Toward More Efficient Urban Water Management in Mexico
by Lilian Saade Hazin
This article describes the efforts of the Mexican government toward more efficient management of water resources. In accordance with the Mexican Constitution, municipal governments have been responsible for urban water and sanitation services. However, in practice most municipalities have weak finances and little expertise in managing water systems and the federal government still plays an important role in the management and financing of water infrastructure.
The article highlights the current state of the water sector in Mexico, including some of the main aspects of the legal and institutional framework. It discusses the main difficulties faced by the municipalities in accomplishing their task. The strategy of the federal government, in order to achieve better urban water management, has focused on four main policies: changes in the legal and institutional framework for water management, further decentralization, new financing schemes, and greater private sector involvement. It concludes that flexible approaches should allow municipalities to find appropriate institutional, financial, and technical solutions.
CURRENT STATE OF MEXICO'S WATER SECTOR
The growing population, as well as the economic development, experienced in Mexico over recent decades has led to growing pressures on the environment. Economic development and demographic growth are concentrated in medium-sized and large cities whose authorities face the challenge of increasing and improving the provision of services.
There are several problems associated with water supply and sanitation in Mexico. Among these problems, the following are worth mentioning: insufficient water coverage, population growth (2 per cent annually), ineffective operation of several water systems, unequal temporal and geographic distribution of the country's water, low pricing, water pollution and low treatment capacity.
Coverage. According to the National Water Commission, 84 per cent of the Mexican population has access to drinking water and only 67 per cent has access to sewerage services. In other words, fifteen million Mexicans do not have access to water services and thirty million to sewerage services . Furthermore, these national figures do not highlight the differences in the quality of the service nor the inequalities between rural and urban areas. In rural areas, only 52 per cent of the population has access to drinking water and 21 per cent to sewerage services. This implies poor access to services on the part of the 30 per cent of the Mexican population living in dispersed communities with less than 2,500 inhabitants.
The Water Program 1995-2000, formulated by the National Water Commission and presented by the Executive Branch, aims, among other things, to increase by 10 million the number of people with access to running water and by 15 million the number of people with access to sewerage services . In other words, the increase in the number of people with access to these services will equal the total population of countries such as Chile, Ecuador, or Belgium.
Water Losses. In addition to the need to increase coverage, there are some inefficiencies in the system associated with, among other things, the low levels of maintenance of the infrastructure. Its deterioration is causing physical losses, with 40 per cent of the water being lost through leakage .
Geographical and Demographic Distribution. The distribution of economic activity and population by region in Mexico does not necessarily correspond to the location of the country's rivers and aquifers, which makes distribution of the resource difficult and costly. Over 76 per cent of the Mexican population live in the northern and upland region of the country, which has 20 per cent of the water resources. Nevertheless, 70 per cent of industry and 90 per cent of irrigation is carried out in these areas . Likewise, water is unevenly distributed over time, since rainfall is concentrated in six months of the year.
Pricing. Generally it is held that water supply should be provided at a very low cost or at no cost. This is especially true in situations in which the relative shortage is high. This approach has resulted in very high levels of overexploitation in some regions, and a social reluctance to accept price increases.
Water distribution has been highly subsidized, both in investment and in operation. Traditionally, subsidies have been given to agriculture and municipal water, while industry pays a higher contribution than other users, which creates cross subsidies for the financing of water services. One should note that irrigation accounts for 80 per cent of total consumption.
Water administrative and pricing policies in Mexico have not been very effective in facing increasing water demand under circumstances of relative water scarcity and budget limitations. This situation has had the result that water supply revenues have made little contribution to financing and that, consequently, the water sector is increasingly dependent for its development on the federal budget.
Pollution. Water pollution is a problem that has given rise to concern in Mexico. Its health costs have been estimated in 1992 at around US$3,600 million . The estimates in Ref. 4 include the cost of diarrhoeal diseases caused by water and soil pollution, as well as by the lack of sanitation and by food poisoning. The pollution load is concentrated in a few catchment areas. According to studies conducted by the National Water Commission, 89 per cent of the total pollution load arises in 20 of all the country's catchments. Similarly, 50 per cent of wastewater discharges have been recorded in a total of four catchments: Panuco, Lerma, San Juan, and Balsas, which receive discharges from the main cities of the central region .
Treatment Capacity. Despite the importance of recovering treated wastewater to satisfy increasing water needs, the treatment capacity in Mexico is very limited and is not fully exploited. Only 10 per cent of the effluents are properly treated . It is envisaged that treatment capacity will be significantly increased in the coming four years.
Mexican water authorities are making efforts to coordinate their activities and implement action plans to address these problems. The future patterns of resource extraction, production, and consumption will have to respond to long-term goals. The following section describes some of the efforts made by the government to find solutions to the water problems.
GOVERNMENT POLICIES IN WATER MANAGEMENT
Since the 1940s, Mexico, like many other developing countries, experienced an important population growth. As a result, significant federal government funds were diverted to the construction of large infrastructure projects with large economies of scale and to projects with long recovery periods. During the early 1980s, the water system was deeply affected by the financial crisis that struck the country. Despite fiscal reforms, the collection of taxes remained low.
The following summarizes the investments carried out by the National Water Commission in different activities in 1995 : Development of irrigated land, 64 per cent; construction of infrastructure to provide drinking water, 26 per cent; social infrastructure, 5 per cent; development of seasonal-crop lands, 4 per cent, and; sewerage and wastewater treatment, 1 per cent. It can be seen that the greatest share of CNA's budget is destined for the development of irrigated areas.
Due to the quantity of resources needed in coming years to satisfy the population's water demand, government funds, being federal, state, or municipal, will not be sufficient to meet the investments required. It is estimated that the amount of resources needed to accomplish the goals of the Water Program 1995-2000, including the increase in system efficiency, is close to US$7 billion (42 per cent for water supply projects, 25 per cent for sewerage projects and 33 per cent for sanitation). Therefore, it is necessary to develop new financing schemes including partnerships with the private sector.
In order to achieve better urban water management, given the lack of financial resources to develop action plans, the strategy of the government of Mexico focuses on the following policies: reforms to the legal and institutional framework, effective decentralization policies, and new financing schemes, resulting in greater private sector participation.
Institutional and legal framework
Before 1989, water management was not confined to one central body, but was dispersed. Thus, the support and financial resources for water supply and sanitation were not always properly addressed. The response of the government to initiate the solution to the water problems and its incoherent policy was the creation of the National Water Commission (CNA) in 1989, as an autonomous body under the Ministry of Agriculture and Water Resources. It is the main authority at the federal level dealing with water management.
The main role of the CNA is to administer the nation's water resources and to coordinate its investment programs. Its main objectives are: to integrate water planning and management; to guarantee adequate institutional coordination among the three levels of government; to reinforce the role of government as a regulator and in the decentralization of responsibilities; to design and build water infrastructure, and; to define and implement financial mechanisms to support the development of water resources and to promote greater participation of users and society as a whole .
The National Water Commission is currently attached to the Ministry of Environment, Natural Resources, and Fisheries, created in December 1994. This is an important change, as a more comprehensive policy framework was adopted. For historical reasons, there was a tendency to highlight the importance of water for its agricultural use. Therefore, it was thought that the Ministry of Agriculture and Water Resources had the authority to manage water resources. The new vision takes into account the many important uses of water. It is now considered more efficient to treat water as a natural resource.
As for the legal framework for water management, it is important to mention that in 1983, municipal governments were entrusted with the overall responsibility for urban water supply and sanitation, among other services. The problems faced by municipalities in accomplishing this task will be further discussed.
In December 1992, the National Water Law (Ley de Aguas Nacionales) was enacted, replacing the Federal Water Law of 1972. This change was driven by the need to adapt the legal framework to the changing conditions in the water sector. The new law provides a modern regulatory framework for water management that fosters a greater involvement of the private sector in the water industry. It is combined with other laws at the federal level that deal with water management, ecological balance, and health-related issues, as well as other regulations at the state level.
The National Water Law of 1992, among other things, regulates and encourages private investment in water infrastructure, including construction and operation of water treatment plants and works for water supply. The law also regulates concessions or contracting schemes for potable water and sanitation services. It is worth acknowledging that the law mandates the establishment of water rights that can be traded in an open market.
The Mexican government faces a changing environment, with two important characteristics: a growing demand for more active participation by society in public policy making and at the same time society demanding more effective government participation . As a result, in the last few years there has been a tendency toward decentralization, as an organizational form that can respond in a more effective way to those demands.
In search of better economic, social, and financing solutions to respond to the growing needs of the country, a trend toward strengthening local provision in the areas of water supply and sanitation has begun throughout the country. Although the decentralization process in the water sector in Mexico started in 1983 when municipalities were entrusted with the responsibility of providing urban water and sanitation services, there is still much more to do in order to achieve effective decentralization.
Mexican authorities are certain that the efforts toward effective decentralization will make it possible to identify local needs and to ascertain the most appropriate response to meet them, while encouraging better resource management. It may also develop new markets and create jobs at the local level.
An analysis of World Bank-funded projects showed, using available data for a group of developing countries, that the per capita water production costs are four times higher in centralized than in fully decentralized systems and are lowest when decentralization is combined with centralized coordination .
However, it cannot be said that decentralization by itself is good or bad. The success of any decentralization effort will depend on the ability to increase local governments' management and planning capacity. Without rapid improvement in the ability of municipalities to set infrastructure priorities, develop systematic plans, and manage resources, decentralization will not be successful.
In the Mexican case, municipal governments are the administrative entities closer to communities, therefore, they are considered to be best able to identify their needs. The following section describes the main difficulties faced by municipalities in Mexico.
Main Difficulties Faced by Municipalities
Although the current legislation establishes that municipalities are responsible for the provision and management of water and sanitation services, the federal government still plays an important role in several activities, including the financing of water projects. The following is a brief summary of the main economic, financial, and political obstacles faced by most of the municipalities.
Lack of Continuity in Policies and Programs, and Lack of Accountability. This is associated, among other things, with the fact that municipal administrations change every three years, with no legal possibility for reelection to the following term of office. A major problem, however, is the lack of accountability.
The lack of continuity in policies and programs, as well as the lack of accountability, limits the ability to make efficient and permanent progress and provides no incentives for the municipalities to establish long-term water planning. Due to the latter, many of the problems are bequeathed to the following administrations and there are no incentives to look for efficiency such as leakage control and tariff updating. The often short planning horizon is not well suited for long-term maturity of infrastructure works.
Economic Differences Among Municipalities. The political division of states does not necessarily correspond to the concentration of economic activity in the country as a whole. This situation also occurs at the municipal level, where one can find great differences among municipalities. In many of them, the community is so dispersed that it is difficult to achieve administrative and governmental coherence. There is also an unequal income distribution among municipalities as 90 per cent of the wealth is concentrated in only 520 of around 2,400 Mexican municipalities .
Lack of Financial Resources and Payment Sources. There is no doubt that one of the main problems facing local governments in their commitment to produce wider urban infrastructure is the lack of financial resources. The facilities to assign resources and public funds are still centralized.
In most cases, municipality funds are just enough to pay current expenses, i.e., salaries and other administrative costs. The level of indebtedness incurred by municipalities, mainly with the central government, is extremely high. Therefore, it should not be surprising to find that, on average, municipalities cover less than 3 per cent of total public investment. Most public investment comes from the central public sector; around 84 per cent of all public investment made in 1994 by the three levels of government (federal, state, and municipal) came from the center and the remaining 13 per cent of total public expenditure corresponded to states . Table 1 shows how investments in the water sector have mainly been carried out by the federal government, at least until 1994.
Source: Based on Information from CNA 
Municipalities face several difficulties in obtaining revenues. Some sources are insufficient or costly and others underutilized, therefore municipalities depend to a large extent on the federal budget allocations (participaciones).
Additionally, local governments do not have complete control of their resources. This can be seen by the manner in which revenue shares have increased as a percentage of federal revenue. In fact, grants are often precommited to federal projects through "matching funds" mechanisms for a specific project, provided that local governments also put up some of their own funds. Thus, control of the funds is frequently tied to prior commitments with the federal government .
Market Mechanisms are not Properly Used. There is still the presence of unrestricted subsidies, which leads to the misuse of resources. In many cases, water rates lag well behind costs, partly explained by the fear of local governments of the adverse political reaction that raising water fees may imply. The investment costs cannot be recovered with the water fees and in many cases even the operating costs are not covered.
Possibility that Federation Government May Cover Necessary Infrastructure Costs. Since water is an essential good and given the encompassing role of the federal government, states and municipalities have learned that whenever help is needed for the financing of projects the federal government will step in. This situation, however, can no longer exist as federal funds will not always be available to cover necessary infrastructure investments.
Lack of Capacity to Formulate Projects in Some Municipalities. Aside from insufficient revenues and uneven local economies, several municipalities face a lack of technical capacity and human resources, which limits the proper administration of water resources.
Generally, the federal and state governments have been responsible for infrastructure financing, therefore, most municipal officials lack experience in subjecting proposed public projects to rigorous economic and fiscal analyses. On several occasions, there has been a lack of relative risk assessment and social evaluation of projects.
Lack of Financing Schemes Promoting Multiple Loans, as Well as Fiscal Resources. The adequate provision of water and sanitation services, in quantity and in quality, as well as planning and investments in municipal infrastructure requires financial autonomy on the part of municipalities. Therefore, they will require regular and sufficient income sources.
Many of these problems are interrelated and are mainly associated with the lack of financial resources and the lack of accountability. The Mexican government is working on capacity-building efforts. The government is making important attempts to try to find solutions to the financial problems faced by municipalities, including firstly, an increase in the transfer of resources to states and municipalities; secondly, providing municipalities with the tools for acquiring and controlling their own revenues, and; lastly, developing new financing schemes that provide new market incentives.
Of all the problems faced by municipalities, we will focus our discussion on an alternate type of financing. Financing of infrastructure projects is one of the main challenges of local economies. Financial analysis can help to the solutions of many of the problems mentioned above.
An Example of New Financing Schemes
In recent years, Banobras (National Public Works Development Bank) with the support of different international financial organizations, has helped to finance infrastructure projects in Mexico. The Infrastructure Investment Fund (FINFRA) was created in September 1995 in response to Mexico's economic situation; its main objectives are: promote investment opportunities, finance infrastructure projects, and promote greater foreign investment. It will offer investors a new financing scheme with proper risk and return.
It will involve federal government resources to encourage higher participation of the private sector in the development of basic infrastructure including running water, sewerage, and sanitation. FINFRA funds can also be destined for: the construction of roads; harbors and airports; urban transport and equipment, and; waste collection, disposal and recycling .
Priority will be given to projects for development, technology transfer, diversification strategies, and the increase of capacity and modernization of productive plants. Projects supported by FINFRA may be assigned through a bidding process.
The initial contribution of the federal government will be 1.7 billion pesos (the equivalent of US$265 million). There are two types of series: A and B. "A" represents the capital subscribed initially by the federal government that might also be subscribed to by the private sector, either domestic or international, as well as by international financial organizations. "B" corresponds to the capital always subscribed by the federal government .
FINFRA aims its efforts at projects that face financing problems because of their size, maturity, or risk, or at projects whose private profitability is smaller than their costs, but which have high social profitability.
According to FINFRA rules, there can be two types of fund participation: risk and subordinated capital. Risk capital refers to FINFRA's participation with private investors as a minor partner on the project, by the contribution of capital, expecting financial profitability from its investment. As for subordinated capital, FINFRA provides capital to the project, reducing the total resources required, without requiring financial profitability during the project's life. The sum of the risk capital and subordinated capital cannot exceed 49 per cent of the project's total investment.
In order to give transparency to the process of project selection, the approval of high risk investments will be submitted to a joint committee, constituted of a representative from the Ministry of Finance (SHCP), the Ministry of Communications and Transports (SCT), the Ministry of Administrative Control and Development (SECODAM), and the National Water Commission (CNA). Finally, there will be a representative from BANOBRAS but with no voting right .
Private Sector Participation in Water Supply and Sanitation
Due to the amount of resources needed to cover increasing water demands, the private sector represents an appealing option, particularly in urban areas (medium and large cities) and in the main tourist centers.
Two concessions have been granted to private entities in medium-size cities and a contract to operate water and sanitation services in Mexico's Federal District, with its population of more than eight million. It is too early, however, to confirm that this sort of application has been successful. All have made efforts to increase physical and commercial efficiency. It demonstrates that Mexico is on the path toward more conscious water use and lessons can be learned from these experiences.
Greater private sector involvement will allow access to new financing schemes and technologies as well as qualified human resources. It will provide continuity to management programs of water utilities. Finally, private participation will allow greater funds to be used for other priorities such as education, poverty alleviation, and health programs.
In order to attain more efficient management of water resources, the strategy of the government includes: changes in institutional design, a set of decentralization policies, and greater private sector involvement. In addition, given the problems faced by municipalities, the creation of new financing schemes that involve new stakeholders will contribute to the creation of greater local infrastructure.
Proposals such as FINFRA will put forward the creation of new infrastructure and most important of all, it will allow the selection of projects according to their social value. An additional advantage of funds such as FINFRA is their long-term vision.
To some extent, infrastructure projects should be sensitive to market concerns. But social welfare objectives, especially for weak local economies or a specific target group of the population, may require different kinds of strategic federal support or even certain subsidies to assure successful development of priority infrastructure.
The federal government has to enhance innovative partnerships within state and municipal governments and the private sector. It is important to effectively decentralize the administration of infrastructure to state and municipal governments. Decentralization of institutions and responsibilities alone is unlikely to solve the problems of water management. It is imperative to provide financial and administrative support to state and municipal agencies. In order to achieve effective decentralization, municipalities should be provided with the means to effectively manage and control water and sanitation services.
The ultimate aim is to increase coverage and cost-effectiveness, while protecting water resources. Flexible approaches should allow municipalities to find appropriate institutional, managerial, financial, and technical solutions. Long-term commitment on the part of both public and private entities is one of the key factors toward more efficient water management.
This article is presented by Lilian Saade Hazin in her individual capacity as staff member of the Mexican Ministry of Environment, Natural Resources, and Fisheries. The views presented in this article are the responsibility of the author and do not necessarily represent those of the institution to which she is attached.
The author is grateful to Dr. Juan Carlos Belausteguigoitia and Mr. Antonio Saade for their invaluable help.
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