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Glass half full

By Paul Constance, San Pedro Sula, Honduras

Depending on whom you ask, San Pedro Sula’s water system is either a remarkable success or a cautionary tale.

The basic facts are not in dispute. Between 1999 and 2003, the number of homes with residential water service in San Pedro Sula increased from 84 percent to 93 percent, thanks to the installation of 13,600 new connections. The proportion of tap water receiving proper sanitary treatment rose from 22 percent to 80 percent. Water pressure and continuity increased throughout the system.

These gains took place during a period when the city’s population grew at a daunting pace—from 444,200 to an estimated 526,000 people. Most notably, they were achieved without using a single lempira (Honduras’ currency) from the municipal budget. Instead, the necessary infrastructure improvements were paid by a private firm, Aguas de San Pedro, S.A. de C.V. (ASP), which holds a 30-year concession to provide the service.

But if you ask a sanpedrano what he or she thinks of the water service, the answer will not necessarily be positive. Many people are unaware of the statistics listed above. Few realize that the US$16 million ASP has invested to date has allowed the city to redirect taxpayer’s money to other social services. The local media tend to ignore the improvements, focusing on low-income neighborhoods where the service is still bad. Several opposition politicians are trying to turn water into a future campaign issue, telling voters that they should refuse to let ASP install water meters in their homes.

So which view is correct? In order to find out, IDBAmérica spent several days in San Pedro Sula interviewing consumers, municipal officials, ASP executives and health authorities.

Breaking point. Compared to other cities in Central America, San Pedro Sula’s water problems are mild. Nearby rivers and a healthy aquifer provide abundant water, and until the mid 1980s the city had a publicly managed water system that served a majority of the population reasonably well. Unfortunately, the service’s revenues and payroll proved too attractive. Speaking at an IDB conference on water issues held in Washington in November 2003, Oscar Kilgore, San Pedro Sula’s current mayor, said that “political interference” in the water service’s management had brought it to the point of collapse by the early 1990s. Overstaffing and a reluctance to raise water rates to cover costs and keep pace with inflation had left the service with debts of around US$42 million and huge projected future losses. This at a time when the system needed at least US$150 million in capital investments to keep up with estimated demand over the upcoming decade.

San Pedro Sula receives some of its water from this stream in the mountains near the city.

San Pedro Sula is Honduras’ second largest city and its industrial nerve center. When a boom in export-oriented maquiladora factories in the 1990s attracted tens of thousands of workers from all over the country, stretching public services even further, the city government decided to take drastic action. In 1999, having studied all the options, officials decided that a concession to a private company would be the best way to attract needed investment and ensure that the service was properly managed. With the help of a technical cooperation grant from the Multilateral Investment Fund (a member of the IDB Group), an investment bank was hired to help municipal officials prepare the terms of reference for a concession to operate, expand and improve the city’s water and sanitation system.

The process included consultations with labor unions, local businesses, community leaders, and civil society organizations. “The municipal government was very careful to ensure that the concession was prepared with integrity and openness,” said Chris Jennings, an IDB water sector specialist who worked with Honduran officials on the project. “They created a ‘Municipal Transparency Commission’ made up of notable representatives of civil society, including labor unions, the Dutch consul in Honduras, the Catholic Church and a local university, to oversee the process. The municipal corporation itself carefully reviewed all of the documents, at each stage of the process.”

Three international consortia offered formal bids for the concession. To make sure that the process was transparent, the municipality decided to award the concession based on a single criterion: the lowest water tariff. The bids were opened in public and the concession was awarded to a group of Italian companies headed by Acea, which runs water and sanitation systems for the city of Rome. Not only was the tariff offered by this group the lowest, but it was lower than the tariff charged by the municipal water company at the time.

Initially things went very well. In an impressive display of continuity, Mayor Kilgore, who took office a few months after the concession was awarded, pledged his full support for the concession. Lucio Constantini, ASP’s general manager in San Pedro Sula, says that work proceeded swiftly in the first year, thanks in large part to the municipal government’s help. ASP repaired old pipelines and installed new wells, pumps, treatment stations and holding tanks throughout the city.

What price? The honeymoon ended when ASP began to raise water rates. The city had not raised rates for many years prior to the concession, even as inflation eroded the value of the lempira, and as a result consumers were paying less than US$2 per month for up to 20,000 liters of water. Many households without meters were consuming even more than that, but still paying the minimum rate. The terms of the concession authorized ASP to maintain the true value of the tariff through semiannual adjustments based on inflation. ASP was also entitled to apply a single adjustment of 20 percent to the tariff after the concession had been in force for two years.

Predictably, people were not happy when their water bills went up, and the mayor’s office started getting complaints.

Meanwhile, ASP was hitting technical and bureaucratic obstacles. The company found that the city’s maps of existing pipelines were often inaccurate, leading to costly mistakes and delays when attempting to lay new pipes. In order to expand water service, ASP needed to construct a series of wells and pumping stations on privately owned land. The concession gave the city responsibility for acquiring this land, but this process got mired in legal challenges and disputes with titleholders. As a result, ASP has not been able to build key parts of the infrastructure and has missed some of its service expansion deadlines.

The situation came to a head in Cofradía and Chamelecón, two sprawling low-income districts that had endured decades of deficient or nonexistent water or sanitation services. After years of neglect and broken promises, residents of these districts were fed up. News that a large private company had taken over the service was greeted with suspicion, followed by demands for immediate improvements.

Not surprisingly, ASP was unable to meet these expectations. Many of the water pipes in these neighborhoods were old, broken and clogged with mud. As a result, even after ASP installed new pumping stations that improved pressure for part of the day, the water coming out of the taps was cloudy. When ASP announced that it would not repair old pipes or guarantee continued water pressure in Chamelecón unless all homes agreed to the installation of water meters, the local residents rebelled. “We will let ASP install meters only when they can provide good quality water and 24 hour pressure,” says Juan Ramón Montes, president of the Chamelecón’s federation of patronatos (neighborhood associations).

Shared responsibility. The resulting impasse has been inflamed by the local media—which sometimes portray ASP as a corporate villain insensitive to the needs of the poor—and by opposition politicians, who use it to attack the city government.

The situation has put everybody on the defensive. Municipal officials complain that ASP is failing to meet its service targets, is not flexible enough with consumers in poor neighborhoods, and is raising rates without considering the social impact. “ASP needs to see that the problem isn’t just technical–it’s social and political,” says Osmín Bautista, the deputy mayor of San Pedro Sula. “[We understand] that there is a cost involved in delivering water to each home, but people need water to survive, and so there are humanitarian considerations. We can’t go in and tell a community ‘if you won’t install meters, we won’t give you water’.”

An example of the residential water meters that ASP has been installing.

ASP officials counter that the terms of the concession require them to install water meters in every home. Moreover, they say that they cannot meet people’s expectations of improved service without the land needed to install new pumps and wells—land that city officials have yet to hand over. And they point out that ASP’s water rates are still around 50 percent lower than those charged by the public water service in Tegucigalpa, the Honduran capital. In fact, according to ESA Consultores, an independent consulting firm in Tegucigalpa, ASP’s rates are among the lowest in all Central America.

The truth, then, is that both perspectives on San Pedro Sula’s water system are correct. For the overwhelming majority of the city’s residents, water service has improved under the concession. The city is saving millions of dollars per year in infrastructure spending and even earning revenue (since ASP must transfer 5 percent of its billing revenue to the municipal treasury).

Water service has also improved in the poorest parts of San Pedro Sula—but certainly not to the extent that people are entitled to expect. If the frustration of consumers in Chamelecón and other low-income areas is not addressed soon, and if their situation continues to be used as political ammunition, some sanpedranos think that the concession itself will be in danger.

Sink or swim. Fortunately, most people in positions of authority seem to understand that ASP is vital to the city’s future. “We need to make every effort to safeguard the concession,” says Bautista, the deputy mayor. “Failure would carry a terrible price for the city.” Oscar Galeano, president of San Pedro Sula’s powerful Chamber of Commerce, told IDBAmérica that its members are convinced the concession is the best way to guarantee that their businesses will have the water services they need, and he said the chamber would be willing to help mediate a solution to any ongoing conflicts.

ASP’s Lucio Constantini admits that his company needs to do a better job of communicating its policies and plans to consumers. “This has been a weak area for us,” he said, “so we have recently hired a public relations company to help us out.” Bautista also agrees on the need for better communication. “The three of us—the consumers, the concession holder and the municipality—we are in the same boat. We have to find a common language and be more transparent with each other.”

Such cooperation will be even more vital in the years ahead, because the concession includes plans to build what will be one of Latin America’s most advanced waste-water collection and treatment systems. These investments—designed to reverse dangerous levels of contamination caused by untreated sewage leaving San Pedro Sula—will be financed with a surcharge to the water service.

Chances are good that San Pedro Sula will work out these challenges. But the city’s experience offers valuable lessons for other cities that wish to attract private investors to their water and sanitation sector. See links at right for an article that explores some of those lessons, and for a report on the crucial role that public perceptions and access to information have had in San Pedro Sula’s water sector.