SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) is the primary water and sewage company responsible for providing and managing water and sanitation services to the Lima metropolitan area. As the city faces significant challenges due to its location in a desert region, rapid urbanization, and the impacts of climate change, SEDAPAL needs to undertake substantial investments to improve and expand its services. SEDAPAL has embarked on a comprehensive plan involving nearly $7 billion in new infrastructure projects to address these challenges. These projects aim to enhance water quality and improve sewage treatment. Additionally, SEDAPAL is focusing on building more reservoirs in the mountains near Lima to capture and store precipitation, a critical step in ensuring a more reliable water supply for the city’s growing population, which is expected to reach 13 million by 2030​​.

The necessity for these investments is underscored by the vulnerability of Lima’s water supply system to climate change. The city relies on three key rivers – the Rimac, Chillon, and Lurin – which are increasingly unable to meet the rising demand for water. The melting of mountain glaciers, which contributes significantly to these rivers’ flow, and the unpredictable impact of climate change on precipitation patterns in the Andes further complicate the situation. The water tariff system is a cornerstone of SEDAPAL’s ability to provide high-quality and sustainable water and sanitation services in Lima, especially in the face of growing demand, infrastructure needs, and the challenges posed by climate change.

In this context, and within the strategic partnership framework between SEDAPAL and IFC, IFC seeks to contract a consultant to identify global best practices for water tariff determination in terms of methodology and inputs and provide a comparative analysis with Lima’s current framework.

The services provided by K&M Advisors were structured into three main tasks:

Task 1 (Work Plan): K&M prepared a comprehensive work plan that detailed each task and activity, the organizational structure of the consultancy, involved parties, and a timeline including milestones and expected outputs.

Task 2 (Comprehensive Assessment of WACC Methodology): Following Peru’s Legislative Decree No. 1620 aimed at reforming water and sanitation services, K&M undertook a detailed study to propose a relevant WACC (Weighted Average Cost of Capital) methodology for SEDAPAL. This involved reviewing the current regulatory frameworks, existing methodologies, and assessing risks associated with SEDAPAL’s operations. A SWOT analysis was conducted to tailor the WACC methodology effectively to the needs and challenges specific to the Peruvian water sector and SEDAPAL’s operations.

Task 3 (Review of Tariff Models): Concurrently, K&M reviewed tariff models by analyzing SEDAPAL’s operational efficiency indicators and the existing tariff model used by SUNASS. This review also included a benchmarking analysis against similar regulatory frameworks globally. The consultant prepared a comprehensive presentation on the findings, which included strategies to address identified weaknesses and optimize tariff models to enhance SEDAPAL’s financial and operational performance.

These tasks were completed in collaboration with IFC and SEDAPAL, ensuring that the consultancy’s recommendations were well-grounded and actionable, tailored to the specific operational realities and regulatory requirements of the water sector in Peru.