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Prasa: Get It Fixed
Prasas 10-year contract with Ondeo Services to rejuvenate Puerto Ricos aging water system. Government aims to take back management in five years under well-trained local team.
By LIDA ESTELA RUAÑO
May 9, 2002
Ondeo will save Puerto Rico $823 million in first five years: Private management will invest up to $250 million in three years, finance reconstruction, increase billing by limiting lost and stolen water, cut workforce by attrition and modernize facilities.
The government aims to transform the moribund Puerto Rico Aqueduct & Sewer Authority (Prasa) into a world-class water system. Its intention is to evaluate the agency in five years to see if the new Prasa management team can cancel the private management contract and take over, running it as efficiently as the private sector did.
The Commonwealth government negotiating team, led by Government Development Bank President Juan Agosto Alicea, signed the worlds largest water management contract, $3.82 billion over 10 years, with French company Ondeo Services last week. They did so keenly aware that conditions at Prasa have sunk to such a low level, it requires a first-rate water management operator to put it back in order. The new contract will save the government $823 million over the first five years, of which $152 million is saved the second year of the contract.
Once Ondeo brings Prasa up to world standards, and the 10- to 15-member government management team and 4,000 Prasa employees are armed with the latest technology and management techniques, the government will be in a position to decide if it should take Prasa back under its wing.
"Prasa is now a very ill patient, and must be placed in the intensive care unit. As government, I dont have the resources to take care of the patient," Agosto Alicea said. "Once vitamins and IV [intravenous medicine] are administered, and via technology transfer, my team has absorbed the best techniques in water management so they can run Prasa as a world-class water system, we will be open to the possibility of taking back Prasa and managing it ourselves in five years," Agosto Alicea said.
Although the contract with Ondeo is for 10 years, there is a clause that the government can cancel the contract after five years if it so decides, after paying a cancellation fee.
The government has been under fire, from both the labor sector and prominent engineers and other professionals, who object to handing Prasa over to the private sector, thereby decrying the professionalism of local engineers, accountants, and attorneys who either work for or have contracts with Prasa.
Another objection is that if a global player in water management such as Vivendi--whose subsidiary, the Water Co., ran Prasa for the past seven years--was under constant criticism for alleged mismanagement of the agency, why entrust it to another world player, the French company Ondeo, for 10 years. Prasa employees often complained about the use of the French language and French technicians, which allegedly created communication problems.
In an effort to ensure that the contract is carried out in strict compliance, Agosto Alicea will also offer smaller contracts to the three losing bidders. "We are going to award them smaller contracts for specific areas, within their core competencies, and we will bring in other world players that did not bid, which could include Severn Trent and others," Agosto Alicea added. He said the government will spare no effort to put together the best team of advisors to get Prasa back on its feet quickly.
The other companies that bid for the Prasa contract were the parent company of the incumbent managers, Vivendi, plus the English companies Anglian Water/ Earth Tech, which pulled out at the end, and Thames Water.
The governing board
The governments new plan calls for a core of 10 to 15 people to serve as a government management board for Prasa. The board will have a $10 million annual budget, to cover its payroll and contracts with losing bidders and consultants to analyze specific problems. The nine-member Prasa board, including four from the government and five from the private sector, will be appointed for staggered short terms, to be renewed for an additional five year term. This will ensure that the board continues beyond any governors four-year term, allowing permanence to the beleaguered agencys governing body.
"Each board member must have expertise in needed areas, such as environment, finances, and law," Agosto Alicea said. Gov. Sila Maria Calderon is expected to announce the names of the nine members of the board on June 30. The Calderon administration will submit legislation to transfer management power back to the Prasa board so that it is enacted before the July 1 deadline, when Ondeo takes over Prasa and the new board begins overseeing the companys performance.
The board will select its executive president, who could be a board member or from government or the private sector. The president does not have a specific term in office, instead, his continuance depend on his performance as judged by the board. The president will recommend four vice presidents for board approval, each of whom will oversee a specific area of concern.
One vice president will be responsible for management of the Ondeo contract, including scrutiny over Ondeos performance and the contracts-specified compliance commitments. Another will supervise Prasas finances; a critical issue second only to providing quality water service is to stabilize Prasas finances, now in total shambles. The third vice president will supervise planning & environmental compliance, overseeing Ondeos proposed permanent works programs, which the government will finance, and ensuring U.S. Environmental Protection Agency (EPA) compliance. The EPA has found areas of noncompliance for years, resulting in millions of dollars in annual fines to the agency. Legal counseling is a must in an agency as complex as Prasa, and will become the responsibility of the fourth vice president.
Although Agosto Alicea refused to comment on who the vice presidents will be because it is up to the new Prasa president to appoint them, insiders say its likely to be a rollover of the current government team which helped draw up the new Prasa management contract.
Sources suggest that Jose Bolivar, current project manager for the Prasa contract, will be the vp of finances; Jose Amador, incumbent Authority for Infrastructure Financing (AFI by its Spanish acronym) executive director, will be vp in charge of planning and environmental compliance; Jose Martinez Laboy, on leave from his job at the U.S. Army Corps of Engineers from which he will soon retire, will probably be the vp in charge of contract management, and Miriam de Lourdes Figueroa, now GDB vice president in charge of the Legal Division, will be offered the same post at Prasa.
AFI will fall back to its original position as a financing entity under GDB. All of the projects that it now manages for Prasa will be phased into the realm of the planning and environmental compliance vp within six months. Both Amador and Martinez Laboy will have younger lieutenants so that when they retire, the young turks can take over their positions.
The teeth to make it work
In spite of the general public skepticism that the new Ondeo contract sounds suspiciously similar to the contract signed with the Water Co. seven years ago, Agosto Alicea is emphatic that the new contract has the necessary teeth to ensure compliance.
Jose Bolivar added that the incentive and penalty variables in this contract to ensure compliance are 20% of the total versus 5% in the old contract, which provided incentives but hardly any penalties. Prasa board Chairman Jose M. Izquierdo, who is also secretary of Transportation & Public Works, said that if Ondeo has not delivered on its promises at the end of the 10-year term, the penalties will be such that Ondeo will lose millions of dollars.
"Nonperformance will be costly to them," Izquierdo said. Agosto Alicea added that because Ondeo will be spending between $200 million and $250 million in the first three years in capital expenditures, it anticipates increases in revenues. Incentives are built into the contract to reward compliance. "That is the risk they have to take," Agosto Alicea said.
Agosto Alicea is certain the government will lose $2.5 billion within 10 years if it continues with the current contract with Vivendi subsidiary, the Water Co. "We have an annual Prasa deficit of $200 million, which when inflation is considered increases to $250 million, which at the end of 10 years will be $2.5 billion," Agosto Alicea said.
The current Water Co. contract (which expired but was extended until June 30) would have cost $6.3 billion over 10 years, versus $3.82 billion with Ondeo. Agosto Alicea said that Prasa will pay an average of $385 million annually to Ondeo, which means that for slightly over $36 million monthly, Ondeo must meet payroll, purchase chemicals, and pay for other expenses.
"We will continue to pay for insurance and electricity, because there is the petroleum cost variable which is unpredictable," Agosto Alicea said. Because the government retains ownership of all the plants and equipment, it is in the publics best interest to have them fully insured. He said the insurance policies are put up for bid by the Treasury Department and cost an average of $10 million annually whereas the energy bill runs to about $60 million a year. If Ondeo surpasses a specified limit of energy consumption, the French company will have to pay the difference.
Another plus with the Ondeo contract is that it promises to increase Prasas annual income, which now stands at about $330 million a year (see box). Ondeo will also finance up to $200 million of the permanent improvements that the government will undertake during the next four years at a lower interest rate than what GDB can offer.
Cutting out the waste
The new contract addresses several thorny issues. With the new financial scenario, there is no need to increase rates. Ondeo cannot decree a rate increase, only Prasa may do so. "If we maximize revenue increasing it significantly and if we reduce costs significantly, there will be no need to increase rates," Agosto Alicea said.
According to a study by one of the bidding companies, of which CARIBBEAN BUSINESS obtained a copy, there are an estimated 100,000 clients, mostly individuals, who have installed a device, commonly called pillo for thief, so that their meters dont register water consumption. Modern technology, which Ondeo has, allows them to quickly identify where these thieves are located.
The study estimated that if each of these clients paid a conservative monthly sum, such as $20, it would increase Prasas monthly income by $2 million, or $24 million annually and $240 million, over 10 years.
One of the bidding companies estimated that 54% of the water now produced by Prasa is lost. The new contract calls for an immediate loss reduction so that only 20% is unaccounted for in 10 years, an industry-wide acceptable standard. "This would represent savings of $50 million in 10 years," Agosto Alicea said.
Thieves account for a portion of this, but the majority of the water lost is through leaks. Ondeo is committed to repair all visible leaks within six months. Over the next three years Ondeo will also install 320,000 new meters, another reason water is unaccounted for, at a cost of $24 million. With less water wasted, fewer treatment chemicals and less energy are consumed. All of these measures will increase revenue (see related story).
Prasa now has 6,000 employees, 800 of whom work in management positions, while most bidders cited 4,000 as the right number to run the agency efficiently. "All Prasa employees will be public employees, protected under the laws of the Commonwealth of Puerto Rico, and no one will be fired, except in the case of just cause," Agosto Alicea said adding that union contracts will be respected. Average annual salary per employee is $40,000, so 2,000 fewer employees represent another annual saving of $80 million.
The company plans to reduce the workforce by attrition, meaning people retiring or resigning for personal reasons will not be replaced. "The agency will also open voluntary early retirement windows with an attractive incentives package for those who wish to take advantage of it," Agosto Alicea said. It is up to Ondeo to determine how many employees it needs to run Prasa efficiently.
Another crucial issue is putting all the Prasa plants within federal EPA compliance. Agosto Alicea met with EPA Regional Director Jane Kenny in New York and presented his plan. "What I proposed is that instead of fining Prasa for every act of noncompliance, we be judged on our integrated plan which includes a timetable. If we do not comply with this, then we will be fined," Agosto Alicea said. While Kenny was positive about the idea, no commitment can be reached, until the plan is presented.
Ondeo must present its plan for permanent improvements to be carried out by the government by Jan. 1, 2003. Agosto Alicea said that proposal will be given to one of the losing bidders as consultant to scrutinize and make recommendations. Within three or four months of that, the government will announce its permanent improvement plan. The plan will be submitted to EPA by the summer of 2003. If EPA accepts the plan, fines for noncompliance will be established. Now the government pays an average of $3 million to $5 million annually in EPA fines.
This Caribbean Business article appears courtesy of Casiano Communications.