Transcript REC PEIP

REC PEIP
National Workshop
Montenegro, 13 May 2008
Reform Strategies to Cope with the
Challenges Faced by the Water Industry in
Central Europe
Andras Kis
Corvinus 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 utilities
3. Tariff setting policy and related issues
Central and Eastern European perspective and
examples
Discussion after each session
Part 1
1. Key challenges for water utilities in the
process of transformation
2. Strategies for reforming the utilities
3. Tariff setting policy and related issues
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 circumstances
Self-financing, no more central government subsidies
•
but there are some exceptions: e.g. in Hungary disadvantaged
areas with high operating costs get subsidies
Fragmentation 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-offs
Tariff 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
•
–
E.g. Electricity shortage in Albania
Decreasing Production of Drinking Water: The
Case of Transdanubian Waterworks, Hungary
Drinking water production in the region of Lake Balaton during
the last 16 years
drinking water production (millió m3 )
35
30
25
20
15
46,5%
42,4%
12%
38,6% 44,6%
29%
27%
23,6%
19,4%
16%
15%
10
8%
7% 7%
6% 6,6%
5
0
Years
Pruducer price index
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
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 circle
It 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 efficiency
EU 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
Barcelona
Multiple water uses (agriculture, water utilities, industry,
transportation, hydro power etc.)
•
Coordination problems
•
Decisions are rarely made with economic rationale
•
Example: water abstraction fee in Hungary
Pollution of water bodies
•
Accidental pollution: cyanide in the Tisza river in 2000
•
Sewage discharge: drinking water of Bucharest polluted
by Pitesti
Part 2
1. Key challenges for water utilities in the
process of transformation
2. Strategies for reforming the utilities
3. Tariff setting policy and related issues
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
Invoicing and Collection of Tariffs
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
Invoicing and Collection of Tariffs
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
Benchmarking Club of the Hungarian Waterworks Association
Unit Energy Use of Water Production (MWh/1000 m3)
1
Utilities
Average
0,9
0,8
0,7
0,6
0,5
0,4
0,3
0,2
0,1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Benchmarking
Benchmarking Club of the Hungarian Waterworks Association
Labour Cost / Total Cost
0,4
Utilities
Average
0,35
0,3
0,25
0,2
0,15
0,1
0,05
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Benchmarking
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•
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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:
–
–
Hungary, Czech Republic, Romania, Croatia, BiH, Moldova and
Albania
Planned extension: Montenegro, Slovakia, Poland, Bulgaria
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
1. Key challenges for water utilities in the
process of transformation
2. Strategies for reforming the utilities
3. Tariff setting policy and related issues
Sequence of Tariff Reforms
Metering of consumption is a prerequisite
Identify 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 tariffs
Analysis, modeling of tariff reform
Determine tariff levels
Public consultation
Introduction 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
Drinking water production (millió m3) in the
operation area of DRVCo.
2000
2001
7
2002
2003
6
2004
5
4
3
2
1
2
3
4
5
6
Months
7
8
9
10
11
12
Permanent consumers
Seasonal consumers
361 m3 felett
346 - 350 m3
331 - 335 m3
316 - 320 m3
301 - 305 m3
285 - 290 m3
271 - 275 m3
256 - 260 m3
241 - 245 m3
226 - 230 m3
211 - 215 m3
196 - 200 m3
181 - 185 m3
166 - 170 m3
151 - 155 m3
136 - 140 m3
121 - 125 m3
106 - 110 m3
91 - 95 m3
76 - 80 m3
61 - 65 m3
46 - 50 m3
31 - 35 m3
16 - 20 m3
1 - 5 m3
Distribution Function of the Consumption
Transdanubian Waterworks Company, Hungary, 2005
10,0
9,0
8,0
7,0
6,0
% 5,0
4,0
3,0
2,0
1,0
0,0
Revenue Stream under Different
Tariff Regimes
Hypothetical example
Permanent and seasonal
customers
Tariff 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
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
Book keeping
improvements,
cost center
accounting often
needed
Knowledge about customer categories e.g.
•
Number of accounts
•
Consumption level and pattern
•
Outstanding revenues
Detailed knowledge of present and future costs
•
By activities (water, wastewater, ...)
•
By cost types (investment costs, operating costs)
•
By customer categories
Response of customers to changes in tariffs
•
Elasticity of demand
Other considerations
•
Ability to pay
•
Regulatory requirements
Use of ASTEC in Pitesti, Romania
Use of ASTEC in Pitesti, Romania
Changes introduced
(examples)
... and their impact
on
• 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
• Produced and
consumed water
quantities
• Collected and
treated wastewater
quantities
• Prices
• Financial accounts
(costs, revenues)
• Monthly invoices
ISPA Project in Pitesti
Rehabilitation and upgrade of water treatment, water and
wastewater networks and WW treatment
ISPA grant and EIB loan
Reduced 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
Use of ASTEC in Karlovac, Croatia
Changes introduced
(examples)
... and their impact
on
• 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
• 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 plant
ISPA 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)
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
S-2006
S-2008
Fixed water cost
Fixed wastewater cost
S-2010
Variable water cost
Variable wastewater cost
ISPA Project in Karlovac – projected
change in tariffs
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
CW
wastewater fee
CW water fee
Industry, S2010
Industry, S2008
Industry, S2006
Households,
S-2010
Households,
S-2008
Households,
S-2006
VAT
W as tewater
tariff
W ater tariff
ISPA Project in Karlovac – projected
change in consumption (m3/year)
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
S-2006
S-2008
S-2010
Household Households
with both
with wat er
services service only
Large
indust ry
Rest of t he
industry
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