Re: Message for CEO Riley Bechtel
Source Gail Apps
Date 00/04/27/17:34

Most of the messages we've received about Cochabamba from concerned citizens
such as yourself were triggered by reports from Jim Shultz of The Democracy
Center, who also issued a call to action.

Following up on the last message we sent you on behalf of International
Water Ltd., below is a letter sent to Mr. Shultz by Didier Quint, managing
director of IWL.

Also, on Bechtel's web site (
you'll find a letter that Mr. Quint sent to the editor of the San Francisco
Examiner in response to an April 19 Jim Shultz commentary, which is also
posted on Bechtel's site in pdf format.

We hope this information gives you a greater sense of the complexities of
this issue and the steps that were taken to provide local decision-makers
with reasonable approaches to improving the water delivery system.

* * * * * * * * * * * *

To: Jim Shultz,
The Democracy Center

Dear Mr. Shultz:

I am writing in response to your e-mail message of April 9. I want to
provide you with more comprehensive information than you may have had access
to previously, including the nature of the concession held by Aguas del

As you certainly know, Cochabamba is the third largest town in Bolivia with
an estimated 600,000 people. The city's rapid increase in population is due
mostly to the migration of citizens from the neighboring poor rural areas.
This migration has created significant social problems that the city has
been unable to address.

These problems include the lack of appropriate low cost housing, equal
access to education, a growing gap between the rich and the poor, and,
generally a lack of access to public services. These problems are
unfortunately extremely common in developing countries. Some of them can
also be found in the more developed world.

On a matter I am quite familiar with, many of the cities in the developing
world lack an appropriate water distribution network, not to mention
wastewater collection and treatment systems. Cochabamba is no exception and
the situation is even worse, as the raw water sources have been
progressively exhausted. This particular situation is widely acknowledged
and many engineering studies have been performed in the last ten years or so
to identify various solutions to this pressing problem. To date, no action
has been taken as the solutions all carry a very expensive price tag. The
municipal authorities have been deferring any action, hoping that some kind
of subsidy or state financing could avoid passing on these costs to local

Such an approach is understandable but, unfortunately, has created a
difficult situation for the municipal water company (Semapa) from a
technical and financial point of view. The Semapa network is barely able to
supply partial water coverage to less than 60% of the population. Most of
the households have to survive by buying water from truckers at a price
several times the official tariffs. In short, water, as delivered by
Semapa, is cheap, particularly for large users, but is so scarce that
people, predominantly the poor, have to buy it from private entities at a
price obviously not regulated. This water, trucked into the city, is mostly
drawn from the water table which, unfortunately, cannot be replenished.
Needless to say this parallel water market is a very profitable industry and
well drillers, truckers and merchants of all kinds have become prosperous by
selling a non-sustainable resource at exorbitant prices. A number of
government officials over the years have been alarmed by this situation and
have tried to figure out how to provide some relief to water-starved
Cochabamba. One of the solutions was to identify new sources of water
outside the region and build a system to transport this water to the city.
To do so would require additional financial resources that the national and
local governments do not have. In addition to a new supply of water, it
also became obvious to the national government and the local municipality
that it was necessary to improve the water system through private
management. Such a public/private partnership could help increase operating
efficiencies, repair leaks and discourage pilferage. It would also
accelerate the implementation of the building program without using national
or municipal debt.

A first attempt to find a concessionaire to manage the Cochabamba water
distribution system was made in May 1997 by the previous government. An
international call for tender was initiated at the same time that the La Paz
water privatization was occurring. Unfortunately, the Cochabamba call for
tender was cancelled. At that time, the municipality was very much opposed
to the tender because it was not taking into account the Misicuni project.
This project is a long-standing effort to construct a dam (to store the
water during the rainy season) a tunnel, (to carry the water across a
mountain ridge) and an aquaduct (to bring the water to the city). There
were other solutions to bring water to Cochabamba, including extracting
water from the existing Corani dam, but Misicuni had been supported time
after time by the local officials, contractors and people of influence.

After cancelling the tender for the concession, the new government, in a
gesture of good will, decided to build a portion of the Misicuni project and
negotiated a sole-source contract for the tunnel section with a local
contractor and a major European company. This was obviously risky as the
financing of the whole project was not secured and there was a high
probability that the scheme would remain uncompleted and useless, after the
government had spent a large amount of money for tunnel construction. In
order to mitigate this risk, the government decided to revive the concession
tender and include in its scope not only the distribution system, but also
the Misicuni project. The State utilized a financial advisor (Banque
PARIBAS) very familiar with water issues to estimate and arrange for the
most suitable legal and financial structure. The terms of reference were
prepared and the tender was advertised at the beginning of 1999, at
approximately the same time that the construction of the tunnel started.

International Water decided to follow the tender and we associated ourselves
with Abengoa (of Spain) and four Bolivian companies including ICE, a major
Cochabamba contractor and builder of the new airport and Misicuni tunnel.
The joint venture, called Aguas del Tunari (AdT), submitted its bid in April
1999. To our great surprise, none of our competitors submitted a bid. Even
the two French water giants, Vivendi and Lyonnaise des Eaux, declined to
submit a price. We understood that Vivendi, which had to abandon its
Tucuman (Argentina) concession a few months before, was very cautious about
entering into a potentially similar situation. We never understood why LdE,
having won the La Paz concession in 1997, did not submit a bid.

At this point it must be stressed that many international water companies
had expressed concerns about the feasibility of the Misicuni scheme that was
supported by local municipal and economic interests. The questions were
mostly focussing on the feasibility of the dam and possibility of attracting
sufficient financing to the project, given the poor records and economic
condition of Semapa, the municipal water company.

In Aguas del Tunari's bid, we also stressed these points and insisted on an
alternative, consisting of a later implementation of the dam portion of the
project. We were certain that the tunnel could not be built in two years
and consequently that the construction of the dam could be deferred by
several years. By deferring the construction of the dam, the initial
upfront expenditure would have been diminished, thus allowing for a much
lower and progressive increase in tariffs. We also proposed to focus our
first year's effort on repairing the existing network, where the leakage
factor was in excess of 60%. As a matter of fact, 60% of the water pumped
in the network was either lost or pilfered, which means that it was possible
to delay the construction of the dam by making better use of the existing
raw water supply.

Unfortunately we could not convince the government's "Negotiating Committee"
that this approach was the most reasonable to pursue. The Misicuni dam had
become a collective obsession and the municipality (which was participating
in all negotiations) insisted that the dam be built during the first two
years of our contract. Consequently we used our financial model, under the
supervision of the advisory bank, to calculate the tariffs necessary to get
financing from the multi-lateral banks (the IDB, IFC, and the CAF) as well
as the pension funds in Bolivia, all of whom had already been approached by

A close examination of these tariffs persuaded us that such a rapid increase
would be difficult socially, without modifying the tariff structure. In
fact the pre-existing tariff structure of Semapa was not in line with the
usual international water agency practices. Generally, in order to protect
scarce raw water sources, you try to force consumption down by applying a
rising unit cost. This means that the more water you use, the more you pay
per unit; consequently commercial and industrial users are driven to save
water and the small consumers are charged a nominal amount. Semapa tariffs
are the other way around; in a country where water is scarce the more water
you use the less you pay per unit. We proposed that the municipality
implement a tariff structure that would put no or few increases on poorest
citizens and increase substantially the bill for the large users, which
happen to be the wealthy. This structure was reluctantly accepted.

During the course of the negotiations, we were unsuccessful in obtaining
amendments from the state or the municipality that would have allowed for a
lower increase in tariffs. For instance, the municipality wanted us to
repay Semapa's previously accumulated debt and roll that cost into the rate
structure. Similarly, the municipality insisted that we sign and execute
the construction contract of a treatment plant with OTV (a subsidiary of
Vivendi) that we thought excessive in price and not necessary. Also, the
state decided that AdT pay for using the tunnel under construction and the
municipality decided to charge AdT for the existing Semapa assets. In
short, we had to reflect in the tariff increase all the increases that had
never been implemented before. When you add these requirements to the early
building of the Misicuni project, we estimate they account for more than 50%
of the tariff increase, each of these was not necessary and done against our

After several months of negotiation with the municipality and the state,
assisted by their financial and legal advisors, the concession contract was
finally signed by the State Water Regulator in the presence of the
President, the Mayor and all the Ministers in charge. In our contract the
tariff structure and the level of services to be delivered by AdT were very
precisely defined as well as were all other customary clauses in such a
contract. While the main portions of the contract were published in the
press, we strongly recommended to the municipality to engage in an
information campaign in order to inform the population of the changes that
were to be implemented. For reasons beyond our understanding, this action
was never taken.

On November 1, 1999, the concession was finally handed over to us. The new
tariffs had been made public by the Regulator and were enforceable starting
on the first of January 2000, as agreed in the contract. We began to
operate, with the immediate goal to reduce the losses in the network and to
get as much water as possible from existing sources. This action proved to
be effective, as we were able to deliver water to more consumers for more
hours of the day and at a higher pressure. Many consumers expressed their
satisfaction and our employees were developing a new mode of operation and
pride in their work. We were confident that we could implement this program
in a shorter period of time than the one required by the contract.

Unfortunately in mid-January, opposition to the contract emerged, first from
the Civic Committee and then from a newly created entity, the Coordinadora,
presenting itself as the protector of the interests of the people of
Cochabamba. Very quickly it became apparent that the Civic Committee wanted
a renegotiation of the contract and that the Coordinadora wanted the
termination of the contract. It also became apparent that the Coordinadora
was mostly composed of people and organizations having an interest in the
parallel water market or being part of the most affluent sector of the
population. In a sense it was logical to see them strongly against our
contract. What was disturbing was to see this group manipulating small
farmers from the surrounding countryside and organizing them into violent
action against a contract that had nothing to do with them whatsoever.
Several wealthy interests paid poor people - many bussed in from outside the
area - to demonstrate against the concession.

Moreover, national water legislation (unrelated to the Aguas del Tunari
concession) placed restrictions on new wells - particularly unpopular with
small farmers and wealthy landowners. Opposition to the proposed new water
law also came from coca leaf growers who, the state asserted, were supported
by their cocaine connection.

As the demonstrations evolved, we asked the Water Regulator to instruct us
on a course of action and he did so by rolling back the tariff to previous
levels. While this was a clear beach of our contract, we decided to
continue to operate the company in order to allow time for the municipality
and the state to find a solution and work with the Civic Committee and the
Coordinadora in helping them understand our contract and responsibilities.
Unfortunately, neither the municipality nor the state was able to convince
the Coordinadora to refrain from misleading the community.

Unfortunately this situation has had a tragic ending. Aguas del Tunari
managed the water network until the lives of our employees had been
threatened and the concession contract terminated by the Regulator. We can
understand why the State, unable to control the violent action of some local
and national economic interests, decided to terminate our contract.
Nevertheless AdT shareowners have had their property expropriated, the lives
of their employees and their families have been threatened and they have
been wrongfully held partially responsible for tragic events that have
nothing to do with them. Our loss is important but what is more important
for us is the sadness of these events and the criticism of all our efforts
to find a good and fair solution to the problem of water in Cochabamba.
Today, Semapa is back to its previous style of operation. The poorest part
of the population will continue to subsidize the wealthiest and the
industries. The water truckers have regained their thirsty customers, and
nothing has been resolved.

We trust that you will help in avoiding this status quo from continuing and
refrain from spreading misinformation about our activities and motives. It
may serve your purposes, but it will not help the people of Cochabamba solve
their water problem.


Didier Quint
Managing Director
International Water LLC

> -----Original Message-----
> From:
> Sent: Monday, April 10, 2000 9:06 AM
> To: BecWWW, Northame
> Subject: Message for CEO Riley Bechtel
> Dear Sir,
> Bolivians have made it absolutely clear that they want Bechtel's water
> company, Aguas de Tunari, out of Bolivia, through a week of huge protests
> that have nearly shut down the country. To protect Bechtel, the Bolivian
> government has now put the country under martial law, leaving many dead and
> wounded. Bechtel has a responsibility to honor the wishes of Bolivians and
> bring the crisis to an end by immediately signing an agreement to turn the
> water system back over to Bolivians.
> I lived in Bolivia for two years, and visited Cochabamba. I can very
> well imagine the peasants' reaction to privatization of essential
> services.
> Please attempt to make your profits elsewhere.
> Sincerely,
> J. Doug Ohmans

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