Comparative Review of Water Sector Restructuring in the EU Accession States


Comparative Review of Water Sector Restructuring in the EU Accession States

Will Medd , Cordula Fay, and Simon Marvin

2003

http://www.roark.dk/intermediaries/

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New intermediary services
and the transformation of urban
water supply and wastewater disposal systems
in Europe
http://www.irs-net.de/intermediaries
Comparative Review of
Water Sector Restructuring
in the EU Accession States
Work Package 1, Final Report
EU FP5 “Intermediaries” Project
September 2003
Will Medd (w.medd@salford.ac.uk),
Cordula Fay, and Simon Marvin
Drawing upon individual country reports
available on http://www.irs-net.de/intermediaries involving:
Susanne Balslev Nielsen and Birgitte Hoffman (Estonia and Latvia)
Ross Beveridge and Simon Guy (Lithuania and Slovakia)
Cordula Fay, Matthias Naumann and Tim Moss (Czech Republic and Poland)
Vasilis Markantonis, Dimitris Zikos and Panagiotis Getimis (Cyrpus and Turkey)
Will Medd and Simon Marvin (Malta)
Vesselina Penevska (Bulgaria and Slovenia)
Eszter Somogyi, Jozsef Hegedus and Andrea Tönko (Hungary and Romania)
“Intermediaries” is an international research project funded by the European Commission under the Framework
5 Programme Key Action “Sustainable Management and Quality of Water” (contract EVK1-CT-2002-00115)
Duration: 11/2002 – 10/2005
Copyright: This paper must not be published elsewhere (e.g. mailing lists, bulletin boards etc.) without the
authors’ explicit permission and must not be used for commercial purposes. If you cite, copy or quote this paper
you must include this copyright note, regarding the conventions of academic citation:
Will Medd, Cordula Fay, Simon Marvin: Comparative Review of Water Sector Restructuring in the EU Accesstion
States, Work Package 1, Final Report published by the EU-project Intermediaries (website: http://www.irsnet.
de/intermediaries/ComparativeReport.pdf)
Contents Pages
Executive Summary i
1 Introduction
1.1 Methodological Challenges
1.2 Working Definitions
1
3
3
2 Trajectories of Restructuring
2.1 Frameworks for Liberalisation
2.1.1 Decentralisation
2.1.2 Private Sector Involvement
2.1.3 Regulation
2.2 Commercialisation
2.3 Private Sector Involvement in Practice
Summary of Restructuring
5
5
5
8
9
10
12
16
3 Challenges of Restructuring
3.1 The private sector and the multinationals
3.2 The role of loans
3.3 Increasing water tariffs
3.4 Municipality capacity
3.5 The place of restructuring
3.6 Effective regulation
3.7 Donations
Summary of the Challenges
18
18
21
25
26
28
28
29
29
4 The Future of Restructuring
4.1 Coordinating EU Directives
4.2 Building local knowledge and expertise
4.3 Improving water quality and infrastructure
Summary table of the Futures
30
30
30
31
32
Appendix
Summaries of Country Reports 33
Bulgaria 33
Czech Republic 34
Cyprus 35
Estonia 36
Hungary 37
Latvia 38
Lithuania 39
Malta 40
Poland 41
Romania 42
Slovakia 43
Slovenia 44
Turkey 45
Sources
Key website sources 46
Bibliography 50
Boxes and Tables
Boxes Pages
Box 1 Bulgaria – reforming legal frameworks 7
Box 2 Malta – developing commercialisation 12
Box 3 Czech Republic – towards full private sector involvement 14
Box 4 Slovakia – piloting private sector involvement 16
Box 5 Romania – developing private sector involvement 19
Box 6 Hungary – continued negotiations with the private sector 20
Box 7 Estonia – municipal enterprises and environmental programme 23
Box 8 Poland – negotiating tariffs in Gdansk 25
Box 9 Latvia – building municipal capacity 27
Tables
Table 1 ISPA funds in percentage per country 24
Table 2 Summary of Accession States future restructuring 32
i
Executive Summary
This report focuses on the status of water sector restructuring across the EU
Accession states. It is the outcome of the first work package, undertaken between
November 2002 and September 2003 of a wider EU Framework 5 project, “New
intermediaries” (www.irs-net.de/intermediaries). The report is based upon individual
country working papers for each of the Accession states available on the
Intermediaries website. The report is structured around three main sections of
analysis:
Trajectories of Restructuring
· There has been a widespread emphasis on the decentralisation of the ownership,
management and regulation of water and waste-water/sewage utilities, though there
is also large variation in decentralised in principle and decentralisation in practice.
· Commercialisation has been pursued to improve water sector efficiency, sometimes
through private sector involvement, as a condition to secure grants/loans and in
exceptional cases, as an alternative to private sector involvement.
· There are four main groups of countries in relation to private sector involvement as:
first, widespread; second, being actively developed; third, limited; and finally
virtually not existent.
Challenges for Restructuring
· Seven key challenges facing the current restructuring of the water sector are
identified: the implications of multinational involvement in local water supplies; the
implications of involvement by lending bodies; the difficulties of increasing water
tariffs to cover costs; the capacity of municipal level organisation; the variations
between geographical areas of municipal capacity; the difficulties of developing and
ensuring effective regulation in an increasingly fragmented context; and finally the
role that donations might play.
The Future of Restructuring
Three particular challenges will be important to the future processes of restructuring:
· how an increasingly fragmented water sector can be coordinated to ensure
alignment with relevant European policy objectives.
· how appropriate capacity and expertise within Accession States will be developed
to ensure that local priorities and concerns are protected.
· how increased public debate will be achieved about whether private sector
involvement will lead to more investment in aging infrastructure networks and what
alternative methods for increasing investment there might be.
ii
1
1 Introduction
This report forms part of a wider EU Framework 5 project “New intermediary
services and the transformation of urban water supply and wastewater disposal
systems in Europe” under the Programme Key Action “Sustainable Management and
Quality of Water” (contract no. EVK1-CT-2002-00115). The project fills a
knowledge gap on the current restructuring of the water sector across Europe by
mapping the development of intermediary activities and organisations and assessing
whether, in what ways and in what institutional and organisational contexts these
services can accelerate the application of resource-saving technologies and social
practices (www.irs-net.de/intermediaries).
This report is the outcome of the first work package of the project, undertaken
between November 2002 and September 2003, to review of the current status of water
market restructuring in the Accession States of the European Union, providing an
institutional backdrop for context-sensitive analysis of intermediary activities. Other
EU research projects have been undertaking analysis of the current and future
trajectories of current EU states, in particular, AQUALIBRIUM (reviewing UK, GR,
DK, D) and EUROMARKET (reviewing UK, F, D, I, E, NL, CH).
The report focuses on the status of restructuring across the EU Accession states. It
consists of a comparative overview of the current status of restructuring in relation to
processes of decentralisation, private sector involvement and commercialisation and
identifies key challenges facing the development of the water sector in the Accession
states, concluding by pointing to specific areas that need to be addressed in relation to
wider EU agendas. The report is based upon country reports for each of the
Accession states that have been published as working papers on the Intermediaries
website (www.irs-net.de/intermediaries). The complexities of Accession state
restructuring coupled with the methodological challenges involved in researching the
Accession states (see below) mean that this report does not claim to offer a
comprehensive overview of Accession state restructuring. Rather, the report aims to
identify key trends and key issues emerging in the processes of restructuring. To this
end, emblematic examples from those reports are used which illustrate the
2
complexities involved in restructuring. We also include the executive summaries of
the country reports in the appendix.
The report shows that, across the Accession states, jurisdictional, environmental and
social concerns about water supply, quality and affordability are all core drivers for
restructuring. The research suggests, however, that while there is a general consensus
about the value of water as a public good there is nonetheless diversity in the ways in
which different states have approached restructuring the water sector. The report
identifies the ways in which countries have developed varying degrees of
decentralisation, private sector involvement and commercialisation of the water
sector. One of the key challenges facing the Accession states is raising revenue for
investment in the infrastructure as well as in organizational capacity. Different routes
have been taken by different Accession states, as well as by municipalities within the
Accession states. For some, commercialisation of state owned water companies is
seen as an effective way of increasing efficiency. For others, the pursuit of loans or
donations are key in relation to meeting environmental objectives. While in some
countries, there is a strong emphasis placed on developing private sector involvement,
often coupled with supporting loans to enable this to happen. These trajectories,
however, are not a linear process and involve complex negotiations, at times reversals
in ownership and changes to legislation. As well as identifying the extent to which
restructuring has taken place, this report also points to the challenges of restructuring,
including for example the impact of multinational involvement by the private sector
or banks, the differential capacity of city and town/rural municipalities and the
implications for local capacity – and capability – building. We end by identifying the
challenges facing the development of restructuring in relation coordinating EU
objectives, building local knowledge and expertise , and in improving water quality
and infrastructure and summarise the apparent trajectories of the different Accession
states
Following this introduction in which we identify some methodological challenges and
key definitions used, the report is set out as follows. First, we overview the complex
trajectories of restructuring highlighting processes of decentralisation,
commercialisation and private sector involvement across the Accession states.
Second, we identify key challenges facing the development of the water sector across
3
the Accession states. Third, we give emblematic examples of the processes of
restructuring to highlight the complexities involved in local contexts. Finally we
conclude highlighting three specific challenges that will be important to the future
development of the water sector in the Accession states. The appendixes present the
executive summaries of the country report working papers, useful website sources
used during our research, and a list of core references.
1.1 Methodological Challenges
There are particular methodological challenges involved in reviewing the processes of
restructuring across the Accession states. There are relatively few academic or policy
accounts of the processes of water sector transition in the Accession states. There are
also few secondary sources available through web-based and/or library searches.
Consequently:
·  There are few secondary sources documenting changes we can be used
to clarify the validity of the findings
·  Rapid change in some of the Accession states means it is difficult to
provide up to data and reliable information
·  Large variability in the application of policies within countries means
that careful consideration between intention and actuality must be taken
Given these source limitations each country report has also been reviewed by a
country representative with expertise in the water sector and subsequently revised in
response to their feedback.
1.2 Working Definitions
Conceptualising the processes of restructuring across the Accession states can also be
problematic with different terms being used with different meanings across different
contexts. Often the wider process of liberalisation is used to capture processes of
decentralisation of structures, commercialisation of management practices and
privatisation of ownership. However, it is important to note that there are separate
processes at work which do not necessarily go together nor follow a linear trajectory.
Decentralisation does not necessarily go hand in hand with privatisation. Privatisation
4
does not necessarily go hand in hand with commercialisation. For example, privatised
ownership, of wells in rural areas, does not necessarily go hand in hand with
commercial management practices. Similarly, though the legislative framework may
be in place for privatisation, there may be no uptake and therefore no privatisation.
These issues of definition are particularly important in relation to the Accession states
because there is a risk of specifying too tightly particularly meanings that become
difficult to operationalise in local contexts. Our initial pilot work for this work
package suggested the importance of using broad concepts to enable comparison
because imposing tight definitions, developed from western-European countries, was
found to be misleading and limiting when applied to the Accession states. In order to
enabling comparative analysis, this report will therefore talk of ‘restructuring’ to
refer to the general processes of change and will use the specific definitions below to
refer to liberalisation, commercialisation and private sector involvement:
·  Liberalisation: Reforming legal frameworks to permit and regulate
competition in the water market.
·  Commercialisation: Adoption of business management practices
characteristic of the private sector in order to improve the efficiency,
effectiveness and/or market position of a water/sewage utility.
·  Private sector involvement: The full or part transfer of ownership,
responsibility service provision from the public to the private sector.
5
2 Trajectories of Restructuring
This section presents an overview of the processes of restructuring across the
Accession states to show how processes of restructuring are varied, diverse and
continuous. There are differences in the frameworks for restructuring as well as the
practices of restructuring between the different states and within individual states.
Consequently we do not present an account of a singular process of restructuring
leading towards a uniform pattern of water sector organization across the Accession
states. Diversity coupled with continuous, and sometimes rapid, change means we
present an assessment of the types of changes being undertaken rather than about the
outcomes of restructuring processes. Claims about the outcomes would not only be
premature but would also neglect the contested nature of restructuring and continuous
processes of negotiation that water governance entails. The section examines three
aspects of restructuring, namely, frameworks for liberalisation, commercialisation and
private sector involvement. Each is dealt with separately because in principle they
involve distinct processes and logics, although in practice they become entwined in
very particular ways contingent to local circumstances.
2.1 Frameworks for Liberalisation
Processes of liberalisation involve reforming the legal frameworks to permit regulated
competition in the water market. Currently water is exempt from EU competition law
and in the Accession states there is little explicit reference to promoting competition
in the water sector, although as we shall see in section 3.1, concerns about lack of
competition in tendering processes are raised. However, as within the broader policy
context of liberalised utility sectors, three aspects of liberalisation processes can be
identified: decentralization, policies for private sector involvement, and economic and
environmental regulation.
2.1.1 Decentralisation
Decentralisation processes refer to the devolution of rights, responsibilities and/or
ownership to municipal levels of government; by contrast centralisation involves the
establishment of rights, responsibilities and/or ownership within central state
government. In principle there has been widespread decentralisation. This has
involved transfer, in part or in full, of ownership of assets, rights and/or
responsibilities to municipal authorities. Many countries began processes of
6
decentralisation from the early to mid 1990s, namely Bulgaria, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Poland. A second wave of countries includes
Romania, Slovakia and Slovenia that developed decentralization policies from the
mid 1990s. In Malta and Turkey the water sector remains centralised.
Decentralisation has taken four forms:
·  First, the typical process involves the transfer of assets, rights and
responsibility of operation to the municipality, with the state setting the
legislative frameworks for the form of ownership, management and regulation
issues, as in the Czech Republic, for example.
·  Second, decentralisation can involve the transfer of assets and/or
responsibilities of provision of services to municipals with the state retaining
ownership of the water supply. In the Czech Republic, for example, state
owned regional level water utilities sell the rights or operation to the
municipalities.
·  In Estonia the central state remains the owner of the groundwater and with
extraction rights and provision of services being decentralised to the
municipalities. In Hungary, decentralisation delegated ownership of the water
utilities and the responsibility of the water supply to the municipalities, but the
ownership of groundwater and surface water was retained by the state.
·  Third, decentralisation can involve the transfer of management to
municipalities but not the ownership of assets. In Cyprus, the state retained
ownership of the utilities and management responsibility was transferred to the
municipality level.
·  Fourth, decentralisation may involve co-ownership between the state and
municipalities. This was the case in the first phase of decentralisation in
Bulgaria.
It is important to note, however, that while the framework for decentralisation may
have been in place in some countries there has been little uptake of ownership by the
municipalities, for example in Slovenia and Slovakia.
7
Box 1
Bulgaria – Reforming Legal Frameworks
In Bulgaria the organisation of the water sector has taken a number of different forms
of ownership. These are state (public), municipal (public or private) and private.
While the majority (48) of “Water Service Departments” (WSD) have remained in
public ownership (either by municipals (19), the state (13) or 51% state and 49%
municipal (16)) in three case of private sector involvement have developed. Two of
the municipals developed lease arrangements with ‘water associations’ (in 1999)
while the third, Sofia, has developed a concession arrangement to a company that is
owned by the municipal and foreign investors (in 1999). Four water associations
(WA), as private limited companies, had been established in Bulgaria (in Sliven and
Veliko Tarnovo), three contracted by the same municipality (Veliko Tarnovo). The
WAs were established by employees of the WSD and consumer representatives, and
were leased the right to use a particular water and sewage system or utility for a 10
year period. The employees moved to their new positions without a change in their
employment contract (as allowed by legislation). Managers from the initial WSD
became managers of the three new WAs. WAs paid the municipality for the ‘right for
use’ while the WSDs coordinated the WAs investment program and kept a full control
on investment priorities and on the right to exercise an investment control. The WAs
were responsible for the everyday repairing services, maintenance of the installations
as a whole, can change the water prices and meter the users consumption and collect
the bills. Arguments against the WAs have been made in terms of the lack of
competition and possibilities for corruption, that users are charged too much in
relation to investments made and water quality, and that increased profits do not lead
to reinvestment. A recent Water Law in 2003, however, has excluded WAs as a legal
form of private ownership, and they have been suspended with ownership being
returned to WSDs. Meanwhile, the only concession in Bulgaria, SOFIA, has also
undergone renegotiations and the EBRD has become a shareholder.
Source: Penevska, P. (2003) “Current Status of Water Sector Restructuring in
Bulgaria” Working Paper for EU Intermediaries Research Project, http://www.irsnet.
de/intermediaries
Further, within states, there are variations in the processes of decentralisation. In
Bulgaria, following a second wave of decentralization, there are cases of 100%
transfer of ownership to the municipalities while in other cases the state remains the
owner. In Poland, there still remain a few state owned utilities, water associations
and municipal budgetary units, despite the legislation that the water utilities should
become commercial law companies at the municipal level. In Hungary, lack of clarity
about legal definitions of responsibilities has lead to variations and negotiations about
the status of ownership between the municipalities and the state. In Lithuania, there
has been differential uptake of ownership by municipalities, particularly resistance by
8
more profitable municipalities, usually with urban populations, to merge with less
profitable municipalities, usually large rural population.
Such variations of decentralisation in the different states has sometimes motivated
processes of legislative clarification. In Bulgaria, for example, legislation in 1999
consolidated issues of ownership, along with management, pricing, service regulation,
and investment and new legislation in 2003 has clarified the legal frameworks once
more. In Slovakia too, legislation in 2002 aimed to consolidate the process and
options for the transfer of ownership to the municipalities.
2.1.2 Role of the private sector
This section examines the four frameworks for the transfer of ownership,
responsibility or service provision from the public to the private sector. The actual
involvement of the private sector is discussed below in section 2.2.
The introduction of frameworks for private sector involvement falls into four
categories:
·  First, is the case of Hungary in 1991 where such frameworks were introduced
alongside decentralisation.
·  Second, are countries where frameworks for private sector involvement were
introduced after decentralisation processes. These are Bulgaria (although
development of private sector involvement was suspended in 2001), the Czech
Republic (beginning in the early to mid 1990s and consolidated in 1996),
Estonia (from the early to mid 1990s), Latvia from 2002, Poland from 1996,
Romania from 1996, Slovakia from 1997 (but clarified in 2002), Slovenia
from 1999.
·  Third, is Turkey, where frameworks for private sector involvement are being
planned.
·  Fourth, there are countries where frameworks for private sector involvement
are non-existent, namely Malta (where there is explicit legislation referring to
water as a public good), Cyprus, Turkey and Lithuania.
The frameworks include establishing what the private sector can be involved in.
There are differences between states in terms of the extent to which private sector
9
involvement is allowed. Most states enable private sector involvement in the rights of
operation. For example in Romania this tends to be either through a lease or
concession arrangement. Private sector involvement can also be of the ownership of
assets, as in Hungary and the Czech Republic. In these cases private sector
involvement can therefore be in the ownership of the assets and in rights of operation.
Note, however, that there are sometimes cases of ambiguity about what can be owned
in the water sector, as for example in Hungary where there were disputes about the
ownership of assets.
There are also differences in the frameworks for the forms in which there can be
private sector involvement. Private sector involvement might be for the full ownership
of a utility, for a public-private partnership with the municipality, or a public-private
partnership involving the central state. The form of private sector involvement can
take all forms. For example in Bulgaria, the frameworks for private sector
involvement until recently meant that utilities could be owned by the state, the
municipal, a municipal- private partnership or full private sector ownership. In
Romania, municipalities can choose between the utility being a municipal enterprise,
a commercial company or a within the public administration, which could then
involve a concession arrangement with the private company.
Finally, it is also important to note the possible changes or amendments to
privatisation. In Bulgaria, the government made a decision in 2001 to suspend private
sector involvement of water utilities for an indefinite period and has recently
produced a new framework for private sector involvement in 2003.
2.1.3 Regulation
Although there are, in principle, forms of regulation across all the Accession states, in
practice it does not appear to be particularly effective. Prominent are concerns about
the regulation of pricing policies and of the environmental aspects of water use.
A key aspect of regulation has been the establishment of pricing policies. In Bulgaria,
Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovenia
decentralisation processes have included the decentralization of price setting.
However, this is often within the context of restrictions placed by the central states
10
and negotiation with the state. For example in the Czech Republic the municipality
agree a price with the state based on projections of the cost of the water; in Hungary
there is no central formula but there is legislation stating prices must reflect justified
expenses; in Latvia legislation allows for profit making although in practice prices do
not cover full costs; in Lithuania the state oversees the tariff setting; in Slovakia a new
body has been established to review price setting; in Slovenia (until 1998) the state
sets a maximum price; in Sofia, Bulgaria, prices have been negotiated between the
municipal, the EBRD, who gave a loan to the concession and subsequently became a
share-holder, and the concession. In other countries tariff setting is a central activity,
for example in Cyprus, Lithuania, Malta, and Romania. Turkey is also looking to
develop pricing policies.
In relation to environmental issues, regulation seems to have primarily remained
within the central state although no Accession countries – with the exception of Malta
– report an autonomous body concerned with such regulation. Instead, different
administrative departments within central government tend to be responsible. The
extent to which they are effective remains to be seen and there are increasing concerns
about the need to have independent regulators.
2.2 Commercialisation
Processes of commercialisation involve the adoption of business management
practices characteristic of the private sector in order to improve the efficiency,
effectiveness and/or market position of a water/sewage utility. Commercialisation
can be applied to both public and private ownership.
Four aspects of commercialisation are present across the Accession states:
·  First, coupled to processes of decentralisation have the establishment of
municipal level utilities that as budgetary units requiring accounting practices.
For example, in Hungary, while there were options for privatisation legislation
did require, in principle, for municipalities to set up budgetary enterprises by
1996.
11
·  Second, there is evidence of developing commercialised management
practices to improve efficiency. These became particular visible where there
has been the specification of contractual arrangements, including funding and
accounting between a municipal and a water company. In Prague, key criteria
for Vivendi, which had been active in the Czech water market since 1995/6,
included the price setting, the strategy proposed in the business plan, technical
proposals and productivity gains.
·  Third, public-private partnerships commercialised practices can be present
through the dominant role of private company on the management boards, see
examples from Hungary and Bulgaria. In practice the extent to which
commercialised logics are developed and applied can depend on the size of the
utility. Larger utilities tend to have the capacity and expertise to pursue
commercialised management, which may include bringing in foreign
expertise, for example in Hungary, Latvia, Romania.
·  Finally, there has been the increased emphasis placed on price rationing. Price
setting has been linked to demand management practices, for example in
Bulgaria, Czech Republic, Cyprus, Malta, Turkey. There is growing impetus
across a range of countries for the price level to reflect the true costs of water
provision and investments required. In Bulgaria and Hungary, for example,
revenue from fees must cover the utilities expenses, although sometimes, as in
Hungary, the state may subsidise costs in some cases. In Romania, the state
owned water company charges the municipalities for water.
Establishing the extent of commercialization can be difficult. For example in
Lithuania while municipals act with autonomy there is little evidence of the import of
business practices. In Slovakia, a part from transfer of ownership to private sector
there is little evidence available. In Slovenia too, there has been little evidence
although the impact of new legislation is expect to change this.
12
Box 2
Malta – Developing Commercialisation
While there is explicit monopoly status granted to the Water Services Commission
(WSC) in Malta, and emphasis has also been placed on improving the efficiency of
the water sector gained strength from the mid-1990s. As such the WSC was
established as a company, though remaining public owned and various processes of
commercialisation are now present. The WSC reports the new Chief Executive was
appointed based on his private sector management experience; there has been the
establishment of distinct distinct management units within WSC, namely, Corporate
Services, Communications, Management Information Systems, Groundwater
Operations, Gozo, Technical Support Services, Distribution Operations; WSC also
report they are planning to generate a “Gozo Unit” as a strategic business unit within
the WSC. The WSC as has two distinct subsidiary organisations which have their
own management (the Institute for Water Technology and Malta Desalination
Services Ltd.); There is also an emphasis on cost cutting. The emphasis here is on
reducing money spent on overtime and shift allowance and the lowering of interest
rates on bank loans); increased emphasis on making efficiency gains (through
metering, billing, reduction in leakage); the WSC contracts out work where
appropriate on a commercial basis. The WSC shares with the Malta Regulation
Authority an emphasis on contracting out work where possible and within a
commercial imperative.
Source: Medd, W. and Marvin, S. (2003) “Current Status of Water Sector
Restructuring in Malta” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
2.3 Private sector involvement in practice
While frameworks for private sector involvement are in place in many states, there is
wider variance in the actual practice of private sector involvement. In this section we
overview the forms of private sectors involvement in practice.
There are four categories of private sector involvement in the Accession states:
·  First, private sector involvement in the Czech Republic is far more
widespread than other Accession states. The form of private sector
involvement is at the municipal level and is mainly concession contracts,
although there are exceptions where assets are also owned by private
companies. In the concession arrangement the ownership of the water
13
infrastructure remains with the municipality and the company is licensed
the operating rights. Interestingly, River Basin Boards remain as state
enterprises and sell water, and sometimes the rights to abstract water, to
the water utilities.
·  Second, in Hungary, Poland, Romania Slovakia, and Slovenia private
sector involvement is limited but is being developed. For example, in
Hungary concession arrangements with private companies have been
established in six of the largest cities and in one smaller region. The
municipals retain the majority of the ownership of the companies,
although the management is dominated by the private sector
·  Third, in Bulgaria, Estonia and Latvia there has been limited private sector
involvement but further private sector involvement has been on hold. For
example, in Estonia municipals have established municipal enterprises that
are state owned, and only in one case has ownership and management
been delegated to a private company. In this case, Tallinn, only just over
half of the shares of the company are owned by the private sector. In
Latvia there are private forms for rural supplies, industrial users, and
private payment for connection. Here legislation makes private sector
possible but there has been no uptake.
·  Fourth, private sector involvement is virtually nonexistent in Cyprus,
Lithuania, Malta, and Turkey. In these countries private forms of supply
are only present on an informal basis. In Malta there are forms of
polishing/desalination, bore holes for agricultural users and bottled water
supplies. In Lithuania the only presence of privatized forms is in the
provision of district heating, forming either concessions or being bought
by private companies. In Turkey there is some private ownership of small
springs and water sources. And in Cyprus contracting of management
functions is present in the case of the desalination units in which private
companies are given 10 year lease contracts.
Across these countries there are different forms of private sector involvement being
practiced. First, the most popular model is the concession, given to a public-private
partnership. Within this model are variations over the ownership and management.
The private sector sometimes has majority ownership, while sometimes it is the
14
municipality that has majority ownership and the private sector is often given a
majority on the management board, for example in Hungary and Bulgaria. Second,
there are also lease arrangements, as in the case of Water Associations in Bulgaria.
These Water Associations are formed by former employees of the water departments
and consumer representatives. Only two municipalities have implemented such
contracts in Bulgaria, one to three water associations, and one to a single water
associations. Legislation passed in Bulgaria in 2003 that has in fact declared Water
Assocations as illegal. Third, there is delegated Management. In Bulgaria a company
(Omonit Ltd) was set up by the municipal of Sofia and delegated responsibility for
controlling and auditing the concession arrangement. In Cyprus there has also been
delegated managemnent of desalination units. Finally, there are also example of full
ownership. In the Czech Republic, Anglian water is the owner of the assets as well as
operational rights in Ostrava, Northern Moravia. In Hungary confusion over
legislation means that some of the stockholder companies own the assets too for
example in Budapest and Kecksemet.
Czech Republic – towards full private sector involvement
The Czech Republic is unique because of the widespread privatization of the water
sector with no restrictions placed on foreign companies buying shares of Czech Water
companies. Most of the Czech water market is now in the ownership of multinational
companies:
15
|
Duben 2002
RA
Prachatice
Ceský Krumlov
Tábor
Domažlice
SM
OS
LN
DC LB
PH
KL
TP
JC
PV
CV
CL
MB
LT
MO
UL
PE Prerov
PA
PJ
NA
ST
ZR
KO
NB
PI
HB
SU
PB
TU
NJ
OP
SY
RO
AB
BK
UO Bruntal
KV
JN
Vsetin
JE
CR
Beroun
RK
DO
KT
KH
PS
Olomouc
TA
PZ
BN
HK
TC
ZN
JI
BO
CH
SO
JH TR BM
PT
CB
BV
CK
KA
KM
UH
FM
VY ZL
HO
ANGLIAN WATER
ONDEO SERVICES
Gelsenwasser
VIVENDI WATER
Negotiations with
private companies not
yet completed
Pl
Ownership of water operators in the
Czech Republic
ME
Source: Vivendi 2002
The dominant form of privatization in the Czech Republic is the form of a concession
arrangement. In Prague, for example, Vivendi Water, a subsidiary of Vivendi
Environment (VE), bought in 2000 together with the AWG consortium a 66 % stake
in the water utility (Prazské vodovody a kanalizace-PVK) for €174 million. The
remaining 33 % will be transferred to the City of Prague free of charge. PVK was a
legal successor of the state companies Prague Waterworks and Prague Sewage and
Watercourses. Its main activity is drinking water supply and operation of the sewage
system and wastewater treatment. VE/AWG will operate all water and wastewater
services for 1.2 million people living in Prague and its suburbs until 2013. The
contract is worth average revenues of €110 million a year for 13 years. Criteria for the
decision for Vivendi, active in the Czech water market since 1995/6, were the price,
its strategy proposed in the business plan, technical proposals and productivity gains.
VE/AWG proposed rapid reduction in leakage from the Prague network, improved
treatment of the city’s wastewater, a staff training programme and the introduction of
a customer services centre. The privatisation of PVK has extraordinary importance for
the Czech water market. PVK was the last major privatisation of water companies in
the Czech Republic. Vivendi itself sees strategic importance in the Prague concession.
One reason might be the decision of the EBRD for a 15-year €50m loan to the City of
Prague to finance leakage reduction and improvements to the profitability of
wastewater treatment plants in June 1999.
During the privatisation of the Prague Waterworks and Sewers the Prague Town
Council requested to postpone the decision of the public tender owing to concern of
unauthorized water prices. The typical model of privatisation – assets remaining in
municipal ownership, operation by private companies – can result in private water
companies not feeling responsible for the facilities. However, the excessively high
bid (three times higher than experts estimated) may result in substantial price
16
increases. Vivendi also plans restructuring which results in a reduction of the number
of plants from seven to three and in a cut in the workforce by 200 employees. As well
as Prague, Vivendi serves 3.4 million people in the Czech Republic and is the market
leader in the country. The company leads the Czech municipal outsourcing market.
Vivendi Water had estimated revenues in 2001 of 225 million € in the Czech Republic
and a work force of around 6,000 people.
Source: Naumann, M. and Moss, T. (2003) “Current Status of Water Sector
Restructuring in the Czech Republic” Working Paper for EU Intermediaries Research
Project, http://www.irs-net.de/intermediaries
These variations of ownership are occurring within countries themselves. In
Hungary, for example, there are 27 larger municipals with stockholder companies, 61
limited companies, 1 smaller municipalities which has set up as an enterprise, one
municipal institutions and 5 not-for-profit companies. In the Czech Republic there
are 100% state owned, joint state owned and municipal owned and 100% municipal
ownership. Where municipalities own 100% of utilities they can opt for different
forms of private sector involvement.
Box 4
Slovakia – Piloting Private Sector Involvement
In December 1998, the Trencin Waterworks Company ((Trencianska
Vodohospodarska Spolocnost) (TVS) was formed by 48 municipalities when they
acquired control of the water supply, sewerage and water treatment infrastructure
from the state for free. TVS was established as a private company operating the major
share of the water supply, sewerage and water treatment infrastructure for the regions
of Trencin, Nove Mesto and Myjava in Western Slovakia. TVS provides water for
around 144, 000 (about 80% of the population in these regions). Suez Lyonnaise des
Eaux (Paris, France), is the major shareholder, with a number of smaller –privateshareholders
controlling the rest of the company. Concerns about the local politics
involved in negotiating the contract lead to new laws being developed by the next
government in 2000.
Source: Beveridge, R. (2003) “Current Status of Water Sector Restructuring in
Slovakia” Working Paper for EU Intermediaries Research Project, http://www.irsnet.
de/intermediaries
Summary of Restructuring
In summary our review of the Accession state countries certainly evidences large
scale transitions of legislative frameworks taking place.
17
In terms of liberalisation frameworks:
·  widespread emphasis has been placed on the decentralisation of the
ownership, management and regulation of water and waste-water/sewage
utilities. However, there is also widespread variation in terms of what
has been decentralised and the extent to which decentralization has taken
place in practice. Consequently legislation in many countries continues to
develop to clarify the issues involved in decentralization.
·  there has also been the introduction of widespread frameworks for private
sector involvement in the Accession states, providing for different forms
of ownership, for example the extent of state or municipal ownership, and
different degrees of ownership, for example ownership of assets as well as
operational rights. Countries continue to provide legislative clarification
about the legal basis of ownership.
·  legislation for regulation has also varied. In relation to price setting
legislation varies from the state setting tariffs, the state setting tariff limits,
and the state setting the framework within which local tariffs can be set.
Environmental regulation is largely undertaken by state departments and
there pressures to develop autonomous regulatory bodies.
Commercialisation is also being developed across the Accession States in order to
improve the efficiency of the water sector. Often these processes are linked with
decentralisation, where forms of companies have been established that require formal
accounting practices. Sometimes commercialisation has become important as a
consequence of private sector involvement or as a condition for grants or loans. In
other cases the development of commercialisation can be seen as an alternative to
private sector involvement.
In terms of the actual private sector involvement different forms of development have
been identified, both in terms of if there is private sector involvement in practice and
of what kind. Although there are different processes within the countries, the
countries can be classified in four main groups of private involvement:
·  The Czech Republic plays a particular role, since there is far more private
sector involvement than in all the other countries. Here, in most of the cases
the private sector involvement happens on the municipal level, namely on
basis of concession contracts.
·  In Hungary, Poland, Romania, Slovakia, and Slovenia private sector
involvement is in process but still limited to large cities.
·  In Bulgaria, Estonia and Latvia private sector involvement has been limited
and not developed although legislation allows to do so.
·  In Malta, Cyprus, Lithuania and Turkey private forms are even virtually not
existent.
In terms of how private sector involvement is being implemented, a wide range could
be identified. The most common model is the concession, given to a public-private
partnership, although different variations exist. Even within the single countries,
processes are ongoing in different ways.
18
3 Challenges of Restructuring
In this section we identify key challenges emerging in the processes of restructuring
across the Accession states. Throughout the Accession states there is reported need to
raise revenue in order to invest in water sector infrastructure, including the need for
repair, maintenance and new provision. Coupled with pressures to reduce public
expenditure, years of underinvestment in the water sector and the need to meet the
demands of the European Water Directive, Accession states have explored different
ways of increasing investment through donations, loans, private sector involvement
and developing commercial practices. In doing so, however, the Accession states
have faced challenges and below we identify five in particular: first, the dominance of
multi-nationals where there is private sector involvement; second, the implications of
loans; third, the complexities of increasing water tariffs; fourth, the capacity of
municipalities; fifth, the differential place of restructuring, sixth, the need to develop
better regulation, and seventh the role of donations. We take each in turn.
3.1 Private sector involvement and the role of multinationals
Private sector involvement offers the potential of raising revenue for the municipality
or state, for example through concession arrangement or as a part owner of the
privatized utility, while enabling re-investment of profits through stipulation in the
contract. In practice, however, there are emerging concerns that re-investment by the
utilities involving private sector involvement appears to be limited. In Bulgaria, for
example, it is reported that investments were not made in Sofia in the ways stated in
the concession contract. These issues are also reported in Hungary and in the Czech
Republic where concerns are particularly acute because of the presence of
involvement by multinationals which can mean that profits are in effect being
exported. With large profits being made and exported, lack of investment and rising
prices, foreign companies in Budapest and Szeged, for example, conceded profits in
order to maintain their reputation. The exportation of profits can involve more subtle
relationships. In Sofia, for example, national producers and experts, for example for
research, consultancy, insurance, audit, software etc., were not being contracted by
the concession company. In Hungary it is reported that companies sometimes
stipulate the use of their own equipment in the contract instead of using local
suppliers. Interestingly, in the Czech Republic, where private sector involvement is
19
wide spread, the need for investment was not been the main driver. To the contrary,
the infrastructure condition is reportedly in a good state (Milnes et al 2003) which is
why it has been attractive to private investors.
Box 5
Romania – developing private sector involvement
In Bucharest, Romania, Vivendi won a tender for the concession to Bucharest
municipal water services in March 2000. The concession is for the treatment and
distribution of water and sanitation services and will involve a 15% real tariff increase
in the first year of operation, no tariff change for the following four years, and a
downward adjustment after that. The total investment by Vivendi subsidiary General
des Eaux is likely to be around US$1bn. While pre-qualification for the contract took
some time, with advice and support from the International Finance Corporation (IFC),
there was only a month and a half between the call for bids and the award of the
contract with the contract awarded on the basis of average lowest tariffs. Later
conflicts emerged between the new operator company (Apa Nova Bucuresti) and the
city municipality, including concerns over the transfer of assets. Some of the assets
were transferred to the operating company that should not have been. Another
problem was connected to the dismissal of employees: the Apa Nova planned to
dismiss 3000 employees out of 4900. Further legislation has attempted to clarifying
the rights of ownership.
Source: Somogyi, E., Hegedus, J. and Tönko, A. (2003) “Current Status of Water
Sector Restructuring in Romania” Working Paper for EU Intermediaries Research
Project, http://www.irs-net.de/intermediaries
The processes of establishing contracts with the private sector can also be a
problematic. In Bulgaria, the concession in Sofia involved 7 years of negotiations
with concerns about transparency, clarity of the contract, the investment programme,
the relationship to local producers and the price formulation. These concerns lead the
suspension of further privatization processes in Bulgaria. In the Czech Republic, one
company in Ostrava had sold its shares twice in a limited period of time and the
Regional Commercial Court decided to freeze shares. And in North Bohemia, a
multinational company tried to buy stakes without public bidding and the local
authorities had to stop the procedure. In Romania the legislation changed many times
during the Bucharest deal. Problems encountered included a mistaken transfer of
assets and lack of security for employees. In Slovakia, one concern is that
municipalities that are keen to raise revenue run the risk of selling their assets with the
price in mind rather than longer term issues. A further concern is the status of the
20
contract. For example in Bulgaria concerns are raised about the difficulty of changing
the concession contract that is in place for 35 years.
Box 6
Hungary – continued negotiations with the private sector Szeged
The Szeged Water Works and Baths (Szegedi Vízmuvek és Fürdok) was privatised in
1994 through a concession contract made with the French Compagnie Generale des
Eaux (CGE). In the framework of the privatisation three joint venture companies were
formed: the Szegedi Vízmu Kft (Szeged Waterworks Ltd), the Városi Vízügyi
Beruházási Kft (City Water Investment Ltd) and the Magyar Vízügyi Kivitelzési Kft
(Hungarian Water Construction Ltd) in which the CGE had 49%, 30%, 70%
ownership respectively. Several concerns were raised about the contract: the
openness of the tendering process; high management fees; a pricing structure allowing
an open ended guarantee to CGE that losses will be covered by the municipality; the
monopoly status for the network construction against the Law on Public Procurement
(that was created after 1994); the new development of the sewerage network was
financed from the water and sewerage fees and no foreign funds were drawn into to
advance developments. Consequently, the contract was subject to an almost
permanent process of renegotiation between 1994 and 1999. The Socialist leadership
(1994-1998) did not want to terminate the contract as they did not have the financial
capacity to buy back the company, but succeeded in making amendments: reduction
of the management fee and the change of the price formula. In 1999 the Fidesz
leadership (1998-2002) wanted to renegotiate the whole contract and started to
campaign for through the local media. The French company was blamed to cause a
damage of 800 million HUF to the city. A long dispute started between Vivendi (the
former CGE) and the municipality and finally Vivendi turned to the International
Court in Geneva claiming that Szeged Municipality had violated the contract several
times. Furthermore the registration of Szeged Water Works Ltd. was refused by the
Court in 1994 because of irregularities of assets transport and this decision was
approved by the Supreme Court in 1999. Finally in 2001 agreement was reached that
gave the municipality more control over the Water Works and less financial
responsibilities concerning the funding investments. A new joint stock company was
set up to operate the sector in which the municipality had majority representation.
ISPA funds were also attracted for investment.
Source: Somogyi, E., Hegedus, J. and Tönko, A. (2003) “Current Status of Water
Sector Restructuring in Hungary” Working Paper for EU Intermediaries Research
Project, http://www.irs-net.de/intermediaries
Another concern is with the affect of private sector involvement is employment
security. In Bulgaria many employees lost their jobs in Sofia even though this was
contrary to the contract. Further, national experts and produces have been excluded
from contracts with the concession. In the Czech Republic there have been large
reductions in numbers of jobs, with a reduction in staff by 40% between 1991 and
2002 which was not accountable to over employment. In the Czech Republic there
21
are controversies about the levels of pay of workers in the water sector. There are
arguments about the limited opportunity for collective bargaining that means
differential pay rates between companies are emerging as well as arguments that the
pay in the water sector is higher than average is more important. In Romania, there
were disputes about the loss of jobs in Bucharest. Hungary is seen as an exception
where employment levels have remained the same.
In summary, common problems encountered in negotiating contracts with the private
sector:
·  concerns about transparency
·  clarity of the contract
·  clarify of investment
programme
·  relationship to local producers
·  price formulation
·  selling of shares
·  legislation changes
·  Mistaken transfer of assets
·  Employee security
·  Lack of public bidding
·  Assets sold for low price
3.2 Role of Loans
Another avenue for raising revenue for the water sector is the use of loans or
donations. In Lithuania, for example, loans have been used as an alternative to
private sector involvement. The extent, reasons and implications of gaining loans for
investment do vary:
·  First, the role of the loan can be to support private sector involvement. In
Sofia, part of a loan from the European Bank for Reconstruction and
Development (EBRD) supported the initial expenses incurred by the
concession company. Similarly in the Czech Republic, the EBRD supported
the concession company (51 % City of Brno, 39 % Suez Lyonnaise des Eaux,
10 % private investors) in Brno to enlarge and upgrade the Brno-Modrice
wastewater treatment plant.
·  Second, in other cases, the loan may enable the municipality to develop more
commercialised practices. For example, in Estonia, the EBRD, while it
supported private sector involvement in Tallinn, it also supported the
conversion of the national Water Supply and Wastewater Board into a state
owned enterprise in 1993, which also enabled it to borrow money from foreign
banks.
23
·  Third, for municipalities there can be limits to being able to take out
commercial loans. For example, while in Romania the World Bank supported
reconstruction in Bucharest until 1999 municipalities could not take out loans
without government approval and obstacles nonetheless still remain. These
include that municipalities cannot take out a commercial bank account, high
credit risks making loans expensive, limited revenue relative to the costs of
investments, and banks lack of experience in evaluating feasibility. More
recently, however, the EBRD has also launched a Romanian Municipal
Environmental loan Facility.
Box 7
Estonia –municipal enterprises and environmental programmes
During the Soviet period, all the water management utilities (except Tallinn) were
under the control of the Water Supply and Wastewater board. In 1992 this Board was
converted to a State owned enterprise, Eesti Vesi (Estonian Water) that was
responsible for all the water and wastewater services outside Tallinn. In 1992 The
European Bank for Reconstruction and Development (EBRD) contacted the state
owned enterprise Eesti Vesi and a feasibility study was made for municipalities to
finish investment projects using loan from the bank. On basis of the feasibility study it
was recommended to establish a new company with two aims, to act as a borrower of
money from a foreign bank and also to manage the water management investment
project on behalf of the municipalities. In 1993 the municipal owned company AS
Eesti Veevärk (Estonian Water Company) was established for that purpose. In 1995
Eesti Vesi was liquidated and the responsibility for the ownership and operation of the
assets was transferred to the municipalities. A called the Small Municipalities
Environmental Programme (SMEP) in which 13 municipalities participated between
1996 and 2001, was developed and involved the provisional sum of 641 million EEK
(40 million Euro), nearer 802 million EEK (51 million Euro) when additional grants
are taken into account. SMEP resulted in a significant decrease in the pollution of the
rivers and lakes of Estonia as well as of the Baltic Sea. The quality of the drinking
water was also improved. The water and sewage service became more reliable and
available to more of the population. The construction of municipal water and
wastewater treatment plants became a countrywide activity. Following up on the
SMEP, the ministry of the Environment, with support from the Danish Environmental
Protection Agency (DEPA), initiated a similar program “Small Municipalities
Investment program” (SMIP) for 17 small municipalities. The program involved
investments of 30 million Euro or close to 500 million EEK (Milnes et al 2003) and
(Trolle 2002).
Source: Balslev Nielsen, S. and Hoffman, B. (2003) “Current Status of Water Sector
Restructuring in Latvia” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
24
An emerging concern about the use of loans is the role that the lending bank can then
play in negotiating water governance to ensure sufficient profits are made to ensure
repayment. In Sofia, water prices have increased since the concession began, based
on a formula negotiated between the municipal, the concession and EBRD that
includes a profit base and money for paying back the loan. The EBRD assisted the
city in the amendment of an existing long-term concession contract between the city
and a joint stock company minority-owned by an international operator (EBRD 2002:
7). Small projects in cooperation with the EBRD also took place in Ostrava and Plzen
(EBRD2002: 37). Similarly, in Poland, the Municipal Support Agreements between
the EBRD, utilities and municipalities were established in order to guarantee a stable
regulatory environment, tariff setting and corporate governance system, or adequate
conditions for the operation of utilities to ensure repayment of loans (OECD 2003,
p.31).
It is also important to mention the role of the EU ISPA funds that support pre-
Accession states in meeting EU environmental and transport infrastructure standards.
These funds are to be used to fund large investments, which will have a major positive
impact on the environment (see table 1 below).
Table 1 – ISPA funds in percentage per country
0 5
10
15
20
25
30
35
40
Bulgaria
Czech Rep.
Estonia
Lithuania
Latvia
Poland
Romania
Slovakia
Slovenia
Hungary
2000 2006
Source: Official Polish ISPA website, http://www.europa.delpol.pl
25
3.3. Increasing Water Tariffs
Across the Accession states there has been concern that water tariffs do not reflect the
true costs of water let alone generate revenue to enable investment in the
infrastructure. There has in general been rises in water tariffs. In Bulgaria this had
been the case in the concession in Sofia but also for water associations based on a
lease contract. This was also true in the Czech Republic, although there was much
variation across the country in the price rises.
Box 8
Poland – negotiating tariffs in Gdansk
In the early 1990s the Gdansk water and sanitation system was suffering by
deficiencies and inefficient management to expand the infrastructure. Furthermore,
the city needed to upgrade the wastewater treatment to act in accordance with the
multinational effort to in terms of ecological concerns of the Baltic Sea. In 1992 the
Saur Neptun Gdansk S.A. (SNG) was established to serve the city of Gdansk. The city
itself owns 49% and Saur 51% of the new company’s assets. As a private operator
Saur is responsible for the operation and maintenance of the system, maintaining
quality-of-service standards as specified by the city municipal council and billing and
collection. The city retains ownership of the relevant infrastructure and is responsible
for capital investment and for financing, regulation and tariff setting. Thus, the city of
Gdansk through its municipal council controls and regulates the performance of the
company both as a shareholder in SNG and through the contract. The municipal
council and the private operator renegotiate a new rate every year. A thirty-year lease
contract was signed between the city of Gdansk and SNG in 1993.
Economic conditions and regulatory procedures are not yet stable. As a consequence
of tariff increases and meter installations between 1993 and 1995, average demand
fell sharply from by around 25% and concomitantly, average water production fell by
more than 20%. Tariff adjustments have been subject to political considerations.
Successive tariff increases below the rate of inflation have undermined the financial
capacity of SNG. The uncertainty involved in the negotiations between the municipal
council and the company have slowed proposed investments. The contract was later
modified because the new municipal council criticised some aspects of the contract
and decided to renegotiate it. Clearer procedures for annual tariff negotiations and
their timing, the sharing and control of information and the definition of a coherent
annual operating plan consistent with politically viable tariff increases were
established. A new remuneration formula for the private operator was defined on the
basis of a fixed return on capital.
Source: Fay, C. and Moss, T. (2003) “Current Status of Water Sector Restructuring in
Poland” Working Paper for EU Intermediaries Research Project, http://www.irsnet.
de/intermediaries
26
There are three problems associated with increasing water tariffs:
·  First, is the problem of establishing what the actual cost of water is. In the
Czech Republic, for example, it is reported that calculations depends on the
reliability and transparency of the water companies. And in Bulgaria there
have been experiences of overcharging and invoicing problems.
·  Second, one of the paradoxes of water pricing as a means of raising revenue
for investment is that increasing the tariffs can lead to decreased water
consumption, in turn leading to a further need to increase the tariff. This
occurred in Hungary, Poland, Estonia and Latvia. In Hungary, water
companies can apply for state support if its production costs exceed revenue
raised by fees, for which the state sets a limit, while households can also apply
to municipalities for support. Interestingly in Hungary in the case of
Debrecen, which remained municipal, price rises were moderate.
·  Third, the difficulty with the rising water prices to raise revenue for
investment is that the provision of water for populations that are more sparsely
populated is more expensive, thus introducing a differential price between
rural and city areas.
3.4. Municipality Capacity
Within and between different Accession states there are variations between the
capabilities of different municipal entities. Commercialisation is an option for raising
revenue. In Romania, cities with utilities owned by the municipalities have proved
successful in raising revenue to finance debts and make much needed investment.
And similarly, the case of Malta demonstrates a developed example of
commercializing the state owned water company. However, there are three key
problems facing municipalities in the process of restructuring:
·  First, there are concerns about the ability of municipalities to negotiate with
multinational companies, particular in negotiating a contract.
·  Second, in Bulgaria, the Czech Republic, Estonia, Hungary, Lativa, Romania
and Slovakia, concerns are reported about the levels of skills and opportunities
for training. In Sofia, for example, high expenses were incurred paying for
foreign consultations and research. In Estonia and Hungary these problems are
27
reported as particularly acute in the smaller municipalities. In Hungary, for
example, restructuring lead to the formation of 400 companies where
previously there were 33, thus losing previous economies of scale.
·  Third, smaller municipalities have limited resources for buying in appropriate
expertise. In Romania the extent of knowledge is noted as important in
determining the degree of autonomy of the municipalities. Only the larger
municipalities with populations of over 50,000 have developed autonomous
entities. In Slovakia more recent legislation has attempted to enforce
decentralisation as a response to little uptake of ownership by the
municipalities. Lack of expertise in the government to deal with the process
of transfer, reluctance by profitable companies to merge with unprofitable
ones, lack of funding for investment in the assets and uncertainty about issues
such as tax, pricing and insurance were all contributing factors.
Box 9
Latvia – building municipal capacity
In Latvia one of the concerns has been developing investment in areas where
municipalities have lower capacity. Support for investment in larger city areas has
been gained from the World Bank and Nordic countries in relation to concerns about
the Baltic Sea. A National programme of investment called 800+ aims to develop the
water supply and waste water treatment in small and middle size cities and rural areas.
Currently the main focus of the Program 800+ is improvement of municipal water
services infrastructure by providing municipalities with technical and investment
assistance in order to reach compliance with EC water sector related directives by
2015. The programme began in 1996 and is partly funded by EU Phare. The
programme involves 800 new waste water treatment utilities in 69 areas. The project
office seeking and coordinating foreign support has been privatised and thus works as
a private consultant.
Source: Hoffman, B. and Balslev Nielsen, S. (2003) “Current Status of Water Sector
Restructuring in Latvia” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
28
3.5 The place of restructuring
Further, restructuring seems to have been mostly developed in city regions. This can
involve complex dynamics as resources get channeled into prioritising city regions to
the detriment of water/wastewater in rural areas and smaller city areas. For example,
directing restructuring towards large city regions can means drawing in national
resources as well as international resources, for example bank loans, to those areas to
the detriment of other areas that become marginalised. For example, loans for
restructuring – whether from international banks or the state – tend to require support
from the municipality and only those municipalities who can raise appropriate
resources can provide investments, for example in Hungarian city municipalities.
Across all the countries there are poor levels of water supply and waste-water
collection in the rural areas and smaller cities. Interesting the 800+ scheme in Latvia
attempts to address these problems by bringing together different municipalities.
3.6 Effective Regulation
The process of restructuring has involved putting in place appropriate regulatory
mechanisms. In practice this has been problematic. For example, in the Czech
Republic, despite developed decentralisation, private sector involvement and
regulatory frameworks, in practice there is no effective price regulation reflected in
rising and differential prices across the country. There are three key problems around
developing effective regulation:
·  First, is the tension around the autonomy of the regulator. This is particular so
in countries such as Bulgaria, Czech Republic, Hungary where the municipals
have been both the regulator and the contractors. Hence, in Sofia, for
example, a separate company owned by the municipal was set up to fulfill this
role.
·  Second, is the fragmentation of regulatory bodies. In Latvia it is report that the
regulation of water has been disjoined from national regulation with many
separate local municipal regulators created in cities and regions that have less
capacity and will be more expensive. In one case, a multi-sector regulator has
been established between 31 municipalities. Such fragmentation presents
problems for ensuring consistent regulation.
29
·  Third, are the costs of ensuring effective regulation can be problematic for the
Accession states and the municipalities, as report in the Czech Republic.
3.7. Donations
Although it is no widespread, it is important to note the role that donations can play in
shaping water sector development. This is particularly the case in Latvia where
support form Nordic countries is often given on the basis that there will be no private
sector involvement.
Summary of the Challenges
In this section we have identified seven key issues facing the practices of restructuring
across the Accessions states. First is the dominant role of multinationals within the
process of private sector involvement. The expected positive contribution to
investment in the local water infrastructure is often hindered because of several
factors along the relationship between investor and responsible bodies. Second is
investment in the local water sector through the use of loans. Loans have sometimes
been adopted to support private sector involvement and sometimes to support the
municipalities in establishing commercial practices. Another kind of loan which is
present in all the Accession States and used in particular in Poland is the EU ISPA
fund which support the States towards environmental and infrastructure standards.
Third, investment which is done in the water infrastructure, whether through private
or public funding, often causes increasing water tariffs. The degree differs from
region to region. Within the research several associated issues were identified like for
example the problems concerning the establishing of the actual cost of water.
Furthermore, the raising prices often lead to decreased water consumption. That
means the investment costs often cannot be covered without a further increasing of
the cost. Fourth, there are widespread variations in the capacity of municipalities to
negotiate with municipalities, in terms of the levels of skills and opportunities for
training, and for buying in appropriate expertise. Fifth, issues of differential
municipality capacity are particularly evident for smaller town/rural areas. Sixth,
there is a lack of effective regulation, concerns about the autonomy of regulators, the
fragmentation of regulatory bodies and the costs of effective regulation. Finally, there
is evidence of donations playing an important part in the water sector in Latvia.
30
4 The Future of Restructuring
The complexities of restructuring across the Accessions states coupled with the
methodological challenges faced means that, while this report has been able to
highlight key emerging issues, it cannot claim to be comprehensive nor to capture the
full trajectories of the different nation states and municipalities within them. What is
crucial, however, is particular recognition that the processes of restructuring are far
from complete in any of the Accession States. They do not follow a linear trajectory
but involved complex negations through which local configurations of restructuring
are taking place. In this final section of the report we identify three key challenges
that the restructuring of the Accession states face and summarising in table form the
current status and trajectories of the Accession state restructuring in relation to the
particular question of private sector involvement.
4.1 Coordinating European Water Priorities
The current patterns of restructuring, with an emphasis placed on decentralisation,
involves the fragmentation of control over the water sector as well as the creation of
new agencies. This has led to difficulties in ensuring appropriate regulations are in
place to achieve sustainable water sector management. This is particularly important
in the context of other European initiatives relevant to the water sector. Most notably
the Water Framework Directive seeks to overcome the problem of fragmentation by
coordinating the plurality of actors needed to achieve sustainable water management.
The processes of restructuring need to involve anticipation of how an increasingly
fragmented water sector can be coordinated to ensure alignment with relevant
European policy objectives.
4.2. Providing Relevant Knowledge and Expertise
Lack of expertise in the Accession States creates management problems in water
companies and means that public authorities are not always able to negotiate with the
private sector on level terms. This is particularly important in a context where there
are external pressures accelerating competition, for example from agencies such as
the World Bank and multinational investors. The development of further
restructuring and private sector involvement will need to anticipate how appropriate
31
capacity and expertise within Accession States will be developed to ensure that local
priorities and concerns are protected.
4.3. Improving the Quality of Water Infrastructure
Across the Accession States there are serious concerns about infrastructure condition.
Evidence indicates that private sector involvement has as yet rarely led to increased
investment in water infrastructure even where water prices have risen. Instead,
investment in infrastructure has been resourced primarily through grants or loans (e.g.
EIB, EBRD, HELCOM) as well as price increases. There needs to be increased
public debate about whether private sector involvement will lead to more investment
in aging infrastructure networks and what alternative methods for increasing
investment there might be.
Meeting these challenges will require resources and one of the core questions
throughout our review has been about how the Accession states have responded to the
need for investment. While loans and commercialisation have been important, it is
certainly the question of private sector involvement that has sparked the most debate.
Below, the table summarizes the current trajectories of the different Accession states
in relation to private sector involvement and the key issues facing that state. As the
table shows, four categories of country are identified. The first category currently
only includes the Czech Republic where which there is almost full private sector
involvement. The second category includes those countries that are actively
developing private sector involvement. Here a core concerns includes integrating
smaller municipal countries to make them financially viable. The third category is
countries where private sector involvement has been put on hold. Here the common
issue is waiting to learn the lessons of private sector involvement and exploring the
need for new legislation. Finally are those countries where the role of the private
sector is virtually non-existent. There the emphasis has been on developing
commercial practices within the water sector.
32
Table 2 – Summary of Accession States future restructuring
Trajectories of water sector restructuring
in the Accession States
Towards full private sector involvement
Czech Republic
Emphasis now on development of water regulatory body, demand management and personnel training.
Developing private sector involvement
Hungary
Further private sector involvement, integrating smaller water companies and increased role for domestic
investors
Poland
Increasing the role of the private sector to raise revenue to secure ISPA grants
Romania
Further private sector involvement and integrating smaller municipal water companies
Slovakia
Establishing water companies by integrating smaller municipal water utilities in order to enable private
sector involvement
Slovenia
Continued decentralisation and private sector involvement through concessions
Private sector involvement on hold
Bulgaria
Private sector involvement postponed, new legislation in 2003 has consolidated legal framework and
cancelled water associations.
Estonia
Further commercialisation; possible private sector involvement depending on lessons of Tallinn
Latvia
Current government rejects private sector involvement, but legislation has been prepared and could
enable this
Private sector involvement virtually non-existent
Cyprus
Maintain monopoly, develop equity of provision, enhance commercialisation (including lease for
management of desalination)
Lithuania
Merging municipalities for economies of scale/increased expertise, improved environmental regulation,
secure loans
Malta
Continued monopoly, developing commercialisation and technological improvements.
Turkey
Increased decentralisation and development of water prices
33
Appendix: Summaries of Country Reports
Bulgaria
Liberalisation
A process of decentralisation of responsibility for the water sector from the central
state to municipalities began in 1991. New legislation in 1999 consolidated the
potential for state ownership, municipal ownership (which could be part private) and
fully private ownership. Responsibility and ownership of water/wastewater utilities
has been almost fully transferred from the central state to municipalities, including
management of water supply and sewage treatment, regulating prices, services and
investment. In 2001 the government suspended further private sector involvement.
Commercialisation
Municipalities have commercialised water management including: clearer definitions
of water users, specification of contracts for maintenance, metering of clean water and
sewage, specification of how water and sewage is paid for, the conditions in which
water supply and sewage collection are terminated, and the introduction of water
prices.
Private Sector Involvement
There have been two forms of private sector involvement. First, ‘Water
Associations’, of which there are 4, although 3 are contracted to one municipality, are
private companies formed by employees and consumers. Departments transfer their
managerial functions to the Water Associations, including transfer of ‘the right to use’
water/wastewater utilities for a period of 10 years. Water associations are responsible
for managing, investment, day-to-day maintenance, metering and pricing,
communicating with customers. Water and Sewage Departments retain the ownership
and control on investment priorities. The second form is the concession of which
there is only one, in Sofia given to an “ad hoc” private sector company jointly owned
by a British-American consortium and the Municipality of Sofia for the operation and
maintenance of water/wastewater for 35 years.
Country specific issues
Key problems of water loss and establishing responsibility for metering, control and
reducing such loss.
Future Trajectories
Further private sector involvement of assets has been planned in two city areas,
however, these have been postponed due to concerns of transparency and corruption
experienced with private sector involvement in Sofia. The government has suspended
private sector involvement, however, new legislation is expected to consolidate the
legal context for private concessions and water associations.
Peneveska, V (2003) “Current Status of Water Sector Restructuring in Bulgaria”
Working Paper for EU Intermediaries Research Project, http://www.irsnet.
de/intermediaries
34
Czech Republic
Liberalisation
The current legislative framework has liberalised the water sector primarily by
permitting the private sector involvement of water companies. The liberalisation of
the water sector is founded on the Large Privatisation Act (1991), which foresees the
transfer of rights and the sale of shares to private companies; the Amendment to Small
Businesses Act (1996), by which rights over water supply and sewerage systems
became licensable and were transferred to private companies; and the “Act on Water
Supply Systems and Sewage and Drainage Systems” that defines the standards for
concessions of operators for drinking water supply and wastewater disposal. The
private sector involvement of the water sector was implemented during the second
stage of coupon privatisation (1993-1995).
Commercialisation
Drinking water supply and waste water sewerage is managed in most cases by private
companies. Prices are fixed by the municipalities according to the restrictions of the
Ministry of Agriculture and the Ministry of Environment. Nevertheless there have
been dramatic increases in water prices.
Private sector involvement
The water sector is almost fully privatised, as the ownership of water/ wastewater
companies has been transferred to private investors. Private companies act as
operators while the ownership of the water infrastructure remains in municipal hands.
Water management companies like the river basin boards are in public ownership.
Country specific issues
The fragmentation of the water sector, which poses an obstacle to efficient water
investment and the dominance of large multinational companies (Vivendi, Ondeo,
Anglian Water).
Future Trajectories
All experts see a trend towards more private involvement. The Czech trade union
CMKOS expects that in the future two multinationals (Vivendi and Ondeo) will
control up to 90% of the Czech water market. There is also still need for a regulatory
body for the water sector and a fixed definition of ‘water’ and water rights in the
Czech constitution. Finally, to meet the challenges of limited public finances and the
need for investments considerable effort is needed to educate staff in water
management issues.
Source: Naumann, M. (2003) “Current Status of Water Sector Restructuring in the
Czech Republic” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
35
Cyprus
Liberalisation
In general there has been limited liberalisation of the water sector. However, there are
processes of decentralisation and frameworks for water pricing to provide for the full
cost of water.
Commercialisation
Commercialisation of the water sector has involved important steps. First, the Water
Development Department has developed water demand practices, including price
setting. Second, regarding water provision, Urban Water Boards or Municipalities
undertake management responsibility.
Private Sector Involvement
The only involvement of the private sector is in the management of desalination units
in which private companies are given 10 year contracts. There is no further
participation of domestic or foreign private companies in the water sector.
Country specific issues
Water is perceived as a scarce resource and water demand has risen above the
available surface water and ground water. The increase in the need to meet demand
and the pressure from agricultural and tourist users has led to several changes in the
water and sewage sector, in particular, the construction of desalination plants,
irrigation plans and passing of a new water demand policy with an emphasis on public
awareness.
Future Trajectories
The perception of the government that water is a public good means a natural state
monopoly is preferred instead of liberalisation/private sector involvement.
Government policy is directed towards an emphasis on the efficient allocation of
water and social equity. Additionally, in terms of water market commercialisation, the
Ministry of Agriculture, Natural Resources and Environment plans the establishment
of two institutions, the Water Entity and the Advisory Committee of Water
Management. This aims to improve the efficiency of water policy.
Source: Markantonis, V. and Getimis, P. (2003) “Current Status of Water Sector
Restructuring in Cyprus” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
36
Estonia
Liberalisation
The water sector is liberalised in respect of the extraction of water resources and
provision of services through the Competition Act. However the ownership of
groundwater according to the Water Act (1994,1996) vests in the State.
Commercialisation
Environmental investments programs and especially the Small Municipalities
Environmental Program (SMEP) and Small Municipalities Investment Programme
(SMIP) has facilitated new management practices in over 30 municipalities. The
limitations of commercialisation are currently the lack of competent personnel and
finance for investment.
Private Sector Involvement
In the early 1990s the water sector was owned by the state but the ownership was
transferred to municipal enterprises after a decision to privatise all state owned
enterprises. The municipal enterprises are now public limited companies. There is
one case of municipalities delegating ownership and responsibilities to a private
company in the capital Tallin. In 2001 the city of Tallin sold 50.4% of the shares to
the private company International Water/United Utilities.
Country specific issues
Since 1996 major investments have been made in sewage treatment and
environmental protection through national and international investment programs
based on non-private sources. Estonia nearly complies with the EU Water Framework
Directive.
Future Trajectories
The future trajectory seems to be commercialisation as a part of modernising the
municipal water utilities and creating a stable economy. While it is legally possible to
develop further private sector involvement, it is an open question if the first
experiences from Tallinn will be followed in other areas.
Source: Balslev Nielsen, S. and Hoffman, B. (2003) “Current Status of Water Sector
Restructuring in Estonia” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
37
Hungary
Liberalisation
As a part of a wider decentralisation process in the early 1990s, ownership of water
utilities was transferred to municipalities, including responsibilities for defining water
and sewage fees. This also enables the municipalities to introduced privatization.
Commercialisation
Municipalities had to transform water and sewage works into a commercial company by
the end of 1996. Legislation states that revenue from fees must cover the justified
expenses though there is no central price setting formula. For water companies with
high expenses there are subsidies from the Ministry for Environment and Water.
Emphasis has been placed on rationalisation of operations in order to avoid producing
losses, though this has been limited to large companies who had the appropriate
expertise and knowledge. In the case of smaller companies, lack of competent experts
and political dynamics have limited the uptake of commercialization.
Private Sector Involvement
Water companies were privatized in six large cities and in one smaller region. The
privatized sector covers about 20-25% of the water supply of the Hungarian
population. Foreign investors established concession contracts for 15-25 years the
municipality retaining the majority ownership in water companies. But the
management boards tend to be dominated by the representatives of the foreign
companies.
Country specific issues
There is no central policy for water privatization, the municipalities themselves have
to decide on the mode of operating the water companies. The revenue from
privatization was not spent on sector improvement, however, significant
developments are needed to meet EU requirements. In the case of some privatized
water companies, problems emerged that raised the question of transparency of the
privatization process and the capability of the municipalities in negotiating contracts.
Future Trajectories
There is likely to be mergers between smaller water companies to generate economies
of scale. EU requirements place pressure on more professional and efficient operation
and this could lead in some cases to further private sector involvement. There is
increased interest from domestic investors in the water sector.
Source: Somogyi, E., Hegedus, J. and Tönko, A (2003) “Current Status of Water
Sector Restructuring in Hungary” Working Paper for EU Intermediaries Research
Project, http://www.irs-net.de/intermediaries
38
Latvia
Liberalisation
Under the Law on Environmental Protection (1991) local government are responsible
for the utilisation of natural resources within their own administrative territory. The
Law on Water Management (2002) states the right to use water and water bodies for
personal and commercial purposes in accordance with this law and other legislation.
Law on Regulators of Public Utilities (2000) states that water supply and sewerage
should be regulated by local regulators.
Commercialisation
The water sector has been decentralised, with ownership moving from the state to
municipalities. Water services are normally provided by special purpose companies
owned by the municipalities. The utilities are, in principle, dependent on tariff
revenues and legislation allows for profit generation from tariffs. In practice tariffs
hardly cover the costs of operation and certainly not the investments necessary for the
water sector to meet the demands of the EU water frame directive. Foreign support for
technological and managerial development has been important.
Private Sector Involvement
Different kinds of private ownership of water utilities can be identified, for example
private water supplies in rural areas, wastewater treatment within industry, and private
sources of financing for individual connections to the centralised systems (including
the installation of meters). There are no examples of transferring either the ownership
of public water utilities of the concession of services to private companies.
Country specific issues
Latvia is close to complying with the EU technical standards of water supply and
wastewater treatment. The great challenge to the water sector is the implementation
of River Basin Management. As many municipalities are very small in terms of
population they do not have the capacity to manage and develop the water sector.
Regional reform seems necessary but politically difficult to achieve.
Future Trajectories
The government at the moment states (by law, contract or agreement???) that the
water sector will not be privatised, but legislation has been prepared for private sector
involvement and a plan from the Ministry of Environmental Protection and Regional
Development points to private sector involvement of municipal water utilities in 5-10
years. Indeed, large companies have shown interest in the water utilities of the two
largest cities.
Source: Hoffman, B. and Balslev Nielsen, S. (2003) “Current Status of Water Sector
Restructuring in Latvia” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
39
Lithuania
Liberalisation
In the years since independence municipalities have taken control of property from
the state and the water sector is publicly run by municipal water companies. The state
sets tariffs and guidelines for the provision of services.
Commercialisation
The municipal companies are able to act with a large degree of autonomy although
there is little evidence of explicit commercialisation.
Private Sector Involvement
The water and wastewater sector has not been the subject of a full private sector
involvement programme. There is still a general consensus that these services should
remain in public hands. At present the private sector is only involved in the provision
of hot water in which the majority of municipalities have either rented out their assets
under concession agreements or sold on their assets to private investors.
Country specific issues
Since the restoration of independence in 1990, the main priority has been to address
the legacy of Soviet disregard for the wastewater sector (the water-supply sector
requires less investment). Massive investment is required to update the infrastructure
and to improve environmental performance. Foreign grants and loans are the major
source of finance for improvements in the wastewater and water sector. The
government, under pressure to reduce the state debt to conform to EU economic
standards, does not want to finance the water sector. This, combined with a reluctance
to raise tariffs, places a huge burden on the government to encourage foreign
investment and loans.
Future Trajectories
The main emphasis is government plans to restructure the sector in order to secure
further loans and grants both in relation to the EU and international financial
institutions. The intention is to replace municipal and ‘village’ companies with larger,
regional water companies.
Source: Beveridge, R. and Guy, S. (2003) “Current Status of Water Sector
Restructuring in Lithuania” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
40
Malta
Liberalisation
The water sector has not been liberalised. The Water Services Corporation Act
(1991) grants exclusive rights to state owned public utility, the Water Services
Corporation (WSC). As a monopoly WSC has exclusive rights for the acquisition,
production, sale, distribution, exportation and disposal of domestic, commercial, and
industrial water. The Malta Resources Act (2000) established the Malta Resources
Authority as an autonomous and independent regulator with the function of regulation
of treatment, storage, disposal, use or re-use of sewerage, waste-water, sludge, and
storm water run off, provision of public sewerage systems, re-use of treated effluent
and disposal of sewerage.
Commercialisation
The WSC has distinct management units – Corporate Services, Communications,
Management Information Systems, Groundwater Operations, Gozo, Technical
Support Services, Distribution Operations. WSC also has two subsidiary
organisations with separate management (the Institute for Water Technology and
Malta Desalination Services Ltd.). WSC also places increased emphasis on making
efficiency gains (through metering, billing, reduction in leakage) and cost-cutting.
Finally, WSC contracts out work where appropriate on a commercial basis.
Private Sector Involvement
Private sector involvement of water in Malta is limited because of the exclusive rights
given to the Water Services Commission. However, private forms of provision are
present in the form of private uptake from wells in the agricultural sector, private
Reverse Osmosis polishing plants in, for example, hotels, and in large scale provision
of bottled drinking water.
Country specific issues
Malta is classified as ‘water scarce’ with the lowest natural water resource per capita
of the Mediterranean countries. Malta also has the highest government budget deficit
of the Accession states.
Future Trajectories
Water is perceived as a precious resource in Malta and there is widespread consensus
that private sector involvement and liberalisation of the water and waste water sector
should be limited. Instead, developments are likely to focus on improving efficiency
gains (e.g. through further commercialisation, technological development and
infrastructural investment) while addressing environmental concerns (e.g. improving
use of second-class water).
Source: Medd, W. and Marvin, S. (2003) “Current Status of Water Sector
Restructuring in Malta” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
41
Poland
Liberalisation
Restructuring in the early 1990s transferred responsibility and ownership of water and
wastewater utilities from the central state to the municipalities. The Law on Local
Government (1990) created the utilities as municipal budgetary units. The Law on
Municipal Management (December 1996) required the transformation of the utilities
into commercial law companies.
Commercialisation
Utilities exist as commercial law companies and, contrary to the requirements of the
1996 law, as budgetary units, water associations or State owned companies.
Municipalities are now responsible for the management of water supply and sewage
treatment, regulating prices, regulating services and investment.
Private Sector Involvement
The majority of utilities are owned by the municipalities, with the exception of a few
cases where private investors are also involved. In the case of Gdansk, where the
need to improve the water and wastewater infrastructure was very urgent, 30 years
lasting contracts between the local authorities and a private investor were concluded
in the early 90s.
Country specific issues
The Polish water and wastewater sector was in a very poor condition due to the
neglect of its development by the former socialist government. In the 1990s the
priority was providing for the needs of industry rather than improving the level of
service provided to citizens or protecting the environment. Given the high and
growing unemployment rate in Poland and the financially difficult situation in some
regions, municipalities are not always able to provide their part of the investment and
therefore need the financial backing of private investors.
Future Trajectories
Polish municipalities are particularly keen to acquire ISPA (Instrument for Structural
Policies for Pre-Accession) grants that allow towns and cities of more than 100,000
inhabitants to apply for funds to improve their water and wastewater infrastructure in
order to meet EU requirements. To access these grants the municipalities need to
contribute around 35% of the total required investment themselves. Some of that 35%
is likely to be raised from private investors.
Source: Fay, C. (2003) “Current Status of Water Sector Restructuring in Poland”
Working Paper for EU Intermediaries Research Project, http://www.irsnet.
de/intermediaries
42
Romania
Liberalisation
The Law on Water (1996) and the Law on Environmental Protection (1995) set up the
legislative framework for environmental, economical, quality and consumer
regulation (that are in accordance with the EU standards) and allowed for private
sector involvement. Decentralization included the transfer of ownership of water and
waste water utilities to municipalities. Municipalities can choose the mode of service
operation, as municipal enterprises, commercial companies, or public services (within
the executive structure of the municipalities, as concession or leasing contracts).
Water tariffs are defined centrally. Surveillance of the sector is undertaken by the
Ministry of Water, Forestry and Environmental Protection and the National Company
of Romanian water (established in 1999).
Commercialisation
Signs of commercialisation are present as municipalities have separated different
functions into specific organisations in order to establish better transparency and
efficiency. These processes are more developed in the larger cities.
Private Sector Involvement
Ownership of the utilities is retained by municipalities and the management and
responsibility for development of the public assets was commissioned to foreign
investors. Private sector involvement is a high priority in government strategy to raise
revenue for reconstruction and development. Four water companies (Bucharest,
Ploiesti, Falticeni, Timisoara) have been privatised so far in the form of concession
contract for 25-49 years. Further three water companies are under private sector
involvement process.
Country specific issues
There is a significant lack of provision of water and sewage infrastructure in rural
areas. There is also no clear distribution of competencies between the municipalities
and overlaps and conflicts occur between the two tiers of local and regional level. The
regional municipalities deal with the regional water supply system and coordinate the
investments made by rural local councils. The local municipalities’ legislation and
mechanisms are often not prepared for transparent and sufficient private sector
involvement.
Future Trajectories
There will be more commercialisation in the sector as it is seen desirable to foster the
profitability and economic efficiency of public services. More municipal enterprises
will be turned to commercial companies and the intention is to integrate the small
public service providers. The private sector involvement of public services is regarded
as high priority in the Government strategy in relation attracting investment and as a
means to meet the consumers’ requirements.
Source: Somogyi, E., Hegedus, J. and Tönko, A (2003) “Current Status of Water
Sector Restructuring in Romania” Working Paper for EU Intermediaries Research
Project, http://www.irs-net.de/intermediaries
43
Slovakia
Liberalisation
The water sector has not been liberalised and is slowly being reformed, with the
objective of devolving control from the state to the municipal authorities. ‘The
Conception of the Transformation of the State Water Works’ (July 2002) clarified this
process which was first initiated in 1997. It was agreed that the five state-owned
regional water and sewerage bodies would be replaced by seven regional joint-stock
companies that would then transfer ownership of the water infrastructure to
municipalities or associations of municipalities upon their request.
Commercialisation
Apart from the transfer of ownership of the water infrastructure to municipalities there
is little evidence of commercialisation at present, though this is likely to change
dramatically as private sector involvement increases.
Private Sector Involvement
Once municipalities have taken ownership of the utilities (by the end of 2003), they
are free to involve the private sector through selling part of their company to an
investor or signing a long-term leasing/operations contract with a foreign operator. As
of 2002, three municipal associations had taken control of their water and sewerage
utilities. This accounts for 5-6% of the population. Only Trencin has ‘delegated’
control of its utility to a private foreign company, Suez Lyonnaise des Eaux.
Country specific issues
Once these transfers are completed it is expected – and hoped by the Government –
that many municipalities will follow the path to assist them in undertaking the major
improvements required to update the decaying infrastructure, improve environmental
standards to bring the country in line with the EU and make the utilities more cost
effective in general through the introduction of private sector practices and foreign
management expertise.
Future Trajectories
The debate over the merits of private sector involvement is far from over – indicated
by resistance to private sector involvement in Komarno and Hlohovec. Many foreign
water companies are interested in market investment. Some municipalities in largely
rural areas have not taken over ownership and control of the water and waste-water
sector and it is unclear what will happen.
Source: Beveridge, R. and Guy, S. (2003) “Current Status of Water Sector
Restructuring in Slovakia” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
44
Slovenia
Liberalisation
Water/wastewater sector legislation is based on the Water Act (1999, 2001) and the
National Programme of Water Management (2002) introducing economic valuations
of the use of water, payments for water rights (acquired on the basis of a water permit
or concession), and includes compliance with the EU directive on Common EU
Waters. Regulation is undertaking by the state in the area of water regulation,
maintenance of the existing infrastructure and investment in protection against the
harmful effects of water.
Commercialisation
Up until 2001 none of municipality water companies had been restructured. It is
planned that the bulk of tasks now carried out by state will be handed over to the
regions. Municipalities will carry out all tasks on their level on the principle of
proportionality (financial resources in proportion to the tasks) and the principle of
self-financing (revenue raising from own taxes, etc.).
Private Sector Involvement
There is one form of private sector involvement – concession. One water utility is
privatised. The concession is given to a multinational consortium who have majority
ownership of the company given the concession for 22 years.
Country specific issues
Due to the increasingly restrictive monetary and fiscal policy in Slovenia, the
economic policy of water sector – and in particular, the application of economic
instruments for implementing it – is a priority. To ‘cover’ the gap between the
required and provided funds, emphasis is place on improving the efficiency and
effectiveness of operations and more sustainable use of water.
Future Trajectories
The proposed constitutional amendments enforce the principle of subsidiarity and
encourage the process of decentralisation. A new policy is being developed that will
set up legal and economic mechanisms for: establishing an economic price for the use
of water; establishing sustainable management of the natural water resources;
promoting a sustainable system of waste management and reducing quantities of
waste at source. Between 5% and 52% of the equity in the water companies is
planned to be sold to key investors (starting 2001). Concessions will be introduced for
the right to use water (starting 2002).
Source: Penevska, V. (2003) “Current Status of Water Sector Restructuring in
Slovenia” Working Paper for EU Intermediaries Research Project, http://www.irsnet.
de/intermediaries
45
Turkey
Liberalisation
There is currently no liberalisation framework of water sector with the water sector
being the responsibility of the central state, although there is some evidence of
decentralisation.
Commercialisation
The only evidence for commercialisation in the Turkish water sector is the
introduction of water prices that do not currently cover the operational costs of water
supply. Water companies remain in public ownership and there are no developments
in the application of business practices.
Private Sector Involvement
Until now there has been no development of private sector involvement in the water
sector. A small exception is the private ownership of some small springs and water
sources. Apart from those exceptions, water supply and wastewater disposal is
managed entirely by the state.
Country specific issues
The extraordinary importance of agriculture for the Turkish economy sets special
requirements for the water sector. Three quarters of all water use is in the agricultural
sector and water management in Turkey is strongly oriented towards securing
agricultural production. Turkey has to deal with highly polluted rivers especially in
the western part. Highly concentrated industrial production and high population
density cause major wastewater pollution problems.
Future Trajectories
Although the state remains the dominant actor in the Turkish water market increases
in water prices are anticipated. Decentralisation of the water supply is creating
openings for municipalities or user groups to become more involved in water
management.
Source: Zikos, D. and Getimis, P. (2003) “Current Status of Water Sector
Restructuring in Turkey” Working Paper for EU Intermediaries Research Project,
http://www.irs-net.de/intermediaries
46
Websites Sources
The following provides a list of briefly annotated websites that have useful in the
compilation of this research.
Baltenergy.com – http://www.baltenergy.com . Has latest news links and, a catalogue that
‘contains information about Latvian, Lithuanian, Estonian and Russian companies,
whose major operation areas are energetic industries’
Central European Review – http://www.ce-review.org . “Central Europe Review (ISSN
1212-8732) was founded in June 1999 by Andrew Stroehlein to offer new
perspectives on Central and East European politics, society and culture. The magazine
grew exponentially in the following months and very quickly became an authoritative
source of information on the region, cited widely and winning awards and
commendations around the globe.” Can do country specific search.
Central Intelligence Agency (CIA) – http://www.cia.gov/. All sorts of information
but in particular ‘The World Fact Report’ which includes detailed and updated (2002)
profile of different countries and includes water
(http://www.cia.gov/cia/publications/factbook/)
Council of Europe – http://www.coe.int/portalT.asp Has a variety of links if you do a
country search or a ‘water’ search
Energy Regulators Regional Association – http://www.erranet.org/about/ .“ERRA is
a voluntary organization of independent energy regulatory bodies of the
Central/Eastern European and Newly Independent States region. The Association’s
main objective is to increase exchange of information and experience among its
members and to expand access to energy regulatory experience around the world.
ERRA has working relationships with energy regulators in the European Union and
the United States. Its members meet regularly to develop technical papers on tariff,
licensing, competition, trade and other energy issues”. The website includes a list of
members (for example organisations and individual contact names) which may
provide some useful links. Also has some specific information for Baltic and
Southeast Europe though mainly on Electricity.
European Bank for Reconstruction and Development (EBRD) –
http://www.ebrd.com/ “… uses the tools of investment to help build market
economies and democracies in 27 countries from central Europe to central Asia … It
provides project financing for banks, industries and businesses, both new ventures and
investments in existing companies. It also works with publicly owned companies, to
support privatisation, restructuring state-owned firms and improvement of municipal
services. The Bank uses its close relationship with governments in the region to
promote policies that will bolster the business environment.“ There’s no specific area
on this website but a search for ‘water + COUNTRY’ may be useful.
European Commission DG Environment –
http://europa.eu.int/comm/dgs/environment/index_en.htm. Obviously a key website
for us. Has useful search facility and includes a document on the benefits of
Environmental Acquis for the Candidate Countries in which part C is on Water
47
Directives (http://europa.eu.int/comm/environment/enlarg/pdf/benefit_c.pdf). Also is
the host of EURO STAT (http://europa.eu.int/comm/eurostat/), which includes
document with key data on candidate countries
(http://europa.eu.int/comm/eurostat/Public/datashop/printproduct/
EN?catalogue=Eurostat&product=1-13122001-EN-AP-EN&type=pdf ). And
section on water (http://europa.eu.int/comm/eurostat/Public/datashop/printproduct/
EN?catalogue=Eurostat&product=env-pb-wt-EN&mode=download)
European Environment Agency – http://www.eea.eu.int/ “The European
Environment Agency’s core task is to provide decision-makers with the information
needed for making sound and effective policies to protect the environment and
support sustainable development.” Includes section on Water
http://themes.eea.eu.int/Specific_media/water). Has useful definition section for web
page, which includes different terms used in different languages
(http://themes.eea.eu.int/Specific_media/water). Has 2 key reports (which include
some Accession States) on Water resources problems in Southern Europe (Topic
report No 15/1996) (http://reports.eea.eu.int/92-9167-056-1/en) and Water Stress in
Europe – can the challenge be met? New Year Message 1997
(http://reports.eea.eu.int/92-9167-025-1/en)
European Environmental Bureau (EEB) – http://www.eeb.org/ “The EEB is a
federation of 141 environmental citizens organisations based in all EU Member States
and most Accession countries, as well as a few neighbouring countries. They range
from local and national to European and international. The aim of the EEB is to
protect and improve the environment of Europe and to enable the citizens of Europe
to play their part in achieving that goal The EEB office in Brussels was established in
1974 to provide as a focal point for its members to monitor and respond to the
emerging EU environmental policy. It has an information service, it runs ten working
groups of EEB-members, it produces position papers on topics that are, or should be,
on the EU agenda and it represents the Membership in discussions with the
Commission, European Parliament and the Council. It closely coordinates EUoriented
activities with its Members on the National levels. Furthermore it is working
on an environmentally attractive enlargement of the EU as well as some pan-european
issues like the follow up of the Aarhus Convention.
European Federation for European Unions – http://www.epsu.org/ .“The European
Federation of Public Service Unions, EPSU, is a free and democratic federation of
independent trade union organisations for employees in public services in Europe … The
EPSU covers the various industries and different vocational categories within the public
sector with the exception of postal and telecommunications services, transport and
teachers.” They have a campaign called ‘Water in Public Hands’ (in Campaigns tab),
they have a list of affiliates (by country)
(http://www.epsu.org/affiliates/list/Listunions.cfm) and
Open Society Institutes – http://www.soros.org/. “The Soros foundations network
includes Soros foundations that operate in individual countries or regions; the Open
Society Institute (OSI) and its offices; OSI initiatives supporting the work of the
Soros foundations; and U.S. Programs, which are initiatives that operate in the United
States only. Our foundations and initiatives operate in more than 50 countries in
48
Central and Eastern Europe, the former Soviet Union, Africa, Asia, and the
Americas”. There’s no specific area but a search by country may be helpful.
Organisation for Economic Co-operation and Development (OECD) –
http://www.OECD.org An “international organisation helping governments tackle the
economic, social and governance challenges of a globalised economy”. The site
includes country profiles, statistics, working documents etc. It has a good search
facility which if you choose advanced search can be country specific, covering all
their documents or specific themes. In the statistic portal, for example, a search for
‘water’ brings up, for example, brings up documents on water pricing (industrial and
household).
Public Services Research Unit – http://www.psiru.org/index.asp .“The PSIRU was
set up in 1998 to carry out empirical research into privatisation, public services, and
globalisation … PSIRU’s research is based on the maintenance of an extensive
database of information on the economic, political, financial, social and technical
experience with privatisations of public services worldwide … The principal focus at
present is on the water, energy, waste management and healthcare”. Includes
information on multinationals (http://www.psiru.org/companyindex.asp), a reports
page which is rich in material (including report on ‘Water privatisation and
restructuring in Central and Eastern Europe, 2001 and Water partnerships- publicpublic
partnerships and ‘twinning’ in water and sanitation
(http://www.psiru.org/reportsindex.asp)
The Regional Environmental Center for Central and Eastern Europe –
http://www.rec.org “The Regional Environmental Center for Central and Eastern Europe
(REC) is a non-advocacy, not-for-profit organisation with a mission to assist in
solving environmental problems in Central and Eastern Europe (CEE). The Center
fulfils its mission through encouraging cooperation among non-governmental
organisations, governments and businesses, supporting the free exchange of
information and promoting public participation in environmental decision-making.”
Includes link to ‘Economic Instruments in the Water Sector’
(http://www.rec.org/REC/Programs/SofiaInitiatives/EcoInstruments/Water/Default.ht
ml)
Stockholm Environment Institute – http://www.sei.se/. Has a “Water Resources
Programme” (http://www.sei.se/research.html) which “ aims to support decisionmaking
and induce change towards sustainable water use by providing knowledge
that bridges science and policy-making … The Programme integrates multiple
disciplines in a systems-based and process-oriented approach that encourages
stakeholder participation”. Country search can bring up all sort of interesting data.
Tradepartners – http://www.tradepartners.gov.uk “Trade Partners UK works
alongside Invest UK within British Trade International whose role is to foster
business competitiveness by helping UK firms secure overseas sales and investments,
and by attracting high quality foreign direct investment.” Note this is UK government
website but that it enables searching ‘the market’ in other countries and provides a
country profile which includes useful things like the key newspapers, advertising
agencies, and contacts etc.
49
United Nations Economic Commission for Europe (UN ECE) –
http://www.unece.org. Has a specific section on water
(http://www.unece.org/env/water/) with ‘useful links’ and documents within that. The
water section is based “The Convention of the Protection and Use of Transboundary
Watercourses and International Lakes (Water Convention)” which “is intended to
strengthen national measures for the protection and ecologically sound management
of transboundary surface waters and groundwaters.” Also has ‘Environmental
Performance and Reviews Programme’ based on East European Countries
(http://www.unece.org/env/epr/). There is also the UN Collaborating Centre of
Energy and Environment worth a visit (http://www.uccee.org/) “UCCEE is a
collaborating centre of the United Nations Environment Programme (UNEP),
specialised on energy and environmental issues … The Centre supports UNEP in
pursuing its aim of incorporating environmental aspects into energy planning and
policy worldwide, with special emphasis on developing countries.”
World Bank – http://worldbank.org .Has information on water and privatisation and
provides a search mechanism, which you can do for a Country. It has a publication
section and search for ‘water’ brings up 50 sources. Section on water supply and
sanitation (http://www.worldbank.org/html/fpd/water) which has various reports and
in this area the reports (e.g. Water Research Markets) takes you to ‘Rapid Response
Papers’ (http://rru.worldbank.org/Resources.asp?results=true&stopicids=54. Also in
the water supply and sanitation area you can explore regional areas (e.g. Europe and
Central Asia: http://wbln0018.worldbank.org/eca/eca.nsf), Urban Water Supply and
Sanitation (http://www.worldbank.org/html/fpd/water/urban.html) and Rural
(http://www.worldbank.org/html/fpd/water/rural.html)
50
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Una respuesta

  1. Tiene muy buenos links para cosas europa

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