Jordi Valls
Director General
Suez
/
Insight

Subsidized Water Tariffs a Danger to Water Efficiency

Wed, 11/01/2017 - 09:46

Water is quickly becoming a scarce resource in many parts of Mexico and this problem is only exacerbated by the fact that many areas across the country suffer outdated treatment systems. “The country is in need of a remodeling of its water infrastructure as almost 40 percent of the resource is lost through inefficient pipelines,” says Jordi Valls, Director General of Suez Mexico.

According to WWF, water may cover 70 percent of the planet but only 3 percent of it is considered freshwater that can be used for drinking, bathing and irrigation. Of this 3 percent, two-thirds are inaccessible as they are present in glaciers. Considering this reality, the cost and use of water should reflect its scarcity, says Valls, who points out that water is almost given away in Mexico. “The country cannot provide efficient water services at current prices because it cannot raise enough profits to pay for maintenance costs.”

As a company that provides water-treatment services, Suez struggles with the highly subsidized water tariffs authorities have set. “A middle point needs to be found between the subsidized tariffs and the financial needs of the project to make it more viable,” he says.

Despite the pricing issues, Suez considers Mexico to be one of its most high-potential markets, with a large portfolio of projects that need to be developed. The company already has over 300 plants and more than 50 years of experience in the country.

To make water-treatment services more sustainable and profitable, Valls proposes a scale for tariffs that is divided into blocks and terms of use. “The average family only requires 18m3 of water and households that use more than this should be paying more because water is becoming increasingly scarce,” he says. “Besides consumption, tariffs could also be based on the socioeconomic context as certain families have enough acquisition power to pay for the services without subsidies.” Valls believes other factors should be taken into consideration, such as proximity to water sources. Water services should not cost the same in Chiapas, for example, a state with an abundance of lakes and rivers, as in Mexicali, which is surrounded by deserts. He says these proposals could potentially solve the issues created by flat tariffs that do not properly control consumption nor motivate people to be more conscious of water use.

An exception in the faulty water system is Aguas de Saltillo, a company that is 49 percent private and 51 percent public. It helped the city of Saltillo in Coahuila acquire one of the best water-performance standards in Mexico. “Its business model is exemplary as it combines the best of both worlds through a healthy balance of regulatory and business knowledge,” says Valls. “It is easier to work under a company with this model and ensure the viability of projects.”

Suez also highlights the BOT model for guaranteeing transparency and legal certainty. The model requires a private company to build, invest and operate a plant for a certain period of time and allows the company to gain its investment back through trusts and tariffs paid by the public sector. The tariffs depend on the cost of capital and the volume of water treated, says Valls. BOT is commonly used by operators and construction companies in the Mexican water industry to mitigate risk and attract muchneeded capital. “The government could use a completely public model to develop its water infrastructure but the amount of capital these projects require often surpasses its financial capabilities,” Valls explains.

Considering the billions of dollars on the line, companies like Suez and Veolia depend on banks to finance projects and risk losing access to capital if costs and timelines are not well-structured. “Some projects are simply ideas that are not executable,” he says. The physical part of the project -– the construction phase –- takes three years to develop but planning is the most important phase.

Suez prioritizes this stage to protect the investment of financial institutions. “The best way to mitigate these risks is by investing plenty of time into the project’s planning phase to make sure that it is executable,” he says. “Fortunately, Mexico has an abundance of capital.”