Harvard Case - Aguas de Cartagena: The Privatization of Water in Cartagena, Colombia
"Aguas de Cartagena: The Privatization of Water in Cartagena, Colombia" Harvard business case study is written by Christa C. Erml, Henry Lee. It deals with the challenges in the field of Economics. The case study is 18 page(s) long and it was first published on : Jul 1, 1998
At Fern Fort University, we recommend that Aguas de Cartagena (AdC) proceed with the privatization of the water system in Cartagena, Colombia, while implementing a comprehensive strategy that prioritizes both financial sustainability and social responsibility. This strategy should address the concerns of the local community and ensure equitable access to clean water for all citizens.
2. Background
The case study 'Aguas de Cartagena: The Privatization of Water in Cartagena, Colombia' focuses on the decision faced by the Colombian government to privatize the water system in Cartagena. The city's existing water infrastructure, operated by the state-owned company Empresa de Acueducto y Alcantarillado de Cartagena (EAC), was in dire need of modernization and expansion. However, EAC lacked the financial resources and technical expertise to undertake these critical improvements.
The main protagonists in the case are:
- The Colombian government: Seeking to improve the quality and accessibility of water services in Cartagena while managing public finances effectively.
- Aguas de Cartagena (AdC): A consortium of international investors led by the French company Suez, vying for the privatization contract.
- The local community: Concerned about potential job losses, affordability of water services, and the environmental impact of privatization.
3. Analysis of the Case Study
This case study can be analyzed through the lens of several frameworks:
Strategic Framework:
- Porter's Five Forces: The water industry in Cartagena is characterized by high barriers to entry due to the significant infrastructure investment required. However, the threat of substitutes is relatively low, as there are limited alternative sources of potable water. The bargaining power of buyers is moderate, while the bargaining power of suppliers is high due to the limited availability of specialized equipment and expertise. Finally, the rivalry among existing competitors is low, as AdC is the sole bidder for the privatization contract.
- SWOT Analysis: AdC's strengths include its financial resources, technical expertise, and international experience in water management. Its weaknesses include a lack of familiarity with the local context and potential resistance from the community. The opportunities lie in the potential for improving water quality and access, while the threats include political instability, economic downturns, and regulatory changes.
Financial Framework:
- Project Evaluation: The privatization contract presents a significant investment opportunity for AdC. The financial viability of the project depends on factors such as the tariff structure, the cost of capital, and the expected growth in water demand.
- Supply and Demand: The demand for water in Cartagena is expected to grow due to population growth and economic development. This growth in demand presents an opportunity for AdC to increase its revenue and profitability.
Social Framework:
- Corporate Social Responsibility: AdC must address the concerns of the local community regarding job security, affordability, and environmental impact. Implementing a robust CSR program that prioritizes local employment, affordable tariffs, and sustainable water management practices is crucial.
- Poverty: The privatization of water services presents an opportunity to improve access to clean water for low-income communities. AdC should implement targeted programs to ensure that all residents have access to affordable and reliable water services.
4. Recommendations
AdC should proceed with the privatization of the water system in Cartagena, implementing the following recommendations:
- Develop a comprehensive strategic plan: This plan should outline AdC's long-term objectives, including improving water quality and access, expanding infrastructure, and achieving financial sustainability.
- Engage with the local community: AdC must actively engage with the community through public forums, town hall meetings, and community outreach programs. This engagement should be transparent and inclusive, addressing concerns and building trust.
- Implement a transparent pricing strategy: AdC should develop a pricing strategy that balances affordability for all residents with the need to recover costs and generate a reasonable return on investment. This strategy should include mechanisms to protect vulnerable populations from excessive price increases.
- Prioritize environmental sustainability: AdC should adopt best practices for water management and treatment, minimizing environmental impact and promoting water conservation. This includes investing in technologies that reduce water loss and improve water efficiency.
- Foster partnerships with local stakeholders: AdC should collaborate with local businesses, NGOs, and government agencies to enhance the effectiveness of its operations and address community concerns.
- Develop a comprehensive training program for local employees: AdC should invest in training programs to equip local employees with the skills and knowledge required to operate and maintain the water system effectively.
- Implement a robust corporate social responsibility program: This program should prioritize local employment, community development initiatives, and environmental protection.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: AdC's core competencies lie in its financial resources, technical expertise, and international experience in water management. These competencies align with the mission of improving water quality and access in Cartagena.
- External customers and internal clients: AdC's external customers are the residents of Cartagena, while its internal clients are its employees. The recommendations aim to meet the needs of both groups by ensuring affordable and reliable water services while providing opportunities for local employment and training.
- Competitors: As the sole bidder for the privatization contract, AdC does not face direct competition. However, the recommendations aim to create a sustainable business model that can withstand potential future competition.
- Attractiveness ' quantitative measures: The financial attractiveness of the project is dependent on factors such as the tariff structure, the cost of capital, and the expected growth in water demand. The recommendations aim to optimize these factors to ensure a positive return on investment.
- Assumptions: The recommendations are based on the assumption that the Colombian government will provide a stable regulatory environment and that the local community will eventually embrace the privatization of the water system.
6. Conclusion
The privatization of the water system in Cartagena presents a significant opportunity to improve the quality and accessibility of water services while promoting economic growth and development. AdC should proceed with the privatization, implementing a comprehensive strategy that prioritizes both financial sustainability and social responsibility. By addressing the concerns of the local community and ensuring equitable access to clean water for all citizens, AdC can establish a successful and sustainable water management system in Cartagena.
7. Discussion
Alternative options to privatization include:
- Continued public ownership: This option would require significant government investment to modernize and expand the water infrastructure. However, it may face challenges in attracting the necessary financial resources and technical expertise.
- Partial privatization: This option would involve a partnership between the government and a private company, potentially offering a balance between public control and private sector efficiency. However, it may be more complex to implement and could lead to conflicts of interest.
The recommendations are based on several key assumptions:
- Stable regulatory environment: The Colombian government will provide a stable regulatory environment that supports the privatization of the water system and ensures fair competition.
- Community acceptance: The local community will eventually embrace the privatization of the water system, recognizing the benefits of improved water quality and access.
- Economic growth: The Colombian economy will continue to grow, supporting the demand for water services and ensuring the financial viability of the project.
8. Next Steps
To implement the recommendations, AdC should take the following steps:
- Within 6 months:
- Establish a dedicated team to oversee the implementation of the strategic plan.
- Conduct a comprehensive community engagement program.
- Develop a transparent pricing strategy.
- Within 12 months:
- Finalize the privatization contract with the Colombian government.
- Initiate the modernization and expansion of the water infrastructure.
- Implement the corporate social responsibility program.
- Within 24 months:
- Complete the training program for local employees.
- Establish partnerships with local stakeholders.
- Begin monitoring and evaluating the effectiveness of the strategic plan.
By taking these steps, AdC can ensure a successful and sustainable privatization of the water system in Cartagena, benefiting both the community and the company.
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Case Description
In 1992, Mayor Gabriel Garcia Romero confronted a situation all too familiar in developing countries-an inadequate and under capitalized water system. Only 28 percent of Cartagena's households had reliable drinking water. Thirty percent were not hooked-up to the system, and the remaining 42 percent had access, but their supply was frequently interrupted. Less than half the population had sewerage services, and there was no wastewater treatment-a problem with serious implications for public health. The water system had not been maintained adequately for more than a decade, and losses were estimated at 52 percent of the total supply. Only a percentage of the customers received bills, and many of these were never collected. Prices remained below cost, so even if the bills were collected, revenues would not have covered expenses. HKS Case Number 1482.0
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