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Finding the best fit

 

With a goal of sustainability by 2021, Estonia is studying its public water supply and waste water services to find its most effective operations

Since Estonia’s re-independence in 1991, development and investment in the water sector has been mainly subsidy driven. In the 1990s, subsidies for water infrastructure were still small. In addition, the level of infrastructure depreciation and national legislation did not encourage any largescale investment in the sector. However, the need for investment increased significantly over the following decade due to tightening legislation (transposition of directives following accession to the EU) and ageing infrastructure. These growing investment needs meant that the government and the EU were involved in financing the projects.

The Estonian water sector received its largest investments during the last EU funding programming period and before the EU accession (2004-13), when over €700m in subsidies was allocated from the EU Cohesion Fund and €190m in subsidies from the national Environmental Programme managing nationally collected environmental charges.

For the current EU funding programming period (2014-20), the Cohesion Fund is allocating significantly smaller funds, less than €150m, to support the water sector. The subsidies from the environmental programme also keep decreasing substantially. We must consider the fact that such amounts of subsidies from the EU and the government will end, starting from 2021.

Estonia’s population is 1.3 million; of this, 1.1 million inhabitants are connected to the public water supply and sewage system. Approximately 200 companies provide water and sewage services. The two largest of these companies, Tallinna Vesi and Tartu Veevärk, provide services to 540.000 inhabitants, around 42% of people connected to the public water and sewage system.

The majority of the 200 water companies provide their services within very small service areas. Companies are generally owned by the local municipality and until 2005, it was typical to have one water company operating in each municipality. After 2005, the Ministry of the Environment initiated the setting up of regional water companies. This resulted in five regional companies – each administrating between three and 20 municipality areas – being established.

The aim of setting up regional companies was to make the water sector more efficient and to better coordinate the EU subsidies-based investments. These regional companies were a prerequisite for receiving EU financing. The expansion of the existing, and set up of new, regional water companies continued after the government’s one-time initiative, but the number of small water companies still remains too high.

The main problem with small water companies is their lack of economic sustainability. The revenue they receive from tariffs is not enough to cover infrastructure investments. The required increase in tariffs would be so high that the customers could not afford it. Today, the water bill is 1.5% of household income on average. However, to pay for the necessary infrastructural investments, this would have to be closer to nearly 4% in smaller service areas.

Over the last decade, large investments were made into smaller areas so that the service quality and compliance with environmental requirements would not drop immediately. However, the risk of not meeting the service quality as well as the environmental requirements will significantly increase over the long term (10+ years). At the same time, there is already a certain number of small water companies (e.g. water cooperatives) who, in fact, do not meet the environmental requirements, nor ensure sufficient service quality.

A determining factor in the Estonian water sector is the administrative reform which merges municipalities. The merging municipalities are expected to consolidate the water companies they own. In some areas, water companies are implementing administrative reform. Large companies have taken over water services in rural municipalities. When this happens, there is no significant impact on water price. Though the water price in smaller service areas is usually higher than in larger service areas, the overall price increase is compensated by optimised labour costs and equipment. At the same time, some mergers have indicated that the larger water companies take little interest in smaller ones whose service quality is below par because operating in those areas is economically unreasonable and a price increase would be inevitable. This price increase would have to be passed on to consumers.

Considering the fact that starting from 2021, the Estonian water sector should be sustainable without subsidies from the EU, the Estonian Waterworks Association is carrying out a study that will identify the water sector models and company sizes that would best suit the country. The models being considered must ensure affordable prices for providing sustainable services in the long term and provide waste water collections in areas with a low population equivalent.

The study compares various existing types of water operators. This kind of comparison gives us a good idea of what could be the most efficient model. It is obvious that companies operating only in the waste water collecting areas with over 10.000 people equivalent (pe) are more sustainable than companies operating in the waste water collecting areas with under 2.000 pe. Most probably, the optimal size for a regional water company would be one that, in the event of merging smaller waste water collecting areas with larger service areas, would not increase the price level in larger service areas by more than 10-15%.

The study also analyses various forms of water operators. To measure the alternatives, three or four of the most common types of water operators in Europe are assessed from the perspective of the national legislation and economic situation. Today, the most common type of water operator in Estonia is a unit owned by the local municipality, which also owns the infrastructure and provides both drinking and waste water services. So the study, for example, considers alternatives where the owner of the infrastructure is an exclusive legal entity, owned by the local municipality. The municipality organises calls to find an operator to provide services for an agreed period of time. This kind of approach creates competition between water companies and abolishes their monopoly position.

The study also considers the alternative common in Nordic countries where water services are provided by the local municipality without creating a business unit for this purpose.

Once the water operator model and water company size that would best suit Estonia have been identified, respective motions to amendment will be submitted to the writer of a legislative drafting, in order to ensure incentives and legal bases for implementing the model.

Even though the study under preparation does not impose an obligation on water companies to reorganise their operations or merge, it will provide analysed results for setting up the most optimal water company and will serve as a strategy paper for developing sustainable water plants.

By Indrek Tamberg, Member of the Management Board, Keskkonnalahendused OÜ on behalf of the Estonian Waterworks Association

Read more: Water Matters

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