August 8, 2017
There is a human right to water and sanitation, so the balance between availability and affordability is fundamental to the water service process
The organisation and economic framework of the water sector in Europe is very diverse and reflects the subsidiarity principle which EurEau supports. In all European countries, the economic aspects of the supply of both drinking and waste water services have always been interlinked, but since 2000 the Cost Recovery Principle and its implementation have been at the very top of the agenda.
EurEau’s Committee on Economic and Legal Affairs focuses on the costs and governance of drinking and waste water. It is chaired by Carl-Emil Larsen, with Susanne Vansgaard as Committee Coordinator. The committee is supported by two working groups and their chairs: Regulation and Governance (Per Seeliger, ErftVerband, Germany); and Economics (David Berman, FP2E, France). The 60 members in the committee encompass professionals such as lawyers, directors of utilities/ operators and advisers.
The Committee’s main working topics are water pricing, managing long term assets, increasing the public understanding of the water sector and the realisation of the right to water and sanitation.
We work hard to create awareness and visibility of our views in regard to both cost recovery and affordability. This contributes to the work that needs to be done in cooperation with the service operators, members of EurEau and the authorities. In EurEau, we are conscious that there is still much to be done in creating awareness and visibility.
Economic aspects in the water sector
Economic aspects of the drinking water and waste water services have always been interlinked. Article 9 of the EU Water Framework Directive (WFD) demands that EU Member States shall take account of the principle of cost recovery in regard to drinking and waste water services. Implementing this directive resulted in comprehensive discussions, which are still ongoing. The European Commission is to review this ambitious directive.
The human right to water and sanitation as formulated by the UN means that the service must be available, accessible, affordable, acceptable and safe. This message is also important for the Right2Water campaign from 2014, which was signed by almost 1.9 million EU citizens.
In general, national authorities and economic regulators have increased pressure on water operators to be more efficient. This means that service providers’ performance and water tariffs are on the national and local agendas. At the same time, there is a trend towards decreasing water consumption per capita over time – an important fact, particularly when we take into account that most of a water operator’s cost component is represented by fixed costs (assets), ranging from 60-80% of total financial outlay.
In many Members States, there is a risk of reduced revenue from decreasing consumption, as reflected in water bills. This means that operators have less money to reinvest in their infrastructure. Furthermore, organisations such as the European Investment Bank and the European Commission, which have contributed to investment financing through loans and grants, are evaluating their programmes in relation to the water sector. This is an issue of special interest for Members States where the recovery of costs are not financed by consumers and national taxes.
Tariffs and affordability
One of the main areas we work on is the human right to water and sanitation. In order to strike a balance between availability and affordability, pricing policies and affordability mechanisms play a fundamental role. In countries where these mechanisms are needed, EurEau recommends using social policy measures targeting persons facing affordability problems.
Pricing is an important issue. An artificially low level of water prices would lead to the depletion of water resources and fail to secure investments in infrastructure maintenance, leaving a heavy burden of investment for future generations.
Keeping tariffs artificially low would generate a vicious cycle of underfunded services, inadequate investment and ageing infrastructure. The quality of water services would decrease and future users will not be able to enjoy the same level of quality at a similar degree of affordability.
This should be considered in the context of decreasing water consumption that entails a risk of reduced income for water service providers. It may constitute an identifiable risk to the sustainability of the European water services. So, in the view of EurEau, the focus of the political debate should be broad and refer to the sustainability of water services as required by EU directives and national legislation, leaving affordability considerations to be addressed by social policy instruments at national level.
Water tariffs and the Cost-Recovery Principle
Setting water tariffs is the responsibility of national and local authorities. However, the European Court of Justice indicated that Member States may, subject to certain conditions, opt not to proceed with the recovery of costs for a given water use activity, where this does not compromise the purposes and the achievement of the objectives of that directive.
This could lead to a scenario where Member States decide to levy either low or no domestic water charges or fund service providers solely or largely through central government subvention. Under such a scenario, the need of the water services for a long term, stable and reliable income in order to allow them to raise funds for investment would be undermined.
The users of water services must be charged the full cost of the service thus allowing the costs to be recovered and let water bills finance investment in water infrastructure, ensuring adequate funding for the water service provider.
Costs to be recovered from consumers should include depreciation, renewal and maintenance costs, as well as the cost of financing long term investments so that benefits are shared between current and future generations in a sustainable manner. The revenue which service providers receive needs to cover the totality of these costs, be it received from customers, various water users or governmental organisations.
The charges should be set on the basis of the investment needs of the water infrastructure. Further, water and waste water service providers are subject to strict regulation, since they render their services in a monopoly regime.
There may be a need for the Cost-Recovery Principle, which is currently stated in the WFD, to be further strengthened in the upcoming revision of the legislation. Any review should take into account the ‘3Ts’ methodology, bringing together tariffs, taxes and transfers. The 3Ts represent a powerful tool in unlocking our understanding of fund sources.
Focus in the near future
EurEau endeavours to make policymakers aware of the need for investment. We will also increase transparency to the benefit of consumers, owners of utilities/providers, authorities and politicians on local, national and European levels.
By Carl-Emil Larsen, Chair of the EurEau Committee for Economic and Legal Affairs, and Susanne Vangsgaard, Committee Coordinator
Read more in Water MattersAuthor : EurEau