By NANCY BIRDSALL

It's the region's most serious public health problem, and it can only be solved with massive investments on the order of $8-$10 billion annually. This is more than the IDB has lent for the sector in some 200 projects in the past 30 years.

Where will the money come from? It may sound obvious to assert that consumers ultimately must pay for the services they use, but for decades, governments in the region have subsidized water companies because low tariffs failed to keep up with inflation and could not cover costs. These subsidies exacerbated the region's fiscal woes while making it harder for cash-strapped water companies to justify rate increases that could have paid for service improvements and expansion.

Ironically, the subsidies often benefitted those consumers who were most able to pay: industry and relatively affluent residential users. A well-off family I know, in a lovely residential area of a large South American city, cannot get the authorities to send them a bill for the thousands of gallons of water they've used for their swimming pool for the past 10 years! Meanwhile, in the same city, poor people must buy water from tanks on trucks at prices 20 times the cost of piped water.

The bottom line: consumers must get billed for services they use, and the prices they pay must cover costs.

Of course, the costs and the bills should be as low as possible, and this is where the private sector can help. In some Latin American cities, private management has already reduced water losses from illegal connections or inefficient operations from 25 to 45 percent. Private managers are using three to four employees per 1,000 connections, versus 10 to 15 employees in the public sector. Private owners have doubled collection indices because they have incentives to read the meters and send out the bills.

Unfortunately, private sector participation can result in higher fees for consumers and layoffs of workers. Firms may resist making investments in poor neighborhoods. But these problems can be overcome, for example through concession contracts requiring that the firm provide services in low-income areas. In some cases, transparent subsidies can be provided so that these services yield an acceptable return. Workers who lose their jobs can be retrained or participate in microenterprise programs.

Proposals to raise the cost of services and privatize a traditionally public sector responsibility can meet with stiff political opposition. But better service and more equitable access can also bring well-earned political rewards.

--The author is IDB executive vice president.