_Designing Pro-poor Water and Sewer Concessions_ _Kristin Komives_ charges a 12 percent interest rate; in parts of El Alto, households pay only 8 percent interest. This subsidized interest rate was not part of the agreement with the Municipality of El Alto.

Because Aguas del Illimani has some flexibility in the pricing and financing packages that it offers its clients, the company can create payment packages to tailor to particular demands, needs, or concerns -- while taking care that its offers make financial sense. Concession contracts that require long financing periods or subsidized interest rates, however, could be dangerous because these measures may not be financially sustainable over the long-term.

# Risk

Tariffs and connection fees can be designed -- on paper -- to guarantee total cost recovery and to provide financial incentives for serving poor neighborhoods. In practice, however, concessionaires face many risks that may alter this picture. Risk is of course a normal part of the private market, but concession contracts and sector regulations often include provisions to reduce various types of risk. Discussion of how risk should be allocated in concession design is beyond the scope of this paper<sup>66</sup> . Here I consider only how two common risk-reduction provisions could affect low-income households: disconnection regulations and exclusivity provisions.

## _Nonpayment and disconnection_

Some concessionaires experience problems collecting bills from customers. Billing customers at cost recovery tariff levels does little good if customers do not pay their bills. Thus, concessionaires generally seek some leverage over nonpaying households. In Bolivia, the 1992 Regulations permit utilities to cut off service to any households that do not pay their water and sewer bills within two months. Armed with this power, both SAMAPA and Aguas del Illimani have achieved high collection rates from domestic customers.<sup>6 7</sup> Many countries, however, prevent disconnections for nonpayment or make cutting off service a very long and difficult process.

One could argue that low-income households _with_ water and sewer connections would actually benefit in the short-run if governments prohibited disconnection; this move would effectively remove the obligation to pay water and sewer bills. Low-income areas _without_ access to the water and sewer network, however, would lose out if a no-disconnection policy resulted in low collection rates. Low collection rates jeopardize cost recovery, and concessionaires that are unable to cover their costs are likely to reduce their service expansion plans.

## _Exclusivity_

Most concessionaires in the water and sanitation sector are granted the exclusive right to provide services in their concession areas. Exclusivity is often justified on the basis that it reduces revenue risk -- and thus increases the attractiveness of projects with high capital costs and long amortization periods. It is also advocated as a way to protect the revenues of concessionaires that

> 66 For more information on risk allocation, see World Bank. 1997. _"What a Private Sector Participation Arrangement Should Cover,"_ Tool Kit #3, The World Bank: Washington, D.C.

> 67 They have a much harder time collecting from public entities. In 1996, nearly 67 percent of SAMAPA' s customer debt belonged to government bodies. Aguas del Illimani's most delinquent customer is the municipality of La Paz. Aguas del Illimani recently reached an agreement with the government to compensate it for debts it inherited from SAMAPA.

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