EurEau

Road to reform

 

Improvements in the Bulgarian water supply and sanitation sector are underway. However, more investment and further EU assistance is still required

 

The reform of the Bulgarian water supply and sanitation (WSS) sector has been an issue since the mid-1990s. The reform itself was partially prepared by different governments over the years but for one reason or another, aside from separate timid steps, it did not start properly.

One of these steps included establishing a water regulator as part of the energy regulatory body, which failed to bring results. The real changes were set in motion by the World Bank when they proposed a strategy for the development and management of water supply and sanitation in Bulgaria, approved in 2014. We expect this will lead to a financially, technically and environmentally sustainable WSS sector that provides high quality WSS services at tariffs affordable to customers.

Current condition of the WSS sector

There are 51 WSS operators in Bulgaria. These hold, maintain and operate the WSS systems and facilities and provide WSS services to customers against payment. Fourteen operators are 100% state owned, 15 have mixed municipal and state ownership, 21 are 100% municipally owned and one operator, Sofiyska Voda JSC, is a public-private partnership with predominantly private ownership.

A more precise report shows that a total of 64 companies are registered as WSS operators, including some small private companies that provide services to a limited number of customers and/or hold WSS facilities.

According to a report by the Energy and Water Regulatory Commission (the Bulgarian regulator), WSS operators belong to four groups: big ones (eight), which service populations exceeding 220.000 people and whose annual revenues exceed €10m; average-sized ones (20), with 75.000 people serviced and annual revenues of between €2.5m-€10m; small ones (14), which service a population between 18.000-75.000 people and have annual revenues between €200.000-€2.5m; and micro ones (9), which service fewer than 18.000 residents.

As a whole, Bulgaria’s WSS sector is inefficient when compared to its European peers: water losses are higher than in other EU countries, staff productivity is lower and the frequency of failure is among the highest. According to data from the National Statistical Institute, water losses, both technical and commercial, exceed 60% and for some WSS operators, they are even up to 80%.

Capital investments in the sector are below the level needed to maintain the existing infrastructure. EU grants are the main source of funding and they are predominantly focused on constructing sewage and waste water treatment plants and not so much on WSS network maintenance. The length of the supply network is over 70.000km, which supplies water to 99% of the population.

In the meantime, the average age of water supply networks exceeds 35 years. Calculations show that in order to maintain them in their current condition, €332m will be needed per year. In other words, over €1.5bn is needed just for the maintenance of water supply networks over a five year period. It can be concluded that the investment in network maintenance over the last few years was grossly insufficient.

Apart from maintenance, investment is needed to modernise water supply systems and improve their efficiency, as well as to construct drainage and waste water treatment systems in order to comply with the Urban Waste Water Treatment Directive. Bulgaria has unfulfilled commitments as per the Treaty for Accession to the European Union, namely regarding the provision of waste water drainage and treatment for agglomerations of over 10.000 equivalent residents by the end of 2010 and for agglomerations of between 2.000 and 10.000 equivalent residents by the end of 2014. The financial resources needed to align sewage and waste water treatment facilities to the EU requirements are estimated at €3.6bn.

 

Reforms, objectives and principles

The sector’s situation clearly justifies the need for a reliable financial plan for the short, mid and long term. The implementation of such a plan could only be ensured by carrying out deep reforms – a combination of measures and practices – which would result in specific amendments to the legislative and institutional framework and would enable the WWS operators to be direct beneficiaries of EU grants.

These would also improve the WSS operator’s possibilities for co-funding capital investment, including investment in WSS infrastructure, which is a public state and public municipal property. Review of the current dividend policy is needed in order to allow profit to remain in the companies and be used for re-investing, increased tariff revenues and developing the regulator’s capacity.

The reform’s leading principles are:

  • Financial sustainability: providing sufficient and timely resources for the funding of the sector’s investment plan. ~ Efficiency: optimising policies and practices to achieve compliance and the cost-effective meeting of objectives.
  • Affordability: resolving the issues related to tariff affordability through suitable social policies.
  • Predictability: WSS operators and the water regulator working together to achieve the sector’s main objectives.
  • Transparency: publishing data about the condition of the WSS sector and a comparative analysis of the WSS operators’ activity in order to encourage sustainable WSS practices.
  • Competitiveness and economies of scale: consolidation of, and introducing benchmarking of, WSS operators to enhance efficiency and service quality.

 

Main themes of the reform

Lists of assets

The information about existing assets was incomplete when the reform commenced and remains so today. Most of the assets were constructed by the WSS operators and are included in their accounting balance sheets, but there are also assets constructed by the municipalities, the state or third parties, some of which have never been registered. Operators do not keep complete records on the changes made on assets as a result of an emergency or scheduled capital investment activities.

The reform envisages preparing complete lists of all known assets and transforming them into public property – municipal or state, depending on each asset’s scope of application. Thus, assets, for instance, water mains, which serves more than one municipality, become state assets and all others are public municipal assets. It is supposed that the process of asset inventory, in order to transfer them to their new owners, will, in itself, improve the WSS operators’ assets databases.

 

New sector contractual framework: Municipal WSS Association (MWSSA) – WSS operators

Once they own all WSS assets, the municipalities should determine who will manage their day-to-day operation and maintenance. To avoid system disruptions, the reform envisages that the municipalities within a territory on which currently existing operators perform their activities (so-called designated territory) should be united in a MWSSA. The state is also involved, holding 33% of the MWSSA. The associations are to take decisions on working with the currently existing operators, by means of direct negotiation, 15-year contracts for the maintenance and operation of WSS systems and facilities. These contracts set the rights and obligations of the WSS operators. Their obligations include the implementation of an investment programme of a given amount and meeting specific key performance indicator levels.

 

Attracting investment

It is believed that operators which service bigger populations are more viable, more effective and more capable of attracting loan capital for investments.

Therefore, the reform plans for the MWSSA to comprise all municipalities within an administrative region in Bulgaria (a total of 28), and thus each region should have one MWSSA and one WSS operator.

 

Failure of the business plan

State water regulations were introduced in 2007. The business plans approved by the Energy and Water Regulatory Commission were impossible to carry out due to the absolute discrepancy between the WSS tariffs and the objectives set.

The business planning process envisaged the preparation and approval of a five year business plan with a specific investment programme and indicative objectives, followed by an independent process of tariff approval based on models that failed to take into consideration the funds needed to fulfil investment intentions.

The reform envisages a change to the legislation so as to ensure a direct link between investments and the WSS operators’ revenues, by guaranteeing a social affordability threshold for prices. An important new element of the tariff is the recognised admissible depreciation of public assets used by the operator. These measures should be combined with enhancing the regulator’s capacity and resource security.

 

Prioritising needs

Individual investments without clearly defined priorities and a systematic approach do not result in the improvements expected. In view of the scarce resources and big needs of the sector, it is essential to determine the most critical needs and focus investments on them.

Therefore, the reform envisages starting with the preparation of regional master plans and their subsequent development into regional feasibility studies.

 

Implementation and difficulties encountered

The reform, including the thematic areas listed previously and their accompanying measures, was set as a preceding condition for the provision of funds under the Operational Programme Environment 2014–2020. This poses a risk for our country of failing to receive the funds approved under this programme, but on the other hand, it is a strong driver for the new government to bring the reforms to an end.

Many of the measures planned should have been completed by the end of 2016, so at the time of writing, it is not possible to make a confident summary of the actual implementation and the difficulties encountered.

 

Ownership of WSS assets

With the joint efforts of the state, the municipalities and the WSS operators, the lists of known WSS assets were prepared and submitted to the Ministry of Regional Development and Public Works, to be registered as public ones.

Once again it was confirmed that there are many operational assets for which no documentation has been provided, which makes them assets of an unclear status, and even illegal ones.

The lack of a solution to the specific method of taking assets off the WSS operators’ balance sheets even now makes them face the risk of an accounting loss or excess profit. Some WSS operators have taken public assets off their balance sheets and others have not, waiting for more specific instructions.

Making all WSS assets public is regarded by many stakeholders as the first step towards sector concessions, which is not perceived well by all, and it may lead to issues preventing EU funding.

 

New sector contractual framework

Contracts between the MWSSA and the WSS operators were signed everywhere. However, they pose two main questions for WSS operators: how realistic and feasible are they?, and how will the relations between the MWSSA and the regulator be governed in case of discrepancies between the contract and the five year business plans?

The contracts signed were prepared and proposed by the main owner of WSS assets, the MRDPW, without engaging in detailed discussions with the operators and the regulator. They follow a universal logic and are based on the expert assessment of the respective WSS operator’s investment capabilities. As a whole, they should be the basis for the five year business plans but in some cases the priorities set by the regulator do not correspond to the contractual ones.

This double regulation – contractual and centralised – may prove to be an impediment for the companies’ efficient operational and investment activity.

 

Consolidation of WSS operators

The WSS sector consolidation proved to be the biggest challenge for the reform. Most municipalities which own WSS operators refused to transfer their WSS activity to the big WSS operators despite the direct threat that in this case the entire administrative region to which they belong will not be funded under the Operational Programme Environment 2014-2020.

In some cases, where companies performed well, this was expected, but in the case of others it was surprising. Reasons may include an incorrect communication strategy, a lack of clarity about the future of the companies affected and their staff, or political and other motivations.

 

Reform at the regulators

The legislation was amended with operational price models and procedures for preparing and approving the five year business plans. This, of course, needs to be proven by their practical application. There are fears that because of the short deadlines for preparation and review of business plans, these documents will not be the best possible. During preparation, substantial changes occur in the operator’s expenses and the procedure provides no possibilities for accommodating them. The measures and investment envisaged lead to an increase of WSS service tariffs (30% on average) as early as the first year, which will be hard for customers to accept. For some WSS operators, the tariffs exceed the social affordability threshold.

The regulator’s expert capacity is improving, but the available financial resources are insufficient for a detailed review of all WSS operators’ five year business plans.

 

A regional approach to investment planning

Regional master plans were prepared but based on incomplete and not fully verified information. They demonstrated the need for investment whose amount exceeded expectations.

Preparation of feasibility studies for 16 administrative regions with single WSS operators is under way. This will delay the implementation of investments until after 2018.

 

 

Conclusion

The Bulgarian WSS sector made a decisive move to implement a reform that will ensure greater investment, its efficient implementation and a higher quality of the services provided. The reform is being applied based on a precisely prepared, widely debated and officially approved strategic framework.

The difficulties encountered in the reform’s implementation are mainly related to the lack of preliminary analysis of the measures accompanying the reaching of strategic objectives, which is used as grounds among critical circles to raise issues regarding review of some of the reform’s major principles.

Urgent financial needs and the reform’s link to EU funding are key engines for its successful completion.

 

By Ivan Ivanov, President, Bulgarian Water Association

Read more: Water Matters

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