Puerto Rico worse after Ondeo leaves

Friday, February 20th, 2004.
By Francisco Javier Cimadevilla of Caribbean Business

Recently, the Puerto Rico Aqueduct & Sewer Authority (Prasa) chairman appeared before the Legislature to explain the Calderon administration’s decision to cancel Prasa’s management contract with private operator Ondeo because the French company was demanding additional money to run the authority. Ondeo had said Prasa’s situation was so bad it needed an additional $113 million a year on top of the $360 million a year it was receiving under its 10-year management contract in order to make it work.

“No way,” said Agosto Alicea. “We’ll take it over.” Last week, the same man went before the same Legislature and said he couldn’t run Prasa unless the administration assigned more money. He said running Prasa requires $550 million a year, so he asked the Government Development Bank to fork over an additional $215 million a year on top of the $360 million a year budgeted. Does Alicea think he’s in wonderland?

Some politicians and sectors of the press have attempted to portray the whole Ondeo debacle as an indictment of the policy of privatization. To us, the episode is more an indictment of this administration’s poor management of the whole issue than anything else.

Although fewer every day, there may be some things—like roadways, the police, or museums—that, because of their nature, government must provide. But there are few things, if any, that the private sector couldn’t manage better.

As explained in our front-page story today, privatization is neither good nor bad in and of itself. The key is how you go about it, including the selection of the new private-sector buyer or operator.

In Puerto Rico’s recent history, we’ve had a good number of privatizations that have yielded excellent results: the sale of several government-owned hotels, the sale of the pineapple program, the Teodoro Moscoso Bridge, the Superaqueduct, and Metrobus. Others, like the Health Reform and the sale of Puerto Rico Telephone, are still works in progress but are looking good.

If yet others, like turning over the management of Prasa to a private company, haven’t yielded the expected results, it hasn’t been because privatization itself wasn’t a good idea. In the case of Prasa, most people in Puerto Rico acknowledge that Ondeo’s predecessor, the Water Co., had managed to improve the system, even if it still had a long way to go.

When the Water Co.’s contract expired in 2002, the Calderon administration was loath to validate the selection that had been made by the prior administration. It insisted on getting a new private operator and brought in Ondeo. Then, the administration failed to manage that contract adequately. Now Prasa is back in government hands and Agosto Alicea says he needs, on average, $250 million more a year to run it. Who will pay for it? The taxpayers, of course. Now that’s a case for privatization if we ever saw one.

Privatization comes in many shapes. One involves the outright sale of government assets to a private company, like the sale of the government-owned hotels or the unprofitable Navieras, which had accumulated losses of hundreds of millions of dollars. Another type of privatization involves opening up a government monopoly to competition by private companies, like the government allowing private companies AES and EcoElectrica to set up power plants side by side with Prepa’s own.

Still another modality is for the government to remain the owner but to turn over the management to a private company, as is the case of the island’s public housing projects and, until now, Prasa. In those cases, the government is responsible for making a good selection of the private operator and supervising the contract effectively. The latter requires making sure the private operator delivers the results promised under the contract, but with the leeway the operator requires to manage the enterprise more efficiently than the government, which is presumably what it was hired to do. In the case of Ondeo, this administration failed to do both.