Peru: Disaster Risk Management in Water and Sanitation Utilities Volume II: Policy Considerations and Financial Protection Strategies

Transcription

1 Water and Sanitation Program: Technical paper Peru: Disaster Risk Management in Water and Sanitation Utilities Volume II: Policy Considerations and Financial Protection Strategies October 2012 Canadian International Development Agency Agence canadienne de développement international

2 Peru: Disaster Risk Management in Water and Sanitation Utilities Volume II: Policy Considerations and Financial Protection Strategies Author This publication has been produced by Consorcio Evaluación de Riesgos Naturales América Latina, ERN AL, conformed by Centro Internacional de Métodos Numéricos en Ingeniería (CIMNE), Evaluación de Riesgos Naturales, Ingenieros Consultores S.C., ITEC Ltda. and INGENIAR Ltda. Content Contributors World Bank Fernando Ramírez, Senior Specialist in Disaster Risk Management (LCSDU) Oscar Ishizawa, Specialist in Disaster Risk Management (LCSDU) Diana Rubiano, Senior Specialist in Disaster Risk Management ETC (LCSDU) Water and Sanitation Program (WSP) Glenn Pearce Oroz, Regional Director for Latin America and the Caribbean Iris Marmanillo, Disaster Risk Management in Water and Sanitation Sector Project Leader Gustavo Perochena, Disaster Risk Management in Water and Sanitation Sector Project Coordinator The production of this study was made possible by the financial support from the Canadian International Development Agency (CIDA). Graphic Design Shinny Montes First Edition: October, 2012 Press Run: 150 copies Printing: GMC Digital S.A.C. Lima, Peru 2012, World Bank s Water and Sanitation Program All rights reserved wsplac@worldbank.org The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to the work is given.

3 Table of Contents Foreword I INTRODUCTION II INSTITUTIONAL CONTEXT FOR THE WATER SUPPLY AND SANITATION SECTOR IN PERU Sector service providers (SP) Sector service provider description and general statistics Sector service provider indicators and financial statistics Management and financial indicator analysis Institutional context for water supply and sanitation services in Peru Overview Ministry of Economics and Finance (MEF) Ministry of Housing, Construction, and Sanitation (MVCS) Presidency of the Council of Ministers (PCM) National Superintendence of Sanitation Services (SUNASS) Banking and Insurance Superintendence (SBS) Association of Municipalities Legal framework Insurance sector in Peru General Description General opinion on the insurance sector III CATASTROPHIC RISK IN THE WATER SUPPLY AND SANITATION SECTOR IN PERU Overview Risk assessment methodology Probabilistic risk analysis procedure Necessary basic information Hazard Assessment Exposure assessment

4 3.3.4 Component vulnerability Risk Assessment General risk analysis for the sector Analyses made and assumptions General diagnosis of the sector risk profile General diagnosis of the sector risk IV POLICY ELEMENTS FOR RISK MANAGEMENT AND FINANCIAL PROTECTION STRATEGY Overview Elements for disaster risk management Elements for specific policy Overview Identifying the risk Risk Reduction Comprehensive sector financial protection strategies Contingency plans, emergency attention, and reconstruction Financial protection strategy for the sector and for the SP Introduction Alternative 1: individual insurance scheme for the SP Alternative 2: Sector SP group insurance Implementation and interaction with sector SP Implementation Interaction with the agencies related to the sector Budget reallocations Recommendations for strengthening disaster risk management and financing Recommendations for driving risk financial protection V ANNEX 1: PROBABILISTIC RISK MODELING METHODOLOGY Overview Identification of the basic information required Risk analysis Risk analysis procedure Basic risk calculation equation Hazard temporality

5 5.3.4 Uncertainties Specific risk estimators Probability of Loss Value Exceedance Sole scenario analysis Hazard and risk analysis VI ANNEX 2: GENERAL DIAGNOSIS OF THE CATASTROPHIC RISK FOR THE SECTOR Financial risk management indicators General diagnosis of the sector risk situation VII ANNEX 3: RISK TRANSFER AND RETENTION INSTRUMENTS Transfer and retention instruments Financial risk transfer Transfer and financing on the capital market Financial risk retention Transfer and retention through a captive insurance company 7.2 Combining financial protection alternatives Retention and transfer structure design Financial optimization analysis Need to protect public assets VIII ANNEX 4: WATER SUPPLY AND SANITATION SECTOR INTERNATIONAL FINANCIAL PROTECTION EXPERIENCES International cases Experiences in Colombia The experience in Chile The experience in Mexico The experience in Costa Rica Comments on other mass insurance mechanisms Case analysis Conclusions

6 List of Figures Figure 2 1 Water supply coverage evolution Figure 2 2 Sanitation coverage evolution Figure 2 3 Unit volume of water produced Figure 2 4 Percentage of waste water treated Figure 2 5 Service continuity Figure 2 6 Mean service fees Figure 2 7 Work ratio Figure 2 8 Operating margin Figure 2 9 Percentage of unbilled water Figure 2 10 Roles, by different levels of government...28 Figure 2 11 Roles, by different Government Ministries...29 Figure 3 1 Seismic hazard in Peru...40 Figure 3 2 Detail of the pipe line network in a sector of the city of Lima...42 Figure 3 3 Illustrative vulnerability functions...43 Figure 3 4 Loss exceedance curve in terms of exceedance rate (left) and return period (right)...44 Figure 4 1 Retention and transfer structure...62 Figure 4 2 Risk retention and transfer structure...66 Figure 5 1 Probabilistic risk assessment methodology...86 Figure 6 1 Seismic Hazard in Peru, PGA, RP = 500 years...91 Figure 6 2 General risk indicators for the SP in Peru...94 Figure 6 3 Probable maximum loss for the SP groups...95 Figure 6 4 Probable maximum loss as a percentage of the exposed value...96 Figure 6 5 Average annual loss as a percentage of the operating income...96 Figure 7 1 Losses due to small events and large events during a prolonged period of time Figure 7 2 Retention and transfer structure Figure 7 3 Financing costs

7 List of Tables Table 2 1 Total number of water connections in 2009 (Continued in Table 2-2)...14 Table 2 2 Total number of water connections in 2009 (Continuation of Table 2-1)...15 Table 2 3 Summary of the number of water connections in Table 2 4 Water supply and sanitation system coverage in Table 2 5 Water supply coverage evolution Table 2 6 Sanitation coverage evolution Table 2 7 Unit volume of water produced Table 2 8 Percentage of waste water treated Table 2 9 Service continuity Table 2 10 Mean service fees Table 2 11 Work ratio Table 2 12 Operating margin Table 2 13 Percentage of unbilled water Table 2 14 Water supply and sanitation sector main functions and responsibilities...27 Table 2 15 Net insurance premiums as compared to Table 2 16 Insurance claims - September 2010 as compared to Table 2 17 Insurance loss variation...35 Table 2 18 Net technical results, by type of insurance...35 Table 3 1 Table 3 2 Table 4 1 Table 4 2 Table 5 1 Table 5 2 Table 5 3 Table 5 4 Table 5 5 Basic SP information required for risk analysis...39 Average annual loss...45 Probable maximum losses for the different SP groups...67 Range of probable commercial premium values...67 Detailed seismic hazard information, requested from the Service Providers (SP)...82 Detailed basin flooding hazard information, requested from the SP...83 Detailed landslide hazard information, requested from the SP...83 Detailed risk, exposure and vulnerability study information, requested from the SP...84 Hazard Temporality...87 Table 6 1 Risk indicator for the 50 SP in Peru (Continues on Table 2-15)

8 Table 6 2 Risk indicator for the 50 SP in Peru (Continued from Table 2-14)...93 Table 6 3 Table 7 1 Table 7 2 Table 7 3 Probable maximum loss for the different SP groups...94 Benefits for catastrophic risk sellers and buyers Catastrophe indexes Disaster risk coverage financial instruments Table 8 1 Aguas de Manizales insured amounts (at 2008) Table 8 2 Table 8 3 Table 8 4 Aguas de Manizales combined material damages policy deductibles Insured amounts during the installation process Medium-sized and large Chilean SP. Market share

9 Foreword Foreword The seismic risk in Peru is the highest catastrophic risk in the country. According to a World Bank study, Peru is located on the 20th spot of the world ranking of countries with highest economic 1 risk due to threats caused by extreme events such as earthquakes, floods, frosts, among others. In August 2007, Peru s south region was hit by an 8.0 Mw earthquake, affecting the population with infrastructure damage. This disaster put in evidence the weakness in disaster risk management politics, and holes especially in the reduction of vulnerability and emergency management 2. As part of the support that the World Bank offered the Peruvian government in facing reconstruction, infrastructure seismic risk evaluation was developed for SEDAPAL 3 and EMAPICA 4, two Peruvian companies that provide drinking water and sanitation services. The study looked to quantify the probable losses that these companies are exposed to for damages on their infrastructure due to the occurrence of future earthquakes. The results of this evaluation are constituted in a fundamental input for future analysis in the design and prioritization of disaster risk reduction measures of these companies. The study features some recommendations of risk management policies and emphasizes on the need to continue improving the knowledge of threats and risks. Due to its reach and methodology (probabilistic risk modeling, using the CAPRA platform) 5 it is the first to be developed in the water and sanitation sector in Peru. In this sense, the study also offers an excellent opportunity to review and learn the usefulness of the probabilistic approximation and to promote new studies in other regions of the country. The study had the decided support of Board Members and officers of SEDAPAL and EMAPICA companies for the collecting and arrangement of the baseline information and the technical studies. We would like to express our acknowledgement to those who, with their invaluable contribution, made possible the development of this publication; Fernando Ramirez (Disaster Risk Management Senior Specialist, LCSDU), Oscar Ishizawa (Disaster Risk Management Specialist, LCSDU), Diana Rubiano (Disaster Risk Management Senior Specialist ETC, LCSDU), Iris Marmanillo (Water and Sanitation Senior Specialist, TWILC), Gustavo Perochena (Senior Economist, TWILC), Yehude Simon (Communications Officer, TWILC), Juan Chong (Consultant, TWILC) and Marisol Noriega (Program Assistant, TWILC). We also thank the Canadian International Development Agency (CIDA), for funding this study. Anna Wellestein Sector Manager Disaster Risk Management and Urban Issues for Latin America and the Caribbean The World Bank Glenn Pearce Oroz Regional Director for Latin America and the Caribbean Water and Sanitation Program The World Bank 1 The World Bank. Natural Disaster Hotspots, Chart 7.2: Countries at Relatively High Economic Risk from Multiple Hazards. Page The World Bank. Strategic Alliance with the country for the Republic of Peru. Exercises Page Company located in the city of Lima (Central coast of Peru) with 9 millions of inhabitants. 4 Company located in the city of Ica (South of Lima) with 500 thousand inhabitants. 5 The study was advanced by Consorcio ERN LA 11

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11 Introduction I. Introduction The rigorous risk assessment made by water supply and sanitation service providers (SP) in Peru as well as an analysis of the institutional context (State agencies, service providers, insurance companies) are the fundamental bases for proposing a risk protection scheme and the requirements for its eventual implementation in each one of the service providers and in the sector at large through sector policy. The catastrophic risk assessment of a water supply and sanitation system must give priority to the main natural hazard(s) to the system and to the vulnerability of its different components, that is to say, the predisposition of said elements suffering damage if an important event occurs. The analysis must be made for each one of the service providers and for the set of service providers simultaneously because catastrophic scenarios can affect one of more service providers at the same time. In Peru natural events have historically produced significant economic losses. It is worth highlighting the August 2007 earthquake that caused damages worth US$ 2 billion; the 1997 flood that caused damages estimated at US$ 1.2 billion; the 1983 flood that caused damages of around US$ 988 million; the 1970 earthquake that caused damages estimated at US$ 530 million; the 2001 earthquake that generated losses of US$ 300 million; and the 1992 draught that originated damages estimated at US$ 250 million. Considering the high impact that seismic events have in Peru, demonstrated by the above statistics and given the fact that this study aims to estimate catastrophic losses, the risk analysis has given the first priority to seismic events. Volume I of this report presents a detailed seismic risk assessment for two service providers that are representative of the sector, SEDAPAL and EMAPICA. Based on the results, specific recommendations were made regarding vulnerability mitigation and reduction strategies, financial protection strategies, and an action plan for proper risk management at short, medium, and long terms for each one of the sector service providers. The main objective of this part of the study (Volume II) is to suggest policy elements for risk management for the service providers (SP) and to propose a financial protection strategy for the individual service providers and for the sector as a whole. To do so, the study presents a review of the institutional context of the Peruvian water supply and sanitation sector, including the service providers (SP), the institutional context, the legal framework, and the insurance sector. In addition, the study conducts a comprehensive catastrophic risk assessment for the sector, based on the specific case analyses of SEDAPAL and EMAPICA (presented in Volume I), but broadened to include the other sector service providers, and, finally, based on those results, it suggests policy elements for risk management and a sector strategy for the financial protection of the sector. Volume II is aimed at and directed to the public sector, that is, mainly regional and national governments, and to the persons in charge of establishing and supervising the policy for this sector. It also serves as a reference document for sector service providers that wish to implement a risk management system. 13

12 II. Institutional context for the water supply and sanitation sector in Peru Institutional context for the water supply and sanitation sector in Peru 2.1 Sector service providers (sp) Currently in Peru water supply and sanitation service operations, maintenance, and administration are the responsibility of Service Providers (SP) comprised of Servicios de Agua Potable and Alcantarillado de Lima (SEDAPAL) and municipal service providers (jointly, they cover the needs of 62% of the population of Peru), community organizations (they cover 29% of the population, mainly in the rural areas), and small municipalities (they cover 9% of the total population). In the urban ambit, out of the 62% covered by the SP, 29% corresponds to SEDAPAL and the remaining 33% corresponds to 53 other service providers of different sizes with distinct degrees of complexity Sector service provider description and general statistics The water supply and sanitation sector in Peru is made up of a total of 50 service providers of different sizes with different characteristics. A general classification was established according to the company size: large, medium, and small. Based on the information available at the National Superintendence of Sanitation Services (SUNASS), the service providers were given a general characterization. The total population attended with water supply by the 50 service providers is approximately 15 million persons. Out of them, SEDAPAL alone serves over 7 million, representing near half of the total population attended whereas the other service providers classified as large SP serve another 5 million persons. The medium service providers attend approximately 2 million persons and the small service providers solely attend 300,000 persons. Along the same lines, the total number of water connections follows a similar pattern in which SEDAPAL has almost half of the total number of connections (1.3 million connections). Table 2-1 summarizes the number of service providers in each group and the total number of connections Number of connections and classification The SP are classified into three groups according to their size: large (L), medium (M), and small (S). Tables 2-1 and 2-2 show the list of the 50 SP classified and the number of total water connections for the year Table 2.1: Total number of water connections in 2009 (Continued in Table 2-2) Name Type Population attended with water supply No. of water connections 2009 AGUAS DE TUMBES M 132,221 35,801 EMAPA CAÑETE S.A. M 138,779 28,444 EMAPA HUACHO S.A. M 94,670 21,818 EMAPA HUANCAVELICA S.A.C P 26,896 6,881 EMAPA HUARAL S.A. M 65,727 13,654 EMAPA MOYOBAMBA S.R.LTDA. M 46,617 13,165 EMAPA PASCO S.A. M 61,835 11,216 EMAPA San Martín S.A. M 155,231 35,128 EMAPA Y P 10,625 4,166 EMAPAB S.R.LTDA. P 15,996 4,710 1 National Sanitation Plan

13 Institutional context for the water supply and sanitation sector in Peru Table 2.2: Total number of water connections in 2009 (Continuation of Table 2-1) Name Type Population attended with water supply No. of water connections 2009 EMAPACOP S.A. M 125,214 22,944 EMAPAT S.R.LTDA. M 52,771 11,253 EMAPAVIGSSA P 26,683 7,089 EMAPICA S.A. G 166,763 43,359 EMAPISCO S.A. M 80,988 19,284 EMAQ S.R.LTDA. P 18,629 5,361 EMPSSAPAL S.A. M 52,344 11,722 EMSA PUNO S.A. M 160,085 36,156 EMSAP CHANKA P 15,473 3,746 EMSAPA YAULI P 11,703 2,695 EMUSAP ABANCAY M 51,607 10,862 EMUSAP AMAZONAS P 21,404 5,852 EPS - SEDACUSCO S.A. G 362,322 61,218 EPS AGUAS DEL ALTIPLANO P 17,176 5,191 EPS CALCA P 11,689 2,544 EPS CHAVIN S.A. M 92,759 22,496 EPS GRAU S.A. G 862, ,156 EPS ILO S.R.LTDA. M 71,791 21,790 EPS MANTARO S.A. M 56,928 14,848 EPS MARAÑON P 37,756 9,272 EPS MOQUEGUA S.R.LTDA. M 41,555 17,984 EPS SEDALORETO S.A. G 387,872 67,847 EPS SELVA CENTRAL S.A. M 96,497 18,993 EPS SIERRA CENTRAL S.A. P 31,667 9,124 EPS TACNA S.A. G 257,422 67,533 EPSASA G 179,716 44,567 EPSEL S.A. G 707, ,712 EPSSMU S.R.LTDA P 23,108 6,232 NOR PUNO S.A. P 21,156 7,329 SEDA Huánuco S.A. M 176,878 35,860 SEDACAJ S.A. M 151,155 32,426 SEDACHIMBOTE S.A. G 348,187 74,395 SEDAJULIACA S.A. G 201,827 41,373 SEDALIB S.A. G 788, ,583 SEDAM HUANCAYO S.A.C G 310,145 62,404 SEDAPAL S.A. S 7,235,363 1,285,348 SEDAPAR S.A. G 776, ,825 SEDAPAR S.R.L. (Rioja) P 18,627 5,089 SEMAPA BARRANCA S.A. M 59,744 16,507 SEMAPACH S.A. M 159,675 37,

14 Institutional context for the water supply and sanitation sector in Peru Table 2-3 summarizes the number of service providers in each group and the total number of connections. Table 2.3: Summary of the number of water connections in 2009 Service Providers No. of companies Population attended Total number of water connections SEDAPAL 1 7,235,363 1,285,348 Large 12 5,349,598 1,145,972 Medium 22 2,125, ,877 Small ,586 85,281 Total 50 15,018,619 3,006, Coverage Water supply and sanitation coverage is measured as the percentage of the population who live in the zones under the administration of each SP with access to said services. For water supply, domiciliary connections as well as public basins are taken into consideration. Tables 2-4 through 2-6 show the percentage of coverage for large, medium, and small SP and for the service provider SEDAPAL (SE) separately. Table 2.4: Water supply and sanitation system coverage in 2009 Service Providers Type Urban population 2009 water supply coverage 2009 sanitation coverage Population attended [%] Population attended [%] SEDAPAL SE 8,979,056 7,235, ,873, Large L 6,114,346 5,349, ,630, Medium M 2,591,978 2,125, ,813, Small S 434, , , Total 18,119,947 15,018, ,578, Table 2.5: Water supply coverage evolution Service Providers Type Urban population Water supply coverage [%] SEDAPAL SE 8,979, Large L 6,114, Medium M 2,591, Small S 434, Total T 18,119,

15 Institutional context for the water supply and sanitation sector in Peru Table 2.6: Sanitation coverage evolution Service Providers Type Urban population Sanitation coverage [%] SEDAPAL SE 8,979, Large L 6,114, Medium M 2,591, Small S 434, Total T 18,119, Figure 2-1 presents the evolution of the water supply coverage through time for the different service provider groups. Figure 2.1: Water supply coverage evolution Figure 2.2: Sanitation coverage evolution Water supply coverage (in %) Sewer Coverage (in %) Year Year Sedapal Large SP Medium SP Small SP Sedapal Large SP Medium SP Small SP As can be seen in Figure 2-1, solely the large and medium service providers have had water supply coverage growth whereas SEDAPAL and the small service providers have shown a clear drop in coverage for the year Figure 2-2 shows that the sanitation coverage behavior has a tendency similar to the water supply coverage evolution. Here, only the large and medium service providers present growth in sanitation coverage whereas SEDAPAL and the small service providers present a relative drop in the coverage for this service for the year

16 Institutional context for the water supply and sanitation sector in Peru Water supply production and wastewater treatment volumes Table 2-7 and Figure 2-3 present statistics for the water supply volume produced for the population, by service provider group. It also presents the unit volume produced (volume per inhabitant) as an indicator of business efficiency. Table 2.7: Unit volume of water produced Service Providers Type Population attended 2009 Volume produced 2009 Unit volume produced [L/inhabitant] [L] SEDAPAL SE 6,669, ,604, Large L 4,631, ,678, Medium M 1,728, ,921, Small S 262,410 36,050, Total T 13,291,688 1,304,255, Figure 2.3: Unit volume of water produced Unit volume of water produced (m3/inhab) Year Sedapal Large SP Medium SP Small SP 18

17 Institutional context for the water supply and sanitation sector in Peru Another indicator that enables measuring business efficiency in service provision is waste water treatment that measures the percentage of collected waste water that is treated before being sent to the receiver. That information is summarized in Table 2-8 and in Figure 2-4. Table 2.8: Percentage of waste water treated Service providers Type Volume sent through network Volume of waste water treated % of waste water treated [L] [L] SEDAPAL SE 412,039,298 86,681, Large L 245,045, ,607, Medium M 105,047,877 33,256, Small S 24,247,302 10,507, Total T 786,379, ,052, Figure 2.4: Percentage of waste water treated Waste water treated (%) Year Sedapal Large SP Medium SP Small SP 19

18 Institutional context for the water supply and sanitation sector in Peru Service continuity Water supply service continuity is the weighted average of the number of hours per day that the service provider renders the service to the users. The available statistics are presented in Table 2-9 and in Figure 2-5. Table 2.9: Service continuity Service providers Type Active connections Continuity [hours/day] SEDAPAL SE 1,151, Large L 963, Medium M 379, Small* S 58, Total T 2,552, * Not all of the small SP have available information. Figure 2.5: Service continuity Continuity (Hours/day) Year Sedapal Large SP Medium SP Small SP 20

19 Institutional context for the water supply and sanitation sector in Peru Sector service provider indicators and financial statistics The proposal of possible risk management strategies (mitigation programs, financial protection, and contingency plans, among others) for the sector service providers requires reviewing and assessing SP indicators and financial statistics. Some general indicators are presented below according to the information furnished by the National Superintendence of Sanitation Services (SUNASS) Service fees Among the financial indicators, the mean service fee was considered. It is the average value billed per water supply unit of volume. Table 2.10: Mean service fees Service providers Type Billed volume Amount billed Mean service fee [in US$/m3]] [m3] [in US$] SEDAPAL SE 412,709, ,413, Large L 230,059, ,155, Medium M 96,617,437 41,641, Small S 16,927,749 5,231, Total T 756,314, ,443, Figure 2.6: Mean service fees Mean service fee (in US$/m3) Year Sedapal Large SP Medium SP Small SP 21

20 Institutional context for the water supply and sanitation sector in Peru Work ratio The work ratio was used to measure service sustainability. This is the ratio that represents total operating costs (without including depreciation and bad debt allowance) over total operating income. Table 2.11: Work ratio Service providers Type Operating income Operating costs without depreciation or bad debt allowance [%] [in US$] [in US$] SEDAPAL SE 403,457, ,998, Large L 147,512, ,771, Medium M 46,470,681 38,503, Small S 5,762,107 5,153, Total T 603,202, ,426, Figure 2.7: Work ratio (Work ratio (%) Year Sedapal Large SP Medium SP Small SP 22

21 Institutional context for the water supply and sanitation sector in Peru Operational margin The operating margin is another useful indicator because it measures the percentage that represents the operating profit (operating income minus operating costs) over operating income. Table 2.12: Operating margin Service provider Type Operating income [in US$] Total operating costs [in US$] [%] SEDAPAL SE 403,457, ,610, Large L 147,512, ,502, Medium M 46,470,681 47,831, Small S 5,762,107 6,197, Total T 603,202, ,140, Figure 2.8: Operating margin Operating Margin (%) Year Sedapal Large SP Medium SP Small SP 23

22 Institutional context for the water supply and sanitation sector in Peru Unbilled water This indicator measures business efficiency because it represents the percentage of the water supply produced by each SP, which it does not bill, either due to system losses or to not having been measured. Table 2.13: Percentage of unbilled water Service providers Type Volume produced Volume billed [%] [m3] [m3] SEDAPAL SE 671,604, ,709, Large L 405,678, ,059, Medium M 190,921,277 95,960, Small S 36,050,889 16,929, Total T 1,304,255, ,659, Figure 2.9: Percentage of unbilled water Unbilled Water (%) Year Sedapal Large SP Medium SP Small SP 24

23 Institutional context for the water supply and sanitation sector in Peru Management and financial indicator analysis In general terms sector service providers present management and financial indicators that are not very encouraging. First of all, the SP show a level of coverage of water supply to the population from 80% to 87%, but only the medium and large SP have had an increase in coverage through time. Sanitation coverage shows a level from 65% to 85%, but SEDAPAL and the small SP show some coverage difficulty. Treated waste water percentages range from 10% to 60% in some cases and SEDAPAL and several medium SP show the most critical situations. Most of these SP have a service continuity of around 15 hours per day whereas SEDAPAL shows an average of 22 hours per day. The financial indicator situation is not very positive either. On one hand, the sector service fees have increased through time, especially those of SEDAPAL, whereas the small SP service fees have remained practically constant over the past five years. The ratio total operating costs over operating income is around 55% for SEDAPAL, 80% for the large SP, and over 85% for the other SP. Operating margins are negative for most of the medium and small SP, barely positive after several years of negative values for the large SP, and only SEDAPAL presents operating margins of over 20%. Unbilled water percentages are more than 40% in all cases and some service providers show more than 50%. In general, the statistics for the sector evidence important problems such as low levels of water supply and sanitation coverage, low levels of waste water treatment, low levels of service continuity, and financial problems in most of the medium and small SP, aggravated by minimum increases in service fees in recent years, and very high percentages of unbilled water. Those aspects generate a series of priorities for the service providers at the same time as the need for risk management. There is also an evident need to improve business operations aspects, through actions such as optimizing operations, reducing unbilled water, and increasing coverage, among others. If all of the above can be achieved in a sustainable manner through time, that would generate sounder financial conditions for the service providers, which would naturally lead to more resources, in particular for risk management in the service providers. 2.2 Institutional context for water supply and sanitation services in Peru Overview A general description of the institutional context for the water supply and sanitation sector in Peru is presented below. (The information is based on the report Regional plan for the region of Cajamarca, prepared for the World Bank in 2010). During the 1970s, the General Directorate of Sanitation Works (DGOS) ascribed under the Ministry of Housing was the agency in charge of the sanitation sector; its sole purpose was the construction of sanitation works at a national level. Then, in 1981, the National Water Supply and Sanitation Service (SENAPA) was created; it consisted of 15 Affiliates and 12 Operating Units. When SENAPA was liquidated in 1990, the services were transferred to the provincial municipalities that had to constitute municipal public utility companies devoted to sanitation service provision (SP). However, in many cases, the municipalities themselves directly took over the service provision. Through 1992 Law No , the National Superintendence of Sanitation Services (SUNASS) was created. It is an agency in charge of promoting development and laws and regulations for sanitation service provision and in charge of settling user claims. It is the first time in Peru that a regulation mechanism exists for the sector. Indeed, before there was no legal framework to regulate operating conditions, rights and obligations for the service providers and for the users, nor for regulating service fees. 25

24 Institutional context for the water supply and sanitation sector in Peru The General Sanitation Service Law was signed in 1994 and was later regulated through Supreme Decree No PRES, thus establishing the institutional context for the sector and three main protagonists, as follows: The national level Governing Body, whose functions were initially performed by the Ministry of the Presidency and afterwards by the Ministry of Housing, Construction, and Sanitation through the Vice- Ministry of Construction and Sanitation. Its main functions are to formulate, approve, execute, and supervise national policy for service provision, as well as to formulate national development plans for the sector and allocate State resources. The Regulating Body comprised of the National Superintendence of Sanitation Services (SUNASS) that is currently ascribed under the Presidency of the Council of Ministers. Its main objective is to create laws and norms, to regulate, supervise, and control sanitation service provision in an impartial and objective manner to the best interest of the State, of the investors, and of the users. It is in charge of approving the water supply and sanitation service fees that the service providers in the urban areas charge (SEDAPAL in Lima and municipal companies (SP) in the Provinces), except for Tumbes that has a private sector service provider. It does not regulate or supervise other service providers (municipalities and community organizations). It is important to highlight that, in August 2006, the approval of Law No granted the National Superintendence of Sanitation Services the power to set the SP service fees, a function that until then had corresponded to the General Shareholders Assembly or Partners of those companies. Furthermore, the Unique Ordered Text (TUO) in the Regulation of the General Sanitation Services Law approved through Supreme Decree No VIVIENDA of November 2005 set forth that the SP were obliged to formulate Optimized Master Plans (PMO) that would serve as a basis for setting the service fees. The service providers in Peru are: a) Servicio de Agua Potable and Alcantarillado de Lima (SEDAPAL) and Municipal Sanitation Service Providers (SP) that jointly cover 62% of the total population; (b) the Community Organizations that are responsible for 29% of the population, which mainly cover the rural areas, and (c) Small Municipalities (490) that attend to 9% of the total population. Pursuant to the law, the provincial municipalities are responsible for sanitation service provision; so, consequently, they have the power to grant the right of exploitation to the service providers. It is further set forth that, in the event that the municipalities directly provide this service, they must constitute a Management Unit for such services. In addition to the above-mentioned entities, there are other participants in the water supply and sanitation sector who act and are involved according to their particular competence, mainly the Ministry of Health and the Ministry of Economics and Finance (the General Directorate of Multi-annual Scheduling, the National Directorate of Public Debt, and the National Directorate Of Public Budgeting), the Ministry for Women and Social Development (FONCODES), and the Ministry of the Environment. Table 2-14 below summarizes the main sector functions, by institution. 26

25 Institutional context for the water supply and sanitation sector in Peru Table 2.14: Water supply and sanitation sector main functions and responsibilities Areas Urban zone Rural zone Policy definition Investment prioritization Ministry of Housing, Construction, and Sanitation (MVCS) Vice-Ministry of Construction and Sanitation (VMCS) National Sanitation Directorate (DNS) MVCS-VMCS: DNS, OGPP OPI Housing MEF: General Directorate of Multi-annual Scheduling DRVCS: Regional Directorates of Public Budgeting Resource allocation VMCS: DNS Urban Sanitation Directorate VMCS: DNS Rural Sanitation Directorate MEF: National Directorate of Public Debt National Directorate of State Company Activity Financing (FONAFE) Regulation National Superintendence of Sanitation Services (SUNASS) Service fee and quota setting and approval Service Provider Shareholders Boards Municipalities Community Organizations Norms and codes Studies and work performance MVCS VMCS: DNS MINSA: National Directorate of Environmental Health (DIGESA) Regional Governments Municipalities Water for Everyone Program INADE Service Providers Regional Governments MVCS PROSANAR PROMUDEH FONCODES MINSA DIGESA NGOs International Cooperation Agencies Service provision Service Providers (Public, Private or Dual Economy) Municipalities Community Organizations Also, Figures 2-10 and 2-11 (taken from Jorge Villacorta - Jornada Latinoamericana de Políticas e Inversiones de Agua and Alcantarillado) present a schema that summarizes the roles according to the different levels of government. 27

26 Institutional context for the water supply and sanitation sector in Peru Figure 2.10: Roles, by different levels of government Local Government Provincial Municipalities Responsible for service provision SP Municipalities JASS* In charge of service provision. Investments. Regional Government Region Offers technical and financial assistance. National Government Ministry of Housing, Construction, and Sanitation Governing body. Defines policy, prioritizes investments and financing. SUNASS Regulating body. Regulates and supervises service provision. Source: Jorge Villacorta - Jornada Latinoamericana de Políticas e Inversiones de Agua and Alcantarillado 28

27 Institutional context for the water supply and sanitation sector in Peru Figure 2.11: Roles, by different Government Ministries Ministry of Production Ministry for Women Ministry of Health Ministry of Economics Ministry of Agriculture Ministry of Housing, Construction and Sanitation Presidency Counsel Ministers Directorate of the Environment, Industry Regulates the quality of industrial discharges in drainage systems FONCODES Carries out social and economic infrastructure projects Executive Directorate of Basic Sanitation (DIGESA)) Regulates the quality of the water supply and sanitation National Directorate of Public Budgeting Approves SP budgets and management INRENA Grants licenses for the use of surface, underground, and waste water Environment Office Supports policies for sector environmental issues CONAM Governing body for the national environmental policy National Directorate of Public Credit Approves and channels funds for investment National Sanitation Directorate Determines policy and promotes development Regulates water supply and sanitation system design standards and technical specifications Program Agua para todos (Water for everyone) Finances and carries out urban area and rural area projects SUNASS Regulates and supervises urban service providers service quality, service fees, and investments OTHER SERVICE PROVIDERS OUTSIDE OF LIMA SEDAPAL Municipalities That own sanitation service provision companies outside of Lima Central Government (FONAFE) Owner of SEDAPAL stock Source: Jorge Villacorta, Jornada Latinoamericana de políticas e inversiones de agua and alcantarillado 29

28 Institutional context for the water supply and sanitation sector in Peru Ministry of Economics and Finance (MEF) The Vice-Ministry of Treasury ascribed under the Ministry of Economics and Finance ate (MEF) is responsible for the General Directorate of Indebtedness and Public Treasury that works in compliance with the General Law of Internal and External Public Indebtedness. That directorate is in charge of signing for contingent loans. The agency also manages the external debt in all sectors of the Peruvian economy as well as public investment and sustainable debt. The same Vice-Ministry is in charge of the General Directorate of Public Budgeting (DGPP) that is among the agencies that has the most interaction with the different water supply and annotation service providers including SEDAPAL S.A 2. The directorate is in charge of approving the operating budgets of each one of the SP, a labor that it performs on an annual basis and it is further in charge of generating the possibility of assessing credit lines for insurance policy payments. The Directorate of Territorial Budgeting Articulation is the agency in the DGPP that studies the possibility of the Municipal Governments participating in financing the public expenses related to mitigation works that lead to increasing the feasibility of the different SP acquiring insurance policies. It also studies different mechanisms for motivating the intervention of the pipe line network systems and somehow taking risk mitigation measures. To do so would require a series of conditions imposed by the MEF on the municipalities thus complying with water supply and sanitation sector risk management schemes. Currently, there are mechanisms established by the Directorate for Local and Regional Investment for encouraging studies and projects to reduce risk in sectors that are key to the population, and there are programs underway such as Vulnerability reduction and Emergency Disaster Attention along the same lines. Furthermore, the National Environmental Action Plan and the Bicentennial Plan include natural disaster risk reduction as one of the activities to be carried out in their strategic lines of action. Using all of the above, it will be necessary to shape specific risk mitigation and vulnerability reduction projects in water supply and sanitation service provision companies. The General Directorate of Multi-annual Scheduling of the Public Sector is in charge of orienting and integrating public investment plans, which represents an MEF technical filter. Therefore, any risk prevention and mitigation program must pass through this agency and some rules can be set here for accepting retrofitting programs as well as credit line generation for the intervention of the most vulnerable system elements. The retrofitting strategy must be coordinated with the importance of the quality of the information, to enable knowing with a high degree of reliability what the systems comprise and thus be able to establish which components should be worked on Ministry of Housing, Construction, and Sanitation (MVCS) The National Sanitation Directorate (DNS) is the governing body for the sector; it is ascribed under the Vice-Ministry of Construction and Sanitation of the Ministry of Housing, Construction, and Sanitation. The Directorate is responsible for including risk management in the sector and is bound to do so, either based on international experiences or on specific studies to enable defining how it should be handled and, even more importantly, how such policy would be implemented in the sector. DNS boasts three directorates that are related to the technical laws and regulations for the systems (here considerable changes can be achieved for mitigating risk and guaranteeing minimum safety conditions when new systems are designed), plans and programs, and technical assistance. Moreover, 2 SEDAPAL S.A. is a company adscribed to the State Business Activity Financing Fund (FONAFE). In that sense, SEDAPAL is a particular case because it depends directly on the central government, not on any municipal government. Currently, the Metropolitan Municipality of Lima has requested to be in charge of the administration and management of SEDAPAL. 3 In that sense, MEF has published a document named Guidelines for the identification, formulation, and social assessment of public investment projects at a profile level. 30

29 Institutional context for the water supply and sanitation sector in Peru MVCS oversees the Territorial Management Program ascribed under its Vice-Ministry of Housing and Urbanism; one of the action lines of that program is disaster risk reduction in urban areas. Currently, the National Sanitation Plan is being updated; it will be in effect until the year 2021; disaster risk management must be incorporated into the plan guidelines and it is desirable to include aspects related to risk retention and risk transfer. That should also occur in the regional plans and in the Optimized Master Plans as it would enable giving financial visibility to risk-management related activities Presidency of the Council of Ministers (PCM) The Presidency of the Council of Ministers is the governing body of the National Risk Management System (SINAGERD) and of the National Disaster Prevention Center (CENEPRED). This agency promoted Law through which the National Disaster Risk Management System was created and disaster risk management was defined as a social process whose ultimate end is to prevent, reduce, and permanently control disaster risk factors in the society, as well as to properly prepare for and respond to disaster situations, taking into consideration national policies with a special emphasis on those related to economic, environmental, safety, security, national defense, and territorial issues in a sustainable manner. Currently the regulation of that law is being prepared; it will allow more precisely determining PCM functions in SINAGERD National Superintendence of Sanitation Services (SUNASS) The National Superintendence of Sanitation Services is a public decentralized agency ascribed under the Presidency of the Council of Ministers, whose function is to regulate water supply and sanitation service provider operations in Peru. Among others, its functions are to set service fees, supervise, oversee, and audit the different SP that provide their services in the Peruvian territory. Given its nature of regulator, it has an Optimized Master Plan for the SP, to be updated once every five years; that makes it difficult for them to update service fees or to finance risk mitigation measures using their own funds. When acquiring insurance policies to properly cover the various exposed elements, it is possible that the current costs of the different SP increase. Therefore, that procedure must be taken into account when determining whether the service fees should be modified or not to cover such eventuality. The goal of risk management must be incorporated into the Optimized Master Plan to enable controlling the degree of progress and periodical follow-up could be done directly by SUNASS. Depending on the studies conducted, if the Superintendence determines that the impact of the service fees is high, a mechanism must be sought with the municipalities to enable external financing other than through the service fees or the budget approved by MEF must include a supplemental portion to allow additions solely aimed at risk reduction actions and interventions. Ideally that should be integrated into an ample risk reduction program that would enable, for example, negotiating the insurance premiums acquired according to the expected decrease in risk. After additional resources are allocated for system intervention, as the regulating body for the sector, it is desirable for SUNASS, to carry out supervision activities to be able to guarantee that the works are being performed and also that the resources delivered are being entirely used for the purpose for which they were allocated. Regarding contingency plans, the agency has a regulation related to service provision quality; Annex 5 of that regulation states that it is possible to make some modifications to establish some guidelines relating to how contingency plans must be carried out. 31