Lessons from Experience

This section draws the main lessons from the water-pollution-control efforts in these countries (several comments have been presented in the previous section and will not be repeated here). The aim of the section is to identify the characteristics of policy directions followed in these countries and to point out their advantages and disadvantages from an economic perspective. The main issues that will be addressed are the status of the control of non-point pollution sources, the approach to the control of industrial sources, the slow introduction of economic instruments, the efficiency of earmarked resources and financial institutions created to manage these resources, and direct government subsidies for state-owned public utilities.

Point and Non-point Sources

Both point and non-point sources contribute to water-pollution problems. So far, authorities in Latin America have begun to tackle only the former. Even though non-point sources are believed to contribute a larger volume of pollutants, it does not follow that they are the main culprits of the most serious problems. It seems that following the experience of OECD countries, Latin American countries are tacitly delaying facing this very difficult problem until they deal with point sources. Some work has been done through the regulation of pesticides by agriculture/environmental ministries but there is no information about the magnitude of the problems and the impact of these regulations.

Industrial Pollution Control

Even though lack of success has been the generalized result of water-pollution-control efforts, industrial sources have reduced their effluents in some areas in Colombia and Venezuela, while little has been achieved in terms of municipal effluents. The overall approach to controlling industrial water pollution has been guided by command-and-control principles, in which authorities request companies to implement specific types of technologies to achieve predetermined levels of effluents.

Starting with legislation produced in the early 1970s, the responsibility for reducing industrial water pollution has been left to the private sector. While OECD implemented several types of incentive programs to speed compliance with national ambient quality standards, these tools have not been used in the two countries reviewed. Fiscal constraints are the most likely explanation for this policy decision. Success stories may be associated with the use of certain particular non-financial tools:

Comprehensive industrial-pollution-control programs have been launched in some other areas like the state of São Paulo in Brazil, which provide extensive technical assistance together with clear enforcement mechanisms. These programs capture the interest of industrial groups by making available technologies that reduce waste and are at least net-revenue-neutral. Further improvements are implemented later, once industries have organized environmental departments and management understands problems that are reflected in financial statements either as revenue increases or as cost (i.e., penalties) avoided.

Given the overall lack of success countries might be expected to try new approaches in this area. Experience from successful experiences in Latin America and elsewhere indicates that these programs should start with a basic understanding of the costs and benefits from achieving the desired quality levels, reasonable targets for improvements, and good monitoring ability on the part of regulatory agencies. The experience from OECD countries shows that leaving the financing responsibilities to the private sector is a sound economic decision, but care should be taken to make sure that small firms have access to resources from commercial banks on reasonable terms. Incentive schemes such as tax breaks, grants for technical assistance, and others should be adopted only with extreme care, to avoid opening the door to more expensive and inefficient forms of support.

No attempt has been made to evaluate the efficiency of successful programs in these two countries. A rapid review suggests that they may not have been very efficient. In the case of the CVC in Colombia, for instance, while private-sector agents introduced expensive treatments to comply with local regulations, the public utility has not yet implemented any treatment, with the end result that water quality in the Cauca River is below the desired targets. Society as a whole may not obtain significant benefits from these uncoordinated efforts. This is precisely the area in which the implementation of economic mechanisms such as effluent charges or tradable permits may render the biggest gains.

Use of Economic Instruments

It was mentioned earlier that command-and-control has been the preferred approach to controlling water pollution in these two countries, with the exception of the “retributive charges” that the Colombian Ministry has recently begun to implement. Given the important economic efficiency properties of such charges, as was pointed out above, this is clearly a significant step ahead in pollution-control efforts in the region. But a preliminary review would suggest that two difficulties may reduce the effectiveness of the Colombian system:

1. The charges may have been set too low to have a real incentive effect. According to existing estimates, a typical household would have to pay US$0.35/month, which would not be enough to finance even primary treatment through low-cost systems. A municipal public utility serving half a million people would have to pay only US$35,000/month, which could be passed through to customers by amending the public-utilities regulation.

An evaluation of experiences in OECD countries reveals that high effluent charges adopted in the Netherlands were effective in reducing effluents (Bressers and Schuddeboom), while lower levels implemented in Germany have noticeable but smaller effects (Brown and Johnson). The risk of low charges is that polluters may be annoyed by payments that are not high enough to make them take any action other than opposing the system.

2. The overall legal framework for these charges was quite confusing at first, assigning the Ministry the almost impossible task of calculating the precise social damage for every pollutant before it could set any effluent charges. Although the framework has been clarified with a recent verdict from the Constitutional Court, it looks as if some additional legal disputes might still arise.

From a look at the history of pollution-control experience in OECD countries it appears that some Latin American countries would follow the same path, characterized by an initial heavy reliance on command-and-control approaches and a progressive implementation of economic instruments. Both the degrees of success and the speed of adoption of market-based instruments differ widely.

Earmarking Financial Resources

Government contributions to financing pollution-control investments have been made almost exclusively through public utilities and not within clearly defined programs. In this sense, there has been no question of earmarking specific resources for water-pollution control in a sustained way. Still, a good many proposals have been made to adopt such policies, and it is expected that as government support for environmental causes in general increases, the control of water pollution being an important one, the temptation to do so will increase. As an example, in Colombia it is being proposed that the resources generated by retributive charges be returned as grants to finance regional water-quality improvement projects.

Three different types of earmarking may be distinguished: (a) allocating resources from charges for specific environmental offenses to the solution of closely related problems, (b) allocating resources from specific charges to the solution of unrelated environmental problems, and (c) allocating resources from general taxes to environmental problems.

An example of the first type would be the proposed allocation of retributive charges in Colombia to providing grants for water quality control projects. An example of the second type would be the allocation of regional land taxes to the RDCs for environmental purposes. An example of the third type is the now common practice of using central government resources to set up national environmental funds that provide grants for all types of environmental projects.

The general problems with earmarking, which increase as we move from type (a) to type (c) above, are well known in the literature, among them the following:

On the other side, it is fair to recognize that these types of arrangements are introduced to accomplish certain goals, such as guaranteeing minimum support for worthwhile causes that otherwise might not get any or financing causes for which there is not enough public support.

It would be naive to expect that these mechanisms would never be used to promote environmental causes, despite their serious drawbacks. It is probably more important to identify those characteristics that minimize the problems they raise. Qualities of less harmful earmarking mechanisms are the following:

Another important aspect of earmarking resources is how they are transferred: they can be granted as direct contributions to finance investments or through other mechanisms such as interest-rate subsidies. It is generally believed that, other things being equal, the more transparent the allocation the better.

Previous experiences with earmarking resources involved the creation of specific agencies to manage resources generated by these mechanisms. In Colombia, a fund (INSFOPAL) was created to manage resources allocated by the central government to finance sanitation projects throughout the country. It was allowed to make grants for specific purposes, which was probably the first sign of lack of discipline and signaled that easier terms could be obtained. After several years of operation the fund had to be closed because of its poor loan-recovery experience. It was replaced by a more efficient mechanism, itself not exempt from certain weaknesses, that works through commercial banks. Evaluations of numerous experiences of this type in the developing world have revealed the dangers of programs that set interest rates and direct credit to specific sectors on softer terms. Most of these programs have been shown to misdirect credit, generate an almost indefinite dependence on budgetary allocations, and induce inefficient allocation of resources.

Direct Government Subsidies for State-owned Utilities

The most common use of public resources spent in water-pollution control in these two Andean countries has been the direct allocation of subsidies to finance projects built by public water utilities. The majority of projects receiving subsidies were carried out by financially weak public utilities that were not able to cover costs for water supply and sewage collection. The reasoning behind granting the subsidies in most cases was precisely the inability of these utilities to balance their books and the perceived seriousness of the environmental degradation.

While this situation corresponded to the typical case-by-case approach, in which every project is analyzed on its own merits, experience indicates that this type of procedure generates two types of problems:

The problems identified with this type of subsidies include difficulty in precisely defining eligible investments and lack of criteria to define the size of the subsidy, which leads to favoring easily identifiable investments over others more difficult or less visible (e.g., subsidizing end-of-pipe interventions over production adjustments).

Developing countries have not been alone in the use of subsidies to promote the treatment of municipal effluents. Experience in OECD countries shows that municipal wastewater-treatment subsidies absorbed over 60% of total spending in pollution control. In Great Britain up to 60% of the costs was subsidized by government transfers. In Spain, subsidies of up to 75% are granted to public utilities, a significant portion of them financed from European Union sources. Despite this tradition, recent evaluations show that governments are becoming more aware of the significant inefficiencies of these mechanisms. Wary that they imply direct subsidies to polluters, the OECD countries now tend to rely on user charges for their investment in wastewater treatment.

Traditional subsidy programs implemented in the OECD countries to speed up compliance with national targets have been analyzed extensively. Most of the studies show that these investments were less efficient than comparable private-sector projects and over-capacity was found in many instances. Municipalities had no major incentives to control costs. An interesting evaluation (James and Levy, 1984) of the U.S. federal grant program for water-pollution control¹⁸ found that, apart from their well-known inefficiencies, these subsidies crowded out municipal resources and, contrary to what might be expected, induced delays in the implementation of projects that would have been built anyhow.

The situation of public water utilities in these Andean countries suggests that they will be unable to implement tariff adjustments to cover potable water and sewerage costs, much less sewage-treatment costs, until they introduce more efficient management. In this sense, the road to promoting user charges for the financing of municipal sewage-treatment costs passes through the improvement of the managerial, financial, and technical condition of these public utilities.