Ondeo terminated from $3.8 billion Puerto Rican contract

Government dissolves Prasa effective April 1


January 15, 2004

In its eight years in private hands, the Puerto Rico Aqueduct & Sewer Authority (Prasa) racked up a staggering operational deficit of some $1.2 billion as of June 30, 2003, according to the water utility.

While the deficit looms large, the public corporation faces more immediate problems as privatization bites the dust with the government’s announcement that on April 1, it will retake control of Prasa from its French-based operator, Ondeo, under a termination agreement made public on Tuesday. The 10-year contract with Ondeo, effective July 2002, was worth $3.8 billion.

Gov. Sila Calderon recently said she would file legislation to decentralize Prasa into four autonomous regions headed by officials with six-year appointments and to set up separate divisions for maintenance and capital improvements. In the meantime, Prasa officials have charted a two-phase transition over the next five-and-a-half months.

Phase 1 kicks off tomorrow: Ondeo will run Prasa with Prasa’s supervision. Roles will reverse with Phase 2 on April 1, when Prasa will take full charge and Ondeo’s assets will officially revert to the government; the French company’s personnel will stay on until June 30 to provide technical and operational assistance.

Prasa President Juan Agosto Alicea said the net benefit of the cancellation is that Ondeo will pay the government $3 million in cash. However, the government must pay $3 million to $4 million to assume Ondeo’s inventory, including a fleet of new vehicles.

The deterioration of the contractual relationship between Prasa and Ondeo has played out in the local press on an almost daily basis in recent months. Early in December, following a breakdown in negotiations over contract changes, Agosto Alicea announced the government wanted out. He blamed the decision on Ondeo’s demand for an extra $93 million in cost overruns for the first year and request to lower compliance standards. Ondeo countered with allegations that the government misled the company with inaccurate information on Prasa.

As part of the accord, described as amicable by Agosto Alicea, Ondeo agreed to drop its $93 million demand in exchange for the government forgiving Ondeo $54 million in fines for failure to meet contracted standards. He also said the government owes Ondeo $38 million for expenditures such as a new accounting system, but Ondeo owes Prasa $41 million in accumulated employee vacations, Christmas bonuses, and other obligations. It was agreed Ondeo would reimburse Prasa the difference between the two amounts, or $3 million.

To date, the government has paid Ondeo $540 million for payroll, operational costs, and maintenance, equivalent to about $30 million per month. Agosto Alicea acknowledged it costs more than $30 million per month to run Prasa. He said, however, that Ondeo’s estimate of $40 million was considered too high by the government.

Meanwhile, Prasa’s operational deficit went up another notch in 2003. Still, the $189 million deficit racked up by Prasa in fiscal year (FY) 2003—Prasa’s first year under Ondeo—was somewhat of an improvement over the $349 million posted in FY 2002, the highest level to date. The deficit in FY 2001 was nearly $170 million. With the exception of two years in which the deficit dropped somewhat, the authority’s operational losses have been escalating steadily from $90.96 million in FY 1996 to the $349 million high in FY 2002.

Puerto Rican Independence Party House Minority Leader Victor Garcia San Inocencio said the problem with Prasa is that it spends much more than it bills. "The government has been subsidizing Prasa for the past 20 years," he said. Worse, the authority doesn’t run an efficient operation and is saddled with environmental fines.

The representative added that if Prasa’s structural financial and operational deficiencies were corrected, there might not even be a need for higher water rates. In any case, although water rates haven’t risen, consumers already pay for Prasa’s subsidies through taxes, he said.