In the early 1990s the Colombian government decided to prioritise the nation's needs for water and sanitation. This decision followed decades of decline in the public water service, as well as the decentralisation process that was taking place in Colombia (see Box 10.6). In 1995, the national Water and Sanitation Plan was ratified by the national economic and social policy council, addressing the coverage, efficiency and quality of water and sanitation provision throughout the country. The primary goal was to increase water supply by connecting nearly 7 million people, to reach an average connection rate of 90%. In sanitation, the goal was to reach 77% of the population with mains sewerage by 2010. The estimated capital cost for achieving these two targets was US$1400 million. The plan also aimed to improve drinking water quality and reduce leakage rates, and it included environmental conservation measures.

In order to achieve these ambitious targets, significant institutional reform of the water sector was necessary. The 1991 Constitution emphasised the importance of efficient public services, and in 1994 a major change in national government policy re-emphasised basic service provision. New legislation (Law 142) laid down explicit criteria for efficiency in terms of planning, regulation and supervision, and marked a radical shift towards a more positive attitude to the private sector. As in other sectors, the government promoted a market approach that assigned a key role to private capital and technology in the institutional reform process. There were three reasons for this major policy shift:

1. a recognition that the country could not afford the level of public spending needed for infrastructure, and that private resources were needed to fill the gap, leaving public funds for social programmes;

2. a response to the fear in central government that the devolution process could lead to a re-emergence of inefficiency in the provision of services under direct municipal control; and

3. the growing pressure on central government from international financial institutions to open up basic service provision to PSP.

The legislation introduced in 1994 made explicit provision for the regulation of PSP. Article 69 created separate regulatory bodies for water and sanitation, electricity and gas, and telecommunications. A regulatory body for water and sanitation, the Comison de Regulacion de Agua Potabley Saneamiento Basico (CRA) was set up as a semi-autonomous body under the Ministry of Economic Development. Its aim is 'to promote competition, encourage investment and prevent abuse of monopoly power, in order to ensure reasonable tariffs, high quality and ample coverage in service delivery'. One of the most important tasks of the CRA has been to authorise a new tariff structure that reflects the true cost of delivering water and sanitation and establishes transparent rules for cross-subsidies in favour of disadvantaged groups.

The same law specified that a public services watchdog, the Superintendencia de Servicios Publicos Domiciliarios (SSP), should monitor the day-to-day operation of the companies entrusted with the delivery of basic public services. The SSP has separate departments for water and sanitation, electricity and gas, and telecommunications, and is supported by a network of branches at the departmental level that liaise with municipal authorities. In the case of water and sanitation, its key tasks are to ensure that the regulatory decisions of the CRA are applied, in particular with regard to cross-subsidies, complaints from customers, and the examination of corporate financial management. The SSP has the power to fine water companies for the violation of agreed norms.

The joint venture (empresa mixta) emerged as the institutional arrangement preferred by central government to fulfil the twin policy objectives of strengthening local government and encouraging PSP. The arguments put forward in favour of the joint venture were economic and political. The economic argument emphasised that the municipality retained ownership of the assets, as under the more conventional concession contract arrangement, but with the added advantage that, as a major shareholder in the joint venture, the municipality had a financial interest in promoting efficiency in service delivery. The political argument emphasised that, as a major shareholder, the municipality was better positioned to monitor and control the activities of its private sector partner. This was contrasted with the conventional concession contract, under which the public sector effectively handed over control of the day-to-day operations to the concessionaire. Consequently (and despite the resultant conflict of interest) the traditional criticism from public sector unions that the municipality had 'sold out' to the private sector was muted by the joint venture arrangement.