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Speeches

Oct 25, 2006

Investment in Latin American water companies

New York Stock Exchange, NY

We’ve gathered here today to showcase one of the most successful water operators in Latin America and the Caribbean, so allow me to first congratulate SABESP for reaching such an important landmark. The Inter-American Development Bank takes particular pride in SABESP, because over the course of 20 years we have lent nearly $900 million to help finance its expansion.

SABESP is big part of what I consider the untold story of water and sanitation in Latin America. For some time now news about the sector has been dominated by the retreat of multinational companies that invested heavily in the region during the 1990s. Much attention has been focused on the failure of a few large water concessions, and on the ideological debate surrounding private participation in this sector.

But there is another story in Latin America, one that the headlines have largely missed. I’m talking about the emergence of a new generation of national water companies that are efficient, innovative and financially solid. These companies don’t fit one particular mold: in Chile they are fully private; Peru, Ecuador and Honduras have long-term concessions; Bolivia has independent water cooperatives.

SABESP is the most prominent example of yet another model: “mixed capital” companies that are jointly owned by governments and private investors. The Sao Paulo State Government is SABESP’s primary shareholder, but the company actively pursues partnerships with the private sector, both through service contracts and the capital markets.

It is worth pointing out that this was not always the case. In the mid-1990s SABESP found itself in a financial crisis, like nearly all its counterparts in Latin America. But thanks to visionary management and political support, SABESP was able to reengineer itself into an efficient, decentralized, results-oriented enterprise that serves an astonishing 25 million customers. By focusing on financial performance, SABESP was also able to tap private capital in order to rapidly expand service and finance massive infrastructure upgrades.

Investors who bought SABESP’s ADRs have earned impressive returns. But the real beneficiaries have been the people of Sao Paulo, particularly the millions of families that live in low-income areas. For them, SABESP’s turn-around can be measured in higher water pressure, shorter waits for new service, quicker repairs and less disease, thanks to the expansion sewer systems.

That is what I think is most exciting about SABESP’s example: SABESP has shown that a water provider that focuses on financial performance can actually do a better job of serving the poor than an inefficient, loss-making provider. 

Though it may seem obvious, this is a revolutionary concept in Latin America and the Caribbean, where many water and sanitation companies are still not able to recover their operation and maintenance costs. For those providers, investing in new infrastructure is out of the question. This has tragic consequences, because 75 million people are still without access to clean water in Latin America, and 116 million do not have adequate sanitation. Until they become financially self-sustaining, these providers are not going to be able to extend these essential services to the poorest communities.

The good news is that SABESP is not the only water company in Latin America that is helping the poor by focusing on the bottom line.  More than a dozen large public water companies in Brazil, Mexico, Ecuador and Colombia have become world-class providers by following a similar path. 

And the mixed-capital model is spreading as well. In Cartagena and Baranquilla, the two principal cities on Colombia's Atlantic coast, nearly one million people lacked water service a decade ago. Today 98% of the population in both cities has running water and nearly 90% have access to sewer lines, thanks to "mixed capital" companies formed by municipal governments with Spanish partners. Around 150 smaller Colombian cities are also served by mixed-capital water companies.

There is also evidence that investors are willing to take on new kinds of risks in this sector. In Chile, for example, private investors are now underwriting the construction of billions of dollars in sewage treatment infrastructure. This is a landmark development, because on average only 80% of the wastewater produced in Latin American countries is treated before disposal.

All this indicates that governments, operators and investors are now more willing to adopt flexible approaches that reflect the unique requirements of individual cities and countries. This is good news, because we’ve learned that in this sector there are no silver bullets.

At the Inter-American Development Bank, we are offering financing instruments and technical assistance to help both public utilities and private operators in the water sector. Over the past ten years we have financed nearly US$2.9 billion in water and sanitation projects, both public and private. We see universal access to clean water as a core objective, and have made investment in this sector one of the pillars of our “Reaching the Majority” Initiative.

We are working closely with the region’s governments to improve the legal framework and the institutional capacity of regulatory agencies that can make or break projects in this sector. We also recently launched an Infrastructure Fund that will help to jump-start water and sanitation investments, as part of our goal to lend US$12 billion in infrastructure projects in all sectors by 2011.

So it is indeed an honor to be here today to accompany one of our most distinguished partners, and to strengthen our ties with this group of exemplary operators. We are bullish on Latin America, and SABESP gives us renewed confidence that together we can achieve the goal of extending water and sanitation services to all the region’s citizens. Thanks very much for your time.

 

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