Description
Since the early 1990s, local municipal governments have been responsible for the provision of water supply and sewerage (WS&S) services, except in Lima, the capital city. As part of the devolution process, Peruvian Local Municipalities received in ownership WS&S infrastructure and were mandated to organize urban water utilities as autonomous ring-fenced corporations under private company law.
The legal and regulatory framework of water utilities in Peru, established in 1994, is considered sound and provides opportunities for local financing of investments.
Despite this, the sector remains heavily dependent on public financing. The majority of local water utilities cannot meet credit rating and governance standards required to access private financing.
Consequently, loans from financial markets are rare. The World Bank initiated a study to investigate the barriers to local private financing facing the urban WS&S sector in Peru.
Lessons learned
The availability of local financing through Private Pension Funds and others, and their interest in the infrastructure sector, offers an opportunity for water utilities to reduce their dependence on public funding and become financially solvent.
However, there are several challenges that municipalities need to overcome. These include: (a) a government commitment to address the insolvency of water utilities; (b) the fulfilment of conditions for local financing, including a governance structure that enables local investors to retain appropriate oversight over their investments; (c) the regulatory oversight, including tariff reviews and penalties, needed for balance sheet and project based financing of water and wastewater projects; and, (d) the removal of barriers to local financing of water utilities according to contractual and management arrangements.
The main challenge remains to demonstrate that the objectives of the Water for All Program (Agua para Todos) can be achieved sooner and in a more sustainable way in urban areas through a radical overhaul of the balance sheet of water utilities and reforms in their governance framework. Both are considered feasible within the existing legal and regulatory framework, but carefully crafted policies will be needed for facilitating it.
The World Bank study made specific recommendations for key players in the Peruvian Water Utility sector.
Importance of the case for IWRM
Public loans, private loans and equity investment are appropriate to fund the necessary investment programs at the time they are needed. In contrast, the inability of many municipalities and water utilities to access capital markets appeared to be a major obstacle to the development of water and sanitation infrastructure in many parts of the world.
Photo credit: Hanumann