Box 7.10  The Aguateros Water Merchants
Asuncion, Paraguay

In Paraguay (population 5 million), small private companies have been operating for several decades in the two largest cities (Asuncion and Ciudad del Este) alongside a highly inefficient state water company, CORPOSANA. Paraguay has one of the lowest water and sanitation coverages in Latin America: only 42% of the population have access to piped water, 11% have access to basic sanitation services, and there is no wastewater treatment. Some 22% are served with water by CORPOSANA and 13% by water cooperatives in small urban settlements that are coordinated by a state body, SENACSA. But a further 500,000 persons are supplied by small-scale water supply systems based on groundwater sources. These systems are operated by small entrepreneurs known as aguateros (water merchants). There are approximately 350-600 independent aguaterias currently operating. An estimated one-third of the connections made in the past 20 years in Asuncion and Ciudad del Este have been provided by these water merchants, representing some US$30 million total investment.

A typical system consists of a well and pumphouse, which supply a low-income neighbourhood of around 100 households through heavy-duty polythylene pipe. Water is pumped to household storage tanks for a limited number of hours each day. The customers plan their usage around this schedule, filling holding tanks with enough water for the day. The operation is completely private, and the infrastructure simple to install. The aguateros began operations with water truckers but due to the abundant presences of underground water moved on to create these small-scale water supply systems.

'The aguateros selects an area where he calculates that his business can take root in a growing settlement, buys a lot, builds a well and pumphouse and begins by providing water to the first wave of settlers, however few. The aguateros has to move fast, before another stakes a claim in the area, because although aguateros can compete for customers who reside on the edge of one system or in between the two, once established, the pioneer aguatero's right to operate with a given area is generally respected.

Even though the aguateros like to say they work in a an open and competitive market, it is clear that exclusivity must be respected to a limited degree; otherwise the battles for customers could make the business unsustainable. The existence of unclaimed areas on the edge of and between the aguateros' business zones where real competition goes on and the competition by comparison [benchmarking] on this reduced scale, assures that the aguateros do not take unfair advantage of their customers [elsewhere]. The existence of the Aguateros Association, at the same time, limits the possibilities of flare ups between them and tends to standardise service quality and prices.' (Troyano, 1999)

Aguateros require capital to invest in the system. They outlay in full at the outset and assume all the risk. The customers pay a connection charge - the main way that the aguatero recoups the cost of his investment, which he attempts to do within three years, given the risky nature of the business, the phyiscially precarious nature of the infrastructure and the medium-term legal insecurity.

Unlike many large-scale water companies, it is in the aguateros' interest to support those households who cannot pay the connection charge and tariff. Most aguateros therefore operate a credit mechanism facilitating payment by instalment - like traditional moneylenders, at very high interest rates - recouping investment and ensuring the sustainability of his operations. This financing system is no doubt exploitative of the poorest households in that they pay over the odds for the same service, but like most services developed for the poor it provides opportunity and flexibility, based on local knowledge and close contacts with customers. The poor cannot provide collateral or obtain a loan elsewhere, and need some flexibility in payments during difficult times. While they pay dearly for the connection, the water charges are generally metered properly and are lower than the water companies'. Moreover, there is no incentive for the aguateros to cut them off as the different cost of supplying water is insignificant compared with the cost of disturbing the client base with bad will.

However, plans are now under way to privatise the state water utility, CORPOSANA. A new water law has been passed and a regulatory body is being created. But the Cámara Paraguaya de Aguateros (CAPA), the association of aguateros, is protesting vociferously against what it sees as an attempt to put an end to their activities. Under the present plans, private companies will bid for a 30-year concession to replace CORPOSANA. While the new law is unusual in not granting exclusive rights to the concession operator, the aguateros operating within the utility's jurisdiction will be granted operating permits for up to 10 years, and will become subject to tariff regulation. CAPA fears that the regulatory body will stifle competition and that the new concession operator will apply pressure for non-renewal of their licences, thereby leading to their demise.

The concerns expressed by CAPA have provoked a lively debate about the aguateros. Some observers see them as a shining example of the virtues of unfettered private competition, showing up the failings of the public sector in basic service provision. Their existence, it is argued, also challenges the conventional assumption that urban water supply is a natural monopoly based on economies of scale. The aguateros phenomenon, they argue, demonstrates that:

•  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;

•  large-scale state or private monopolies do not necessarily represent the only or best water supply option;

•  small-scale operators are potentially able to serve the poorest because of the flexibility of their operations; and

•  public limitations and/or inefficiencies can be overcome by allowing private sector participation in service delivery.

Notwithstanding the contribution of the aguateros in Asuncion and Ciudad del Este, there are a number of constraints that hinder replicability and issues that need to be addressed in any future arrangements:

•  Physically, the approach is constrained by geology: they can only function where the water table is high enough to sink a well. While this means such an approach is only replicable in some places, it also highlights the importance of contextually specific solutions and building on the existing solutions and assets.

•  The standard of service is variable and totally unregulated. Water supplied by aguateros is not treated and quality is sometimes poor. Supply is usually not continuous and subject to low pressure and interruptions. Once connected, customers are at the mercy of the aguateros and dependent on the aguatero's behaviour.

•  In practice, each aguatero has exclusive rights over his area, which is respected by other CAPA members, and while there is an in-built price control mechanism (described above), at times competition is lacking.

•  There is some question as to whether at present they cater for the poorest because they establish themselves and operate in neighbourhoods where potential customers can afford the US$250-350 connection fee. Although they provide a credit mechanism to the poorest in these areas, they have already selected the areas based on the ability of the majority to repay.

•  Some are not cheaper than the public sector provision. Some monthly operating tariffs are 25-50% higher than those charged by CORPOSANA, although to some extent differences reflect subsidies received by public entities. In the main however they can offer a better price than any other service, except for community-managed systems.

•  The aguateros phenomenon cannot be divorced from its social and political context. The provision of basic public services is woefully inadequate in Paraguay. As late as 1956, when CORPOSANA was created, Asuncion was the only capital city in Latin America without a water supply system. The very slow expansion of the piped network since then reflects the low priority attached to social concerns by a three-decades-old dictatorship, and the rampant level of corruption tolerated in CORPOSANA. The aguateros are thus an informal solution to this structural problem.

Perhaps the key issue is that aguateros do not currently provide sewerage services, and while this has been sustainable in the past through the use of individual septic tanks, conditions (leach lines, soil quality and lot size) may not always support this system. It is unlikely that the aguateros could operate conventional sewer systems and wastewater treatment plants due to their small scale and the need for substantial investment, but it has been argued that small-scale systems such as mini-plants, septic interceptors or ponds would fall within their investment and operational capacity.

While a large private operator might deliver water to the population of Asuncion more efficiently, in a more equitable manner and with a more effective coverage than aguateros could over the next 30 years, a crucial ingredient to ensure this outcome - an independent and competent water regulator - is very problematic in Paraguay. Corruption is endemic among the political elite and within the public administration. For this reason alone, there is a strong case for a tolerant posture towards the aguateros in water legislation that would allow them to continue to operate. There is also a case that greater promotion of their activities could lead to more extensive coverage in poor areas, and a wider service.

Sources: Adapted from Troyano, 1999, translated by Tovo Maria Solo; Andrew Nickson