_Designing Pro-poor Water and Sewer Concessions_ _Kristin Komives_ might also discourage some households from connecting. Low connection rates in expansion areas would increase the company's costs.

There are a number of ways to avoid this problem. One strategy is to allow concessionaires to offer households a range of different services to satisfy differing levels of demand. Aguas del Illimani does not have this option. As described earlier, the technical specifications in the contract and sector regulations dictate that the company sell only in-house connections. Another strategy is to increase demand by restricting and illegalizing competing service options. The consequences of this strategy are discussed in detail below. Finally, tariff and fee structures can be designed to give concessionaires some flexibility in how they price their services. The Aguas del Illimani contract does give the company some leeway in this regard.

Aguas del Illimani's concession contract sets maximum tariffs and connection fees for water and sewer service, but it does not prevent the company from lowering prices or offering financing schemes to increase demand for the in-house water and sewer connections. The Municipality of El Alto and Aguas del Illimani took advantage of this flexibility in an agreement signed by the two parties in July 1997.64 The agreement was an attempt to address some of the municipality's concerns about the concession agreement, which had been negotiated by the national government. In the agreement, Aguas del Illimani agreed to take two measures to reduce the probability that the lump-sum connection fees would discourage households from soliciting connections. First, Aguas del Illimani agreed to give households the option of paying a reduced fee in exchange for supplying labor during the connection process (see Table 6). This work option has been very popular with households in El Alto. Only 20 percent of households that have received water connections through August 1998 chose to pay the full fee.<sup>65</sup> Table 6: Connection fees available to households willing to supply labor during the connection process

|**Household...**|**Water Fee**|**Sewer Fee**|
|---|---|---|
|Does not supply labor|$155|$180|
|Digs trench for household connection|$135|_$150_|
|Digs trench for connection and network line|**$105**|$130|

Second, Aguas del IlJimani agreed to offer "the population most in need" a 3 to 5 year financing plan to pay the connection fees. Financing connections introduces a repayment risk. Utilities would like to minimize that risk by financing connections as infrequently as possible and over as short a time period as possible. Consistent with this principle, Aguas del Illimani tries to offer only one-year financing packages in central and southern la Paz. In poorer neighborhoods, Aguas del Illimani makes the longer financing periods available. Aguas del Illimani makes it even easier for poor households to pay for connections by offering subsidized interest rates to households in the outlying areas of El Alto. In most of the metropolitan area, Aguas del Illimani

> 65 Data provided by Aguas del Illimani for connections through August 1998.

_64 Acuerdo Entre El Gobierno Municipal de El Alto YAguas del Illimani,_ July 24, 1997.

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