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Employee Payroll Accounts For 50% Of Prasa Budget

Agosto Alicea Said Government Didn’t Retake Authority In 2001 Because Study Recommended Layoffs


February 26, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Quo vadis, Prasa?

That is the question gubernatorial candidate Pedro Rossello posed last week: Where is the Puerto Rico Aqueduct & Sewer Authority (Prasa) going? His plan for restoring the embattled public utility to health includes reforestation, replacing pipes, dredging five lakes, and building seven superaqueducts, eight new filtration plants, and one new sewage plant.

Meanwhile, the Legislature worked last week to push through a measure to restructure the authority, paving the way for the government to take back Prasa in the wake of the cancellation of its management contract with French company Ondeo.

Prasa’s problems include an old, leaky, complex infrastructure; illegal hookups to an estimated 100,000 to 200,000 households; more than 50% of plants in noncompliance with federal environmental standards; and rates that have remained unchanged for the past 18 years.

Worse, it lacks an accurate accounting of the water that comes in and goes out of the system. "There is no accounting of all the water that is produced, and nobody can say how much is lost," said Roberto L. Rexach Cintron, vice president of the College of Engineers & Surveyors.

Prasa’s employee payroll is $275 million, 50% of the authority’s $550 million yearly budget, yet reducing manpower is difficult.

Prasa Chairman Juan Agosto Alicea told CARIBBEAN BUSINESS that the Calderon administration considered retaking the public utility when the Water Co.’s management contract ran out in 2001. It decided against it because a privately commissioned study recommended laying off 1,500 employees. "You have to remember that a brutal recession had started in 2001, and if we had come in and laid off 1,500 employees, there would have been serious unrest," said Agosto Alicea.

The layoff recommendation came in a study by PriceWaterhouseCoopers. Agosto Alicea said the accounting firm suggested Prasa hire an outside company to take on 500 employees to do construction work for the utility and to keep gradually reducing the payroll by another 1,000 people.

The study also concluded that retaking control of Prasa would be onerous for the government. But Ondeo’s offer to run the authority for nearly $100 million a year less got the government off the hook.

"Operational costs are about $450 million [not counting electricity and insurance, which add up to another $100 million] and Ondeo agreed to manage it for $360 million per year. We [the government] saved $100 million the first year," said Agosto Alicea.

On the basis of this offer, Prasa’s board decided to favor Ondeo over the two other companies that had bid for the contract: the Water Co., which had managed Prasa since 1995, when the Rossello administration privatized its management; and the British-based Thames Water Co.

It proved a short-lived arrangement. The 10-year, $3.8 billion contract was canceled in January, less than two years after it went into effect, because Ondeo wanted to reduce quality standards and get paid an extra $113 million. The government now wants to restructure Prasa into four regions headed by regional directors with fiscal and operational autonomy and six-year appointments. Additionally, there would be an executive director and a capital improvements chief, also appointed for six-year terms.

Hearings currently underway on the bill are focusing on Prasa’s disastrous finances, which are propped up artificially through subsidized credit lines and taxpayer contributions to the General Fund. The authority is also making a bid to increase its water rates.

Prasa board member Lucy Crespo said Ondeo knew when it signed the contract that it would be losing money in the first few years. That is why the contract was made for 10 years, to allow the company to recoup its investment over that period. Crespo is the general manager of the Hewlett-Packard Caribe Ltd. Manufacturing operation in Aguadilla.

"Ondeo was going to make investments in operations and maintenance to improve the efficiency of the system and reduce operational costs in such a way that the fee they received each month would allow them to turn a profit," said Yamil Castillo, senior vice president in charge of construction loans at Banco Popular’s Commercial Banking Group. "They were brought in because of their know-how, their expertise; they understood they would be in the red the first four or five years."

What did Ondeo achieve during its short tenure? Among other things, it invested in a meter system to start charging more people and began installing a telemetry system to account for water production and a detection system for leaks. Water loss is one of Prasa’s biggest problems, accounting for a 50% loss in its daily water production of 500 million gallons per day, according to Castillo.

"If we can reduce the losses to 20% or less, which was one of the goals of the contract and which we will pursue, we would have an enormous reduction in operational costs," said Castillo.

Ondeo also replaced Prasa’s dated accounting system with one known as SAP and reduced the number of employees by about 500 through early retirement. "There were about 6,000 employees, and now there are about 5,500," said Agosto Alicea. "The attrition is slow because what you are doing is replacing people who retire or die with your own employees."

Castillo and Crespo noted that Ondeo got excellent marks in the beginning. It reduced the number of households without water service from 17,000 to 10,000. By June 2003, however, service started to go down substantially. "We went back to 17,000 households without water," said Crespo.

"We contracted Ondeo to improve service and work with costs. Service is a critical factor. We wanted a competent firm that would help us boost revenue through structural programs that would reduce the loss of water. At the same time, we wanted a company that would reduce costs through operational efficiencies," said Crespo. "The intention now is to have an organization that will be capable of taking up the 10-year plan, following the same parameters in the Ondeo contract, and providing continuity."

Prasa’s 10-year plan calls for the investment of $2 billion in improvements to infrastructure, of which $500 million would go toward improving existing plants and $532 million toward bringing the authority’s plants up to federal standards. The plan also calls for reducing the water loss from 50% to 20%.

This Caribbean Business article appears courtesy of Casiano Communications.
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