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Water Governance in Peru
1. 13th OECD WGI meeting
9 January 2020, Paris
Oriana Romano
Head of Unit
Water Governance and Circular Economy, CFE/CITY
Water Governance in Peru
2. Water risks in the face of megatrends
• 26% hydrographic units exceed the water Environmental Quality Standards
• This is due to due to untreated wastewater, inadequate management of solid waste, and
illegal mining, droughts and floods
• 851 episodes in 2016, mostly most in southern areas of Peru
• In 2018, El Niño caused economic losses of USD 133 million
• 46% of total climate emergencies caused by floods between 2003 and 2014
• Major flood events have occurred in southern coastal regions in the country
• In 2010, PEN 635.83 million of damages in the Cusco Region, of which 96.2% corresponds to
direct damages
• 3.4 million Peruvians lack access to water services
• 8 million Peruvians lack access to sewerage services
• 55.7% of the population (55% in urban areas and 58.2% in rural areas), have 24-hour access to water
supply
FLOODS
DROUGHTS
POLLUTION
UNIVERSAL COVERAGE
4. A complex multi-level governance system
• National Water Resources
Management System: 6
ministers, ANA.
stakeholders
• 14 AAA
• 72 ALA
• 29 River basin councils
planned, of which:
• 12 created
• 3 in progress
MINAM 2019, 12th OECD WGI
5. Fragmented market structure
Urban >15 000 inhab. (50 EPS)
EPS
Urban ≤ 15000 inhab. (Small cities) (450)
Municipal
management units
(Unidades de Gestión
Municipal)
Special operators
(Operadores
Especializados)
Rural ≤2000 inhab. (25 000)
Municipal management units
(Unidades de Gestión Municipal)
Communal Organisations
(Organizaciones Comunales)
• 50 water and sanitation services companies provide drinking water to 59% of the national
population
• 16 small companies have less than 15 000 connections
• In smaller cities there are around 450 operators
• In rural areas, around 25 000 Sanitation Services Administrative Boards
6. Challenging implementation of
Payment for ecosystem services
• Since 2013, the EPS of 34 cities in 19 departments across Peru have adopted a new innovative
tariff structure
• Since 2015, SEDAPAL, in Lima allocate 1% of the company's turnover to a MERESE fund
• In September 2019, SEDAPAL raised PEN 60 million (EUR 16 million) for its MERESE fund.
8. How to bridge multi-level gov gaps for water to
contribute to sustainable development?
• Raise the profile of water policy
• Improve representation of connected
policy areas within different institutions
• Establish mechanisms for co-ordination
between water management and
access to quality water services
• Reduce social conflicts by improving
stakeholder engagement within the
CRH
• Simplify and accelerate public
investment procedures
OECD Principles on Water Governance
OECD, 2015
9. PES to protect headwaters
• Carry out a water risk
analysis for an effective use
of MERESE funds
• Ensure the full adherence to
PES projects
• Ensure coherence between
the various PES systems
Charges for risk management
• Take into account the water
risks (shortage, pollution)
when setting the rate and
the base of charges.
• Beyond the structure, need
to assess whether charges
are proportionate to the
magnitude of challenges
How can economic instruments help achieve
national water resource strategy objectives?
10. How to reinforce the regulatory
framework for WSS?
Number of active water operators in the water and sewerage sector supervised by water regulators
Source: OECD (2015) The Governance of Water Regulators, updated 2019.
From 50 urban Eps to 20 000 + operators
Ways forward:
• Review capacity, competences and powers,
• SUNASS to monitor its performance in carrying out its new functions
• Continue good practice of multi-annual budgeting
• Advocate for budget-setting according to an estimation of the costs related to the regulation
and supervision of the sector
41 hydrographic units exceed the water EQS, caused by the dumping of untreated wastewater, inadequate management of solid waste, environmental liabilities, informal and illegal mining.
The water industry is highly fragmented in Peru, with different modes of market organisation in urban and rural areas
In urban areas:
50 water and sanitation services companies (Empresas Prestadoras del Servicio de Saneamiento, EPS): provide drinking water to 18.6 million people, who represent 59% of the national population, 75% of the total urban population
The 50 EPS, all publically-owned. SEDAPAL, the EP that serves Lima is in a category of its own with over a million connections; down to
16 small companies with less than 15 000 connections (SUNASS, 2018[4]).
Outside of large urban areas, WSS services are provided by thousands of diverse providers.
In smaller cities there are around 450 operators.
In rural areas, around 25 000 Sanitation Services Administrative Boards (Juntas Administradoras de Servicios de Saneamiento, JASS) and municipal operators manager rural services.
Result…
This fragmentation of the market limits economies of scale, with a consequent loss of efficiency in WSS service delivery.
The financial sustainability of WSS operators is a serious concern in Peru, with many urban EPs operating at a loss and many rural operators failing to meet basic financial sustainability.
PES
Five years ago, Peru (MINAM) established a payment mechanism for ecosystem services, called MERESE. The water companies have created MERESE funds financed by the water bill. These funds will “compensate” communities that commit to providing hydrological services, such as the protection of high mountain lakes through reforestation.
Since 2013, the EPS of 34 cities in 19 departments across Peru have adopted a new innovative tariff structure, whereby the EPSs allocate a portion of their revenues to investments in natural infrastructure according to their Optimised Master Plan (PMO). The PMO is planning investments (for the next 30 years) as well as tariff increases (for the next five years). It is subject to the approval of Peruvian water regulator SUNASS.
In the case of Lima, in June 2015, SUNASS helped develop and approved the PMO of the Lima water company (SEDAPAL) which plans to allocate 1% of the company's turnover to a MERESE fund. In September 2019, SEDAPAL raised PEN 60 million (EUR 16 million) for its MERESE fund.
Significant and sustainable funding of MERESE by the EPS goes hand in hand with water tariffs covering all the investment and O&M costs of the supply and sanitation services. This is not yet the case as evidenced by the financial deficits and the lack of qualified personnel of the EPS (Country submission, December 2019).
The impact on the household budget is modest. Often, it is less than 1 PEN per month for the MERESE fund. But, the other side of the coin, however, is that the amounts of reserve funds are often limited (except for Lima given the base of clients served by SEDAPAL).
The activities envisaged vary considerably from one EPS to another. This system of payments for ecosystem services (PES) under the water supply and sanitation policy (aimed at ensuring the protection of upstream water sources) shows its limits in the poor identification of activities providing hydrological services, a step that is essential to calibrate the reserve fund.
When significant, the MERESE fund focuses more on grey infrastructure (water supply and sanitation infrastructure) than on the protection of ecosystems, as shown by the example of Cusco. The PMO logic that underlies the financial functioning of the MERESE funds may lead to an imbalance between resources devoted to grey infrastructure and those devoted to the green infrastructure for which the fund is normally intended. This is the case for the Cusco EPS.
No measure of impacts: Among the pricing studies developed during the same period (Ayacucho, Chachapoyas, Huancayo and Moyobamba, in 2015), only Moyobamba includes criteria to measure the impact (effectiveness) of payments.
Capacity: The participation of NGOs and academics in the fund's management committee has certainly contributed to improving the quality of the Moyobamba price study.
Prior to 2016, SUNASS was responsible for supervising WSS services only in cities with a population over 15 000 inhabitants, = supervising 50 urban EPs.
Since 2016, the scope of SUNASS’ functions has changed dramatically as the supervision of WSS services in small cities and rural areas has been added to its portfolio.
Highly experienced in overseeing urban EPS, SUNASS must now supervise a huge number of operators that have different capacities, coverage, types of network connections, and that operate in very different contexts:
450 operators in smaller urban areas (<15 000 population)
Over 25 000 municipal and community managed operations in rural areas
Tasked with supervising quality of service and financial sustainability.
Few water regulators have responsibility for supervising such a large number of water operators
The expansion of functions represents a challenge for the regulator as it demands a different regulatory approach to the one used so far, requires interaction and co-ordination with bodies it did not previously work with (ATM, regional governments…), has implications for the regulator’s financing model.
SUNASS is pursuing three different regulatory approaches:
EPS in larger urban areas
Smaller cities
Rural areas
In small cities and rural areas:
Supervise: quality of service and financial sustainability
Back to diagram of market structure we saw earlier…
Progress to date:
A strategy for the regulation of sanitation services in rural areas, which seeks to strengthen and complement prevailing institutions.
SUNASS has created a local presence nationwide through 24 regional offices.
A methodology to determine the areas of service delivery that will be implemented through the 24 local offices;
Created multidisciplinary teams with knowledge in each of the regions;
Gathered information from 2 000 rural and small city water providers organised in database and geo-referenced;
A roadmap for coordinated work among the institutions in a given territory;
Questions:
Is setting up local offices the best way forward?
Capacities to do, for example, field visits to monitor service delivery…
Recommendations:
Review capacity, competences and powers, which will need to evolve in step with the expansion of functions. For example, if capacity building becomes a greater focus on work, ensure that SUNASS has necessary competences and powers to carry out these tasks.
SUNASS to monitor its performance in carrying out its new functions, in order to provide feedback into the system on whether the new regulatory approach is meeting objectives for the sector: identify what is working well, as well as areas that may need adjustment
If consolidation of sector is goal, is three different regulatory approaches the best way forward?
SUNASS’s new responsibilities have dramatically changed the regulator’s financing model.
Prior to the expansion of its functions to rural areas, SUNASS was funded solely from the urban water service operators it regulated, collecting a maximum of 1% of income after sales taxes.
While this funding scheme represented a strength that contributed to the independence of the regulator, it was already inadequate to carry out its functions fully, as water utilities in Peru tend to be small public agencies with low business income.
The regulator is now funded by a mix of fees and government funds, with government funds providing the majority of the budget.
In order to cover the expansion of supervision to rural 2019: 100 Soles budget – 70 million from Ministry of Housing, Construction and Sanitation,
The income from regulated entities therefore represents just 30%
These financing arrangements set SUNASS apart from practice for water regulators internationally: data from the OECD Database on the Governance of Sector Regulators show that only 15% of water regulators receive funding from a combination of fees and budget appropriations
So what?
Water regulators’ reliance on funding from government funding can potentially undermine their independence, although there are a number of mechanisms that can be put in place to mitigate this risk. E.g. multi-annual budgeting, and Peru follows this good practice of establishing multi-annual budget estimates.
Still, have been adjustments to how much money they have actually received. Delays in getting money transferred.
Advocating for budget-setting according to an estimation of the costs related to the regulation and supervision of the sector, rather than on available resources, could ensure sufficient resources.
This could strengthen the regulator’s case for more resources and flexibility.
The Peruvian national administration implements a performance-based budgeting system whereby budgets are to be aligned with goals and objectives of the institution and budget execution is monitored in parallel with progress in performance indicators.
In 2018, the Commission for Consumer Defence and Regulators of Public Utilities discussed and approved raising the cap on fees from regulated entities from 1% to 2% of income after sales taxes, but the decision has not passed through Congress.
SUNASS’s new responsibilities have dramatically changed the regulator’s financing model.
Prior to the expansion of its functions to rural areas, SUNASS was funded solely from the urban water service operators it regulated, collecting a maximum of 1% of income after sales taxes.
While this funding scheme represented a strength that contributed to the independence of the regulator, it was already inadequate to carry out its functions fully, as water utilities in Peru tend to be small public agencies with low business income.
The regulator is now funded by a mix of fees and government funds, with government funds providing the majority of the budget.
In order to cover the expansion of supervision to rural 2019: 100 Soles budget – 70 million from Ministry of Housing, Construction and Sanitation,
The income from regulated entities therefore represents just 30%
These financing arrangements set SUNASS apart from practice for water regulators internationally: data from the OECD Database on the Governance of Sector Regulators show that only 15% of water regulators receive funding from a combination of fees and budget appropriations
So what?
Water regulators’ reliance on funding from government funding can potentially undermine their independence, although there are a number of mechanisms that can be put in place to mitigate this risk. E.g. multi-annual budgeting, and Peru follows this good practice of establishing multi-annual budget estimates.
Still, have been adjustments to how much money they have actually received. Delays in getting money transferred.
Advocating for budget-setting according to an estimation of the costs related to the regulation and supervision of the sector, rather than on available resources, could ensure sufficient resources.
This could strengthen the regulator’s case for more resources and flexibility.
The Peruvian national administration implements a performance-based budgeting system whereby budgets are to be aligned with goals and objectives of the institution and budget execution is monitored in parallel with progress in performance indicators.
In 2018, the Commission for Consumer Defence and Regulators of Public Utilities discussed and approved raising the cap on fees from regulated entities from 1% to 2% of income after sales taxes, but the decision has not passed through Congress.
What are some of the approaches used to supervise such a large number and diversity of operators? Is the creation of a local presence the most effective way forward?
How best to manage mixed sources of financing (government budget, fees) in a way that provides sufficient and predictable resources to carry out functions?
How to manage tariff setting process in context of high resistance to paying for water?
