Water supply and sanitation in Venezuela

First phase of decentralization (1991–2001)

When INOS was dissolved under the Presidency of Carlos Andrés Pérez the intent was to decentralize service provision to the municipalities that already had the legal responsibility for service provision. However, because of the lack of capacity and resources of most municipalities, service provision in 20 out of the 23 states was temporarily entrusted to the ten regional water companies under the holding company HIDROVEN (see above). In the remaining three states services were provided by the Corporación Venezolana de Guayana (CVG).The Pérez government also launched a bid for a private concession for the water and sanitation system of Caracas in 1992. However, the bid failed for lack of interested bidders under the proposed conditions.

Beginning in 1993 some states began to play a more active role in the sector. Until 1999 five decentralized water companies were created with a strong presence of the state governments (see above under service provision). This process began in Monagas in 1993 with support from the World Bank.^[9] Some of them also signed management contracts with private operators, which led to an improvement in the performance of the water and sanitation companies.

Between 1994 and 2001 water tariffs throughout the country were increased substantially, so that the ratio of cost recovery to operating costs increased from 27% to 87%.^[10] Such a substantial real tariff increase, which apparently did not cause political turmoil, is unusual in developing countries. However, the increase in tariffs was not paralleled by improvement in services. According to the IDB sector performance even deteriorated in this period.^[11]

The decentralization process remained very slow. Some municipalities refused to receive the service responsibility unless systems would be modernized, but a mechanism to finance the necessary investments was lacking. About 80% of the population thus continued to be served by HIDROVEN and its subsidiaries, and the slowness of the decentralization process consolidated institutions that were meant to be only temporary.^[12]

New sector law and second phase of decentralization (since 2001)

In December 2001 the Government of Hugo Chávez passed a new Water and Sanitation Law (Ley Orgánica para la Prestación de los Servicios de Agua Potable y Saneamiento).^[13] This law was not passed by Parliament. Instead, together with 45 other laws it was passed by the Executive based on an Enabling Act that temporarily gave the President powers to enact laws and bypass Parliament.

The law aimed at reforming the institutional structure of the sector through:

• the actual transfer of the responsibility for service provision to the municipalities through the creation of decentralized service providers – Business Units or Unidades de Gestión (UGs) – each of which would serve several municipalities;
• the creation of a regulatory agency (Superintendencia Nacional de los Servicios de Agua Potable y de Saneamiento – SUNSAPS), to oversee the implementation of the Law, regulate tariffs and subsidies, and develop a monitoring system for the sector;
• the establishment of a policy making and financing body for the sector (Oficina Nacional para el Desarrollo de los Servicios de Agua Potable y Saneamiento, ONDESAPS), whose primary responsibilities would be the management of a funding mechanism for targeted sector investments, policy formulation and facilitation of the provision of technical assistance to decentralized service providers including guidance on the establishment of decentralized service providers;
• the creation of a national bulk water company to operate and expand regional water infrastructure; and
• the establishment of a sector financing fund to channel public resources to the sector under a consistent policy framework.

According to the law HIDROVEN had to complete the transfer within no more than five years from the publication of the law, i.e. until December 2006. However, the transfer has been very slow and the deadline has not been met. Only in a few regions the decentralization to municipalities has advanced, notably in the State of Guárico where HIDROPAEZ, one of the regional utilities under the umbrella of HIDROVEN, is in the process of being replaced by five business units. The Government has also completed studies on the formation of business units in the states of Cojedes, Carabobo and Aragua. Furthermore, the national institutions foreseen by the law so far have not been created. The Ministry of Environment and HIDROVEN thus continue to undertake the national-level functions that the 2001 law had assigned to the new institutions.

In February 2003 tariffs were frozen at the national level through an executive decree. This is in direct contradiction with the 2001 law that stipulates the principle of cost recovery and assigns the responsibility to set tariffs to the municipalities.^[14]

Policy and regulation

The Ministry of Environment and Natural Resources is in charge of setting water and sanitation policies in Venezuela, in line with overall government policies. There is a Vice-ministry of Water within the Ministry and as of August 2007 the Vice-Minister was Cristóbal Francisco Ortiz. HIDROVEN is under the authority of this Ministry. The Ministry of Industry and Commerce sets maximum allowable tariffs in the sector.

Service provision

Water and sanitation services in Venezuela are provided by the national water company HIDROVEN, five state water companies, the Corporación Venezolana de Guayana (CVG), a few municipalities and community-based organizations.

According to the Municipal Law (Ley Orgánica de Régimen Municipal) service provision is a responsibility of the country's 335 municipalities, which own the water and sanitation infrastructure and in principle also set water and sanitation tariffs. However, in practice only few municipalities have the capacity and resources to fulfill these responsibilities.

Tariffs and cost recovery

Cost recovery. Revenues usually are not sufficient to meet operating costs – the ratio of revenue to operating costs was estimated at 86% in 2002. This was a substantial increase compared to 27% in 1994, 65% in 1997 and 75% in 2000, despite high levels of inflation.^[10] As of 2010, 36% of all users, mainly in groups with low ability to pay, received water free of charge.^[6] In 2010 Hidrocapital, which serves Caracas, charged on average the equivalent of US$0.41 per cubic meter, while its costs were US$0.44 per cubic meter.^[18] For 2008, Hidroven had a sales revenue of MB$786, thus covering 77% of its operation and maintenance costs of MB$1,024.^[19]

Tariff level and adjustments. Tariff levels vary substantially within Venezuela by a factor of almost 1:10 between regional companies, reflecting differences in the cost of service provision. The highest tariffs are found in Caracas and the lowest in Aguas de Yaracuy and the Llanos.^[16] Tariffs were frozen in February 2003 at the national level, leading to a 60% tariff decline in real value because of inflation until 2010.^[6]

Metering, billing and collection. In 2008 the share of metered water consumption in total water consumption was 36%, up from only 20% in 1998. However, only about half the meters were read in 2008 with a meter reading rate of only 17.5%.^[6] Billing and collection performance is inadequate as total sector collection in 2003 amounted for merely 73% of the total billing. In 1998 this coefficient stood at only 62%.^[16] In individual companies the ratio varied greatly between 26% in Yaracuy and 80% in Mérida.

Investment

Historical investment levels There are no recent data on the level of investments in the sector. In the five years between 1997 and 2001 Venezuela invested US$637 million in water and sanitation, or about US$127 million annually on average. Investment in the sector has historically been volatile. For example, annual investments fluctuated in the 1986–1998 period between less than US$100 million (in 1989) and US$400 million (in 1992).^[16] To a large extent investment levels mirror fluctuation in oil prices. Investment levels declined from 1986 to 1989 when oil prices were very low. Investments skyrocketed in 1992 after oil prices had increased. Then they plummeted again when oil prices decreased during the remainder of the 1990s. The volatility in sector financing has made it difficult to initiate a sustainable medium-term investment program needed to rehabilitate infrastructure and extend access to services.

Planned investment levels In 2002 the Government adopted an ambitious six-year investment plan for the sector. Under that Plan by the end of 2007 access to potable water and sanitation should both reach 99%, non-revenue water should be reduced to 45%, collection efficiency should increase to 95% and the share of treated wastewater should reach 30%.^[20] The plan estimates that a total of US$4.77 billion will be required between 2003 and 2015 for the sector, which implies an average annual investment of approximately US$500 million, or about four times historic investment levels.

Financing

Sources of financing Before the decentralization of the 1990s investments were almost exclusively financed by central government transfers through a number of different programs, including funds borrowed from international financial institutions and passed on as grants to the service providers. In 2000–2001 state governments and municipalities financed almost half of total investments of US$120m and US$190m respectively.^[21] The capital market makes no contribution to sector financing.

Procedures for Investment Financing The 2001 sector law calls for the creation of a Financial Assistance Fund (Fondo de Asistencia Financiera – FAF) to be administered by a new entity called ONDESAPS which would coordinate and target investments in the sector (see section on the new sector law above). Until 2007 neither FAF nor ONDESAPS have been created. Neither investment subsidies nor recurrent subsidies, whether paid by the national government or state governments, are linked to performance improvements.