February 26, 2018
Cost recovery, further investment and asset management plans will ensure the long term development of Spanish water services
Ever since the International Conference on Water and the Environment, held in Dublin in 1992, water has been considered an eco-social asset, satisfying economic, social and environmental functions. Currently, it is evident that integrated water resources management policies need to be implemented, including water demand policies.
Water tariffs play an important role in water policy and governance. They provide an income to water operators to recover the costs of water services, promote efficient and sustainable water use from consumers and facilitate universal and equitable access to water and sanitation, provided they are clear and transparent.
Calculating a price that reflects the true value of water and contributes to the long term sustainable management of resources is critical, both for the effectiveness and integrity of water pricing systems.
In terms of regulatory principles, article 9 of the Water Framework Directive (WFD) establishes that:
- Member States shall take account of the principle of cost recovery of water services, including environmental and resource costs, having regard to the economic analysis conducted according to annex III of the WFD and in accordance with the PolluterPays Principle.
- Water pricing policies must provide adequate incentives for users to use water resources efficiently, contributing to the environmental objectives of the directive.
- An adequate contribution of the different water users (disaggregated, at least, into industry, households and agriculture) to the recovery of the costs of water services must be ensured.
The WFD links the Polluter-Pays Principle with cost recovery. In the WFD context, several water uses do not cause pollution sensu stricto, and as the WFD requires those who benefit from water services to cover the costs of these, the Polluter-Pays Principle should include the ‘User-Pays’/ ’Beneficiary Pays’ Principles as well.
Spanish regulation framework
In Spain, urban water supply and sanitation services are under municipal competency, as stated in Law 7/1985 Regulating the Basis of the Local Governance System, and these services can be managed directly or indirectly (having public direct management and delegated, both public and private, management). Regardless of the management model, tariffs must be approved by public administration. The most common way of approving the tariffs is via a joint action by the municipality and the Price Commission established by the regional government (the municipalities approve tariffs and the Price Commissions authorise price revisions) or through regional public bodies or regional governments.
The total domestic water bill usually includes all water supplied, taking into account service-related costs of collection (treatment and distribution of water) and sanitation (in which the costs of sewage and waste water treatment are considered, including regional fees for waste water treatment, for the management of waste water itself or financing waste water treatment plants).
The average price for domestic water in Spain is €1.78/m3 (€1.03/m3 for water supply and €0.75/ m3 for sanitation). However, the price of urban water varies significantly between regional areas.
In fact, Spain has the most variable price in Europe, with differences of up to 500% between municipalities. Each municipality or urban water system has a specific cost recovery system and, therefore, a different finance model in which the water tariff does not cover the same costs. In Spain, the urban water sector is financed by the 3T model. This means:
- Taxes, imposed by local, regional and national authorities.
- Transfers, mainly allocated by the European Union.
- Tariffs, determined by the municipalities.
According to the Asociación Española de Abastecimientos de Agua y Saneamiento’s (AEAS) XIV National Study on Water Supply and Sanitation, 84% of municipalities’ tariffs cover all operating costs, including those associated with the operation of services and infrastructure maintenance and conservation. They do not cover investment in modernisation or improvements in infrastructure or equipment.
Where costs cannot be covered entirely by the tariffs, some entities receive subsidies, but according to AEAS’s study, only 8% of service providers receive any subsidy to cover operating costs.
Another reason for obtaining grants is the need for investment in infrastructure and technology. As indicated in AEAS’s study, 28% of respondents received subsidies from European funds and 39% from other funds. Regarding investment in new infrastructure or equipment for the supply of water, operators invest 12.5% of turnover. As for the investment in renovation, where the greatest share is also accounted for by the supply of water, operators spend 9.4% of turnover on renewal.
Although water tariffs are as diverse as existing services, in general, they have a common structure, being binomial and progressive. Tariffs are comprised of two components, a fixed one, and a variable one which depends on consumption and is progressive, following a block system of consumption with increasing prices (usually three or four blocks), with the aim of reducing the consumption of water and increasing the efficiency of water usage.
The WFD compels Member States to develop an economic analysis, including cost recovery of water services. According to the second planning cycle of River Basin Management Plans (RBMP), approved in 2016, the average rate of total cost recovery (including environmental costs) is around 65%, which is insufficient. But there are significant differences in the degree of cost recovery among Spanish river basins. Several reasons can be identified for these differences:
- Investment and infrastructure maintenance costs of water services are usually subsidised, with only part of the total costs being charged to the end user through the tariff.
- There are difficulties in financing urban water services in small municipalities.
- RBMPs do not take the environmental and resource costs evenly or adequately into consideration.
- There is a political resistance to increase water tariffs.
According to the EEA Technical Report No.16/2013 Assessment of Cost Recovery Through Water Pricing, a water pricing system that meets the WFD requirements, as well as other social objectives, should consider the following features:
- The water tariff has fixed and variable parts and uses increasing block rates.
- Rates must be high enough to enable investment in efficient and environmentally sound improvements, innovation and the expansion of water services.
- Rates should be determined in a transparent and accountable way.
Water tariffs should be designed in order to achieve cost recovery, as well as incentive objectives.
Although currently the urban water services are satisfactory, they pose a number of challenges that should be addressed to ensure their sustainability, with the aim of improving the efficiency and universality of water services, securing the human right to water and meeting social demands of citizens.
Prices will need to increase gradually and progressively in the coming years to ensure a continued quality service and begin to correct the infrastructure deficit and the obsolescence affecting urban water services. They also need to comply with the EU’s Urban Waste Water Directive (91/271/EEC) regarding waste water treatment in sensitive areas and small- and medium-sized agglomerations.
After many years without adequate investment, the fallout of the economic and financial crisis and the dispersion of responsibilities and competencies, water infrastructure is ageing. We risk losing the current quality levels of water supply and sanitation services.
It is also necessary to invest in new waste water treatment facilities that are capable of complying with EU legislation to protect and improve the environmental conditions of our water resources, such as the Urban Waste Water Treatment Directive. It is, therefore, imperative to renew the great heritage of infrastructure and equipment that we have in Spain. But given the conditions of control and limitation of public debt due to the current economic and financial situation, it will be necessary to recover costs through water tariffs and to develop mechanisms of public-private partnerships to meet these objectives.
As mentioned earlier, tariffs paid by users do not cover the costs of urban water services. Current tariffs tend to cover the operating costs of the service but do not cover, in general, the amortisation of existing infrastructure or their renewal, nor the impact of new measures on improving the performance or quality of service and, hence, of water.
As indicated by the OECD in its report Pricing Water Resources and Water and Sanitation Services, cost recovery through tariffs is considered a significant driver of the financial sustainability of water operators because other financing instruments (taxes and transfers) are volatile and beyond the reach of the water community.
We tend to forget that the high level of development and population concentration require technological tools that need to be maintained, improved and adapted to increasing quality, safety and resilience, environmental protection and economic efficiency goals. That means investing in renovation, new equipment and contributing to their operation and routine maintenance. In that sense, we detect a tremendous gap between the value we give to water and the economic effort we are personally willing to make to ensure the sustainability of urban services.
Maintaining low water tariffs would lead to underfunded services, inadequate investment and ageing, inefficient infrastructures, which would deplete water resources, decrease the quality of water services and result in future users not being able to enjoy the same level of quality at a similar degree of affordability, as there would be a heavy burden of investment for future generations.
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 investments in water infrastructure.
But maintenance and the renewal of assets in water services needs to be developed in an effective and efficient way, to ensure the long-term sustainability of water utilities.
In this sense, a new systematic and structured approach is needed, which allows for the maintenance and renewal of assets at a manageable pace, while maintaining an adequate level of performance for those assets.
This approach is asset management, in which management of water utilities can assist in making better decisions on caring for the ageing assets, consisting of a set of procedures to manage assets through their life cycles, based on principles of life cycle costing. As the Asian Development Bank (ADB) indicates in its document Water Utility Asset Management: a Guide for Development Practitioners, poor asset management leads to: water losses; less than 24/7 water supply service and concerns over water quality; maintenance that mostly addresses breakdowns; and too high costs.
In recent years, several guides have been developed regarding asset management, such as the previously mentioned ADB guide but also:
- ISO 24516: Guidelines for Management of Assets of Water Supply and Wastewater Systems.
- International Infrastructure Management Manual (IPWEA, 2011).
- Implementing Asset Management: A Practical Guide (AMWA et al, 2007).
- Sustainable Infrastructure Management Program Learning Environment (WRF and WERF, 2008).
- US Environmental Protection Agency’s Asset Management: A Best Practices Guide.
Asset management has several benefits, such as prolonging asset life and aiding in rehabilitation/replacement decisions through efficient and focused operations and maintenance, helping to set rates based on sound operational and financial planning, focusing budgets on activities critical to sustained performance, meeting service expectations and regulatory requirements and improving responses to emergencies and the security and safety of assets.
Although asset management is still not a very extended practice in Spain, we do have some good practices in the sector, such as the Canal de Isabel II Gestión Renewal and Adaptation of Water Supply Networks Plan 2015-2019, the Consorcio de Aguas Bilbao Bizkaia Asset Management Plan in Udal Sareak, SA, FACSA’s Renewal of Distribution Network in Concession Contracts Plan, Aljarafesa’s Assets Renewal Strategy in a Community of Municipalities and Emasesa’s Asset Renewal Strategy.
Our water services assets are ageing and a sustained investment effort is needed to maintain and renew the great heritage of infrastructure and equipment. We can’t rely any longer on public administration subsidies (EU, national or regional) so significant progress needs to be made in order to advance in the cost recovery of water services, as established in the WFD. Service providers have to develop asset management plans to ensure the long term sustainability of water utilities and their cost should be defrayed via tariffs.
Transparency and awareness-raising regarding water tariffs and the need of covering costs of services by water tariffs are a challenge to be addressed immediately.
By Gari VillaLanda Sokolov, and Mariano Blanco Orozco, Spanish Association of Water Supply and Sanitation (AEAS)
Read more: Water MattersAuthor : EurEau