2. Regulatory and sector context

Executive branch

The President of the Republic, the Council of Ministers, and the Presidency of the Council of Ministers (Presidencia del Consejo de Ministros, PCM) constitute the core bodies of the executive branch (Figure 2.2), (OECD, 2016[1]). Along with the PCM, the Ministry of Economy and Finance (Ministerio de Economía y Finanzas, MEF) helps shape the overall regulatory environment in Peru. In the water and sanitation (WSS) sector, the Ministry of Housing, Building and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento, MVCS) is responsible for designing sector policies and regulations. Sunass is attached to the PCM as a body with administrative, functional, technical, economic and financial autonomy, alongside the other Peruvian sector regulators (Law No. 27332).

Figure 2.2. Structure of the executive branch of the Peruvian government

Note: The PCM also houses a large number of public entities, secretariats and commissions, which are not included in this figure.

Source: (OECD, 2016[2]), Regulatory Policy in Peru: Assembling the Framework for Regulatory Quality, OECD Reviews of Regulatory Reform, Paris, https://doi.org/10.1787/9789264260054-en.

Legislative branch

The Congress of the Republic is the unicameral body that holds the legislative power, created through the 1993 Political Constitution (OECD, 2016[1]). The constitution dictates that the Congress consists of 130 representatives that are directly elected based on congressional districts allocated to each region (Congreso de la Republica, 2021[3]). Legislation enacted by the Congress can require regulators to develop secondary regulations. The Congress can ask ministries and regulators to issue opinions on draft legislative proposals, and to respond to questions raised by the representatives. The Congress has 24 standing committees, two of which cover the WSS sector: the Commission of Housing and Construction and the Commission of Consumer Protection and Regulatory Bodies of Public Services.

Sub-national government

Apart from the national level of government, there are three sub-national levels of government: the regional government and two levels of local government (provincial and district local government) (OECD, 2016[1]). The exclusive and joint functions of the different levels of government are described in the Political Constitution, as well as in the Organic Law of the Executive Power (Ley Orgánica del Poder Ejecutivo – LOPE), the Organic Law of Regional Governments (Ley Orgánica de Gobiernos Regionales – LOGR) and the Organic Law of Municipalities (Ley Orgánica de Municipalidades – LOM). Sub-national governments can define regulatory measures within their area. Sunass interacts with the different levels of sub-national government through its decentralised offices.

Judicial branch

The judicial branch is responsible for the interpretation and application of laws, with the Supreme Court as the country’s highest judicial body. This is supplemented by a hierarchical system of 35 superior courts: the National Superior Court of Specialised Criminal Justice and 34 superior courts with a jurisdiction over a judicial district across the 25 administrative regions of Peru. In addition, the tribunals of first instance and the courts of peace (only for minor non-criminal offenses) complete the framework of the judicial system. Sunass decisions relating to complaints, sanctions and tariff approval can be appealed at the administrative tribunals of first instance.

Access to water and sanitation

According to the Peruvian National Institute of Statistics and Information (Instituto Nacional de Estadística e Informática – INEI), 91% of the Peruvian population has access to public water networks, while 77% had access to the public sewerage network. Access differs significantly between rural and urban areas and between the different regions (Figure 2.3). In urban areas, around 95% of population has access to public water networks, against 76% rural areas. Similarly, in urban areas 90% of population has access to public sewerage networks, while in rural areas this is only 28%. Access is most widespread in the region of Tacna, the Constitutional Province of Callao and Lima Province, with an access rate for both public water supply and sewerage well above 90%. Access is least wide-spread in the region of Loreto, with only 56% having access to public water supply and 44% to the public sewerage network (INEI, 2021[4]).

Figure 2.3. Access to water and sanitation in Peru, 2019

Source: (INEI, 2021[4]).

There are considerable concerns in terms of the quality of the drinking water and sanitation provision in Peru. According to 2020 data on Sustainable Development Goal 6 to “ensure availability and sustainable management of water and sanitation for all”, only 51% of population had access to a safely managed drinking water service,1 while 53% had access to a safely managed sanitation service. Access to at least basic service provision is 93% for drinking water and 79% for sanitation. Similar to the case for overall access to drinking water, access is worst in rural areas – in rural area, only 22% has access to safely managed drinking water services and only 60% has access to at least basic sanitation services (UN-Water, 2020[5]).2 The percentage of population that consumes water from the public water supply with an adequate chlorine level (≥0.5 mg/l) was 38.7% in 2019 (INEI, 2020[6]).

National Sanitation Policy 2017-2021

In 2017, the MVCS defined a new national sanitation policy for the period 2017-2021, established through Supreme Decree No. 007-2017-VIVIENDA. In practice, the National Sanitation Policy is a progressive layering of successive policies, programmes and initiatives in the sector in the past couple of decades. The policy document defines Peru’s objective to achieve universal and sustainable access to sanitation, for urban areas by 2021 and for rural areas by 2030, in accordance with the Sustainable Development Goals (SDGs) (Sanitation and Water for All, 2019[7]). The policy document contains a set of guidelines to improve the management and performance of the sanitation service provision. The objectives are to:

• Increase the coverage, quality and sustainability of sanitation services, in order to achieve universal access.

• Reduce the infrastructure gap in the sector and ensure access to sanitation services, primarily for the rural population and those with limited resources.

• Achieve business autonomy and integration of sanitation service providers.

• Increase the levels of efficiency in the provision of services with high indicators of quality, continuity and coverage.

• Achieve sustainable management of the environment and water resources in the provision of sanitation services.

In order to achieve these objectives, the policy document also includes a diagnosis of the sector. This diagnosis points at insufficient coverage and quality, investment gaps, weaknesses in the management of providers, lack of standards for the formulation of investment projects, a lack of co-ordination between actors and a low public valuation of sanitation services. Based on this diagnosis, it establishes a number of policy axes, which each include a number of more concrete policy guidelines.

Following the National Sanitation Policy, in 2017 a National Sanitation Plan was also enacted. This plan is the instrument for the implementation of the National Sanitation Policy. It identifies and links the necessary actions to achieve the objectives, and discusses in detail the current performance of the sector. Based on this, the plan sets targets for indicators, determines actions and assigns these to sector actors, and defines the investment plan needed to bridge the current investment gap in the sector.

Sector structure

The drinking water and sanitation sector is highly fragmented, with a variety of modes of organisation and operation in the urban and rural areas (Figure 2.4). Fifty publicly owned providers (Empresas Prestadoras del Servicio de Saneamiento, EPs) service urban areas with a population higher than 15 000 inhabitants. EPs are responsible for large and intermediate cities, which contain around 62% of the population, or 85% of the urban population (World Bank, 2018[8]). Sunass categorises these EPs by size:

• SEDAPAL, the company that serves Lima, is in a category of its own with over 1 000 000 connections;

• 4 companies with a size between 100 000 and 1 000 000 connections;

• 14 companies with a size between 40 000 and 100 000 connections;

• 15 companies with a size between 15 000 and 40 000 connections; and

• 16 companies with a size below 15 000 connections (OECD, 2021[9]).

Smaller towns with a population between 2 000 and 15 000 inhabitants are serviced by approximately 450 operators. In rural service areas (with fewer than 2 000 inhabitants), service provision is further fragmented. Over 25 000 municipal management units and Sanitation Services Administrative Boards (Juntas Administradoras de Servicios de Saneamiento – JASS) manage the water supply and sanitation services (WSS) in rural areas. A JASS is community-based volunteer committee, responsible for the operation of the maintenance of the WSS services and the collection of household fees (OECD, 2021[9]). In total, JASS are responsible for rural areas, and as such are responsible for about 24% of the population, while municipalities (through smaller utilities and municipal management units) are responsible for the service provision to small cities (containing the remaining 14% of population) (World Bank, 2018[8]).

The high number of diverse sector players leads to a loss of economies of scale and raises the problem of resource inefficiencies, as well as bringing significant challenges for regulation and oversight by Sunass (see Assessment and Recommendations). Local authorities have the decision-making power over the merger and consolidation of WSS providers, but there is resistance at the local level for changing the status quo.

Moreover, there is a lack of formalisation of providers in rural areas. Based on a database on 2 854 providers in rural areas (municipal management units and JASS), Sunass found that only 57% were formally established as a provider.3 For small cities, only 30% of providers were formalised. Formalisation can bring benefits such as the ability to obtain a license for the legal right to use the water resource, the possibility to receive public investment and the right to file a complaint regarding contamination.

Figure 2.4. Market structure of WSS service providers

Source: (SUNASS, 2019[10]).

Another key issue for the providers of WSS in Peru is their financial sustainability. Many EPs operate at a loss and rural providers fail to meet basic financial sustainability. Most operators are small public agencies with low income, and often suffering from inefficient management leading to a low quality of the network and high network losses (i.e. leakage). Moreover, the lack of financial sustainability makes many providers unable to invest, leading to a lack of investment in the sector. Prior to the 2016 Framework Law, donated/subsidised assets were not recognised in the tariff setting process, which prevented companies to build up funds for investments in replacement and expansion.

Currently, 19 out of the 50 EPs are included in a “transitory regime” related to a lack of economic and financial solvency, under which management is taken over by the Technical Agency for the Administration of the Sanitation Services (Organismo Técnico de la Administración delos Servicios de Saneamiento – OTASS), a state agency attached to the MVCS (Sunass, 2021[11]).

Tariffs and household fees

Tariffs for EPs, which operate in urban areas with more than 15 000 inhabitants, are set for five-year periods. The tariff methodology takes into account projected demand, costs and investment plans, and aims to ensure economic and financial sustainability of the operator. Tariffs can increase during the period, conditional on the achievement of certain performance targets by the EP. The tariffs also cover payments towards the Ecosystem Services Compensation Mechanism (Mecanismo de Retribución por Servicios Ecosistémicos – MERESE). Through these payments, EPs can create reserve funds towards the conservation, recovery and sustainable use of sources of ecosystem services. Similarly, the tariffs also cover payments towards a disaster risk management fund (Gestión de Riesgo de Desastres – GRD) and an adaptation to climate change fund (Adaptación al Cambio Climático – ACC) (OECD, 2021[9]).

The tariff methodology identifies a number of different consumer categories: residential, commercial, industrial and public. Consumers pay a fixed charge for their water usage, as well as a flexible tariff based on actual consumption. Poor households can make use of subsidised tariffs, which are funded through the tariffs on other users in the system (cross-subsidisation). The Ministry of Development and Social Inclusion (MIDIS) establishes socioeconomic classification of households, on which basis Sunass determines the eligibility of users for subsidies. Following Legislative Decree No. 1280, Sunass is also responsible for determining the methodology for the household fee (cuota familiar) for service provision through public-private partnerships, municipal management units, special operators and communal organisations (OECD, 2021[9]).

In rural areas serviced by JASS, users pay a household fee. Sunass has set a methodology for the JASS to use in setting the household fee, which allows them to cover at a minimum the operation and maintenance costs and small replacement costs of the sanitation services in rural areas. While JASS ultimately decide upon the level of the household fees, Sunass is tasked with ensuring the economic and financial sustainability of the sanitation providers (OECD, 2021[9]).

Multi-level water governance: regional and local governments

Sub-national (regional and local) governments have the responsibility to ensure efficient water and sanitation service provision within their areas. By law, regional governments are responsible for:

• the formulation, approval and evaluation of regional sanitation plans and policies;

• the provision of technical and financial assistance to local governments to support the delivery of water and sanitation services;

• collecting and upgrading data on water supply and sewerage infrastructure and service management indicators (OECD, 2021[9]).

In addition, local governments are responsible for:

• the management of water network assets within the public domain, and granting the exploitation of sanitation services;

• the creation of Municipal Technical Areas (Área Técnica Municipal – ATM), which monitor and supervise the service provision by providers and support providers through technical assistance and training (ATMs are not providers, although in some cases they perform a dual function);

• Include the allocation of financial resources for investments in sanitation infrastructure in the Concerted Municipal Development Plans (Plan de Desarrollo Municipal Concertado – PDMC) and local participatory budget;

• finance and co-finance investments for the maintenance and replacement of sanitation infrastructure in rural areas;

• collect data and input them into the Water and Sanitation Information System (OECD, 2021[9]).

Situation prior to 2013

The Peruvian water and sanitation sector has experienced many reforms in its past. During the 1970s and 1980s, the sector was largely centrally co-ordinated. The General Sanitation Works Service within the Ministry of Housing was in charge of the direction and development of the sector during the 1970s, until in 1981 it was replaced by a large state-owned company that served most of the urban areas of Peru. This company was called the National Service for the Supply of Potable Water and Sewerage Services (Servicio Nacional de Abastecimiento de Agua Potable y Alcantarillado – SENAPA), and it included 15 affiliated companies and 12 operating units (Giugale, Newman and Fretes-Cibils, 2006[12]).

Starting from the early 1990s, SENAPA was slowly dissolved, and the companies and operating units were transferred to municipalities. The largest provider from that point was SEDAPAL, which serves the capital of Lima and has remained under the control of the national government. Along with this move towards decentralisation came the creation of Sunass in 1992, in charge of the economic regulation of companies in the sector. Around the same time, in 1992, the Ministry of the Presidency became in charge of sectoral policies. It held this position until 2002, when the ministry ceased to exist. From that point on, it was the Ministry of Housing, Construction and Sanitation (MVCS) that became responsible for sectoral policies in the sanitation sector, to define and implement sectoral policies, formulate development plans and assign investment funds to the sanitation sector (Giugale, Newman and Fretes-Cibils, 2006[12]).

In 1994, the General Law of Sanitation Services (Law No. 26 338) was enacted (El Presidente de la Republica, 1994[13]). The law established that sanitation services are a necessary and public utility of national interest, with the purpose to protect the health of the population and the environment. Provincial municipalities are responsible for the provision of sanitation services, which it can delegate to a provider. It also assigned Sunass with the task to guarantee users the provision of sanitation services of increased quality, contributing to the health of the population and preservation of the environment. The law further specified the regulations regarding the functioning of the sector, such as the rights and responsibilities of service providers, the tariff system and the conditions for private sector participation.

The decentralisation efforts of the 1990s were unsuccessful in achieving universal access, a sustainable sector and efficient autonomous utilities. One reason for this may be that the decentralisation was not accompanied by sufficient capacity building or the necessary incentives for regional and local governments (World Bank, 2018[14]). Tariffs remained at a level that was insufficient for companies to fund investments, as they were hardly able to recover their operational costs. This has led to increased level of indebtedness and the inability to adequately manage the operations related to sanitation provision.

2013 Law on the Modernisation of Sanitation Services

Following the General Law of Sanitation Services, in 2013 additional legislation was established through the Law on the Modernisation of Sanitation Services. The purpose of this legislative proposal was to modernise the provision of sanitation services through the establishment of measures to increase access, quality and sustainability, promoting development, environmental protection and social inclusion. The modernisation effort was based on the principles of universal access, social inclusion, protection of the environment, business autonomy and efficiency (El Peruano, 2013[15]).

The 2013 Law of Modernisation of Sanitation Services also created the Technical Agency for the Administration of the Sanitation Services (Organismo Técnico de la Administración delos Servicios de Saneamiento – OTASS), attached to the MVCS, but with functional, economic, financial and administrative autonomy and legal status. The law assigned to OTASS to issues rules, guidelines and protocols, promote the merger of EPs, evaluate the technical and economic solvency of companies and contribute to the strengthening of capacities. The law also establishes the conditions under which EPs can be put in a so-called Transitory Support Regime (Régimen de Apoyo Transitorio – RAT). EPs can be put in the RAT following an evaluation by Sunass of the company’s economic and financial solvency and its compliance with service management indicators and other technical criteria. Sunass can identify through yearly evaluations the companies that should become part of the RAT, while OTASS manages these companies (i.e. elects their board and managers). The RAT is intended as a temporary regime to improve the operations of the EP, with evaluations every three years for EPs included the regime and a maximum duration of the regime of 15 years (Sunass, 2021[11]).

2016 Framework Law for the Management and Provision of Sanitation Services

In 2016, the new administration in Peru launched a new sectoral reform initiative, aimed at the achievement of universal access to sanitation services within Peru. The new initiative, established through law 1280, aimed to:

• Define rules to achieve universal access, quality, efficient performance and sustainability;

• Establish measures to strengthen and increase efficiency in the management of WSS providers;

• Define the roles and functions of authorities responsible for increasing coverage and sustainable provision of WSS throughout the country.

The law sets as key priority the modernisation of the sector through the strengthening of WSS providers. The law aims to transform EPs into public corporations, expected to increase coverage first by including urban areas outside their service area, and subsequently by expanding towards rural areas within their proximity. It establishes the following principles for the provision of sanitation services:

• Universal access;

• The essential nature of sanitation services;

• Social inclusion;

• Autonomy and responsibility in business management;

• Independence in financial resource management;

• Responsibility, transparency and accountability of sectoral entities;

• Good corporate governance and accountability of providers;

• Financial-economic balance;

• Protection of the environment and efficient use of water.

The initiative is expected to increase the incentives for EPs, and also expands the economic regulation of Sunass beyond the EPs to providers in small towns and rural areas. This therefore expands the scope of Sunass’s work towards a large number of small providers that it did not work with before. OTASS holds a central role in the transformation of EPs, to promote integration of companies and increase sustainability (Figure 2.5).

Following the 2016 Framework Law and the 2020 Supreme Decree 005-2020-VIVIENDA, Sunass is tasked with implementing a new tariff regulation model for EPs. The tariff model takes into account differences between providers and their ability to face obligations and improve quality, and fine-tunes their tariff regulation accordingly. Companies will be placed on a scale between their initial level of efficiency and the level of efficiency of a so-called model company, based on their level of development.

Figure 2.5. Activities for the modernisation of WSS sector – Sunass, MVCS and OTASS

Source: Peru: Closing sanitation gaps with evidence-based investments in the sector, Sanitation for All Secretariat, 2019, https://www.sanitationandwaterforall.org/news/peru-closing-sanitation-gaps-with-evidence-based-investments-in-the-sector#:~:text=As%20of%202018%2C%20about%203,7.4%20million%20lack%20sanitary%20sewerage.&text=1280'%20and%20National%20Sanitation%20Policy,of%20sanitation%20sector%20in%20Peru.