Universidad del CEMA Doctorate in Business Administration

The Governance of Public - Private Partnerships The case of Aguas de La Rioja SA

Author: Mr. Juan Ignacio Recabeitia (MBA) jir07@cema.edu.ar Director of the monograph: Dr. Rodolfo Apreda

Buenos Aires, February 15, 2011

ABSTRACT
The purpose of this study is to identify some suggestions for improvement in the implementation of public service concessions from the analysis of the water services and sanitation concession in the province of La Rioja (Argentina). This analysis was done from the point of regulatory governance applied to publicprivate partnerships following the conceptual framework proposed by Kuo-Tai Cheng (2006). From this perspective, we identify some problems for which some solutions are proposed, concluding that for a successful PPP is a prerequisite the existence of a welldeveloped public governance and a change of perspective from a contracting contractor relationship to a partner to partner one.

Introduction
In this paper we will examine the conditions required for good governance in the case of Public Private Partnerships (PPP) from the analysis of the particular case of the provision of drinking water utilities and sanitation concession in the province of La Rioja (Argentina). For this analysis will appeal to the methodology proposed by Kuo-Tai Cheng (2006) in his work "Researching Regulatory Governance for Privatization of Public Utilities: Issues and Reflections". In that paper he proposes an analysis methodology for structuring complex governance arrangements in the case of PPP, arguing that the institutional analysis of the privatization policy and regulatory governance provides a better response than the traditional notion of "New Public Management" for the deficiencies in privatizing public services It also establishes that four key variables to develop an effective regulatory system are: degree of delegation of decisions to an independent agent, degree of independence of the agent, procedural rules and ex post monitoring.

Section 1 we will define the concepts of governance, public-private partnership and regulatory governance; present the theoretical framework for analysis and then present the case to analyze. In Section 2, we will identify some defects that occur in the regulatory structure of the case from the point of view of the methodology adopted. In Section 3, we will make some proposals to avoid the defects mentioned in the previous section for cases similar to the analyzed. Keywords: participation regulatory governance, privatization, transparency, accountability,

Section 1
Governance
The term governance covers a wide range of issues which depend on the perspective adopted. Apreda (2007) cites some examples, noting differences between government and governance. For example, those identified by Gerry Stoker in the sense that the term government refers to the formal aspects of state including the monopoly of legitimate coercive power while the term governance is linked to the forms and styles of government that take advantage of blurred boundaries and overlapping between the public and private sector, a perspective that pays attention to how the private sector is involved in the production of services and strategic decision-making processes. Another perspective is that of Bob Jessop that relates the term governance to the concept of structure for coordination between interdependent activities among multiple stakeholders and self-organization ways. He also quotes Robert Keohane who emphasizes the growing importance of procedures and proposes three as necessary for an acceptable system of governance: accountability, participation, and persuasion. Finally, Francois-Xavier Merrien identifies three prerequisites for the study of governance in the current political context: the existence of a crisis of governance; that this indicates that the traditional state model is in crisis and finally, the focus of

discussion passes through the ways of managing societies in terms of effectiveness and efficiency. According to Mohr (2004), the governance perspective challenges the traditional notion of state sovereignty. The powers of the state have been displaced by supranational entities, for sub-national authorities and by institutions and organizations that influence the political elite. For the purposes of this work, we will adapt the definition of Apreda, understanding governance as the field of study and application which three main tasks are: 1. The search for principles, rules, procedures and best practices that enable the efficient management in a permanent changing institutional context 2. The design, implementation and monitoring mechanisms to establish the representation, the commitments and responsibilities, management of conflicts of interest, the definition of counterbalanced controls and incentives and performance standards of all relevant stakeholders. 3. The distribution and exercise of authority in decision-making.

Public-Private Partnerships
The growth of social demands on public services traditionally provided by the states made them to reach the limit of its financial capacity for these purposes. This phenomenon, jointly with the view that the public sector was an inefficient administrator, led the development of Public Private Partnerships (PPP) in late 1979 as a more palatable alternative to the outright privatization (Mohr, 2004). A conceptualization of PPP is equated to a network of public and private actors that come together to form a cooperative and interdependent working relationship to provide better project management and financial solutions. This view of the PPP assumed the share of risks and responsibilities. This challenges the traditional concept of state (autonomy, centrality, hierarchies) introducing the concept of cooperative work, where private actors are involved not only in implementing state policies, but also have a degree of participation in decision making.

Sharing in some way the decision making also means sharing the responsibility to respond to social or economic problems that are generated between power dependent actors That means to share risks. These shared responsibilities and risks generate little clarity in determining who must answer for decisions and outcomes (public accountability).

Regulatory Governance
There is a particular challenge when designing governance schemes for activities that go from the pure state level to the PPP relationship were confluence the regulatory, bureaucratic aspects, peculiars of the public sphere, with the market mechanisms of the private sector. According to Kuo-Tai Cheng (2006) in connection with the privatization and regulatory governance, there are several challenges ahead. First, it is necessary to disaggregate governance mechanisms for the regulation of public utilities which have entered the market mechanism (having previously been state owned enterprises and monopoly). Secondly, it is necessary to explore the paradox of liberalization and privatization on the one hand and "re-regulation" or regulation on the other. However, Cheng said, many aspects of privatization and regulation are not obvious enough to be observed and these not observed aspects are often the most critical in the process. He also notes that research related to privatization and regulation is multidisciplinary, studies on the subject found in a variety of academic disciplines such as political science, economics, sociology, organizational theory, the management and even cultural studies. Finally, he indicates that it is more difficult to investigate the regulatory mechanisms in the context of developing countries because the regulatory governance is relatively new to them and generally seen as the product of the post-privatization. Cheng notes that the key variables to develop an effective regulatory system are: 1. The extent to which decisions are delegated to an independent agent rather than being taken by the main (political) 2. The nature of the structure of governance, to determine the degree of independence from the political process agent,

3. The rules that specify the procedural framework, such as requirements for accountability, consultation processes, the ability of political principal to overrule the agent, the relative autonomy of financial resources 4. The magnitude of ex post monitoring, e.g. legislative oversight, judicial review, reviewing citizen complaint procedures. Concludes that it is necessary to recognize that the problem is to move between a narrow concept of the instruments and regulatory procedures and a wide political scope.

A theoretical framework for analysis

Cheng identifies a number of interrelated issues that represent the main characteristics of a system of governance for PPP. These aspects are:

Clarity of Roles
When identifying the need to implement a policy of privatization and regulation the first step is to clarify the policy objectives and the roles of the participants, in particular the relationship between the government's proper agencies and regulatory agencies. This tends to clarify roles and functions that are characteristic of regulatory agencies and which of the ministries or other government agencies. Appears here a delicate balance between rigidity and flexibility with regard to sociopolitical objectives of the policies of PPP (that are not easy to define and vary with the societys preferences) and with respect to decision making If left too much discretion in the hands of regulators, it could endanger these goals, as the decisions of the agencies can not meet the expectations of society. Moreover, the democratically elected government is in a better position to make these judgments and therefore the legislative framework should provide clear guidance in this area, eliminating or minimizing the extent of administrative discretion.

Participation
This criterion concerns the extent to which interested parties are allowed to participate in the process of privatization and regulation. One can see that "participation" and "involvement" may be more mere phrases those real solutions. Participation has become fashionable in the current debate about the quality of modern society, as many interest groups do not participate in making decisions and there is a large gap (potentially dangerous) between rulers and ruled.

Participation exists when all stakeholders contribute effectively to the process of privatization and regulation, improving the quality of decisions and increasing the likelihood that agencies receive support and cooperation of businesses, consumers and others. Participation or at least relevant stakeholders consultation is as important as determining the economic and social issues, so that accurate assessments can be made. Without it, there is no guarantee that decisions are truly representative of the public interest. It is also significant that the agencies give reasoned basis for its decisions to ensure fairness. Ultimately, the benefits of participatory processes must be confronted with the administrative costs of implementation.

Independence of the regulator from political power

If the Regulatory Agency has a direct relationship with the government, it could be argued that their decisions are more likely to be compatible with the objectives of government. Moreover, the delegation of power to set standards or the independence of these specialized institutions ensures political fairness, promoting confidence in the privatization and regulatory regime, avoiding political interference. Keep regulatory intervention beyond the political will to help ensure that agencies are free to carry out their functions in the manner they consider best meets the stated objectives. The delegation in politically independent bodies is an important mean by which governments can commit to policies that would not be credible in the absence of such delegation. This also ensures greater continuity and stability in policy formulation and implementation. Independence is even more necessary if it is a highly specialized field that requires expertise.

Accountability
Cheng refers here to the accountability of control agencies before the political power and society. Considers it desirable that the decisions of regulatory agencies could be challenged, if it believes are unfair or show incompetence, but it couldnt be to an extent which made ineffective regulation. This challenge can encourage greater openness in decision-making process and ensure that there would be fewer opportunities for abuse and capture. 7

The lack of control and accountability would create the opportunity for inconsistency and unpredictability in decisions, causing uncertainty among the actors who are affected by those decisions. It could also undermine the investment potential and the confidence of the actors and affect their ability to formulate long term business objectives.

Transparency
Cheng notes that it is clear that transparency is closely related to the notion of accountability, although the two are not identical. Transparency is about the following aspects: Public availability of the most important documents Publication of important decisions Clear and open access to participation Definition of the extent to which institutional mechanisms of transparency are ethically desirable or even necessary in the process of privatization and regulation. Transparency means that the policy objectives are clearly expressed, which brings as a corollary that clear expectations must be cultivated in the minds of the public in whose name the regulation is established. Cheng also said that in the broadest sense, transparency requires that citizens can influence the way public services are provided, based on their opinions or preferences, as well as learn about the decisions that are made. In other words, when the agency makes decisions, do it in a reasonable manner, taking into account all relevant issues and ensure that they provide a fair and equal treatment to all those affected by the decision. A mechanism of transparency is important in itself, since the requirement of regulatory agencies to explain their decisions should reduce the likelihood of injustice or incompetence In addition, transparent decisions made by agencies must meet public interest objectives, but doing so should be open and consistent approaches to ensure that there is stability and predictability of decision making. It also means that companies can be reasonably sure that "ground rules" will not change suddenly, either through a change in

the overall legal and regulatory framework, or through a change in the way that regulators behave within this framework.

The Case of Aguas de La Rioja SA

Chronology
The provision of water and wastewater services in the city of La Rioja was from its inception until 1980 made by the National Government through the company Obras Sanitarias de la Nation and its predecessors. In 1980 through the issuance of the Act N 18586 these services were transferred to the provinces. From then until 1988 the services in the city of La Rioja were provided by a state agency, the Direccin Provincial de Servicios Sanitarios (Sanitary Services Provincial Direction). In 1988, was established the Empresa Provincial de Obras Sanitarias of La Rioja (EPOSLAR) by provincial Act N 5146 as a legal person under public law with autarky. In 1994 and 1995 were authorizing the sale or privatization of EPOSLAR by different mechanisms1. Only in the year 1996 through the Act N 6281 were established the regulatory framework for the provision of water and sanitation services in the province. This regulatory framework is of particular interest since it was the rule (along with the concession contract) that defined the terms of governance of Aguas de La Rioja SA in its different stages. In 1999, after failing the EPOSLAR privatization process, was created by Act N 6763 Aguas de La Rioja SA (ALARSA) as a corporation of the federal Act N19550. By the same law is given in concession for 30 years the provision of water and sanitation services in the cities of La Rioja, Chilecito and Chamical. ALARSA partners were the provincial government (99%) and EPOSLAR (1%). ALARSA incorporated documents contained a transitional provision which authorized its board to hire a private management for a period of 6 months, with option to purchase all the shares that were in state hands. The private management of ALARSA was extended to the year 2002 when occurs the sale of 100% equity to two companies, Latinaguas SA (10% stake) and Aguas del
1

Provincial Acts N 5977 and 6057

Sudoeste SA (90% of the shares). Both companies, according to the prosecutor's impeachment2 were chaired by the same person. In 2007 the economic emergency is issued by the Act N 8211 which in practice frozen public utility rates. As a result, ALARSA enters in a state of financial distress and requires financial assistance from the Provincial State. This financial assistance (granted by decree N 1011/09) was conditional on the creation in the ALARSA structure of a department with the function of manage the financial resources (UCI), been chaired by a person proposal by the Province. Similarly, the same instrument provides that the Ente nico de Control de Privatizaciones (EUCOP Regulatory Agency) conduct an audit of the last 3 years. Following the findings and reports by the UCI and the audit ordered, the intervention of the service during 90 days was decided, as provided in Article 13 of the Regulatory Framework. At the expiration of the intervention (January 2010) was decided the termination of the concession contract and created Aguas Riojanas SAPEM 90% share of the Provincial Government and 10% employee participation. Finally, in October 2010, the General Prosecutor makes a criminal impeachment against the ALARSA board members, denouncing a series of fraudulent acts allegedly committed during the term of the contractual relationship between ALARSA and the Provincial State.

Facts contained in the prosecutors impeachment

The most relevant aspects included in the prosecutor's impeachment are: Signing of a technical assistance contract with a company apparently linked (Latinaguas Operaciones y Servicios SA), when one of its shareholders of ALARSA (Latinaguas SA) had the technical background necessary for the provision of service. Contracts with other companies for legal and accounting advice when the contract with Latinaguas Operaciones y Servicios included them. Maintenance contract with another company (UNISER SA) appears to be related (as its president was in some moment president of ALARSA) and which

See prosecutors impeachment in anexe

10

representative was at the same time member of the supervisory board of ALARSA. Financial assistance agreement with UNISER SA for witch ALARSA delivery one and a half million pesos to cover accrued liabilities by UNISER in the execution of works. This financial assistance is contemporary with ALARSAs application for financial assistance from the provincial government for the maintenance of public service. Payment by ALARSA of UNISERs expenditures on account of contributions when the object of ALARSA did not involve investments of this type. Making unreasonable and unnecessary expenses, including payment of certain non-ALARSA cars, cellular telephones, rents and services for people not connected with the company. ALRSA investment in companies allegedly related, funded in part with tax deferrals For the purposes of this paper, we consider these issues as an example of flaws in the regulatory system, whether ultimately occurred or not as stated in the impeachment.

The mechanisms of control in regulation

Regulation of PPP that related the Provincial State with ALARSA was materialized by the following instruments: The Regulatory Framework for the provision of water and sanitation services The Concession Agreement Federal act for commercial companies and related legislation The regulator (EUCOP)

We will see below witch control and governance elements and mechanisms exist in those instruments.

Regulatory Framework
The Regulatory Framework is a piece of legislation which basically establishes the conditions under which it must provide the service: who is the holder, in witch way the service provision of the service may be delegated, which conditions must meet the

11

service, who set the tariff regime, which are the quality standards, who monitors compliance with the provisions of the Regulatory Framework. It also establishes the rights and obligations of providers and users of the service, the property regime and the sanctions regime. In the case of the province of La Rioja, the regulatory framework was established by provincial act N 6281 in 1996. Its objectives, as specified in Article 4 are as follows. Establish a regulatory system to ensure a quality and efficient provision and a fair and reasonable price for the regulated service. Promote proper maintenance of facilities and the optimization and cheaper services. Regulate the actions and responsibilities of providers and adequately protect the rights and responsibilities of owners and users of the service and monitor compliance with the obligations of those involved. Promote the efficient delivery of service, according to quality standards that are established. Protect public health, water resources, environment and rational use of natural resources involved. To encourage the establishment of effective procedures for preventing and resolving conflicts. We will see in the next section, to what extent the regulatory framework provisions are appropriate to forming an efficient regulatory framework of governance.

Concession Agreement
The concession contract defines the rights and obligations of the concessionaire and the grantor, sets goals to be met by the concessionaire in terms of investment, quality and service coverage. It also establishes a system of sanctions in case of failure to meet targets or minimum levels of service quality.

Corporations Act
There are two aspects of interest in the federal act for commercial companies on the governance of a PPP. 12

First, it should be noted the provisions to the management bodies (Art. 255 to 279) and control (art. 280 to 298). Basically, these provisions place the responsibility of the administration in the persons of the directors (elected by the shareholders) and the responsibility of the audit in the persons of the trustees (also elected by the shareholders). Second, in Article 299 paragraph 5 provides that the company must be subject to the audit of the Control Authority of her settlement when operating concessions or public services.

Regulator
The regulator, which as we saw above is a key component of regulatory governance, in the case under study presents the following background: In December 1995, the Act N 6120 approving the budget for 1995 of the provincial government, Article 22 required that: "Create in the field of the Treasury Department the "Single Privatization Control Entity" with scope above all privatizations performed and that will be performed by the Provincial Executive .Entitle the Executive Branch for by Decree, in General Agreement of Staff, determine responsibilities, structures and other instances of the entity created. " Decree N 145/95 3 established powers, structures and other aspects of this entity. In 1999, the Act N 6786 amended this article in the sense that one of the agency board members should be appointed by "the first electoral minority representation in parliament, and for the political party's proposal". Later in 2000, Act N 7010 was sanctioned, which states that the entity created by Act N 6120 will be an "independent agency of the Provincial Government will have operational, technical and economic financial autonomy" and set attributes, organization, etc. However, this act was vetoed and we didnt found records indicated that the issue has been re-addressed in the provincial legislature. We can see that a key to regulatory governance was created and organized with little careful. In addition to this chronology is the fact that there isnt an electronic repository of decrees and other documents of the Executive of the Province of La Rioja, which
3

We can not found it in the web

13

makes it difficult to make a deeper analysis of the structure, formation, functions and other Regulatory Agency relevant aspects. Fortunately, there is a paper (Azpiazu et al, 2008) dealing with regulatory problems within the Argentina that we used as reference for the analysis of the EUCOP.

Section 2
Matters not covered in the regulation
e will compare the four basic instruments of governance of ALARSA case with the requirements of the institutional analysis model proposed by Cheng: Clarity of Roles, Participation, Independence of the Regulator of Political Power, Accountability and Transparency

Clarity of Roles
Cheng said that is a key issue that policy objectives and roles of participants are clearly established. It also notes the need for balance between the Regulatory Agency and Political Power in terms of discretion in making decisions. In the Regulatory Framework there are a number of objectives (Article 4, see above) that can be assumed as to achieve policy objectives regarding the provision of sanitary services. The Concession Agreement states in its Article 2 (Object of the concession) that the granting of the concession is to provide the service as specified in the contract itself and in the Regulatory Framework, there is no reference by which to discover what the political objectives were for who decided to implement the concession. Nor any of the issues covered in the Concession Agreement, express political objectives. Moreover, with regard to clarity of roles, one example is enough to see that so clearly does not exist: the power to set rates. Normally this is an issue that is in the hands of the Regulatory Agency, as it is one of the prerogatives of the economic regulation of the PPP. In the case under analysis, the Regulatory Framework (Art. 12 incise d) on the one hand gives the holder of the service (the provincial executive) power to fix rates, and in the other the Regulatory Agency to establish the allocation of the tariff regime (Art. 43).

14

This confusion of roles (in the same rule there are two figures who have concurrent powers), was clear in the Concession Agreement, the EUCOP acts as a technical reviewer of the proposals of the concessionaire and approval rests with the grantor (the Provincial Executive) In conclusion, the clarity of roles between the regulator and political power was not well established, or rather, as discussed under "independent regulator" the real decisionmaking capacity was in the executive branch, with the other parties having a minor role.

Participation
The Regulatory Framework establishes the obligation to hold a public hearing on the occasion of a tariff adjustment and gives to EUCOP the power to convene for other cases where it deems fit. Users can petition for a hearing is made public, but such a request is for consideration by the regulator. There are no mechanisms to consider the possibility of forcing a public hearing (for example, a request supported by a certain proportion of users.) In practice, within 7 years of the concession, was conducted one public hearing in November 2009, a couple of months before the termination. This demonstrates the lack of participation of stakeholders in decisions (even only on an advisory non-binding role). Another key stakeholder in the PPP under analysis is the legislative branch. Participation usually goes through the following: Participation in the appointment of directors of the regulatory agency. Award or approval of substantive law (regulatory framework, concession agreement, tariff changes, goal setting, structure of the regulator). This is a way of indirect participation of the citizenry, beneficiary or not of the service. In this case, the participation of the legislature has been very poor. Basically only the dictates of the law establishing the regulatory framework, since in practice the rest of the questions were plainly delegated to the executive (the sale of Aguas de La Rioja, the concession, the formation of EUCOP, etc.). From the formal point of view there was a special committee of privatization who was the link between the legislative and the

15

executive in all matters concerning these issues4, has not been possible to find evidence that suggest that this committee effectively worked.

Regulator independence
In the case under review, from the formal point of view, we can see that the conformation of the Regulatory Agency (EUCOP) went through various vicissitudes and that finally its conformation and organization was in practice in the hands of one component of Political Power (Provincial Executive). This defect is apparent in the following facts: 1. The EUCOP born in an article in a budget act which in turn delegated to the Provincial Executive the definition of all important aspects. 2. Just 4 years later, an act (N 6786), which comprises representatives of the first minority to EUCOP directory, was passed. 3. When the Legislature passed an act (N 7010) refounding the regulator, the Executive vetoed it and did not treat anymore. Some examples of the lack of independence between the EUCOP and the Executive are: The Decree N. 775/00 regulating the operation of EUCOP provided that in the event that the agency's annual balance has losses, it would be "intervene immediately" (Art. 30). In practice, far from being underfunded, the EUCOP generated since its inception in December 1995, a savings fund. However, in 2000, the Executive resolved, perhaps relying on the final provisions of the same Article 30 that left available to the Executive any surplus in excess of 10% - take the EUCOP autonomy in the use of funds. To do so, provided that the rate of supervision and control, to be paid additionally providers of privatized public services (60%) and users (40%) (Act N. 6200, Section 17), instead of being charged for company and turned to EUCOP for administration, was "entered by general revenues to the operating account that the Ministry of Finance and Public Works established (Decree No. 775/00, Art 21). Thus, forcing the body to be economically dependent on the amount that the Ministry will allocate according to their requests for funds (Azpiazu et al.)
4

Provincial Act N 5949

16

While board members EUCOP enjoy stability (5 years) in their functions, in 2000 was removed from office the director nominated by the largest minority represented in parliament (as defined in Act N 6786) without following the procedure established5.

Accountability
At this point it should be consider two situations: 1. How is accountable the Regulatory Agency before the political power and society in the decisions taken 2. How (and to whom) is the concessionaire accountable for their decisions. In the first case, the lack of independence of EUCOP (according to what was seen in the previous section) adds to the fact that all of its decisions are appealable to the Executive, who has the last word in the proceedings. Then, if the Entity is not able to make decisions independently and ultimately, seems pointless to be held accountable. And indeed it is not expected to EUCOP board members are accountable to political power (nor the executive or the legislature), beyond what is established in general for provincial public servants. As seen in addressing the issue of participation, there is no specific mechanism of accountability to society by the EUCOP. Regarding the accountability of the concessionaire, the concession law establishing guidelines and goals related to public service concession (technical goals). This aspect, although improved, did not believe it is key one. This is because here we are interested in how the legal entity which is the concessionaire is accountable for the decisions adopted within the broad area of discretion granted the contract. It clearly indicates that is a contract of results, not means. In its Article 7 states that "The powers of regulation and control under the GRANTOR shall be exercised so as not to interfere or obstruct the service or the substitution of EUCOP in the duties of the concessionaire, in particular, the determination of the media that will produce the results required and committed to this AGREEMENT. The regulation is aimed at controlling the implementation of quantitative and qualitative goals of the service. The GRANTOR shall not take into
Source: draft resolution file 4842-D-2000, Chamber of Deputies, Parliamentary Procedure No. 111 Date: 11/08/2000
5

17

account in meeting the goals by the concessionaire, the amount of investment made by it. " So from the standpoint of contract, the concessionaire is accountable for the results achieved against the targets set, have absolute freedom to choose the means it deems appropriate Obviously, within the legal framework, primarily the Act N 19550. But we believe that herein lies a major failure of this PPP, the concessionaire receives substantial assets belonging to the state (all facilities, buildings, machinery, etc. necessary for a service), which is compounded by the intangible the concession itself (a contractually established monopoly for 30 years, a captive customer base and the right to a compulsive billing and collection) that are not incorporated into the company's assets and therefore are invisible to the law and controls established for commercial companies by it but have a decisive influence on economic and financial management of the concessionaire. Before whom the concessionaire is accountable for the use of this ability to maneuver? From a contractual point of view, it is accountable only for results, from the point of view of the law of commercial companies is supposed to be under permanent control of the Control Authority of its settlement6, although in the case under review any evidence hasnt been found that such control was exercised. This weakness in accountability is the one that would have allowed the concessionaire to perform the resource management questioned in the prosecutor's impeachment, basically, contributions and payments to other companies allegedly involved, in the absence of a mechanism (outside the Act N 19,550) to ensure that the application of these funds (from public) were applied for the maintenance and improvement of the service concessioned. In theory the administrative control of the company should have done it, but we face a corporation with a shareholder who exercises total control and has the ability to manage at their discretion what ultimately is public property.

Transparency
Throughout the process of formation and operation of the PPP can be seen a total lack of transparency. None of the points made by Cheng (cited above) are even partially established.

Federal Act N 19550, article 299 incise 5

18

o public availability of documents, examples of that are that can not be found on the web nor the decrees of the Provincial Executive or how to get them, not corporate balance sheets are available, and the EUCOP lacks even a website. As noted above, the sole mechanism provided for civil society participation has been used only once.

Section 3
Below we present a series of proposals aimed at addressing the problems identified in Section 2 as follows: 1. Clarity of Roles and Independence of the Regulatory Agency 2. Participation Mechanisms 3. Accountability 4. Transparency

Clarity of roles and independence of the Regulatory Agency

The first distinction to be made in cases like the analyzed is between political and Regulatory Agency (in this case the EUCOP). We understand that it is possible to draw a parallel between the two figures and those of the shareholders on the one hand and directory in the case of corporations in the other. Thus, political power would be comparable to shareholders as long as civil society representative who is the final receiver of the profits (and losses) resulting from the PPP. As such, its primary role as Cheng says, is to establish policy objectives so that the Regulatory Agency (comparable to the directory) has a frame of reference as clear as possible to make decisions. We are facing a "trust chain" where each link has a specific function. We view the latter as a waterfall, where the top level provides the necessary elements for the lower level to be able to carry out their duties (including the delegation of sufficient discretion):

19

Society

Political Power

Regulatory Agency

Concessionaire

Thus, in the highest part we have the Society which desires and needs have to be interpreted by the political and translated into policy objectives and the roles of the participants. It should be remembered here that the political power in societies that have adopted the republican representative system is divided into three branches, two of them who should be actively involved in the operation of a PPP (executive and legislative), leaving the third (judicial) as the ultimate safeguard of the rights of the parties. It is imperative that these roles are clearly defined in a specific law (commonly known as the Regulatory Framework) and is also necessary that this definition is the result of a consensus of society, expressed through their representation in the legislature. This need arises from the fact that the horizon of a PPP is long-term (typically 20 or 30 years) so its basic structure can not be subject to changes in political leadership. The Regulatory Framework should focus on clearly defining who are the actors and their roles, what are the policy objectives to be achieved, the mechanisms of participation and accountability and transparency minimums. Unlike the case of the regulatory framework under analysis, should not contain technical matters such as service goals, the tariff regime, the property regime and the sanctions regime. All these issues must be dealt with by the Regulatory Agency, and that, unlike the Regulatory Framework, are liable to alter in the short and medium term, to the beat of the macroeconomic reality.

20

The structure, form of integration, defining competencies, etc. of the Regulatory Agency should also be subject to a law that emerged from the consensus for the same reasons outlined above. Regulatory Agency is for the PPP which the Board is to the Corporations. It is therefore essential that its members (directors) must meet high requirements (technical competence and ethical integrity) and be appointed by consensus within the legislature. We do not believe that the mechanism should be filling positions in the direction of the Regulatory Agency for "majority" and "minority" as this ends resulting in the transfer of political discussions of parliament to the Agency directory . From the point of view of the independence of the Regulatory Agency, we believe that its resolutions against the concessionaire should not be appealed before the political power. From the administrative point of view, their decisions should be final. As noted in Section 1, this allows that government policies are credible and ensure greater continuity and stability of policies and their implementation. However, this would result, if the concessionaire feels that the decision of the Agency is not just, in only one alternative: argue its case before the courts. This is highly inconvenient, introducing an obstacle to a scheme that must be agile. The alternative we propose is that of arbitration. The contract should include a mechanism for arbitration to an arbitral tribunal appointed by agreement between the Regulatory Agency and the Concessionaire. The establishment of this court may be varied depending on the issue in dispute and its resolutions be accepted as final by the parties. This is a modern solution to disputes that arise at the corporate level, although in Argentina there is a mechanism that until now hasnt had great development. We believe that the sanctions mechanisms contained in the Regulatory Framework and Concession Agreement for the case under review, in addition to being completely ineffective, are out of place in a PPP. A PPP is a partnership, a partnership between public and private sector, where risks and decisions are shared. It's so absurd to think of a sanctions regime here as in a partnership between individuals. If the shareholders of a corporation have differences, negotiate and reach an agreement or separate, no penalties apply.

21

Recall that one of the key components of a system of governance is given by persuasion (Keohane 2001), separating the processes of communication and negotiation of the use and threat of force or punishment. We believe that separate the political issues from the implementation and techniques ones facilitate the use of this mechanism for conflict resolution. Regarding the role of the concessionaire, we believe that a key issue is the allocation of risks. We saw that in a PPP the public and private sector share risks and decisions. In the case under study is a brutal transference of risk from public to private sector (contract results, not means) that we believe beyond reason. In fact, in a corporate enterprise the entrepreneur take risk that offsets the benefits that hypothetically will receive. If things go wrong, he ultimately terminates the operation and bears the costs of their decision. But in the case of the PPP in general and in particular in the one under analysis, the operation should continue whatever the economic, political or natural disaster scenario that may arise. Before society, the state is responsible for the provision of public services regardless of the costs associated with any scenario that may arise. Shifting this responsibility to the concessionaire is plainly absurd. And yet, this condition is accepted as it is known that ultimately the state will come in relief of the concessionaire if necessary. We understand that this creates a huge agency problem with the following consequences: 1. encourages the concessionaire to make less risk forecasts 2. creates a false expectation in the society about the real responsibility of the concessionaire 3. leads to the resolution of contract by the state in an arbitrary manner (under the pretext of default by the concessionaire) The solution we see is to establish contractually established not only the risks the concessionaire has to deal with but the mechanisms for addressing the risks that he does not cover and how to establish when the border between the two situations is crossed.

22

A practical example for the case under consideration would be given by the availability of water sources. Given that this availability depends on rainfall, there may be extraordinary drought conditions that are beyond what is reasonably expected to contract. To do this in the contract must clearly define when an extraordinary drought situation should be considered and which the mechanisms to implement in front of it are.

Participation Mechanisms
As outlined in Section 1, Cheng states that there is participation where all stakeholders contribute effectively to the process of privatization and regulation. The key concepts we believe are "all stakeholders" and "effective contribution." We believe that this does not mean that all parties are involved in all stages, but all have a stake in the moment they are in a position to make an effective contribution. In the case under analysis, the mechanism of hearing was established as a "solution" to the participation requirement, leaving at the sole discretion of EUCOP which in practice resulted in their non-use. On the other hand, the public hearing is generally view as a time when the concessionaire is accountable to users, such as sitting on the dock. We believe that this has nothing to do with the concept of participation outlined above. Therefore, we propose a structure for participation, where the different actors make their entrance at the time and circumstances under which everyone is able to make an effective contribution. At a basic level, the participation of society as a whole is through the political mechanisms of representation. The next level is given by the participation of representatives of society (in the legislative and executive) in the definition of policies and roles and accountability mechanism that we will see below. The third level is established for technical and implementation issues. Here what is sought is that the decisions taken by the Regulatory Agency are the result of accurate assessments, with the participation or at least the consultation of relevant stakeholders7

It is not the whole society, is part of it that, for the case under consideration, has the ability to make an effective contribution. For example, user groups, professional associations, chambers of commerce, etc. according to the issue to resolve.

23

so as to ensure that decisions are representative of the public interest , fair and well founded.

Accountability
Following Cheng, we believe the key is the accountability of the Regulatory Agency before the Political Power. Following the fiduciary network model proposed above, we believe that the same string taken in ascending way shows accountability among stakeholders. Clearly, the political power is accountable to the Society, according general institutional mechanisms. We will not stop at this point. Accountability of the Regulatory Agency against political power, is the key to the whole mechanism. It is therefore imperative, like previously seen, a definition and separation of roles and responsibilities, powers and independence well established. Our proposal is to implement a mechanism for accountability of the board of the Regulatory Agency similar to that in corporate governance. There must be a plan of action proposed by the Agency and approved by the Legislature, updated annually and a yearly report also shows the degree of compliance with the plan, and any corrective action plan to conduct. The purpose of this mechanism isnt that the political power to review the technical aspects witch are the responsibility of the Regulatory Agency, but monitoring progress in meeting political objectives that were established to the Agency. Following the trust chain model would be similar to the memory and balance that the board submits to the shareholders. At concessionaire level accountability should be to the Regulatory Agency with target indicators that ideally should take the form of a scorecard with dimensions adapted to the particular case. Following the proposed model would be similar to the accountability of senior management of a corporation performs in front of the directory. For the problem of discretionary management of resources and their possible diversion of corporate purpose, we believe the solution is the proper functioning of the mechanism established under Federal Act N 19550 for state control of commercial companies providing public services or are holders of concessions. The fact that in this

24

case, these mechanisms have not been effectively applied not makes us think it is necessary to develop other alternatives.

Transparency
In the case under analysis there are none of the elements required for make transparency a reality. As noted above, the most basic is the public availability of the most important documents. From the current parameters (web access), including executive decrees are not public. For the case under review the most important issue to us is the lack of public information generated by the EUCOP. We believe it is imperative the existence of a website where find all documents and records of the concession, annual reports, decisions and their justification. It is also a key, as noted by Cheng, who are public policy objectives and the construction of clear expectations in the minds of the public. To do this, we consider it essential that the technical provisions contained in the contract and other documents are appropriate translated to plain language so that they can be easily understood by all concerned.

Conclusions
From the institutional analysis of key variables of the governance structure, as proposed by Cheng, we could make a diagnosis of ALARSA concession that gives us a key conclusion: the probability of success of this concession was slim. The main argument to support this claim is found in the huge institutional weakness of the provincial government in terms of public governance. While this is an aspect not analyzed in this work, to examine the key variables of governance of the concession we found that key areas such as public acts and public resolutions, the independence of institutions, participation, etc. were practically nonexistent. The question is: is it possible to successfully implement a concession (or other PPP) where the public governance is not developed? We believe the answer is a resounding no. A state that lacks the internal governance mechanisms has no possibility of partnering with the private sector.

25

This partnership, rather than the traditional contractual relationship of the Contracting State and the Private Contractor - mere contract of adhesion, which involves sharing risks and decisions and negotiate on an equal footing, in good faith, as true partners, is only possible if the State has institutional mechanisms and appropriated human resources. A clear example in our opinion is given by the chapter on sanctions which appears in the Regulatory Framework and in the Concession Agreement. What is proper in construction contracts, is totally out of place in a partner relationship. We understand that it requires a deep change of mentality when facing a PPP. We believe it is futile to focus on the so-called "economic regulation" in which government agents seek to limit private profit and the private looks the chicane that allows him to justify their actions and maximize their profits. If the way chosen is the PPP is essential to walk the path of persuasion Kehoane pointing us when he says that liberal democratic institutions must meet standards of governance and should encourage participation and persuasion instead of relying on coercion and bargaining based on interests. But this persuasion, negotiation is only possible when the rules are clear, predictable; when one takes into account and consider the views, needs and desires of all interested parties; when the expectations of those parties are realistic and when decisions are explained and justified. aybe an ideal, a utopia. Maybe so, but we believe that every step of progress in this direction will allow us to live in a better society.

References
Apreda, Rodolfo (2007); Corporate Governance, Buenos Aires, La Ley Azpiazu, Daniel et al (2008), Agua y energa: mapa de situacin y problemticas regulatorias de los servicios pblicos en el interior del pas, Buenos Aires, FLACSO. Cheng Kuo-Tai (2006), Researching Regulatory Governance for Privatization of Public Utilities: Issues and Reflections, Journal of National Taipei University of Education, Vol 19, N2, pag 133-160.

26

Kehoane, Robert (2001), Governance in a Partially Globalized World, The American Political Science Review, Vol 95, N1, pag 1-13.

Mohr, Alison (2004), Governance through public private partnerships: Gaining efficiency at the cost of public accountability? , Proceedings of the Summer Academy, Inter-University Research Centre for Technology, Work and Culture (IFZ).[Date accessed: November 12, 2010] Available at:

http://www.ifz.tugraz.at/index_en.php/article/articleview/658/1/30/ [Date accessed: November 19, 2010]. Available at:

http://www.noticiasnoa.com.ar/newnoa/index.php?option=com_content&view= article&id=11988:el-estado-denuncio-a-aguas-de-la-rioja&catid=18:politica OECD (2005), Guidelines on Corporate Governance of State-owned Enterprises , Paris, OECD Publications. United Nations Economic Commission for Europe (2008), Guidebook on promoting good governance in public-private partnerships , New York and Geneva, United Nations Publications.

27