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Role of World Bank and IDB in Peru's Water Sector

WATER SERVICES IN PERU:

The Role of the World Bank and Inter-American Development Bank (IDB)

Background: Of the 27 million people in Peru, approximately 6.4 million people don’t have access to water services and 11.3 million don’t have access to sanitation services. More than 40 percent of the population lives below the national poverty level. For many of the families without piped water, buying water from private vendors can cost a huge proportion of their meager household income, causing families to resort to untreated water from wells, rivers, and streams.  Lack of access to clean and affordable water contributes to the rapid spread of water-borne diseases. In the early 1990s, after World Bank and IDB water sector ‘reforms’ began, a massive cholera epidemic originated in Peru causing more than 3,000 deaths and spreading across Latin America

There is a serious need to re-organize and restructure the public water system in Peru.  There has been a long history of corruption and inefficiency.  World Bank and Inter-American Development Bank collaboration with the Fujimori dictatorship during the 1990s increased these levels of corruption. The reorganization of the water sector should prioritize overall public health, worker rights, and increased access to water and sanitation services in poor and underserved areas.  Unfortunately, World Bank and the Inter-American Development Bank reforms are promoting the wrong solutions.  Similar to the "cookie cutter" model applied in many other countries and economic sectors, the loans of the international financial institutions (IFIs) are requiring reforms that promote privatization or public/private partnerships, and require full cost recovery (increased water rates) in a sector that is vital to human health and public welfare. These reforms place the interests of the private sector over public health.

ANALYSIS OF WORLD BANK & INTER-AMERICAN DEVELOPMENT BANK LOANS IN PERU'S WATER SECTOR

The World Bank Loan: P008051 (Approved November, 1994)

The "Lima Rehabilitation and Management Project" (POO8051) is a World Bank loan of USD 150 million to modernize the public water company in Lima (SEDAPAL) and prepare it for eventual privatization.   The loan conditions required (1) increased water rates, and (2) reductions in the staff of the public water company. The loan conditions prioritized the participation of the private sector over public health and worker rights.

1. Increased water rates in preparation for privatization.

Water rates were increased to make the water company more financially lucrative in preparation for privatization.   From 1989 to 1996 residential water rates more than doubled from US$ 0.17 per cubic meter to US$ 0.41 per cubic meter.  In a country where more than 40% of the population earns less than $2 a day, this increase in the cost of clean drinking water had serious negative impacts on access to clean and affordable water.  Families were forced to make difficult trade-offs between clean water, food, school and clinic fees, and other costs when managing a meager household budget. 

2. Staff reductions in SEDAPAL

To reduce staff, Fujimori decreed a State of Emergency in SEDAPAL, a measure he used to summarily dismiss more than 2,000 workers, despite the protection of a collective bargaining agreement. Jobs were then contracted out to non-union labor. Unemployment increased and those workers with non-union positions suffered lower wages, lack of job security, and fewer health and safety protections.

ALLEGED CORRUPTION: To meet its financial obligations as a counterpart to the Bank, the Fujimori government used money from the fund established by and for workers, called FONAVI. Between 1990 and 1999, USD 564 million were taken from FONAVI, supposedly for investment in the water sector.   Today, it is not clear where and how these funds were spent. Previous President Fujimori is now a fugitive from the Peruvian justice system

Inter-American Development Bank (IDB) loan: 847/OC-PE (Approved December, 1994)

The participation of the IDB in the water sector began in 1991 with technical assistance and continued in 1994 with a loan (N° 847-OC-PE) for USD 140 million.   Disbursement of IDB loan funds was contingent upon various conditions including:

• compliance with the conditions of World Bank loan (POO8051) to downsize and raise rates
• use of funds only for water utilities (1) large enough to be lucrative for privatization, that is with more than 4,000 connections, and (2) willing to re-organize according to the legal framework drafted by the Banks that would facilitate privatization or private concession.

These loans were both designed and implemented in a climate of absolute exclusion of civil society and in violation of the legal rights of workers and citizens.  Both Banks operated according to the direction of the Fujimori dictatorship.

RESULTS

These loans did not achieve their objectives.   On the contrary, they destroyed a functioning and improving water sector organization without establishing another improved, or even comparable one. 

Impact of the IFI Reforms on Labor and Consumer Rights

From its inception, the reforms were hostile to the presence of trade unions in the water sector.   The right of free association and the right to bargain collectively were particularly weakened.  By decree, the Fujimori government appropriated the authority to dismiss workers without restriction, dissolved the practice of labor negotiations in the enterprises, eliminated the right to strike, and imposed wage freezes and wage rollbacks unilaterally.  Union leaders were explicitly targeted for dismissal, and those workers who retained their jobs were intimidated if they attempted any union activity.

The reforms of the 1990s designed by the IFIs for the water and sanitation sector in Peru caused water enterprises to collapse into economic crisis, while workers and consumers suffered negative economic, public health and social effects. During the Fujimori administration, stolen public funds including World Bank loans, were charged to the accounts of the municipal water enterprises, rendering many of them bankrupt. This accounting formed the basis for the argument made subsequently by the IFIs that the utilities needed infusions of capital and must be privatized. Many reforms were implemented through executive decrees of dubious legality and concentrated power and benefits in the Ministry of the Presidency under the now-fugitive President Fujimori.   At the same time, actions required by the loans seriously debilitated the existing system of public service delivery, raising the price of water and reducing access to low-income consumers.

The Pending Loan: Inter-American Development Bank (IDB) Operation PE-0142

By December, 2004, the Board of Directors of the IDB will approve a $50 million loan to Peru that will require municipal water utilities to privatize (form public/private partnerships) and implement increased cost recovery tariff structures.

The loan process and activities:

• After a local consultation process, which the mayors manage largely at their discretion, they will decide whether to opt into an IDB-supported program of privatization in their municipal water utility
• If they sign a statement enrolling their water utility in the IDB program, the mayor receives a lump sum payment of USD 50,000 for pre-feasibility studies.
• Those who continue with the program then receive USD 1 million for feasibility studies that provide a design for a privatization of the municipal water company.
• If the mayor adopts the reorganization required for privatization and signs an agreement with a private company, the USD 1 million are a grant.  If mayor does not agree to privatize the enterprise, he or she must repay the USD 1 million.

Consumer groups, labor unions, women’s organizations and others argue that the IDB is financing a thinly veiled bribe to encourage the compliance of the mayors of the municipalities targeted for privatization.   Such a program will only further reward the culture of corruption. The proposed loan will also raise the price of water to consumers.   The participating municipalities will be required to adjust water rates based on the methodology of the regulatory agency, SUNAS, which requires that rates cover “long term marginal cost,” including the cost of operation and management, investment, debt service, and a return on capital.  Higher water rates will impose further barriers to access for poor and low-income households.

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