Latin American Experiences¹¹

Three Latin American countries —Mexico, Colombia and Brazil— have sought to apply sophisticated systems of water charges. Their approaches differ, as will be seen in the following subsections.

The Brazilian Experience

Since the recent approval of the Federal Water Law (Law 9,433 of January1997), Brazil is on the verge of making wide-ranging reforms in the water sector, including the introduction of bulk water pricing. The Brazilian legal framework for water resources management is based on the constitutional distinction between federal and state waters. Federal waters are those that flow across state boundaries or along the boundaries between two or more states or a foreign country. State waters are those situated entirely within the territory of a single state.

The Federal System

At the federal level, the new water legislation recognizes that water is an economic (not free) good that, as such, should be charged for in order to (1) achieve rational allocation and (2) create financial resources for integrated water resource management at the river-basin level. Implementing the law still requires the passage of detailed regulations, including pricing criteria, which are currently under debate.

According to the recently released regulation proposal, river basin management councils will be free to set water prices in accordance with general principles that include the pricing criteria discussed above.¹² This comprehensive approach was not easy to introduce, since most of the water resources experts preparing the proposal were not clearly aware of the theoretical distinctions among each pricing criterion. Financing needs, rationing, and externality internalization goals were constantly confused. There was also concern that growth would be constricted because of the burden of water charges on users. The comprehensive approach was, in fact, agreed on the basis of conciliating interests rather than on a full understanding of the objective functions behind each pricing criterion.

Although in Brazil the new water management system has adopted the French principle of management by basin, the basin committees in Brazil, unlike those in France, are spontaneously formed by users¹³ and the charge is set by the committees. The charge is more a kind of service payment than a tax. From the legal point of view, classifying it as a tribute (tax or duty) would have required a specific additional law and therefore a much more difficult political process. It would also have had to be collected by the National Treasury and pass through a budgetary procedure that is best avoided in order to guarantee the administrative autonomy of the basin. From an economic point of view, however, such a system can become disjointed and consequently prevent externalities from being included in pricing.

Ceará State

So far, Ceará is the only state to have established water charges. It introduced bulk charges in November 1996 for domestic and industrial water uses. The design of a water pricing system is well advanced in São Paulo.

In Ceará, studies have already been completed to enable the Ceará State Company on Water Resources Management (COERGH), the state’s bulk water supply company, to establish an appropriate charge structure and timetable for increased charges to gradually achieve reasonable recovery of the costs of investment in new water storage and conveyance infrastructure. The key restriction is that the unit price of bulk water may not exceed users’ ability to pay.

User associations are encouraged by COERGH, on the context of river basin committees, to discuss and plan water supply and distribution criteria. COERGH provides technical information and finances meetings, guiding users to come to agreement. A State Water Council with governmental and non-governmental representatives dictates water policy. COERGH acts as an executive body of this council and as a basin agency for user associations. Although user associations are part of this institutional setting for water management and have their role in decision-making, state intervention through the Council and COERGH is dominant.

COERGH’s revenues are expected to grow from zero in the first year, 1995, to US$17.7 million in the tenth year, while the O&M costs would grow from US$1.8 million in the first year to US$6.5 million in the tenth year. After the tenth year there would be a steady financial flow. Its present value (rate of return of 8%) is very close to the present value of the US$110.0 million water resources program launched in 1994, assuming that the investments would be uniformly spread over a ten-year period. This result is only possible because COERGH would not pay for past investments made by the Federal Government for water resources infrastructure.

To adjust demand, COERGH is counting on pricing measures in order to introduce gradually water scarcity values to users. Water pricing policy is explicitly based on ability-to-pay criteria, in which the industrial sector contributes the major share of revenue, cross-subsiding households and, eventually, rural users. Today, revenue from the industrial sector is about 65% of the total, against a consumption share of less than 5%. In the near future, this revenue participation is likely to stay high since industrial demand is going to increase with the accelerated industrialization program taking place in the region.

It is argued that Ceará has been a pioneer in setting water charges mostly because of the scarcity of water and lack of perennial rivers in the state. Ceará has not attempted to introduce pollution components into water pricing, which avoids a rather complicated matter. Bulk water pricing can be applied in a very similar way to any other utility service, such as, for example, energy. At certain levels, supply can be expanded through investments, whereas water quality is more complicated.

The absence of concern over water pollution may seem reasonable in a drought-affected region, although quality degradation itself leads to reduced water supply. Taking into account the state’s commitment to industrialization, water-pollution pricing could be an important factor in adjusting industrial patterns to water availability. Another concern would be for more attention to be given to pricing criteria in order to take into account water demand-elasticities when the price path starts to move up.

In conclusion, the Ceará case, rather than a generalization, should be seen as a particular solution to a particular case. However, the main message is general: water pricing is viable even in poor regions and can play a decisive role in better water management and user participation.¹⁴

The Mexican Experience¹⁵

Mexican water legislation allows the National Water Commission (CNA) to apply the “polluter-pays” principle on water discharge from municipalities and industrial plants exceeding determined standards of organic matters and suspended solid.

The wastewater charge system, in place since October 1991 and recently revised, is intended to enforce the effluent standards and to provide an incentive to firms to invest in abatement for water-quality control. It is legally bound by the Mexican Constitution, the General Law for Ecological Equilibrium and Environmental Protection, the Federal Water Act, and the Federal Water Rights Law.

Lack of enforcement has reduced substantially the revenue raised. Although revenue has increased from US$5 million to US$10 million since its introduction, it still constitutes a minor percentage of the potential revenue. Poor monitoring and opposition from polluters are the main reasons for enforcement failures.

Given the national scope of the water system, effective monitoring would require resources beyond the current financial possibilities of CNA. The lack of private and public participation associated with a lack of information based on careful analysis of the impacts expected from charges has created opposition from polluters on competitiveness and distributive grounds.

The revised version of the legislation is an attempt to remove these political barriers with participation and information and the enhancement of institutional capacity. It is thought that a more participatory and realistic approach may create an opportunity to give Mexico a very effective system of economic incentives for water management and also guarantee financial resources to improve institutional capacity.

At the local level, the municipalities are responsible for water supply and wastewater management. At the national level, the CNA is responsible for the promotion and execution of federal infrastructure and the necessary services for the preservation of water quality. The charge is then applied by CNA and the resultant revenue goes to the Treasury without returning as a fund to either municipalities or polluters, although some of it is budgeted to finance CNA activities.

The original 1991 version was a non-compliance charge, applied only to pollutant concentration levels exceeding standards. The 1995 revision went beyond this to turn the charge into a type of tax levied on all levels of concentration. In the 1991 version, the charge had to be paid for every cubic meter discharged and the charge level would vary according to the four zones into which the country was divided according to water availability criteria. Now it is to be applied to all polluting sources discharging effluents. For those exceeding a monthly discharge of 3,000 m³, the charge level will be determined by the product of concentration level times zone charge. Monthly discharges below 3,000 m³ will be charged a flat fee related only to volume levels.

Only two pollution indicators are considered: the concentration of chemical oxygen demand (COD) and total suspended solids (TSS).

Revisions of the Federal Water Rights Law in December 1995 introduced new procedures to calculate the charge payments, as follows:

1. The charge will no longer be based on water-availability zones but on the different assimilative capacity of the receiving water bodies defined according to the current use of the water and the treatment level required for the amount of pollutants found in the water body. Three categories of water bodies were defined: (a) those requiring little treatment, (b) those requiring secondary treatment, and (c) those requiring more sophisticated treatment.

2. The charge will vary according to different levels of pollutant contents. The concentration of the pollutant COD or TSS will be charged by milligram per liter. The pollutant to be charged will be the one with higher concentration in the water discharge. The Law establishes four concentration possibilities: (a) above 150 milligrams per liter, (b) equal to or below 150 mg/lt and above 75 mg/lt, (c) equal to or below 75 mg/lt and above 30 mg/lt, and (d) equal to or below 30 mg/lt.

Charge levels are determined on the basis of abatement costs and therefore vary according to the control level and pollution concentration in the recipient water body.

The new charge system is stricter, since it does not allow for deducting payment where the emissions are below the standard levels of COD and TSS as before. As can be seen, this charge is no longer a noncompliance charge; it is now a kind of tax on all levels of pollutant concentration.

This revision is significant in economic and environmental terms: first, because a permanent incentive was created for users to reduce the volume and degree of pollution discharged, and secondly, because the assimilative capacity of the water body is now taken into consideration.

However, other forms of charge exemption were created to facilitate the collection of charges. Payers with monthly discharge volume less than 3,000 m³ will still have the option to pay a fixed flat charge varying according to the receiving water body; and to reduce the fiscal burden on small municipalities, public water supplies to those with fewer than 2,500 inhabitants were also granted exemptions.

As a result of the economic crisis in Mexico and widespread failure of users to pay, the government published presidential decrees in 1995 canceling historical debt arising from the previous charge system where either abatement investments were undertaken and following payments are correctly made or the size of debt was a financial threat to firms.

Another important exemption was that polluters who had not complied with the deadline set by the Law for the construction of their abatement facilities, but demonstrated to the CNA that construction was at least 80% finished, would be allowed to pay the charge applicable to the level to be achieved upon completion. The works were supposed to, however, be finished and put into operation before October 1996. Agricultural run-off, because of its diffuse nature, was not subject to water charges.

The Federal Law of Charges is revised every year. Since 1997, it has provided economic incentives for users of water-receiving bodies that have adopted processes for better water quality than that established in the standards. There have been some changes in the classification of certain water bodies and additional pollution indicators are now being considered.

As an additional option and for practical reasons, in order to control the pollution level from municipal and industrial sectors, it was considered more effective to formulate two official standards published in 1997 (one of them still open for public consultation), setting maximum permissible levels of pollutants for wastewater discharges to national waters and goods and the maximum permissible levels of pollutants for wastewater discharges (except for households) to sewerage. This constitutes an enormous effort to simplify the system in place, since it allowed the reformulation of 43 official standards (mostly for specific industrial sectors) into only these two.

The main purpose of this new approach is to provide incentives for polluters to adopt new practices, processes, and technologies for the reduction of their emissions. This change was driven by, among other things, the fact that the government perceived a high degree of nonpayment among users associated with the economic crisis that had struck the country. It was therefore considered that a gradual or multi-stage approach would be the easiest to implement. The deadlines for complying with the maximum permissible levels for discharges to national waters are the years 2000, 2005, and 2010, depending on population size in the case of municipalities and the range of BOD for non-municipal discharges.

The current legal framework establishes penalties for noncompliance. It is too early, however, to fully evaluate the effectiveness of these new standards. In fact, there has already been a reduction in collection, explainable mainly by the extension given to polluters for the construction of their abatement facilities. One important feature is that these standards permit the control of all agents that discharge into a specific body of water under the same parameters. This makes it possible to enjoy economies of scale while encouraging polluters to treat their discharges jointly.

This new instrument is also intended to be dynamic. The parameters considered are the same as in the Federal Law of Charges and the Special Conditions of Discharge, thus allowing for the standardization of policies. There is still a gap, however, in the development of a new regulatory framework for sludge originating from treatment plants and for the establishment of maximum permissible levels of pollutants for the artificial recharge of aquifers and the conditions for water infiltration of soil and subsoil, which the Mexican government is working on. A new standard authorizing the use of treated wastewater for public services has recently been released for public consultation.

Among the greatest problems that the system has faced in the last few years is that in general water polluters do not pay for their discharges. This has been the case with almost all municipalities and a large proportion of industries. The amount collected under this heading represents a very low percentage of the CNA’s total collection level. By introducing these changes environmental authorities seek to force payers onto a reasonable timetable to comply with regulation charges, rather than to increase the revenue level. It is worth noting that the fees collected are diverted to the Treasury and CNA receives a share for its budget.

To conclude, the investments in water pollution control that will be required in the coming years to comply with these new regulations will be huge. The National Institute for Ecology has estimated that the investments required for the period 1995-2010 in wastewater treatment activities (for municipal and industrial uses) are close to US$9.3 billion. The CNA faces the problem of lack of infrastructure to supervise firms regularly, which implies very high costs. With the new legislation in force, the charge system is now more flexible and comprehensive. However, proper institutional development to improve the monitoring and control of discharges is still important to the success of the system.

The Colombian Experience¹⁶

In Colombia, charges for effluent discharges and water uses have been applied since 1974 by the regional environmental agencies.¹⁷ The very few applications of these charges were implemented with a cost-recovery approach attempting to cover the operational costs of monitoring systems.

The failure to expand coverage and introduce pollution/use criteria in the determination of charge levels was due to reasons similar to those mentioned in the Mexican case: lack of appropriate design of the instrument, insufficient information about impacts, lack of compatibility with the available monitoring system, and lack of planning for the expansion of its coverage, which have resulted in vigorous public and political opposition.

Only US$116,000 was collected out of potential revenue of US$90 million. However, in the few cases where the constraints were overcome, it is reported that the successful application of charges has induced changes in patterns of water use and in consumption and pollution.

In 1993 new environmental legislation (Law 99/93) was passed in Colombia in which pollution charges are clearly specified based on the criterion of covering full environmental costs. That is, externality prices with a charge level defined according to the value of water environmental service and the users’ environmental damage.¹⁸ However, this pricing criterion was never fully implemented because of the complexity of defining charge levels, which resulted in strong legal and political opposition.

The Colombian government is attempting to conciliate the current legislation with a new regulation that allows charge levels to be determined by stages in which rates are gradually estimated and implemented. Moreover, attention has been paid to careful analysis of economic and social impacts for future negotiations with polluters and users. The necessary adjustments for the existing institutional capacity vis-á-vis the charge system, are also being considered.

The new charge was implemented by Decree 901 of April 1, 1997. With this law, the Ministry of the Environment defines a minimum tax and the mechanism for adjusting the rate levels to reflect the particular conditions of each locality.

The main issues defined by the decree are the following:

This new legislation eliminates the cost-recovery limitations on charges, which now may be fixed on a tax-levy basis. However, the constraints previously discussed now seem more severe. The new way of setting charges demands a non-existent, more sophisticated institutional capacity since it is complex and bound to vary significantly with activity and spatial factors. Its administration can also be extremely costly. The resulting higher uncertainty of its economic and social impacts is also generating stronger opposition among polluters and users.