MexConnect
Business  |  See all articles tagged ecology finance-economics geography

Mexico's water woes

Naomi Adelson

Dr. Leopoldo Rodarte Ramón, general director of the Federal District Water Commission, has a tough job. He is responsible for supplying an ever-growing population with water, draining thousands of tons of rain and wastewater, and treating huge discharges of industrial and domestic waste. To complicate matters, the Mexico City's water infrastructure is no longer able to carry away the torrential rains that lash it during the summer months, making the capital prone to extensive flooding. Furthermore, the over-exploitation of aquifers is causing the city to sink.

Why, then, does Rodarte act so calm and relaxed?

Rodarte takes his daunting responsibilities in stride, probably because he manages Mexico's largest and most modern water project - the Valley of Mexico Sanitation Projec t- putting him at an advantage when compared to the rest of the country. Not only are private interests salivating as they wait for the bidding process to begin, the venture promises to solve some of the colossal sanitation and water-transport problems that affect the area.

Too much or too little?

While Mexico is a water-rich country, receiving approximately 30 inches of rainwater annually, which provides residents with more than 4,800 cubic meters per capita, according to National Water Commission (CNA) statistics. However, rainfall is not regular. The country receives most of its precipitation during only four months of the year, making it difficult to provide a regular supply to the population. Additionally, a mere 4 percent of the nation's rain falls on the northern 30 percent of the country, while the southeast and the coasts receive over half of the total.

The distribution of the population has also put pressure on the water supply. The central region, where 60 percent of the population lives - and where 70 percent of the gross national product is generated - receives only 25 percent of the country's precipitation, says César Herrera Toledo, vice director of the National Water Commission's General Program.

The use of this precious resource is also highly uneven. According to Herrera, approximately 76 percent of the water consumed in Mexico is used for irrigation, 17 percent for residential use, and 5 percent for industry.

High levels of leakage also plague various regions of the country. The largest user - irrigation - is responsible for more leakage than total residential and industrial demand combined, according to the CNA.

Scaling back the State

The Big Drain

 

Mexico City officials must provide water services for 16 million people. Here are just a few of their most pressing issues:

  • Water leakage accounted for a 37-percent loss of water in 1997. By 1998, leakage had been reduced to 34.2 percent, and in 1999, leakage is estimated to have fallen to 32 percent.
  • Mexico City facilities can treat 7 cubic meters of residual water per second, but operate at only 4 cubic meters per second. The capital discharges 35 square meters of water per second, leaving 41 cubic meters untreated. Every year, more than 400,000 people are negatively affected by untreated water from the Federal District.
  • The aquifers are recharged with approximately 700 million cubic meters annually, but nearly double that amount is extracted. Nevertheless, the Valley still relies on aquifers to obtain 66 percent of its water. Groundwater over-exploitation is the root of recent water shortages, as well as the cause of the city's sinking.
  • The Great Drainage Canal - one of the city's two large canals that artificially drain the city - now rises and falls up to 10 meters due to differential sinking. That situation has left the Great Canal operating at 10 percent of its original capacity, and if it is not rehabilitated, it will be inoperable in just a few years
  • The Inter-American Development Bank (IDB) approved in 1996 a US$1 billion project to clean up the water mess in the capital. In the near future, Mexico City and the State of Mexico government will invest US$2.6 million, the IDB will loan US$365 million, and the Overseas Economic Cooperation Fund of Japan will provide US$410 million in what is called the Valley of Mexico Sanitation Project.

Given the mounting problems faced by the water sector, the federal government began a restructuring of both its water entities and strategies at the end of the 1980s. Government policy had focused on building large public works, but it could no longer finance such large projects alone.

"Water is one of the most capital-intensive businesses around, so sooner or later private sector investment will have to enter," says Michael Phillips Jones, chief operating officer of Latin America North/Caribbean for Industrias de Agua de la Ciudad de México (IACM).

And the private sector is exactly who the government turned to. Since neither states, municipalities, or the federal government could make the colossal investments necessary to resolve national water problems, a new emphasis was placed on "private sector participation," says Herrera. The operation of irrigation districts was transferred to users, while municipalities (through their own water companies) were given the responsibility of providing potable water services, treatment, and drainage.

Mexico turned out to be at the forefront of what would soon become a developing national trend: attracting private-sector investment for water. According to the World Bank, between 1984 and 1990, developing countries awarded water and wastewater contracts totaling US$297 million. Seven years later, private-sector investment in developing countries' water had skyrocketed to US$25 billion.

Private party

Mexico's current water policies continue to encourage private-sector participation. According to the national Hydraulic Plan 1995-2001, "addressing underdevelopment requires huge investments that in turn require private-sector participation, together with public-sector participation." As a result, private-public sector partnerships have now become common throughout the country.

Most states and municipalities - now obligated to provide water services - opted to contract out services or grant full concessions to the private sector. The cities of Cancún, Aguascalientes, Navajoa, and Nogales later decided to fully privatize their water services. U.S.-based water company Azurix, through its affiliate Azurix Cancún, entered into a partnership with Grupo Mexicano de Desarrollo (GMD) - one of the country's largest construction companies - to operate the Cancún water and wastewater concession. Azurix acquired a 49.9-percent interest from GMD, paying US$13.5 million in cash and assuming approximately US$25 million in financing and operational commitments, according to company reports.

"We have a 30-year concession for all water services (potable water, wastewater, and infrastructure) in Cancún. In fact, we are now the water company, though we are regulated by the water company of Quintana Roo," says Michael Wood, chief executive officer for Latin America North/Caribbean at Azurix.

"We feel that (full concessions) are better because you are a total provider. You become more efficient when you run the whole water company. You can manage capital costs, and it's easier to get financing because you are actually controlling the whole system," he says. In Aguascalientes, French-based Vivendi - the world's largest water company - joined with Ingenieros Civiles Asociados (ICA) to form a joint venture called Operación y Mantenimiento de Sistemas de Agua (OMSA). The joint venture now holds the full concession for water services in that city. Nevertheless, Azurix's Wood doubts that more cities will follow suit with full concessions.

"People don't like to think of a private company owning the water," he says, adding that that sentiment won't change "until people see concessions really operating well." "Here, the wave of the future is going to be public-private sector partnerships," says Wood. And so far, his assessment is correct. While Cancún and Aguascalientes opted to open their doors to private investment, other cities - like the Federal District - are only providing service contracts, due to local resistance to the privatization of what citizens here often view as a public good. Last April, in fact, locals gathered outside the local Congress of Chilpancingo, Guerrero, to protest after a legislator suggested that the district's water supply be privatized.

The government is also encouraging private investment in what Wood calls "Mexico's biggest need", wastewater treatment plants. Azurix itself particpates in a joint venture with FYPASA Construcciónes, and holds a 49-percent interest in a US$25-million wastewater treatment plant currently under construction in León, Guanajuato. The firm also holds an interest in a US$20-million treatment plant in Torreón, Coahuila, and is building another for the city of Cancún.

"There will probably be three to four other plants put up for bid this year in Mexico," says Wood, adding that his company will bid on the upcoming Gómez Palacio, Durango, plant. But Azurix faces stiff competition from the subsidiaries of French-based firms Lyonnaise des Eaux and Vivendi. The two hold Federal District service contracts, and Lyonnaise des Eaux, through its subsidiary, Degremont, has a number of waste and cleanwater treatment plants throughout the country. Vivendi also holds the service contract for Acapulco and Puebla. Proagua Potosí is building a wastewater treatment plant in the capital city of San Luis Potosí.

Such plants are usually built under Build-Operate-Transfer (B-O-T) schemes that last from 10 to 15 years. Since large investments of this nature are highly risky, Mexico is providing government guarantees to assuage private-sector fears of instability. The nation's public-works bank, BANOBRAS, guarantees the transparency of bidding and state and municipal payments in all B-O-T agreements.

Rethinking water

Yet it is the Valley of Mexico where the most significant investments are needed. The valley covers 9,000 square kilometers, at the bottom of which is located the Federal District and part of the State of Mexico. The valley is completely closed in by the surrounding mountains, and has no natural drainage. The area was originally composed of several lakes, among which the Aztecs created a system of canals to release water from the valley. The Spanish, however, drained most of the lakes, leaving today's city managers with the burden of enormous flood risks and infrastructure needs.

Inter-American Development Bank (IDB) statistics demonstrate that the Valley of Mexico's aquifers are now over-exploited. While the aquifers are recharged with approximately 700 million cubic meters annually, nearly double that amount is extracted. Yet the valley still counts on them to obtain 66 percent of its water. The groundwater over-exploitation is the root of recent water shortages, as well as the cause of the city's sinking.

"The sinking of the city is a problem that we have been living with for a century," says the city's Water Chief Rodarte. "What we are doing to reduce the effects is to transfer wells to zones where they provoke minimal sinking - at the edges of the valley."

The Great Drainage Canal - one of the city's two large canals that artificially drain the city - now rises and falls distances of up to 10 meters (due to differential sinking). And in several areas where deep drainage pipes used to flow downhill, they are now inclined. The city has had to install pumps to push the water through the Great Canal, as well as move water through urban drainage networks.

That situation has left the Great Canal operating at 10 percent of its original capacity. But the fact that the city is sinking is not its only problem. Since the world's largest metropolitan zone can no longer get residual and rainwater out of the city, flooding risks are a paramount concern. The IDB says that if the Great Canal is not rehabilitated, it will be inoperable in just a few years, leaving the Central Collector to extract all of the city's water. If the Central Collector were to fail, 210 square kilometers of the city would find itself under several meters of water, necessitating the evacuation of nearly 4 million people. Worse still, 90 percent of the subway system is located within the prospective flood zone.

The Valley of Mexico's water problems have also spilled over to surrounding areas. Mexico City has the capacity to treat 7 cubic meters of residual water per second, but operates at 4 cubic meters per second. Yet the city discharges 35 square meters of water per second, leaving 28 cubic meters untreated, says Rodarte. The IDB places that figure at 41 cubic meters per second.

Mexico City's wastewater has traditionally been discharged in the nearby irrigation district of Tula, Hidalgo, causing great environmental damage. In a 1992 study, the National Health Institute and the National Nutrition Institute found that the incidence of intestinal worms (Ascaris Lumbricoides) is between 10 and 20 times higher in the Tula Irrigation District than in areas where water is treated at least once. The IDB estimates that 400,000 people are negatively affected by untreated water from the Federal District.

Yet the governments of the Federal District and the State of Mexico - most of whose population lives in the so-called conurban zone surrounding and attached to the Federal District - are too fiscally strained to revamp the water, drainage, and treatment systems in such a large metropolitan area alone. In 1996, the IDB approved a US$1.035-billion project to clean up the mess. Mexico City and the State of Mexico government will invest US$2.6 million, the IDB will loan US$365 million, and the Overseas Economic Cooperation Fund of Japan will provide US$410 million in what is called the Valley of Mexico Sanitation Project.

"There will be three types of works: wastewater treatment plants, drainage, and an increase in the amount of water available to the Valley of Mexico," says Rodarte. A new water highway, known as the acuiférico, will bring four more meters of water per second into the zone, which will allow the Federal District to close wells within the city to reduce sinking and provide more water to the State of Mexico.

The IDB views private-sector participation as an "important factor for development in the sector," and it will "continue to assist these types of initiatives in the project." The design, construction, and operation of the wastewater treatment plants, as well as drainage works, will be conducted by private companies, according to Bank documents.

"The bidding will be open to businesses from any country," says Rodarte, adding that it is expected to begin sometime this year.

The private sector is quite aware of the size of the IDB project and is awaiting the bidding anxiously.

"We certainly are interested in that project. In fact, one of the treatment plants will be among the largest in the world, treating 45 cubic meters of water per second," says IACM's Phillips.

Population problems

Mexico's annual rainfall distribution

 

  • --Mexico receives around 30 inches of rainwater annually
  • --Rainwater provides more than 4,800 cubic meters per capita
  • --Only four percent of the annual rainfall reaches the northern 30 percent of the country
  • --The southeast and the coastal regions receive more than half of the total annual rainfall
  • --The central region, where 60 percent of the population lives, receives only 25 percent of the total annual rainfall

Mexico City officials also have to contend with providing water services to the city's 16 million population, according to IDB estimates. In the mid-1990s, the city created the Federal District Water Commission to restructure the sector. Service contracts were to be awarded to an unknown number of pre-qualified companies in a transparent bidding process.

"That was the first time that water services were concessioned in the Federal District," says Rodarte.

Seven international consortia entered bids. "At bidding time, no one knew how many contracts there would be. We only knew that there would be a minimum of two," says Phillips.

The Federal District Water Commission ended up dividing the contracts among four companies with four districts each. Each winning consortium now holds a 10-year contract that began in 1994. The firms must be 51 percent Mexican-owned, so foreign companies formed local partnerships to tap into the market.

Two of the world's largest water companies, Vivendi and Lyonnaise des Eaux, won one district each through joint ventures with ICA and Grupo Bufete Industrial, respectively. Agua de México, the joint venture of U.K.-based United Utilities and Grupo Gutsa, was also awarded a contract. Azurix recently aquired a 49-percent interest in Industrias del Agua (IASA), a water and wastewater service joint venture based in Monterrey, Nuevo León, which held the fourth concession with U.K.-based Severn Trent and the Mexican company Samsa. Today, through its subsidiary Industrias del Agua de la Ciudad de México, Azurix is providing the water services.

So far, the private-public sector partnership in Mexico City has been fruitful for both sides. Rodarte says the concessions "are going well," while the government continues to be the owner of the water system.

The service providers are now responsible for leak detection and have significantly reduced leakage. According to Rodarte, in 1997, the city was losing 37 percent of its water to leaks. By 1998, leakage had been reduced to 34.2 percent, and in 1999, leakage is estimated to have fallen to 32 percent.

Perhaps the greatest gift the private sector has given Mexico City is technology. Azurix has been replacing sewer mains without excavations, using technology developed in the United Kingdom that avoids having to tear up sidewalks and streets to reach the pipes. They are also replacing asbestos cement pipes with polyethelene ones. "Asbestos cement is a rigid material, which is not ideal for a city that suffers from earth tremors and sinking," says Phillips. Polyethelene, in contrast, is flexible.

To obtain the US$365-million loan from the IDB, Mexico City had to increase its operating efficiency significantly. With the participation of private firms, the city was able to reach the level required for the fourth year of the project in the first year, according to Rodarte.

Nevertheless, the project is a bit behind schedule. In the initial stage of the contract, the companies were to take a census of users within their designated zone, install meters, and map the infrastructure. Then, the firms were to enter the commercial stage: reading and maintaining meters, calculating and billing consumption. In the third stage, the companies were to begin the operation and maintenance of secondary networks. According to Phillips, however, "that is only being partially implemented. And the day-to-day operation of the sewage lines and water distribution continues to be the responsibility of the delegations."

Here to stay

"The quality of life and commerical development of the country in many ways will be dependent on having a water infrastructure to meet commercial growth needs," says Phillips, adding that, though some authorities are still resistant to the idea of giving up their water responsibilities, private investment will eventually become imperative.

"The government just doesn't have the capital to do the work here," says Azurix's Wood. So that leaves a lot on the private sector's plate. "We think that Mexico affords firms the best opportunities (for investment) at this time. It's a good country to do business in."

Published or Updated on: March 1, 2000 by Naomi Adelson © 2000
All Tags