact on access and affordability when services are privatized. The private sector has no incentive to expand service to poorer communities. Even the World Bank, in a recent review by the Operations Evaluation Department of the water policies since 1993, makes the following comment: ""But getting the private sector to focus on the alleviation of poverty and to design tariffs in a way that does not discriminate against the poor has proved hard to achieve in practice."

2.    There is a contradiction between poverty alleviation missions and policies that promote "full cost recovery." The history of public sector subsidy of water services and commitments to universal access to safe and affordable water should not be overturned. There are serious social COSTS if people or eco-systems do not have access to sufficient water. These include:

•    Public health problems, including epidemics of water-borne diseases such as cholera and diarheal diseases;
•    Gender inequity (since daily household chores fall mainly on women and girl children)
•    Lower productivity of workers
•    Environmental degradation