REC PEIP National Workshop Albania, 25 September 2008 Reform Strategies to Cope with the Challenges...

REC PEIP

National WorkshopAlbania, 25 September 2008

Reform Strategies to Cope with the Challenges Faced by the Water

Industry in Central Europe

Andras KisCorvinus University of Budapest, Hungary

Personal Background

• Education in economics• Present occupation: Corvinus University

of Budapest, Regional Energy Research Centre, Water Economics Unit

• Key water utility projects recently:– UNDP GEF Danube Regional Project – working

with water utilities and governments• Karlovac, Croatia• Pitesti, Romania

– World Bank IBNET Benchmarking Initiative

Topics for Today

1. Key challenges for water utilities in the process of transformation

2. Strategies for reforming the utilities3. Tariff setting policy and related issues

Central and Eastern European perspective and examples

Discussion after each session

Part 1



List of Challenges / Changes

• Decentralization• Economic transformation• Lower consumption / production• Inefficient operations• Degrading infrastructure• Accession to the EU• Problems with water resources

Decentralization of Public Services

Local, and not central decisions about most questions of operation

More suited to local circumstancesSelf-financing, no more central government subsidies• but there are some exceptions: e.g. in Hungary

disadvantaged areas with high operating costs get subsidiesFragmentation of companies• in Hungary 33 water utilities in 1990, more than 300 today• driven by differences in costs – a mix of new tariffs instead of

past uniform tariffs Confronting interests of local governments as owners, regulators,

customers, and political actors:• good quality service• low tariffs• dividend• no lay-offsTariff increases are less likely to happen in election years

Economic Transformation in Central and Eastern Europe

• High inflation, especially in the 1990s– water and sewage tariffs often lagged behind costs– depreciation of assets does not keep pace with inflation

• Poor credit facilities initially– but improved lately

• Open economies– world market prices prevail, e.g. recent surge in fuel

costs

• Unemployed population– lower consumption– unpaid bills

• Migration of workers– lower household water consumption– loss of skilled employees

Economic Transformation in Central and Eastern Europe

• Industrial facilities – shut down or face financial problems - lower demand for

water, unpaid bills– experience competitive pressure - water conservation to

save costs– introduce new technologies – decreased water use

• Example: sugar industry in Hungary - all major factories shut down during the last 15 years

• General infrastructural problems may also have an impact on water services

Decreasing Production of Drinking Water: The Case of Transdanubian Waterworks,

Hungary

12%42,4%

46,5%

29%

38,6% 44,6%

27%23,6%

19,4%

16%15%

6%8%

6,6%7% 7%

0

5

10

15

20

25

30

35

dri

nki

ng

wat

er p

rod

uct

ion

(m

illió

m3)

Years

Pruducer price index

Drinking water production in the region of Lake Balaton during the last 16 years

19881989199019911992199319941995199619971998199920002001200220032004

Consequences of Lower Consumption

In most places there is a variable tariff system less revenue

Lower production somewhat lower operating costs, e.g. less

chemical used

Existing capacities (water extraction, treatment, pipelines, wastewater treatment) are underutilized

higher unit costs sometimes redesign needed

Low Operating Efficiency of Some Water Utilities

• Workforce – low productivity, too many employees, motivational problems

• Poor organization of working routine• Old technology – high fuel consumption, loss

of water• Poor administration, e.g. database of

consumption and payments– e.g. Inkassator in Karlovac

• Certain skills are missing:– e.g. modeling capacities, advanced financial

planning, sometimes management skills

Operating costs are too high - but there is room for more efficient operation, reduction of costs

Degrading Infrastructure Due to Poor Finances

Focus on emergency repair instead of regular maintenance and replacement

• Service may become less reliable• Quality of water may get worse• Network loss may increase• Wastewater backflows• Inefficient wastewater treatment

Creates a vicious circleIt gets more expensive to provide service e.g.

– have to pump more water because of leakage– old machinery consumes more energy

Revenues may be lower e.g.– Unreliable water meters

Accession to the European Union

Regulatory requirements:• Drinking water quality• Wastewater collection• Sewage treatment• Full cost recovery• Integrated planning of river basins (Water Framework

Directive)EU regulations also coincide with local interests:• Protection of water resources and nature• Sustainable services• Economic efficiencyEU also provides investment grants, but• Grants are not sufficient to satisfy all needs• Operating costs also increase, sometimes substantially

Problems with Water Resources

Climate change -> more volatile rain pattern, longer arid periods

• Climate change forecasts• Example from outside of CEE: recent water shortage

in BarcelonaMultiple water uses (agriculture, water utilities, industry,

transportation, hydro power etc.)• Coordination problems• Decisions are rarely made with economic rationale• Example: water abstraction fee in HungaryPollution of water bodies• Accidental pollution: cyanide in the Tisza river in

2000• Sewage discharge: drinking water of Bucharest

polluted by Pitesti

Part 2



Main Groups of Reform Strategies

• Metering of Consumption• Invoicing and Collection of Tariffs• Improved Management of the Utility• Cost Saving Investments• Independent Performance Audits• Benchmarking• Private Participation• Reforms at the Regulatory Level

Metering Reforms

Introduction of water metering and consumption based tariffs

• Costs of water meters and their installation• Lower consumption – lower operating costs• More equitable scheme – payment can be linked to

consumption• Improved acceptance of future tariff increases

Switching to water metering within apartment buildings• The building itself has already been metered• Individual apartments get a direct incentive to mind

their consumption• Lower consumption – lower average household bill –

lower revenues in the short run• Lower operating costs

Metering Reforms

Calibration of meters• Regulatory requirement in many countries• Increase trust of consumers• Reduced the gap between metered amounts and

actual consumption

By-pass meters are planned in apartment buildings in Karlovac, Croatia

• Large diameter meters (for big apartment buildings) cannot measure low flows precisely

• “By-pass” meter has two meters. For low flows a smaller, more precise meter, for high flows a larger meter.

Metering Reforms

Other reforms connected to metering• Garden meters to measure consumption of water

that will not reach the sewer• Big industrial facilities: water consumption and

wastewater discharge as separately metered• Metering of pollution loads at the industrial

discharge points into the sewer, usually based on samples – pollution charges can be introduced

• Automated meter reading through radio signals – this technology is becoming cheaper and cheaper – quicker and no human error

• Less frequent reading of meters

Invoicing and Collection of Tariffs

Integrated information system of invoices and payments – to know the exact situation

Example: after the first careful examination of records in one of our case studies, the water company found out that about 20% their own employees did not properly pay the water bills.

Invoicing as internal or outsourced activity• Large utilities in CEE often outsource meter

reading and invoicing to specialized companies, selected through competitive bidding


Strategies to deal with non-payment and delayed payment:• Issuing a reminder after the payment deadline has

passed – requires up-to-date records• Selling the debts to debt collection enterprises• Well publicized legal procedures• Installation of low pressure valves• Cutting off service - depends on the regulations on

access to drinking water – public wells in the vicinity• Publication of the names of non-payers• Social tariff schemes• Prepaid water – with automated meter reading this is

becoming an option• Discounted debt payment• Community relations – explain the strategy for active

collection of bills and the consequences of non-payment


Methods of invoice payment• In cash at the consumer – most expensive

method, but sometimes the only practical one• In cash at the customer service• Postal cheque• Individual bank transfer • Authorized collection from the bank account

Incentives to choose bank transfers. • E.g. discount from the invoice; participation in a

lottery

Improved Management of the Utility

• Incentive based compensation – annual assessment of the performance of employees

• Management incentives provided by the owners• Internal performance targets

– Example: Nyirsegviz in Hungary has such targets for time need of emergency repairs, and speed of network rehabilitation (meter/day)

• Outsourcing of certain activities after competitive bidding

– For example meter reading, invoicing, laboratory tasks, vehicle maintenance, information technology

• Reduction of redundant workforce• Strategic and annual planning• Introduction of standards (e.g. ISO 9000, 14000 series)• Investigation of illegal connections, water as well as

wastewater

Cost Saving Investments

• Repair of network sections to reduce water loss– Does not always reduces costs. E.g. Karlovac, Croatia water is so

cheap that savings in operating costs do not reach the investment costs

• Replacement of old technologies with new, fuel efficient ones– E.g. Water pumps, vehicles

• New technological procedures– Debreceni Vizmu in Hungary in a research collaboration

developed new bacteria and chemicals to be used in wastewater treatment during the summer season. Savings of chemical costs and energy

• Process engineering– Example: Nyirsegviz in Hungary – Water and wastewater flows are registered real time, electricity

consumption is modeled for the next 15, 30 minutes, 1 hour– Electricity tariffs are based on keeping a predetermined schedule

broken down to 15 minute segments– Electricity consumption is influenced through controlling

water/wastewater flows

Independent Performance Audit

• To reveal cost saving and revenue enhancing opportunities

• Independent – no interest in keeping existing practices

• External expertise and experience

Benchmarking

• Water utilities compare various aspects of their performance to identify areas for improvement and to share best practices

• The process of benchmarking:– Develop the concept of benchmarking (which areas to

investigate, what data to collect, determine participants)– Supply data– Evaluate data, make corrections– Compute indicators– Compare indicator values across participants– Learn from best practices

Benchmarking

Unit Energy Use of Water Production (MWh/1000 m3)

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Utilities Average

Benchmarking Club of the Hungarian Waterworks Association

Benchmarking

Labour Cost / Total Cost

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

0,4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Utilities Average

Benchmarking Club of the Hungarian Waterworks Association

Benchmarking

• World Bank water utility benchmarking exercise – IBNET

• www.ib-net.org• 85 countries, more than 2000 utilities• About 70 indicators• In-country and inter-country comparisons• Participating countries from CEE:

– Albania, Hungary, Czech Republic, Romania, Croatia, BiH, Moldova

– Planned extension: Montenegro, Slovakia, Poland, Bulgaria

mailto:[email protected]



Private Participation in Water Utilities

Advantages:• Municipality or state receives instant revenue instead of future

dividends• Additional access to capital for the utility• Sharing of risks between the municipality and the investor• Privatization is often accompanied with specific reforms, e.g.

service contract between the utility and the city, tariff schedule• Additional reforms are more likely to happen, e.g. metering,

billing, invoicing, cost reductions• New owner may bring useful experience, know-how

Disadvantages:• Long term agreements – difficult or costly to break• Financial achievements (e.g. cost saving) to be shared with

investors• Questions about the fulfillment of long terms goals, such as

protection of water bases, replacement of infrastructure

Private Participation in Water Utilities

Percentage of privately operated water and wastewater service in the World

• The Netherlands 0%• Germany 4%• United States 15%• France 80%• England 100%

In CEE some major privately operated utilities:Budapest, Bucharest, Zagreb (wastewater), Sofia,

Prague

Reforms at the State Level

Central tariff administration:• Should be less bureaucratic• Depreciation to be allowed to be fully covered• Novel tariff designs to be accommodated (e.g.

fixed tariffs)Taxation• Effluent charges to be linked to pollution – to

reward efforts at pollution reduction– Croatia – m3 based effluent charges

• Water abstraction fees to be based on resource scarcity, renewability

– Hungary – abstraction fee depends on activity too

Investment grants are not used efficiently

Part 3



Sequence of Tariff Reforms

Metering of consumption is a prerequisiteIdentify the purpose of the reform• Cost recovery?• Equity among customers?• Savings for rehabilitation or future expansion?• Social considerations?Select tariff designs• Simple variable tariff• Fixed tariff component• Block tariffsAnalysis, modeling of tariff reformDetermine tariff levelsPublic consultationIntroduction of new tariffs, with other, supporting reforms

Tariff Designs

• Simple, variable tariff: EUR/m3 – most common in CEE• Fixed and variable tariff: EUR/month + EUR/m3 after

consumption.– Variable tariff may not always apply to the first few m3/month

• Increasing block tariffs: tariff blocks, the price rises with consumption. Especially at places with capacity problems (water sources or infrastructural bottlenecks)

• Decreasing block tariffs: tariff blocks, the price decreases with consumption. To reflect economies of scale.

• Pollution charges based on measured or estimated pollution releases. Mostly applies to industrial facilities on the sewer.

The Role of Fixed Tariffs: Smoothing Seasonal Pattern of Revenues

1 2 3 4 5 6 7 8 9 10 11 12

2

3

4

5

6

7

Months

Drinking water production (millió m3) in the operation area of DRV Co.

2000

2001

2002

2003

2004

0,01,02,03,04,05,06,07,08,09,0

10,0

1 -

5 m

3

16 -

20

m3

31 -

35

m3

46 -

50

m3

61 -

65

m3

76 -

80

m3

91 -

95

m3

106

- 11

0 m

3

121

- 12

5 m

3

136

- 14

0 m

3

151

- 15

5 m

3

166

- 17

0 m

3

181

- 18

5 m

3

196

- 20

0 m

3

211

- 21

5 m

3

226

- 23

0 m

3

241

- 24

5 m

3

256

- 26

0 m

3

271

- 27

5 m

3

285

- 29

0 m

3

301

- 30

5 m

3

316

- 32

0 m

3

331

- 33

5 m

3

346

- 35

0 m

3

361

m3

fel

ett

%

Transdanubian Waterworks Company, Hungary, 2005Transdanubian Waterworks Company, Hungary, 2005

Permanent consumersPermanent consumers Seasonal consumersSeasonal consumers

Distribution Function of the Consumption

Revenue Stream under Different Tariff Regimes

Hypothetical examplePermanent and seasonal

customersTariff system A: 1

EUR/m3

Tariff system B: 2 EUR/month + 0.67

EUR/m3

Equal total annual revenues under the two schemes

Burden on seasonal customers would increase

200 000

250 000

300 000

350 000

400 000

450 000

500 000

JanSze

ptNov

Tariff A Tariff B

Cost Recovery

• Customers should recover the costs associated with their service – to ensure sustainable services

• Economic justification – to avoid overuse• EU requirement (Water Framework Directive)• Cost recovery for major customer groups

eliminates cross-financing between– Customer categories: households vs. industry

The case of the Karlovac Brewery

– Customer categories: permanent vs. seasonal consumers

– Services: water vs. wastewater– Geographical locations: e.g. inner city, suburb

Levels of Cost Recovery for the Utility as a Whole

• Operating costs (e.g. labor, eletricity, chemicals, fuel)

• ... + maintenance, replacement of existing infrastructure

• ... + upgrade of infrastructure including extension

• ... + environmental costs

Affordability

How will low income households pay their water and wastewater bills?

• Increasing block tariff for all customers – first part of consumption is cheaper, then it becomes more expensive. Also helps to conserve water resources

• State subsidies to household consumption at locations with high costs (e.g. polluted water resource; small, isolated villages) – Czech Republic, Greece, Hungary, Slovakia

• Reduced wastewater charge, or at a flat rate, sometimes linked to property value (Belgium, Japan, Netherlands)

• Social water tariffs for selected groups, such as the poor, or large families

• General income support – and the family will make the consumption choices

ASTEC Model – Account Simulations for Tariffs and Effluent Charges

• Developed under the UNDP/GEF Danube Regional Project

• Purpose: Automated calculation of the physical and financial consequences of changes in the operation of W&WW utilities

• Tool for structured analysis of operational changes, investment projects, and policy reform proposals

• Based on the spreadsheets of Excel, Solver, and Visual Basic

• “Freeware” (anyone can use it without paying for it), but needs a fair amount of learning before effective use

Data Need for Impact Assessment of Tariff Reforms

Knowledge about customer categories e.g.• Number of accounts• Consumption level and pattern• Outstanding revenuesDetailed knowledge of present and future costs• By activities (water, wastewater, ...)• By cost types (investment costs, operating costs)• By customer categoriesResponse of customers to changes in tariffs• Elasticity of demandOther considerations• Ability to pay• Regulatory requirements

Book keeping improvements,

cost center accounting

often needed

Use of ASTEC in Pitesti, Romania

Changes introduced (examples)

• Leakage reducing investments

• Network extension• Individual metering of

apartments• Separated storm water

collection• Effluent surcharge on

industrial wastewater• Cost recovery

requirement• Outsourcing of repair

and maintenance

Use of ASTEC in Pitesti, Romania

... and their impact on

• Produced and consumed water quantities

• Collected and treated wastewater quantities

• Prices• Financial

accounts (costs, revenues)

• Monthly invoices

ISPA Project in PitestiRehabilitation and upgrade of water treatment, water and

wastewater networks and WW treatment ISPA grant and EIB loanReduced costs (e.g. water network repairs, pumping of water)Increased costs (e.g. advanced treatment of wastewater, EIB

loan repayment)Burden as a percent of net income:

Customer category Baseline in 2005

2012

Individual houses 3.16% 4.26%

Apartments with own meter

4.03% 5.44%

Apartments without meter

2.81% 3.79%

Pensioners 4.94% 6.67%

Use of ASTEC in Karlovac, Croatia

Changes introduced (examples)

• Introduction of a monthly water fee

• WWTP investment (primary vs. tertiary)

• Reduce the gap between household and commercial tariffs

• Exchange rate fluctuations - EBRD loan

• Change in government fees paid by ViK Karlovac

• Reduced workforce

Use of ASTEC in Karlovac, Croatia

... and their impact on

• Produced and consumed water quantities

• Collected and treated wastewater volumes

• Prices• Financial

accounts (costs, revenues)

• Monthly invoices

ISPA Project in Karlovac

Water network, wastewater network – partial rehabilitation and extension

New third stage wastewater treatment plantISPA grant and EBRD loan

ViK Karlovac agreed to:• reduce the gap between household and industrial

tariffs• increase average tariffs• increase bill collection• performance audit and subsequent cost reduction• community relations program to explain the

changes

ISPA Project in Karlovac – projected change in costs (million

HRK/year)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

S-2006 S-2008 S-2010

Fixed water cost Variable water cost

Fixed wastewater cost Variable wastewater cost

ISPA Project in Karlovac – projected change in tariffs

0.002.004.006.008.00

10.0012.0014.0016.0018.0020.00

Hou

seho

lds,

S-20

06

Hou

seho

lds,

S-2

008

Hou

seho

lds,

S-2

010

Indu

stry

, S-

2006

Indu

stry

, S

-20

08

Indu

stry

, S

-20

10

CWwastewater fee

CW water fee

VAT

W astewatertariff

W ater tariff

ISPA Project in Karlovac – projected change in consumption

(m3/year)

0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,0002,000,000

Household

with both

services

Households

with wat er

service only

Large

indust ry

Rest of t he

industry

S-2006

S-2008

S-2010

Cost Saving Potential in Karlovac

Measures:• Restructuring collection of revenues• Better organization of work – lower labor costs• Lower leakage of water from the network• More efficient machines and equipment• Automation of water monitoring and dispatch

system• Subcontracting repair and maintenance

Potential size of cost reduction is about 2 HRK/m3, equivalent to 25% of baseline, and 10-12% of future household tariffs

Thank you for your attention!

Contact:Andras Kis

[email protected]+36 20 9717 223

REC PEIP National Workshop Albania, 25 September 2008 Reform Strategies to Cope with the Challenges...

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