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San Diego Magazine /  December 2007 /  A Sewer Runs Through It /  Privatization in Mexico

Privatization in Mexico

HIGHWAY 15 COURSES THROUGH the Mexican state of Sonora like an artery, bringing news of the outside world to small towns with dusty central squares, solitary churches and tawny people with wizened faces still rich in the ancient hues of Indian blood. Nogales, Santa Ana, Hermosillo, Guaymas and a hundred other places, many of them outside the consciousness of the industrial age, tick off like a litany on the way to Ciudad Obregon. It’s here, in the southern tip of the state, that I’ve traveled to look at two wastewater treatment plants, located on the north and south sides of town. The plants are run by a company called Solaqua, a private venture that operates treatment plants in several Mexican cities.

Already past deadline, I’ve come to Obregon, 800 miles removed from the locus of the Bajagua story, in a last-ditch effort to make sense of a debate that has no middle ground. The lines on both sides of the issue are compelling and utterly divergent, and though it seems there’s only room for one right answer, both sides, at times, bear merit and validity. In answering charges that their company has no experience in the design, construction or operation of wastewater treatment plants, Bajagua officials point to the facilities in Obregon. They say a company owned by principal Bajagua investor Enrique Landa built the Obregon facilities.

Alberto Torres runs the plants at Obregon for Solaqua. He’s been with the company since shortly after taking a master’s degree in industrial engineering from the University of Arizona in the mid-1980s. He is serious, with a warm smile, and he speaks a competent, heavily accented English. He gives me a tour of the south Obregon plant that proves the operation clean, efficient and minimally staffed.

As Torres points out, efficiency and innovation—both hallmarks of the private sector—allow Solaqua to maintain its operations at lower costs than similar public-run facilities. He hails the privatization of the country’s sewage systems as a watershed event and believes that if not for the 20-year contracts many cities have with private companies, there would be no wastewater treatment in Mexico.

Miguel de la Madrid, Mexico’s president from 1982 to 1988, and Carlos Salinas, president from 1988 to 1994, dubbed the technocrat presidents of the country, were Harvard-educated economists who brought with them a wind of open-market privatization. One of the sectors that saw immediate effects was wastewater disposal. Torres says many Mexican cities have historically suffered from poor management in terms of public infrastructure, and in many cases gains made in the funding of construction projects have been erased with changes in political stewardship. In the early 1990s, Mexican cities such as Obregon began signing contracts with private companies like Solaqua.

Typically, the private company would take a loan to fund the building of a treatment facility (the two Obregon plants cost a total of $18 million) and then operate the facility for a term of 20 years. The city would pay the company a flat yearly fee for its operation services, plus construction capital and incurred interest costs. After 20 years, the Solaqua contract (as is generally the case) calls for ownership of the plant to revert to the city of Obregon. Torres says Solaqua will bid to continue running the plant.

The situation is win-win, he says: Cities gain modern wastewater infrastructure that otherwise would have been unaffordable, and they’re able to do it without tying up credit lines or issuing bonds. They’re also able to circumvent the setbacks that come with those changing political winds. What’s more, without having to pay high union wages and city-employee benefits, those private companies run public-private facilities cheaper than most cities could hope to.

One of the greatest challenges for Bajagua has been fear of the unknown. Its detractors say U.S. health codes and environmental regulations won’t apply to the Bajagua plant because it will be in Mexico (and subject to that country’s less strict laws), and the company would essentially be operating without U.S. oversight. They also call into question the fact the company has no history with wastewater design or operation. But as Torres points out, the idea of public-private collaboration is nothing new—in either country. American firms like the behemoth American Water have been running for-profit water and wastewater facilities for decades. Last year, another large U.S. firm, Veolia Water, was awarded a four-year contract to run the International Wastewater Treatment Plant in San Ysidro. Solaqua is a shining emblem of private enterprises on both sides of the border that are shouldering the public function soundly and efficiently.

A MAJOR CHALLENGE to Mexican public-private partnerships arose in 1994 with the devaluation of the peso. The surrounding financial crisis was a disaster for several projects. Hermosillo, Sonora’s capital (with twice the population of Obregon), has a half-built, nonfunctioning treatment facility as a result—the company contracted to build that plant was hit so hard by the devaluation it went out of business. The company Enrique Landa was affiliated with was also hit hard by the devaluation and was forced to liquidate and sell off the Obregon project.

“So Enrique Landa wasn’t involved with the building of this plant?” I ask Torres.

“He may have been involved briefly.”

Perhaps the greatest point of contention regarding the Bajagua project involves the no-bid contract the company was awarded. Public Law 106-457, enacted in 2000, was written by a Bajagua lawyer and pushed through congress by California congressmen Bob Filner and Brian Bilbray. It directed the International Boundary and Water Commission to build a 59-million-gallon-a-day treatment plant in Mexico and, controversially, exempted the measure from longstanding U.S. contract and procurement laws, stating the contract with a private enterprise was to be sole-source—no bidding allowed.

Filner says the no-bid element of the contract was incorporated because nobody else wanted the job and because he worried the bidding process would slow the project by another year. Bajagua holds that the IBWC put out notices seeking feedback from companies interested in bidding on the project, but none responded. The IBWC says those notices, if they were issued, would have fallen under protected proprietary statutes and might “potentially relate to sensitive procurement/bidding information,” and therefore the commission couldn’t say whether it issued them or not.

Torres says that in Mexico, up to a dozen companies bid on any public-private contract, and as is normally the case in the United States, bidding details are made public. Part 6.3 of the U.S. Federal Acquisition Regulations calls for full and open competition in government contracting and allows for seven specific reasons for those regulations to be circumvented (including issues of national security, the existence of only one reliable source, an innovative technology, etc.), and none of them relates to Bajagua’s case. I ask Torres about the sole-source nature of Bajagua’s contract.

“Where is this project?” he asks. “My company wants to bid on it.”