Case Examples

Aguateros: SMALL SCALE WATER ENTREPRENEURS

Example of:

    • Private sector involvement in service provision
    • Sustainable model for the provision of water
    • Partnership between a large-scale state monopoly and small private entrepreneurs
World Map

Asuncion, Paraguay
Summary
Over the last 20 years in the city of Asuncion in Paraguay, a system of approximately 400 independent small-scale providers of water (aguateros) was developed that meet the domestic demand for water of close to 400,000 mostly low-income people. The system developed when water carriers and truckers figured ways to lay cheap but reliable piping, and took advantage of new well drilling technologies. Customers of these independent private providers normally live in areas which are less accessible and where the public water companies (CORPOSANA-SENASA) find it difficult to deliver drinking water at reasonable cost.

The typical “aguatero” is a capitalist who organizes a water supply system for the purpose of making money, investing its own money or borrowing funds from commercial banks to drill the well and set up the distribution network. Aguateros are subject to all conditions that apply to any commercial undertaking, including payment of local and state taxes, and so on.

Investments made for drilling wells, establishing the distribution network, as well as other equipment are recouped through connections charges levied on end-users. Taking into account that their typical customer is a low-income family, aguateros allow their customers to pay on an installment basis charging market rates of interest. Cost of operating the water systems are met through reasonable monthly tariff charges, collected by each individual entrepreneur. Connection charges are set at levels comparable to those establish by public sector suppliers, despite the subsidies the latter usually receive. Total monthly payments for a family connected to an independent small water provider will be around 8% of minimum wages during the early period when families have to make installments for connection and will drop to only 3% when payments are limited to the operation tariff.

Water quality is good and, in most places, available 24 hours a day. Aguateros are subject to water quality certifications every six months. Aguateros have joined forces and created an association to protect their interest, strengthen their public image, and prevent government attempts to drive them out of business. In spite of efforts by the state owned company (CORPOSANA) and an important public initiative to expand the water system to low income neighborhoods, the aguatero system is expanding and seems to be highly appreciated by low-income families. Other cities in Paraguay (Ciudad del Este and Encarnacion) have developed similar water provision systems. As a result of the aguatero system, Paraguay urban water coverage has been extended to families and communities that otherwise would have no proper services.
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Objectives
Private providers seek to make a profit by providing water service to low income families.
Components and Process
Small-scale independent water providers in Paraguay operate along the same lines although there are differences in scale. A typical operation will normally include the following steps:
  • The supplier identifies an area with a number of potential end-users and, more important, an indication that the number of end users will increase. Aguatero’s will initiate a new operation only if the neighborhood is not covered by other private or public entity.
  • The idea situation for an aguatero will be one where original demand plus expected increases will lead to a customer base of at least 100 customers within 3 or 4 years.
  • The aguatero will normally buy a piece of land in or near the neighborhood receiving the services and will sink a well which will usually be 100 to 150 meters deep. Average cost of such a well will be around $3,500. In addition, the aguatero has to cover the cost of pumping/extraction equipment, piping which increase the total amount of initial investment somewhere in the range of $6,000.
  • If needed, aguateros will obtain financing from a commercial bank at annual rates of 30 to 40 percent. In addition, private operators assume responsibility for paying taxes, registering their business, obtaining permissions for drill wells, putting in place the distribution network, and obtaining a semi-annual water quality certification.
  • In the first years after establishing the water system, aguateros will operate without metering systems, allowing customers to pay a flat fee. However, when the client base reaches a 150 or 200 customers he will have to decide whether to install meters, a measure that will certainly generate frictions but will reduce per capita water consumption and allow increasing the client base serviced with the same installed capacity.
  • Generally speaking, the supply network will expand until it encounters another area with a public or private water supply system.
  • With few exceptions, the system operates with real and/or potential competition controlling prices and quality. Available evidence indicates that monthly operating tariffs charge by the independent small scale suppliers are set at levels which are only 25 to 50 percent higher than those charged by CORPOSANA and SENASA. Differences reflect subsidies received by public entities plus quality of the service (water quality and reliability of service).
Lessons:
 The system of independent water providers of Asuncion shows considerable efficiency and has highlighted four important points:
  • private initiative can contribute to urban upgrading and improved access to services,
  • private participation in the provision of services can ease financial pressures associated with extending coverage to new areas,
  • the large scale state or private monopolies do not necessarily represent the only or best water supply option,
  • public limitations and/or inefficiencies can be overcome by allowing private sector participation in service delivery.
What worked and why?
  • State water entities adopted a tolerant, and realistic attitude toward private water suppliers, allowing aguateros to operate, innovate, and expand. As a result, a de facto division of labor was established that benefited low income families.
     
  • A market for private provision of water services was created and opened-up to small entrepreneurs.
     
  • Financial markets were open to small entrepreneurs and were willing to assume risk in new areas and markets.
     
  • Aguateros took advantage of the improved business climate that opened up following President Strossner’s fall. Creation and operation of small firms was simplified.
     
  • New technologies allow low cost drilling and piping.
What didn't work and why?
  • The system has produced good results but has remained largely unregulated, specially with respect to connection charges and tariffs. In some cases aguateros have established and operate under conditions of monopoly and abuse their customers.
     
  • CORPOSANA and SENASA have tolerated the system but have failed to see its advantages and use it as part of national policies to expand coverage and improve quality. Laws are under consideration that could drive aguateros out of business, introduce a biased in favor of a highly regulated private monopoly, and over time would eliminate the incentive to make new investments.
TIPS:
To Learn More:

Contact Tova Solo at LCSFU, World Bank. Telephone 202-473-4760 or at tsolo@worldbank.org

The Wall Street Journal, November 27, 1998, pg. A11 and February 4, 2000, pg. A19
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