6.18 The historical experience in the collection of tariffs as well as government policies and the law should support the operator's right to collect payment for services. In Argentina, officials were able to provide a reasonable historical record of tariff payment (with a collection rate of about 80 percent of those actually billed), though the billed percentage was admittedly low. But the firms also considered the collection rate in other industries, such as power, as an indication of consumer willingness to pay for services. Finally, the contractor is allowed to disconnect users who do not pay their bills. Taken together, these characteristics of the environment gave prospective operators confidence that they would be able to collect bills and would be protected in the event of non-payment.

6.19 In Chile, 98 percent of users are metered and the contractor has the right to cut-off water supply in the event of nonpayment. ESVAL also provided evidence that delinquent accounts had been disconnected in the past.

6.20 The story was quite different in Mexico City since there the billing record was not good. The three-phase contracts are designed to improve cost recovery and build confidence in the government's commitment to create commercially viable services. Phases I and II are designed to improve collection. The city government continues to collect tariffs and assume responsibility for revenue shortfalls. The contractors will install a metering and billing system that will provide clear indicators of who consumers are and how much they are consuming. This will provide prospective operators a better feel for the market and for future demand potential. The fee-for-service arrangement continues through the second phase, making it possible to gauge public response to contractor activities and the onset of metered billing for water before the contractors assume any commercial risk.

> 6.21 It is envisioned that the city agency responsible for water and sanitation will eventually

> be dependent on tariff collections for its budget, giving it a financial incentive to improve the collection rate. In anticipation of Phase III, in which the contractors will first take on commercial risk, a separate water commission, la Comisi6n de Agua del Distrito Federal (CADF), was established to administer water supply and sanitation services. The CADF is currently financed as an agency of the DF and it administers the four contracts for city water

> supply. Under Phase III, it is not currently envisioned that the four contractors will be allowed

> to cut-off the water supply of users who do not pay. The CADF will reserve the right to terminate water supply. In the event of non-payment, the contractor will be paid by the CADF.

an IDA credit, and debt service on preexisting loans was assumed by the State, also on a declining basis -- allowing the tariff increases to be phased-in gradually over ten years. Even so, tariffs have increased more rapidly than initially projected, due to higher than expected local inflation, while service improvements, that depend on the procurement of inputs by a State entity, have been somewhat delayed. The higher tariffs and the initiation of metered billing have led to demand reductions. From an economic point of view, demand management through tariffs that reflect the true cost of service is desirable, but uncertainty over the revenue effects of tariff increases is naturally worrisome to private operators.

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