A number of recent sector reviews<sup>10</sup> comment on the precarious financial position of many of the service providers, due to the relatively low level of water tariffs and the political unwillingness to raise them closer to cost recovery levels.

According to the ENCOVI survey, 69% of households have piped water and 87% of the households have some form of sanitation; although only 38% are connected to the sewerage network.

# **2.2       Peace Accords**

The 1996 Peace Accords acknowledged the pivotal importance of modern utilities in the development process, and the historical neglect of the infrastructure needs of rural and disadvantaged urban communities. Although no quantitative targets were set, the Peace Accords made concrete commitments to expanding coverage of electricity, water and sanitation, as well as public telephones.

Following the Peace Accords, two main mechanisms were used to channel greater volumes of finance into (particularly rural) infrastructure.

First, both in the electricity and telecommunications sectors, some of the proceeds of privatization were earmarked to finance rural expansion programs.

In the electricity sector<sup>11</sup> , the net sale revenues from the privatization of the two non-metropolitan distribution companies (DEORSA and DEOCSA), totaling US$110 million, were placed in a trust fund to be used to finance a five-year rural electrification program (PER). The fact that the government was willing to sacrifice such a significant sum of potential fiscal revenue to support rural service expansion is unusual within the Latin American experience of privatization, and indicates the degree of commitment that exists to rural electrification. The objective of the PER is to connect 2,633 communities to the national grid during the period 2000-05, at a total cost of US$333 million. The two distribution companies DEORSA and DEOCSA are contractually responsible for executing the investments. Since the program became active in 1999, almost US$55 million have been disbursed. As a result, about 23% of the coverage target has been met, with a further 5% in the pipeline. The projects executed to date suggest that the average cost of electrifying a rural household is of the order of US$1,000, which is not unusual by international standards.

In the telecommunications sector<sup>12</sup> , 70% of the proceeds of the spectrum auctions held for mobile telephony services (up to an annual ceiling of US$5 million) were allocated to a special fund (FONDETEL) designed to support the expansion of public telephones in rural areas. In line with best practice in a number of other Latin American countries (notably, Chile, Colombia and Peru), FONDETEL bid out the construction and operation of public telephones to the private operator requesting the minimum subsidy. Between 1998/99, FONDETEL disbursed US$7.5 million of subsidies for the installation of some 1,600 public telephones. Each US$1 of subsidy leveraged between US$2-4 of private investment, so that the total subsidy cost per town was US$4,400. However, unfortunately, the revenues from spectrum auctions have now been exhausted and no additional funding source has been identified for FONDETEL. While GUATEL - the state-owned company that continues to hold the rural

> 10 See for example CEPIS, 2000 and IDB, 2001. 11 Information provided directly by INDE. 12 Information provided directly by FONDETEL.

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