vonWeizsackeretal_5_2005

vonWeizsackeretal_5_2005 - WATER 31 creation of the water...

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Unformatted text preview: WATER 31 creation of the water authorities {197%1989). Finally, the issue of industry concentration arises, where, ten years after privatization, five of the ten water companies, including Thames Water, had been taken over by transnational corporations, a process which is set to continue, if not to aCCelerate. Thames Water’s experience also raises some interesting points about the relationship between privatized utilities, public agencies and consumers. OFWAT requires water companies to encourage householders LO change from tin-metered supply, charged on the basis of property value (the norm in England), to meteer supply Thames Water believes this will help to cut consumption, in general, but not at times ofshortage. The reason.> When a water company puts out an appeal to reduce consumption during a drought, unrmetcrecl customers genwmlly do their bit; but a lot of metered customers take the attitude of ‘I’m paying for it; I’ll keep buying as much as 1 want.’ Turning water into a commodity bought by the litre makes it like any market commodity, and breaks any sense of social obligation to use an essential resource responsibly: Raising the price of nonessential water use high enough in times of shortage might curb consumption as effectively as the sense of social responsibility does now a and arguably more fairly Such smart realetirne variable metering is technically feasible. But current regulatory rules require water companies not to discriminate between customers, and this means prices cannot vary too much between metered and tin—metered customers. During the late 19905, Thames Water carried out research which showed that the majority of their customers would be happy to pay a bit more on their water bills in order to pay for environmental improvements. OFWAT vetoed this on the grounds that the consumer interest, which it represented, was in keeping prices down. If true, this suggests that the regulator is enforcing a narrower, more selfish and shortiterm notion of the consumer interest than consumers themselves wish (it. tellng them that they cannot think as citizens when they are being consumers). This is one example of a more general complaint that water companies are caught between the Drinking Water Inspectorate wanting to push purity ever upward regardless of diminishing returns or any sense ofproportion over risk, the Environment Agency wanting to safeguard aquifers, again regardless of any broader consequences, and OFWAT always trying to push prices down, none of them with any remit to take account of the others’ aims. WATER PRIVATIZATION IN TANZANIA: MIXED RESULTS 122mm Saki/flint; In order to improve the efficiency of water delivery in impoverished countries, the World Bank and the International Monetary Fund (TMF) push gqvet‘nments to enter publicfiptivatc partnerships, Often involving privatization. The record ofsuch privatization seems to be mixed. Certainly, 32 NATURAI. RESOURCES AND RELATED INDUSTRIES state-owned water supplies are often ineffective; but they have a built~in tendency to provide cheap or free water to the urban poor. Privatization, on the other hand, tends to exclude the poor from an affordable clean water supply (Bayljss, 2001}. Safe water supplies could Save the lives of many children in Africa. This is one of the reasons why water privatization is a key issue in African countries. Proponents believe it brings efficiency, opponents that it hurts the poor. In the ease of Tanzania, arguments exist for both positions. Water privatization in Dar es Salaam The water supply and sanitation infrastructure of Tanzania’s largest City, Dar es Salaam, built in the 1970s, outdated and deteriorating rapidly by 2.003, was causing estimated water losses of more than 30 per cent through leakage and illegal tapping The Dar es Salaam Water and Sewerage Authority (DAWASA) has been deseribed as suffering ‘from poor billing and revenue collection and inadequate water sources, both in terms of quality and quantity’ (Alcande, 2002). In need of money, the Tanzanian government agreed, in the context of debt relief, to the IMF request to privatize the DAWASA as part of a process of privatizing over 300 state-owned enterprises. However, the government had first to invest. US$145 million to upgrade DAWASA, in order to sell off the company. To finance the cost of upgrading, the government needed credit. On 31 May 2002, the African Development Bank (ADB) announced an agreement with fire Tanzanian government for a low of approximately US$4L7 million, partially to finance the Dar es Salaam water supply and sanitation project. The remaining US$98 million was borrowed from the World Batik, the European Investment Bank and Agence Frangaise de Développement. In May 2003, the World Bank agreed to borrow an additional US$61.50 million for the restructuring (Afl'Ol, 2003). According to the ADB, the project aims at improving the ‘accessibility, quality, reliability and affordability” of the water services to the population, contributing ‘to poverty reduction and improving the economic and social well-being of the people of Tanzania by providing them with a better access to clean water, thereby reducing the. incidence of waterborne disc Ises among the vulnerable groups‘. The handling of the problem, however, raised suspicions that the project’s aim was not poverty reduction, but rather finding a buyer for DAWASA by significantly increasing its value through the government’s investment in infrastructure and customer billing, As a result, the water service in Dar es Salaam may improve, but at considerable cost for customers and the city, increasing national debt rather than reducing it. The company expects high profits while the state of Tanzania carries the financial risk. Kiliwuter: A rural success story? Kiliwater, the largest privatized water company in Tanzania, provided a different experience. It was established in 1995 with financial assistance and support from the Gesellschaft fiir Technisehe Zusammenarbeit (GT2), 3 wars a 3 3 German governmentzowned corporation for international cooperation. By 2003, Kiliwater was serving approximately 335,000 people (62,000 households), mt)de farmers, in the eastern and north-eastern part of Mount Kilimanjaro. About half of the distributed water is locally collected; the other half is transported to the Amboni Reservoir through the 14.6knrlong East Kilimaniaro Trunk Main (EKTM-I), built between 1964 and 1969. The distribution network, about 7001mm in length, built between 1960 and 1978. was expanded in 1993 by about lOOlcm with GTZ support. ’l'here are approximately 7300 water supply stations, 975 of them public and more than 2,000 equipped with water meters. In the more densely populated areas, 400m became the maximum distance to a filling station. Kiliwater tripled the number of water connections in households, partially repaired the rusted governmental pipe network which lost millions of litres of water every month, and installed hundreds of water meters. During a normal drought, about 20,300 cubic metres of Water, or 61 litres per capita per clay (l/cd), should have been available for the population in the service area. However, supply losses reached at least 35 per cent, making only 39 l/cd available (KfW; 2002). By 2003, there was an increasing need to repair and modernize the old EKTMI, particularly the pipes of a diameter too small to transport the needed water. In addition, some parts of die region could not be reached by the EKTM—I. Even though the project provider was able to continuously reduce its deficit, only 70 per cent of the operational costs could be covered from revenue. On the one hand, the provider could not supply sufficient water in regions with traditional water shortage and high willingness to pay; on the other hand, in 2000 of the 6500 connected households payment did not depend upon actual supply but was fixed. in this case, customers consuming a lot (notably by diverting drinking water for irrigation) paid only :1 little. The installation of water meters widi lockable meter chambers could end this practice: but would surely meet with resistance. People do not easily accept obligations to pay for what they see as a public or common good provided free by nature. lyioreover1 poorer ones are unable to pay their water bills. But without a price tag1 people (in any part of the world) have little inclination to conserve water as a scarce TCSUUI'CC. In order to reduce the conflict potential, Kiliwater implemented a policy of support for the participation of communities in decision-making, particularly selected water user groups who were most urgently in need of improved water services and favoured consumption metering. A system was introduced of water committees, where arbitrators from the villages at Kilimanjaro would decide in public meetings who should receive a particular amount of water for free and who should pay By 20031 three experimental communities had been selected for testing this decentralization of responsibilities from the water company to the water users. The ‘privatization‘ of Kiliwatcr cannot be seen as an outright privatization because much of the funds for infrastructure came from foreign aid, which straws, 4,7. 14 meningitwa 34 KATLIRAL RESDUKCI'A AND RELATED lNDL‘STRIES made it easier to include public goals in the company‘s mission, such as guaranteed access to drinking water at World Health Organization (WHO) quality standards, and improved service at least 20 hours a day throughout the year at very affordable prices. The participatory approach taken at Kiliwater seems to have helped to increase a sense of common responsibility. it also helped to find solutions in ensuring water supply for the poor, a matter of central importance in African water privatization. As stated by David Smith, water expert of the United Nations Environment Programme (UNEP) (Sin-a, 2003), if poverty inclusion fails, then water privatization in Africa fails. BUDAPEST SEWAGE WORKS: PARTIAL PRIVATIZATION OF A CENTRAL EUROPEAN UTILITY Alexanderjums and Todd Scbmk The economics of Central and Eastern Europe toolt a shift towards a more liberal, less centrally planned paradigm during the early 19903. This shift was accompanied by a wave of privatization. Industries and assets, most of which were previously state owned and run, were transferred to the private sector in the belief that private markets would be more competitive, bringing supply and demand closer to equilibrium, and thus more eflicient. Privatization also coincided with a reduction of the role of government in the lives of the population, and thus became equated with freedom. Especially when multinational firms were involved, privatization was seen, too, as a way of attracting capital and raising funds for government debt repayment or social services. In this climate, countries felt compelled to privatize not only manufacturing and non-essential services, but even sectors that were traditionally publicly owned in Western Europe and/or North America, such as education utilities and healthcarc.” Municipal water and sewer works Were no exception. Budapest sewage works Budapest‘s municipal sewer works (Frivarosi Csatornizasi Mfivek Részve'nytarsasag, or FCSM) was partially privatized in November 1997 under a deal giving 25 per cent plus one share to a consortium composed of two multinational corporations (MNCs), Compagnie Generale des Eaux and Berliner Wasser Betriebe.“ A special purpose corporation (SPC), with an added investment of €227 million by the European Bank for Reconstruction and Development (EBRD'), was formed at the end of 1998 (EBRD, 1999). As of 2003, the majority stake of the company remained in the hands of the city of Budapest.12 The EBRD’S reason for supporting this privatization was the belief that private firms experienced in managing utilities could improve the efficiency of ii i WATER 35 operations and reduce operating costs (EBRD, 1999). While the municipality remained the majority owner, management control was handed to the private operators and their remuneration linked to efficiency gains made. Partial privatization An interesting trait of this privatization arrangement is that only a 25 per cent stake of the company was transferred to private hands, making it a ‘partial privatization’. This afforded the municipality some control, potentially giving them power to protect the public interest. However, this may have been mitigated by the privatization agreement, which gives management rights to the private partners, thus limiting the authority of the municipality. The quote ofMiklos Snalka in ‘Sewerage priees’ indicates the frustration that this limiting of authority created. The arrangements giving management rights to the foreign partners expire after 25 years. Two disadvantages of partial privatization are that it reduces the income that the government makes from the sale and diminishes the willingness of the minority interests to make large capital investments in the operation. Thesa are two of the key reasons for privatizing in the first place. Sewerage prices According to a Public Services International Research Unit study, sewerage prices in Budapest in 1998, a year after privatization, were 350 per cent more than in 1994, causing concern over affordability (Hall and Lobina, 1999, p8). The increased rates were justified as necessary by the newly privatized FCSM to fund much—needed investment. However, both the city council and CitiZEI'IS of Budapest were dismayed by the increase, believing it unjustified considering the lack of substantial physical improvements to the system. Miklos Szalka, vice-president of the municipal maintenance committee at the time, was quoted in the Nepszabadmg newspaper on 16 December 1998: The sewerage rmnpnny nnrprrrpnred a: 25v30 per cent price increase, and the main argument for this i: the cart; (If development. .. Unfiirtnnately, it is mm? clear that tides: powetfialfawt'gn rampnnirr do not want to male: investments using their own capital 7 on the contrary, they mice its much money as passable fiom the country, including their manngemenrfrer (Hall and Lobina, 1999, p7). It should be noted that a Foundation for Customers in Budapest and for People with Outstanding Charges (HALOZAT), created through a decision of the General Assembly of Budapest in 2001, served to mitigate the effects of higher rates on consumers unable to pay by providing assistance with outstanding charges. However, this is financed from public funds. Erom an environmental point ofview. higher rates are not necessarily negative. More accurate pricing is an effective way of promoting efficiency, as consumers tend to be more conservative with their water usage when it is more expensive. 36 NATURAL RBSOURCRS AND RELATED 1NDUSTR1FS Interestingly, this has not been the case in Budapest. The amount of sewage collected remained approximately the same throughout this time (FCSM, 2003). Quality of service According to its annual report, the basic tasks of FCSM are “to collect and treat sewage and rainwater generated in the area of Budapest and to discharge [this treated waste] into the receptor [the Danube]’ (FCSM, 2003, p11). The quality of its collection and processing systems since privatization therefore becomes the best measure of improvement by the company The most important factor in terms of quality is the impact of the operation on the environmcnt. According to the EBRD, an independent environmental ‘due diligence3 audit carried out in 1997, prior to the partial privatization, found several violations of Hungarian and European Union (EU) environmental standards. The Environmental Action Plan developed by FCSM as part of the privatization pwcess mandated a léiyear timeline for bringing the operation into full compliance. While 16 years may sound rather un-ambitious, the large scale of the sewage works, and therefore the work entailed, must be recognized. According to the ERBD, the work required was given a price tag of around €1 billion. The improvements, mandated as part of the privatization agreement, were designed to greatly increase the system‘s biological treatment capacity. While Budapest’s sewer network, and therefore capacity for biological treatment, provides broader coverage than other Hungarian municipalities, in 1998, 6 per cent of those supplied with municipal water were not connected to the wastewater system, representing a gap in collection (Somlyody and Shanahan, 1998, p13). The length of the Budapest sewer network, however, increased substantially from 4413mm in 1998, immediately following privatization, to 47991tm in 2002 (see Figure 7). VVasrewatcr treatment by 2003, however, remained highly inadequate. In 2002, only 22- per cent of the sewage and rainwater collected was treated biologically, and a further 9 per cent was. screened for nutrients. Despite major improvements to their North-Pest Biological Treatment Facility in 2002, the total biological treatment capacity of FCSM was still only 280,000 cubic metres per day by the end of the year, and significantly less than the daily average of Sewage and rainwater collected in 2002, which was 660,000 cubic metres (FCSM, 2003, p12). Furthermore, it must be considered that the load on the system is much higher during rainy periods and lower in dry ones. As Figure 7 shows, little improvement was made in this area following privatization, and by 2003 the majority of wastewater was still released back into the environment with little or no processing An EBRD Operation Performance Evaluation Review (OPER), conducted in 2003, also seems to have reached the conclusion that service improvements have been minimal. The OPER summary states that ‘the range and scope of services has not been markedly increased, at least from a consumer’s WAT E R 37 Perspective, since the wastewater coverage area remained basically the same “with” and “without” the project’ (EBRD, 2003, p2). OE?ER rated environmental performance as only ‘satisfactory’ and attributed no environmental changes to the bank’s investment. Management Both Vivendi and Berlinwasset, as the MNCs were remarried, have a great deal of experience in managing utilities. As mentioned previously, the primary reason given for instigating the partial privatization was to bring their expertise and efficiency and quality standards into What was seen as an inefficient and under—performing state enterprise. While the management’s concern for the physical state of the sewage system or fOr the utilith customers has been questioned, it has, at ieast on paper, made Changes in management practices. For example, both ISO 9001 and ISO 14001 quality management standards were introduced in 2001 (EC-SM, 2003, p3). It is interesting to note that the only component rated as ‘excellenfi in the EBRD’s OPER, which was introduced previously, was FCSM’s corporate performance ‘in View of dividend payments and current ratios over recent years’ (EBRD, 2003, p2). This would indicate that the MNCS have turned FCSM into a healthier corporation; what is uncertain is whether on not this improvement is benefiting its customers both now and in the future. Investment Investment in improvements to Budapest’s sewage works has come from various sources. The most significant project for the improvement of FCSM’s infrastructure, since privatization, was signed in 1999 and is set to run until 2006. It was created with the aim of significantly improving the environmental performance of the operation by expanding the capacity of the North Budapest and South Pest Wastewater Treatment Plants, and to establish the North Buda Wastewater and Rainwater Pumping and Primary Collection System. Funding included grants from the Hungarian government (US$10 million), wastewarer revenues from the city of Budapest (US$214 million), an EU Phare grant (US$186 million) and a World Bank loan (US$295 million) (World Bank, 1999). The city of Budapest, the sewage works’ largest shareholder, has invested a great deal. The FCSM’s business report for 2002 states in its introduction that: “These [2002] projects have been completed mostly by capital investment provided by the Municipality of Budapest“ (FCSM, 2003, p3). In 2002, the l‘tmnicipality provided some 1160 million Hungarian torints (154,640,000) for Slgnificant improvements to the Northwl’est Wastewater Treatment Plant alone. What is interesting is the relatively small investment provided by the two multinational corporations. Although these corporations exercise control in management, and are remunerated for this, their capital investments have been limited to their initial investments in the SPC. The addition of the EBRD to 38 NATURAL RESOURCES AND RELATED INDUS‘J'RHSS Prepanian ofdischarged water — Length of the sewage network in km mo — ~ 5mm 90 l— — 49cm 80 7 a 4390 70 i— 60 _ ' I 7 4700 5|) — — 45m 4“ 1" —l 4500 so 7 no 20 l— 7 M m _ — 4am: . 4 ‘-—J— 4200 1993 1999 2000 20m 2002 Figure 7 Length of Budapest sewage network and prnpnrtion of sewage treated. Despite increased length oftiua Budapest sewage nstwark, sewage treatment percentages remained at a dismal 30 per cent. Source: data from FESM {2003]. the special purpose company in 1998 was seen by many as a way for the MNCs to reduce their investment costs even further, effectively refinancing their involvement at rates lower than the market would provide. In other words, the EBRD investment improved the financial situation of the MNCs rather than providing capital to PCSM.l3 The capital investments made in ECSM since privatization have come either from the municipality, which previously fully owned the utility, or other sources that would also provide loans or grants to fully private enterprises, such as the Hungarian government, the EU and the World Bank. Given this, it would appear that an increase in investments or grants has not been due to privatization. Conclusion Few would argue that reforms were not needed throughout the utilities markets onentral and Eastern Europe. What is less eenain is that privatization is a necessary impetus for this to happen. While FCSM improved sewerage operations after privatization, adding to the sewage network and treatment capacity, it greatly increased the rates it Charged consumers and paid a significant sum to the MNCs involved in the form of management fees. Furthermore, much of its improvements resulted from grants and loans from agencies and governments, not because the operation was privatized. WAT E R 39 other municipalities have chosen alternative paths. As a public waterworks company, Debreeen expanded its pipe network at less cost than projected by 3 Previously proposed private partner (Hall and Lobina, 1999, p9). It was also found to be more responsive to local needs and interests. The lesson, overall, seems to be that privatization is not necessarily key to effective management and investment. MANAGEMENT SUCCESS AT ROSTOCK, GERMAN 1* Ernst Ulrich van Weiznicker Rostoclt was the major seaport of the former Democratic Republic of Germany (GDR), and historically a proud member of the Hansearie League of North European trading cities. Around 200,000 inhabitants live in the city of ROSIOClC, some 60,000 in its neighbourhood. During GDR times, every conceivable public service was in state hands. Alas, services were also run down and technically un-modern, to put it mildly: After German unification, the municipal authorities of greater Rostoclt decided to outsource the regional waterworks and leased it to Eurawasser, a joint venture of Thyssen Handels Union (holding 51 per cent, but chiefly as inactive shareholders) and Lyonnaise des Eaux, now Ondeo, Paris, holding 49 per cent. Eurawasser Gmb'H (Ltd), in turn, is split into a number of local companies, including Eurawasser Rostock, which control the lOcal management of wastewarer treatment and the distribution of water to customers. Eurawasser Rostock invested the impressive sum of €225 million after 1993, mostly to comply with German and European standards, including the European Union {EU} Drinking Water Directive. Some €55 million Went into upgrading water to drinking water standards and its distribution, another €170 million into a near-complete restoration and modernization of the wastewater collection and treatment system. Both systems e water supplies and wastewater treatment - are seen as top quality by world standards. Eurawasser shouldered the risks of guaranteeing supply quantities and quality and the entire costs of capital and daily operation, with prices guaranteed for 25 years except for inflation adjustment. Furthermore, after 25 years, the leasing contract can be renewed; but the municipalities have the fight to return to self~management after that period. The contract therefore also requires Eurawasser to maintain the value of the capital stock by building up reserves equivalent to capital depreciation. During the leasing period, the local authorities of Rostock and its neighbours retain the right to control, monitor performance and instruct the private operator concerning measures resulting from legal changes. All fiompany measures regarding prices, investments and other changes have to be licensed anew. A board consisting of equal numbers of private and public representatives oversees the compliance of the contract. 4(} NATURAL RESOURCLS AND RELATED lNINJSTRIES The Rostock water leasing is broadly acknowledged as a success story by the public and by the media. Even the PDS {Partei des Demokratischen Sozialismus), the successor to the Communist party, which is governing the respective Lama? (region) of MecklenburgAVorpommern in coalition with the SPD (Sozialdemokratische Partci Deutschlands), proudly boasts of the quality of the water management system in the largest and economically most dynamic city of the region. This success is built on two pillars: the world class water management of the private operator, Ondeo, and the maintenance ofa decisive position of the public authorities in ensuring the public good of highrqualiqr drinking water. To be clear about terminology, the Rostock success story is not about private ownership but about the private management of the water and wastewater service. ...
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