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Colección: INTERAMER
Número: 69
Año: 2000
Autor: Ramón López and Juan Carlos Jordán, Editors
Título: Sustainable Development in Latin America: Financing and Policies Working in Synergy


Institutional and Legal Aspects Prior to Law 99 of 1993

Until 1993 water-pollution-control policies were guided by two main pieces of legislation: Law 09 of 1979 (the National Sanitary Code) and Decree – Law 2811 of 1974 (the Natural Renewable Resources Code). Decree 1594 of 1984 set out regulations for Title I of Law 09 and parts of chapters II and III of Decree – Law 2811, establishing the mechanics of water-pollution control. The main characteristics of the system were as follows:

1. Ambient water quality standards6 would be defined according to potential water use: human consumption, agriculture, cattle raising, recreation, industry and transportation. Individual agents planning to discharge any effluents were required to obtain a license from environmental authorities. The approval of licenses required verification that ambient water quality standards would be preserved and gave authorities the opportunity to decide what actions the licensee would have to take.

2. All point-source polluters were required to comply with certain minimum standards, some of them specified as percentages of reduction from the conditions of untreated water.7 Regional environmental authorities were allowed to set local standards only if they were more stringent than the national ones.

3. A temporary permitting procedure allowed sources that did not meet standards to present a plan for achieving them within certain specified dates.8

4. The law established sanctions for noncompliance.

5. Regional environmental authorities were allowed to charge the costs of their programs to clean up rivers and lakes, based on formulas that weighted organic and all other substances of sanitary interest. Not-for-profit activities were exempted.

The overall success of this regulatory environment can be judged by the poor present condition of many rivers and lakes in the country and the large amount of pollutants still being discharged, as will be briefly presented below. Nevertheless, it is fair to recognize that several regional environmental authorities have accumulated valuable experiences and some local success stories do exist. A few regional development corporations (RDC) proceeded to set goals for water quality and allocated the required pollutant-discharge reductions across the board. Most standards were set in terms of BOD and Total Suspended Solids (TSS). Resolutions approving discharges specified the actions needed to comply with the existing standards.

The Cauca Valley Authority (CVC) was the RDC with the best results. A large number of industrial polluters in its area built treatment facilities, but CVC was unable to bring into compliance the biggest polluter: the city of Cali. CVC implemented retributive taxes allowed by Decree 1594. These charges were discussed with industrial associations in the region, but they were set at very low levels and were used to cover monitoring costs.

This regulatory environment was based fundamentally on a command-and-control approach and had a number of shortcomings, not all necessarily related to the use of command-and-control, with probably three of them sharing most of the burden for its lack of success:

1. Lack of clarity in the definition of the governmental agencies that had final responsibilities and authority. The basic laws cited the Ministry of Health, the National Natural Renewable Resources Institute (INDERENA), and the regional autonomous corporations. As will be seen in the case of Venezuela, it has been common in Latin America to involve health authorities in water-pollution-control efforts because setting standards for potable water falls under their responsibilities for human health.

2. By specifying minimum standards for all effluents the law imposed a tremendous amount of work on very weak regulatory institutions that lacked resources (human and financial) to monitor and enforce regulations. INDERENA had a total programmed budget for the period 1986-1990 of US$56 million, or approximately 5% of the total investment budget for the Ministry of Agriculture. With this budget it had to attend its responsibilities as forestry/fisheries authority and manage the national parks besides those related to water pollution control. This problem was compounded by the fact that the regional environmental authorities were simultaneously responsible for promoting regional development initiatives, with clear conflicts of interest.

3. The environmental authorities had no real means to enforce regulations to municipal sewerage systems and other highly contaminating state-owned enterprises, the main source of pollutants in many areas.

Water Quality Situation and Main Programs to Control Water Pollution9

The most serious water-pollution problems are concentrated in the major urban-industrial corridors: Bogotá – Soacha, Cali – Yumbo, Medellín – Valle de Aburra, Cartagena – Mamonal, Barranquilla – Soledad, Pereira – Santa Rosa, Manizales – La Enea, Valle de Sogamoso, Ibague, Armenia, Santa Marta, and Cúcuta. The major problems can be summarized as follows:
  • Discharges of organic material from both domestic and industrial sources.  The major effect of this contamination is a reduction in dissolved oxygen, impairing aquatic life and causing aesthetic deterioration.
  • Infectious organisms such as bacteria and viruses, originating in the discharge of human and animal wastes. These pollutants come primarily from municipal sewage but also from industrial (food-processing) sources. This contamination poses serious and sometimes lethal health effects when the water is used for human consumption or irrigation of vegetables.
  • Chemical, heavy metals and hazardous effluents discharged by industries, agricultural and urban runoff. These can cause very serious and persisting health effects. Solid wastes contribute to this type of contamination in some parts of the country.
It is estimated that 8,950 tons of organic matter, measured in terms of BOD, is discharged daily in the country. Approximately 80% of this total comes from nonpoint sources, which means that point sources (industrial and municipal) contribute 1,790 tons daily. Industrial sources not only contribute organic matter but also infectious organisms, chemicals, toxics, and heavy metals. The ten most contaminating industries in Colombia are food products, distilleries, breweries, chemicals, paper, slaughterhouses, tanning, lumber, soft drinks, and textiles (see table 3).


As can be inferred from Table 4, most point-source organic matter discharges originate in the domestic sector, which is estimated to contribute a total of 1,200 tons of BOD/day. The magnitude of the problem originating in urban discharges clearly suggests that water-pollution-control policies must address the need to finance municipal wastewater-treatment plants. Given the fact that these investments require that municipal sewers be completed first (i.e., cleaning the river that runs through a city normally requires a wastewater treatment plant and the construction of sewers to collect and convey household discharges), the financing problem for urban pollution control is linked to the financing of sewerage expansion. At present, fewer than 4% of all municipalities treat their sewage, although some important projects are being developed, including large cities such as Bogotá, Cali, Medellín, Pereira, and Cartagena.

In Bogotá the plan calls for the construction of three wastewater secondary-treatment plants. The first phase of the first plant is being carried out through a build-operate-transfer (BOT) contract whose future payments will come from the general funds of the city. In Cali, a primary treatment plant that will handle up to 70% of municipal wastewater discharges is in the beginning of the construction phase and it is expected that most of the investment will be paid by user fees. In Medellín, construction has started on the San Fernando plant, which will provide secondary treatment for approximately 25% of municipal wastewater; the costs of the project, including investment and operation, will come entirely from sewerage tariffs paid to the local water and sewerage utility. In Pereira, a BOT contract is being planned for a secondary treatment plant that will handle up to 60% of the wastewater generated in the city; the funding has not been structured yet, but is expected to come from sewerage tariffs and from local and central government contributions. In Cartagena, a solution to the city’s wastewater-pollution problem is being planned; the financing has not been structured but, given the perceived difficulty of increasing sewerage tariffs, the city expects to obtain contributions from the central government. A series of 23 small plants to serve 21 municipalities are being built in the upper Bogotá River basin, all with financing from the central government; the initial plan called for the municipalities to maintain and operate the plants, but they lack funds to do it.


The situation described above indicates that there is no clear, definite pattern for the financing of municipal wastewater-treatment plants, although user fees are beginning to be used as an important source of financing. Contributions from the central government do not follow any clear pattern and are normally allocated as a result of heavy regional bargaining with central authorities.

Public Water Utilities

The situation of municipal wastewater-treatment efforts is intimately linked to the situation of the public utilities that handle the potable water and sewerage services. In Colombia, most public utilities face very difficult financial situations arising from a well-known low-level-equilibrium trap common to most Latin American water utilities. This situation is characterized by a circular condition in which:
  • Social goals imposed on water utilities lead to the setting of low tariffs as means of achieving equity objectives, which are strongly defended by political bodies overseeing the tariff setting process;
  • These tariffs generate meager revenues, which are not sufficient to maintain good service and even less to expand coverage; and
  • Poor-quality services and low coverage do not generate enough public support for tariff increases, since low-income neighborhoods are often the ones that face the most serious service limitations.
Coverage by potable water and sewerage has been increasing despite the serious problems faced by public utilities. Between 1985 and 1993 water service increased from 58% to 76% and sewerage increased from 45% to 63%, but the situation is not uniform across urban and rural areas. Table 5 presents coverage percentages for 1993, which clearly indicates the great disparities between urban and rural areas, particularly in sewerage.


The financing of the sector in the period 1994-1998 relied on two sources: resources from public utilities represented between 40% and 50% and contributions from different central government accounts the rest.11 Although specific figures for the period 1985-1993 were not available, the way investments were financed during the period 1994-1998 is probably representative for the previous period also.

An important reform in public-utilities regulation implemented in 1994 has been achieving some results in terms of reducing the tariff lag,12 but there is still an important gap to be bridged. The three lowest brackets of the tariff schedule lag by 80% to 50% and the middle bracket by 20%. Current tariffs show that on average the two highest brackets have average tariffs 20% and 50% higher than LRAC, but they represent a small percentage of the customer base. No specific charges exist for industries discharging into public sewers, on the incorrect assumption that they are pre-treated.

According to a recent study by César Vargas based on information from the Ministry of Development, average long-run costs for these two services (potable water and sewerage) have the following structure in most public utilities in Colombia: administrative costs in the range of 10-20%, operating costs in the range of 20-40%, and capital costs (investment plus depreciation) in the range of 45 to 80%. The average for capital costs is approximately 60%. Tariff improvements are expected to be allocated first to cover administrative and operating costs, and afterwards to capital costs. It should be clear, then, that given the sizable amounts of funds needed to continue improving potable-water and sewerage coverage and the observed adjustment of these tariffs, heavy pressure on central and local government resources to finance needed investments will continue to exist. On the other side, a continuation of the positive trend in tariff revenues from these two services will free some central government resources, which regional governments may be expected to demand as a contribution to their water-pollution-control strategies.
Recent Changes to the Regulatory Framework

Law 99 of December 1993, based on the new national constitution of 1991, put in place a new set of institutions, regulations, and instruments to correct past problems. Some of the main changes include the following:

1. The transformation of INDERENA into an Environmental Ministry, and a change of role for the RDC from regional development promoters to regional environmental authorities. The four largest cities were asked to create environmental authorities to recognize their particular needs.

2. The law specifically introduced the use of economic instruments as the main way to deal with pollution problems.

3. In spite of the advantages of economic instruments, the law mandates that the Ministry of the Environment establishes maximum permissible levels of emissions, discharges, and deposit of substances or compounds that may affect the environment. RDCs are allowed to establish regional standards as long as they are more stringent than the national levels.

4. The RDC can grant concessions or permits to achieve the desired quality levels. Each point source is required to obtain a permit from local authorities before it can discharge effluents into any river.

5. The RDC and other authorities can impose fees and sanctions, which may include daily fines of up to 300 minimum monthly salaries,13 temporary or permanently closing down the source. The previous law allowed authorities to impose fines up to a maximum of US$500/day.

6. The law allows the use of retributive and compensatory charges for environmental protection. Retributive charges can be levied for using the environment to discharge polluting substances; compensatory charges can be used to cover expenditures to maintain the quality of natural resources. The law mandates that these two charges include the economic valuation of the social and environmental damage of the particular activity.

At first sight, the introduction of pollution taxes seems to follow the recommendations of economic theory. Nevertheless, other aspects of the law create obstacles to the implementation of these instruments:

1. The methodology prescribed to estimate these charges (Article 42) makes little economic sense and does not follow current professional practice.14

2. The law assumes that damage assessment is a precise exercise, which creates the possibility of protracted legal challenges by the regulated agents.

3. The law is not clear as to what is the reference pollution level for the estimation of damage.

4. These pollution charges may not function as economic instruments for emissions reductions because the authorities are supposed to establish simultaneously the maximum permissible emission levels. In fact, the Ministry adopted the same emission levels determined by Decree – Law 2811 of 1974. Taxes are redundant under this circumstance unless they are set high enough to induce emissions lower than the allowable levels or unless the allowable levels are so high that they are not binding. We must remember that the efficiency of emissions taxes depends on allowing sources to discharge whatever amount of pollutant they decide upon as long as they pay the required tax.

5. The mandate for emission standards and taxes makes the implementation of other economic instruments, such as tradable permits, more difficult.

Articles 42 and 43 of the law were challenged all the way to the Constitutional Court. Although the legal arguments are difficult to summarize, it may be said that the challenge arose out of confusion about the spirit of the retributive and compensatory charges and their convoluted implication of the polluter-pays principle. The verdict of the Court clarified that these charges represented the adoption of the polluter-pays principle, and also that their estimation was an imprecise exercise. In the Court’s opinion, the estimation of charges is understood as an exercise in balancing costs and benefits that does not necessarily imply the application of mathematical formulas.

The Ministry has worked very aggressively during the last two years on implementing the retributive charges, which are considered part of a national water-pollution control program. The targets of this plan include the adoption of primary treatment for 60% of municipal effluents by the year 2000 and 80% by 2007, and of secondary treatment for 10% by the year 2000 and 20% by 2007. Decree 901 of 1997 developed the retributive charges created in Article 42 of Law 99/93. The main aspects of this regulation are the following:

1. The Ministry is given authority to determine national minimum charge levels. Annual increases of up to 50% can be implemented in every region during the first five years. The Ministry must set new levels every 5 years.

2. Every region can increase these levels on the basis of its particular needs to achieve regional ambient standards.

3. Ambient standards are understood as the quality levels that balance costs and benefits; these levels are to be negotiated in every region among polluters and beneficiaries.

Resolution 273 of 1997 determined a national minimum charge of 39.5 pesos/kg of BOD and 16.9 pesos/kg of TDS. On the basis of these initial levels the Ministry has estimated how much money could be collected from residential sources for different scenarios of charge increases (see Table 6). The main assumptions for this estimation are that the population grows by 2%/year; that only urban areas with sewerage coverage above 80% pay; that the load generated by every person is 1.5 kg/month for every pollutant considered, which means a monthly payment of $84.6/person; that primary and secondary treatment will be introduced according to the goals of the water-pollution-control program; and that values are discounted at the rate of 4.8%/semester.


After discussions with RDCs the Ministry has estimated that scenario 3 is the most likely outcome. The implementation of these charges for the main industrial sources would trigger changes in production processes and the building of treatment plants that are difficult to predict in advance; nevertheless, the estimate of revenues in Table 7 assumes different levels of response by industries. The main assumptions for this estimate are that by 2007 discharges could be reduced by 16% for the pessimistic scenario, 26.5 % for the average scenario and 36% for the optimistic one; industrial growth rates vary between 2% and 3.5% per year; and values are discounted at the rate of 4.8%/every six months. The Ministry estimates that the most likely result will be the “average” scenario, with charges increased after year 5.


The combination of the two most likely outcomes implies that these charges would generate approximately a net present value of US$370 million dollars during the first 10 years.

The Ministry expects that there will be heavy political pressure to use these resources to subsidize regional investments, particularly given the fact that Law 99 specifies that revenues generated by these charges will belong to the RDCs. Current plans at the Ministry therefore call for them to be used to set up regional funds that will finance pollution-control investment carried out by public and private agents. The resources would be allocated according to some cost-effectiveness considerations still to be defined. As will be discussed below, this solution could induce some problems also.

This short review clearly shows that even though some of the details of the new regulatory and institutional arrangements developed after Law 99/93 could be improved, a new dynamic has emerged, and the financing of water-pollution-control programs pays much more attention to economic efficiency fundamentals.