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Water Prices in CEE and CIS Countries. Volume II: Case Studies

Contents

Abbrevations and Acronyms

The following currencies and conversion rates have been used in the report

For Brno

1 CZK = 0.20 DKK as of October 1999 equivalent to 1 EUR = 36.75 CZK as of October 1999

For Poznan

1 PLN = 1.80 DKK as of November 1999 equivalent to 1 EUR = 4.14 PLN as of November 1999

For Kaliningrad:

1 RUR = 0.28 DKK as of November 1999 equivalent to 1 EUR = 26.58 RUR as of November 1999

For Borovichi

1 RUR = 0.27 DKK as of November 2001 equivalent to 1 EUR = 27.18 RUR as of November 2001

For Ukmerge

1 LTL = 1.96 DKK as of September 1999 equivalent to 1 EUR = 3.80 LTL as of September 1999

Appendix 13:
Case Study: Poznan, Poland

February 2000

Read Appendix 13: Contents

Contents

Preface

This case study, prepared by COWI, is being made available to the public to illustrate the methods presented in the main text of the toolkit. Neither DEPA, EBRD nor the Municipality of Poznan has verified or takes responsibility for the factual findings contained in this document. The opinions and recommendations expressed in this document are those of COWI and do not necessarily reflect the opinions or recommendations of DEPA, EBRD or the Municipality of Poznan.

Due to the time period involved in preparing the toolkit we acknowledge that certain information may not reflect the present situation of the city.

Abbrevations and Acronyms

Chapter 1.
Introduction

Background

Over the past thirty years major infrastructure investments have often been implemented based upon detailed and systematic engineering analyses, but without much analysis of the prospective demand for the service. Today, an investor, whether public or private, will require that detailed studies of future demand and surveys of willingness to pay will have to be undertaken before investing in major infrastructure, such as transport infrastructure.

Within the water services sector, similar requirements are only now gaining ground. This may partly reflect that the nature of the revenue risk is different in water services. Cars can avoid a toll road by taking alternatives routes, but urban households cannot avoid receiving water / delivering wastewater from / to the monopoly water utility.

The rationale

However, water/wastewater utilities also face revenue risks, for example:

	Reduction of water consumption by consumers;
	Political protests impacting on the level of approved tariffs;
	Poor collection rates for water bill, etc.

EBRD and DANCEE have entrusted COWI to prepare a tool kit for consultants / analysts working for policy makers who want to address these, and related revenue risk issues, while designing water and wastewater service infrastructure investments. The toolkit will include practical guidelines on how to assess affordability and willingness to pay for water and wastewater services.

An integrated approach

The design (and cost) of a water and wastewater service infrastructure is not just a technical issue. Different designs lead to different service levels and cost structures, and each of the service levels are likely to be perceived differently by the consumer and thus to lead to different acceptability levels of the applied water prices. This should be integrated into an infrastructure design to reduce revenue risk and to make sure that a service level and an associated price level, acceptable to/optimal for the consumers, is applied. At the same time, affordability issues may set an overall limit for the possible increase in average tariffs and thus for the level of ambition with regard to future service levels if these are to be financed by the users. This implies that the analyses of the toolkit should be carried out concurrently with the technical analysis.

Reduction of revenue risk requires integration of design, cost and WTP considerations. This requires a close dialogue between the technical team, the affordability and WTP analysts, and the policy makers.

The research project and its case studies

COWI is carrying out the project in order to design a toolkit based on literature research, extensive consultations with stakeholders and three case studies.

The Poznan case study is one of three case studies being undertaken by COWI as part of the preparation of the toolkit. The other case studies are being undertaken in Brno (The Czech Republic) and Kaliningrad (Russia). The subjects of analyses, and the analytical methods used, have differed somewhat between the cities in order to provide the best basis for the preparation of the toolkit.

The primary purpose of each case study has been to provide insights into the design of the toolkit. The secondary purpose has been to provide city authorities with information on the link between acceptability of future (higher) water tariffs and customer perceptions of water service levels in a broad sense.

This working paper has been prepared with both of these purposes in mind.

Acknowledgements

The present working paper has been prepared by Mikkel Birkeland, Karsten Vesth-Hansen, Michael Jacobsen, Arne Rønnest and Zsuzsa Lehoczki, all COWI. Chris Heywood and Michelle Wheadon, from Accent Marketing and Research contributed to designing and implementing the stated preference survey. Krysztof Podemski of Ankieter was instrumental in implementing the stated preference survey and provided comments on the design. Many people in Poznan generously provided their time and inputs in discussions with the team. In particular Magdalena Weselowska from the City Administration and Pawel Chudzinski, PWiK have been instrumental in assisting the team. The people met have been listed in Appendix 13.4. Peter Christensen (COWI) supervised the market research and Michael Jacobsen (COWI) is overall responsible for the "Acceptability of Water Prices in CEE and CIS countries" project and for this working paper.

Structure of paper

The structure of the paper is as follows.

Chapter 3 provides background information on the technical situation. This background information serves two purposes. It enables the foreign reader to read this working paper as a "standalone" paper. Furthermore, it describes how the project team perceived the technical situation, whilst designing the market research on acceptability of higher tariffs.

This chapter also discusses likely future investment levels and their likely consequence for tariffs, thus setting the stage for the discussions of affordability and willingness to pay.

In Chapter 4, we briefly describe the institutional set-up as we have understood it. This forms the background for our analysis of how the water service and tariff issue is perceived and how it may be framed (or influenced) in the future. We note that there are different understandings of water quality in Poznan today and that this, together with the observed willingness to pay for improved service, may be used to gain support for an "improved water at higher tariffs" strategy. We also note that lack of information among consumers today is a key issue.

In chapters 5 and 6 we present the results of the willingness to pay analyses and of the analyses of affordability issues.

Chapter 2.
Executive Summary

The level of service in Poznan, for both water and wastewater, is high in relation to many other cities in Poland and in the CEE. There is a corresponding high tariff level. The tariff level is uniform for different consumer groups. Thus tariff increases due to a policy to end cross-subsidisation by industry belongs to the past.

The (ongoing and planned) level of investments in water and wastewater services in the city of Poznan is high. This reflects the need to renovate a system which (in parts) is quite old, the need to comply with EU requirements and a desire to expand the current high level of services to gminas surrounding Poznan. Acknowledging the high level of service currently found in Poznan, we have focused on willingness to pay to avoid deterioration in future service levels and have compared that with willingness to pay to have improvements within water supply. We have assessed, but not quantified by applying the stated preference methodology, willingness to pay for improved wastewater treatment (to comply with EU legislation), and we have not assessed willingness to pay more in order to expand services in the surrounding gminas. Both of these are legitimate policy objectives and our choice solely reflects the desire to test different aspects of willingness to pay in different case study cities.

Average income levels in Poznan are higher than average for Poland. In general affordability does not seem to be a major issue in Poznan (within reasonable investment levels and tariff increases). However, there are vulnerable groups for whom the issue of affordability is likely to need consideration. There are opportunities to address the issue of affordability for low-income groups through the tariff structure and through tariff collection policies etc. However, these have not been analysed or elaborated on in this working paper.

Consumers perceive the services of PWIK (cold water supply) less unfavourable than for most other utilities. However, there is ample room for improvement. 40% of consumers feel that the cold water services and wastewater services are not worth the current price. Furthermore - and in contrast to the factual situation - most consumers believe that tap water is not drinkable. This may reflect a lack of information about actual water quality, it may reflect habits and it may reflect that many consumers are unsatisfied with taste, smell and colour (in that order). A limited number of samples exceed the standards for iron, manganese, turbidity and colour (in that order) thus giving (limited) backing to consumer complaints about taste, smell and colour.

The willingness to pay analyses show a significant willingness to pay to avoid deterioration in service levels. The WTP is higher for young people than for old, higher for women than for men and (not surprisingly) lower for persons from lower income households than for persons from average and higher income households.

Interestingly, almost half of all water consumers believe that the appropriate strategy for PWiK in the future is to increase service levels and tariffs, 40% believe that the appropriate strategy is to maintain current service levels and tariffs, while only 10% are undecided or prefer lower service levels and tariffs. This situation may explain why the question of water tariffs in Poznan has not emerged as a significant political issue until now.

However, in relation to potential future tariff increases it is worth noting that the analyses indicate that consumers perceive their level of information about water and wastewater services to be low. This increases the risk that sudden and significant water price increases will be seen as arrogant and not justifiable. To address this issue the existing procedures and practice for tariff-setting could be complemented by a more participatory process during which the public understanding of the intention and the need of changes should be targeted.

Chapter 3.
Technical Profile

The following chapter and the "Poznan Technical Profile" table in Appendix 2 comprise a brief technical profile of the water and wastewater systems of Poznan, and anticipations of future investment requirements. Refer to Appendix 3 for a list of reports used.

The objective of the technical profile is to provide technical background information necessary for the assessment of the public's acceptability of water and wastewater tariffs.

The profile is brief, and is based on data collected from available reports and discussions with water utility staff.

The water and wastewater services are entrusted the Poznanskie Wodociagi i Kanalizacja Sp. z o.o. (PWiK), a limited liability company 100% owned by the City of Poznan. A restructuring process is in progress, where the aim is to have private sector participation through concession.

3.1 Overall service level

Poznan has about 578,000 inhabitants. PWiK serves not only Poznan but also cities south, east and north of Poznan through interlinked systems: Lubon, Puszczykowo, Mosina, Swarzedz, Czerwonak and Murowana Goslina. The total population in the service area is 678,000 persons. The water supply coverage is assessed at 97%.

With regard to the wastewater system, the PWiK serves essentially the same area as for water supply and the coverage is about 85% (94% in Poznan city). There are three separate wastewater systems: (i) Poznan, Lubon, Swarzedz and part of Czerwonak, (ii) Mosina and Pouzczykowo, and (iii) Murowana Goslina and part of Czerwonak.

3.2 Existing water supply system

Poznan utilises groundwater, mainly through infiltration systems along the Warta River. The groundwater is treated to remove iron and manganese, as the raw water content of iron and manganese is too high, and the water is further chlorinated. The water quality, after treatment, fulfils current standards. The current water quality at consumer level is generally high, with only a limited number of samples exceeding the standards (about 2% of the chemical samples and 1% of the bacteriological samples). This means that the iron content increases in the network due to the networks ferrous pipes. It should be noted that the current Polish standard for iron is 0.5 mg/l; in the future the EU standard of 0.2 mg/l will have to be fulfilled.

The system has sample storage.

The water network is comprised of 1,122 km of water pipes, and 352 km of connections. About 3 /4 of the pipe network have dimensions < 250 mm. More than half of the pipes are of cast iron, and about 30% are plastic. The pipe network is relatively new, only about 32% of the pipes are more than 30 years old and approximately 16% of the pipes are more than 50 years old.

3.3 Existing wastewater collection and treatment

The wastewater system is comprised of 901 km of sewers, including 242 km of connections. The system is basically a separate system (only 25% of the pipes form a combined system).

The wastewater system is comprised of four systems and five wastewater treatment plants. The main Poznan system has two wastewater treatment plants, the Centralna (COS) and the Lewobrzezna (LOS) plants.

The largest plant (COS) is under modernisation. The new capacity will be 200,000 m3/day and the plant will provide MB treatment with some nutrient removal (effluent criteria is 30 mg Tot-N/l. Tot-P criteria is 1.5 mg/l. The second largest plant (LOS) is a MC plant with a present load of 48,000 m3/day.

3.4 Consumer groups, unit water consumption and metering

The water balance has been estimated by VA-Projekt as follows:

Total water production: Total water consumption: Hereof domestic consumption: Unaccounted-for-Water:

117,416 m 3 /day; 246 lcd; 143 lcd; 62 lcd equal to 20%.

This means that the domestic consumption comprises about 58% of the total consumption. The domestic unit water consumption (143 lcd) is comparable to unit demands in North-western Europe. The UfW is not excessive.

3.5 Water and Wastewater Operations

The water supply provides 100% coverage of 24 hours supply per day at a design pressure of minimum 5 m. Reportedly only a few minor areas face pressure problems.

As mentioned above, the water leaving the water treatment plants fulfils applicable water quality standards, and only a few samples, which reach the consumers exceed the standards. The most frequent parameter for non-fulfilment are iron, manganese, turbidity and colour, and to a minor degree bacteriological parameters. This means that the water quality changes in the network, mainly due to the ferrous materials (with regard to the chemical parameters) and due to polluted reservoirs or leaks (with regard to the bacteriological parameters).

The number of recorded breakdowns is 42 per km per year for water pipes (115 per km per year if connection pipes are included) which is lower than, for instance, Brno, and much lower than for most CIS countries, but much higher than, for instance, in Scandinavia.

The number of blockages in the wastewater network is 280 per km per year, which is quite high (eg. six times the average for UK); and substantially higher than, for instance, Brno.

The annual rehabilitation intensity has been estimated at:

Water pipe network: 0.9% which appears on the low side, but reasonable. The number of failures appear to be high compared to a corrosion condition assessment made during the Technical Audit. This corrosion assessment suggests that 8% of all iron pipes (ie about 73 km of pipes) have through-thewall corrosion and need to be replaced. It is estimated that a further 0.3% of the pipes will become fully corroded per year;

Wastewater collection network: 0.2%, which also appears on the low side, but reasonable. CCTV inspections have begun but only a limited part (< 5%) of the network has been inspected. The Technical Audit suggests that 42 km of wastewater collectors (6%) are to be upgraded within 5 years.

3.6 Staffing and Staff Efficiency

The staff of the water and wastewater utility comprises 998 employees. Selected staff efficiency indicators are:

1000 persons served per staff member: 1000 m 3 of water sold per year per staff member: Km of water and wastewater pipes per staff member:

0.68 57 2.03

These indicators are comparable with other CEE countries. Compared to North-western Europe the staffing is high.

3.7 Investments

The firm Aqua has, in 1996, outlined an investment programme for PWiK, but it is based on demographic and water demand projections which have become outdated. Furthermore, the investment programme anticipates a severe present condition of the water and wastewater networks. In connection with the preparation of a concept paper for the restructuring of Posnan water and wastewater company in 1998, some preliminary adjustments to the investment programme were proposed, without actually making detailed technical assessments.

Finally, a full technical review has been made by VA Projekt.

The investment programmes are summarized in the following table; all figures in Mill USD:

Table 3.1:
Investment Programmes

According to discussions with PWiK, the annual "internal" investments for 1999 and 2000 are about 40-50 mill PLN/yr. (10 mill USD/yr.). It should be noted that the City finances most development investments, for instance 85% of the Central WWTP, scheduled for completion ultimo 2000.

The completion of the Central WWTP will result in increased O&M costs notably for power supply and general maintenance of the 350 mill PLN investment (this has been taken into account in the financial model of Booz-Allen & Hamilton).

The overall tariff increases for various levels of investments have been assessed in the financial model of Booz-Allen & Hamilton. The results are illustrated in Figure 3.1.

Figure 3.1:
Relationship between medium term investments and resulting tariff increases, Poznan 1998 - 2005.

With regard to the required investments for water pipe renovation, it appears that the Technical Audit recommendations will result in investment levels closest to the Booz-Allen estimates. It is consequently anticipated that the level of investments of the Technical Audit will be of the same order as those of the Booz-Allen & Hamilton estimates, ie at about 50 mill USD for the period 1998-2005. This means that we are at the lower end of the curve shown above, say at about a 20% increase in tariffs.

If the PWiK were to the finance full cost of completion of the COS WWTP (estimated 44 mill USD by Booz-Allen), the 1998-2005 investments will be about 100 million USD, and the tariff increases will be up to 60%.

The current level of PWiK investments of about 10 mill USD annually will require an approximate 20% increase in tariffs (one time).

Chapter 4.
Institutional Framework And Policy Network Analysis

4.1 Purpose and structure of analysis

The purpose of this chapter is to describe political and institutional factors, which can be expected to influence the future process of setting water tariffs in Poznan.

Specifically, the chapter addresses the following issues:

	The process of water tariff setting: which actors are involved? Is the process open or closed? Do few or many actors determine the outcome?
	The current status of water tariffs as a political issue: is it a salient or non-salient issue? Have many different viewpoints been articulated? Is it perceived by the decision-makers as a sensible issue?
	The framing of the water tariff issue: how is the issue defined (and by who) and how will the framing of the issue influence the likelihood of getting acceptance of higher water tariffs?

Information was compiled during a fact-finding mission to Poznan in October 1999 during which the above subjects were discussed with representatives of the PWiK, the prominent parties on the Poznan political scene, different departments with the Poznan City Administration, NGOs, and research institutes. Please see Appendix 4 for a list of organisations and persons met.

4.2 The water tariff setting process 4.2.1 Description

In accordance with general provisions in force in Poland, the municipality of Poznan is responsible for setting tariffs for water and waste water. The current tariff setting procedure follows the following steps:

1. Material indexes for production costs (increases) are approved by Board of PWiK, as well as agreement on inflation; and a planned increase in power and heating costs.
2. Following the PWiK Board approval, the various departments make the actual calculations, coordinated and compiled by the Economist Department.
3. The tariffs are approved by PWiK Board and the PWiK Supervisory Board.
4. The tariff proposals are sent to City Board. The board may consult the Office for Competition and Consumer Protection (the antimonopoly office) and other institutions. There are no legal regulations describing how and when the Office should be involved. However, in reality the Office has during recent years always been asked for its opinion by the City Administration before the actual increases were approved.
5. The City Board seeks advice from the City's Committee of Municipal Economy and the Committee of Finance. Following recommendations from these bodies, it approves the proposals or request explanations and further documentation.
6. The tariffs are incorporated in the financial plans of the PWiK which are approved by the supervisory board and finally by the general assembly.

For the past two years the proposed tariffs by PWiK have been approved, as suggested by PWiK, without discussion.

It appears that the Poznan City Board is ultimately responsible for setting the level of tariffs increases and that three actors are involved: PWiK, the City Board, and the Office for Competition and Consumer Protection (anti-monopoly office), whereas other stakeholders, like NGOs, and political parties are not directly involved.

The process is therefore somehow "sheltered" from the central political scene, i.e. the City Council. It is the impression thus, that the decisions taken by the City Board are seen as of a predominantly administrative and "neutral" nature, compared to the City Board which is the arena for the explicit political decisions and controversies.

As a consequence, for a political party in opposition - currently the SLD party, the existing institutional set-up seems to make it more difficult to campaign on the water issue than if water tariffs were set by the City Council. In this case the opposition party would be more involved. Until a few years ago, water tariff setting was indeed within the competence of the City Council but the council assigned this competence to the Poznan City Board.

Also, in everyday activities and planning, PWiK does not interact much with the political system. Nor does the company involve itself systematically with e.g. NGOs and housing co-operatives. The housing co-operatives - in spite of representing the tens of thousands of tenants - have not received advance notification of changes in water prices, nor have they been directly included in the policy process as a stakeholder.

4.2.2 Assessment

The water tariff setting process takes place within a quite well established and closed framework where the main participants are PWiK and the City Board.

This may be a rational set-up in business-as-usual situations without drastic changes in the water tariffs. However, in the case of significant increases in water pricing which are to be made in the coming years, the existing procedures for tariff-setting could be complemented by a more participatory process during which public understanding of the intention and the need for changes should be targeted. Otherwise, one runs the risk that sudden and significant water price increases will be seen as arrogant and not justifiable. This could eventually lead to a decline in the political will to reform the water sector in Poznan.

4.3 Water tariffs as a political issue

The question of the future design of water tariffs in Poznan has not emerged as a significant political issue until now. Consequently, statements given by interviewees are of a very general nature. Thus it is difficult to anticipate what specific attitudes the dominant actors will articulate when - or if - the issue paves its way to the political agenda. However, different perceptions of water tariffs can be detected among e.g. the political parties.

4.3.1 The City Board

The City Board is an executive body made up of representatives from the ruling political coalition which, since the autumn of 1998, consists of the Union Freedom Party and the AWS party. The board finds that the provision of water should take place with respect to the cost-recovery principle. However, at the same time, the City Board has decided to fund major investments such as the refurbish-ment of the central wastewater treatment plant. Although subscribing to this guiding principle of cost-recovery, the two parties within the coalition have a somewhat different priority of the issue.

4.3.2 The Political Parties

There are three political parties represented in the Poznan City Council. A brief description is given in Table 4.1.

Table 4.1:
The political parties on the Poznan political scene - Attitudes towards future water tariff increases.

The UW party is willing to let the water prices reflect the full cost of water provision, even within a short period of time, whereas the SLD party advocates for a much slower development and requires that more attention be paid to the social impact of such changes. The position of the AWS party seems to somewhere in between. In conclusion, at the current stage, the political level acceptability of higher water prices seems to be neither high, nor low. The specific level of political acceptability depends on how the water issue actually will be framed. For a discussion hereof see Section 4.4.

4.3.3 The water industry

Peoples' attentiveness to water pricing is recognised by PWiK. The company is therefore exploring additional revenue sources other than higher water prices by which to finance investments. Alternative revenue sources under consideration are:

	to expand company activities to other cities (due to excess water supply capacity);
	to start selling water in bottles. The bottled water would be of the same quality as water distributed via the pipe networks. Already now PWiK is suspicious that some of the water sold on bottles is taped from the PWiK distribution system.

Producers of bottled water and individual water filtration systems also belong to the water industry.They have an economic interest in people perceiving the water quality as low as it will increase the demand for such products. According to information given by representatives from PWiK, the local administration, and research institutes filtration systems are promoted aggressively. However, the market research does not support this view.

4.3.4 Environmental groups

According to a representative of a local environmental group, called the Section of City Cyclists Environmental Friendly Transportation in the City, environmentalists find it difficult to deal with the water tariff issues due to its complexity. It involves environmental objectives, social impact, and (lack of) trust in public authorities. Environmentalist fully supports the environmental objectives (decrease water consumption, improve WW treatment) but they would like compensation schemes to be introduced simultaneously with introduction of higher water prices in order to lessen the negative social impact. Moreover, they would like PWiK to show itself as a company with transparent procedures and high management competence. They also would like to see PWiK reach out to the civil society and to interact with the NGOs directly, such as inviting them to meetings and discussions.

4.3.5 Housing cooperatives

Two housing co-operatives were interviewed. They find it, for various reasons, difficult to make water pricing a political issue. The reasons are, among others, that there is a common understanding within the general public that prices will eventually have to increase over the coming years, and the tenants are somehow reluctant to allow the representatives of housing co-operatives to involve themselves in political activities. Moreover, it is feared that their voices would not be heard within politicaladministrative circles if the housing co-operatives eventually were to engage in political activity.

4.3.6 Assessment

The case of a future application of the cost-recovery principle, for the provision of water services in Poznan, may become an emerging political issue. For now only some of the conjunctures are visible. However, it has been detected that the political parties put different emphasis on the issue and that they do, to a varying degree, consider the social impact of a water pricing reform.

4.4 The Framing of the Water Issue

4.4.1 Description

To frame a policy issue is to compose data, information, values and perceptions in such a way that it creates a certain perception of reality. Issue framing is therefore essential for policy outcomes. If a situation is framed as problematic it facilities other options and decision-making opportunities that if framed as non-problematic. Framing is thus not a "neutral" exercise but an important policymaking activity. It follows that political actors often are involved in more or less deliberate policy framing activities. They all create a different "reality" which facilitate the fulfilment of their interests and ideology.

A striking feature of the "water situation" in Poznan is that it is framed differently by different actors.

At least two different positions can be identified: one claiming that the water is of high quality and another perceiving the quality as mediocre. The first position is based on what is seen as "real" data; i.e. monitoring of water quality and scientific reports, the other being based on the sensing of the water.

The two positions are contrasted in Figure 4.1.

Figure 4.1:
Two different perceptions of Poznan water quality

During interviews with representatives of the political parties, some concern was expressed as to what degree increased water tariffs would go hand in hand with improved water quality. It appears clearly that the parties who either strongly (the UW party) or moderately (the AWS and SLD parties) support future water tariffs increases expect an improvement of the water quality.

They all see the issue as "higher water prices for better quality" and not "higher water price to sustain current quality". They therefore tend to see the water quality as not (sufficiently) good. As discussed in the following chapter, the political parties reflect the perception of the voters on this issue.

4.4.2 Assessment

Seen in this light, it could be interpreted as a political asset that a significant share of the inhabitants gives a low score to water quality. It will make it easier to get the population to accept higher water tariffs, provided improvement can be guaranteed, when the current situation is framed as "problematic".

A representative of the PWiK, however, rejects the somehow bold thesis that it is in the long-run interest of the decision-makers that the population - the voters - has a negative perception of the water quality on the ground that it will make them swallow price increases⁴. Rather, this person insists that PWiK will strive to close the gap between the company's measurement of water quality and peoples perception of the water.

No "truth" on the quality of the Poznan water exists; it is perceived differently by different actors. The political parties frame the water issue as a matter of "higher water tariffs in return for improved water quality".

It has been noted that producers of bottled water and individual water filtration systems have an economic interest in people perceiving the water quality as poor as it will increase the demand for such products. On the other hand PWiK wants the population to accept its product as good and healthy, but the company does not seem to have developed a strategy to counter the apparently false information/perception being given by e.g. bottle water producers.

To sum up, in the light of the future investments in e.g. the pipe system and the corresponding expected increase in water tariffs, the fact that many inhabitants perceive the current situation as somehow "problematic" may increase the political and public acceptability of higher water tariffs.

4.5 Concluding assessments

This study of the political acceptance of higher water prices, and the description of the current setup for setting the tariffs, does not give a clear-cut picture of the Poznan case. The results should also been seen in the light of the limited scope of the study. However, the study gives grounds for drawing four conclusions.

1. Political acceptability. The political acceptability of significant higher water tariffs in Poznan is likely to be low if investments are not accompanied by tangible improvements. It is difficult to foresee a situation where the politicians will be able to "sell" the issue to the voters as a matter of service maintenance rather than improvement. However, as noted below consumers are willing to pay significant amounts to avoid service and quaity deterioration. This may make framing the water issue in terms of "higher tariff for higher service" easier.
2. Not one accepted "truth" of water quality. A second observation is that an accepted truth in regard of the quality of the water being provided by the PWiK does not exist. On the one hand we find statements, "proofs" and monitoring results pointed to high quality, on the other hand it can be observed that many decision-makers (and significant parts of the general public, according to the SP analysis) see the water quality as unsatisfactory.
3. Framing may determine outcome. A third conclusion follows from the above, namely that "framing of the Poznan water situation" probably will be of crucial importance for the future discussions on investments in water supply and WW treatment. The combination of 1) politicians having a need for a solid you-will-get-better-water argument in return for burdening the people of Poznan with additional costs and of 2) many people having a mistrust in the current water quality could lead to the delicate conclusion that:

   	it is a strategic and political asset that people have a "too negative" perception of the water they consume;
   	it is in the interest of PWiK to carefully consider the manner and timing of a correction of this attitude, as it may strongly influence peoples' willingness to pay and the politicians' willingness to support higher tariffs.

4. High degree of concurrence. There seems to be a quite high degree of concurrence between people's willingness to pay and politicians' willingness to decide.

The SP analysis shows that 49% thinks charges should be increased and service quality improved whereas 41% thinks charges and quality should remain at the same level as now. These figures seem to fit with the signals given by the political parties that the prices should either increase at only slow pace (if no improvement will follow) or significant increases should correspond with service improvement.

Chapter 5.
Willingness to pay

5.1 Introduction

The objective of this chapter is to present the methodology applied and the results of the stated preference survey.

The methodology comprises a number of steps. These include background research, qualitative research and quantitative research. Each of the steps is discussed in the section on methodology.

The quantitative research is based on interviews with 150 consumers living in Poznan and being responsible for paying the household water bill.

In order to assess the willingness to pay a stated preference approach has been used, and the results indicate some willingness to pay. There is willingness to pay both to avoid a worsening and to obtain improvements of present services.

5.2 Stated preference survey methodology

The method applied in this stated preference survey contains a number of tasks. These include:

1. Background research;
2. Qualitative research;
3. Design of questionnaire;
4. Pilot survey;
5. Final survey;
6. Data analysis.

Each of the points are discussed below.

5.2.1 Background research

The first step in the analyses is background research. The purposes of the background research are to:

	Understand the realistic technical options/alternatives and in particular their impact on realistic service levels;
	understand payment collection, enforcement and usage measuring principles and practices, and the financial standing of the utility;
	understand the socio-economic context, in particular income levels and distribution and types of households.

The background research have also included:

	Discussions with other team members covering technical and financial issues;
	consultation of earlier reports, statistics, working papers giving general introduction to the utility and the local economy in Poznan.

5.2.2 Qualitative research

Following the background research, qualitative research amongst customers is undertaken. The purposes of the qualitative research are to:

	Gain a first understanding of which service factors are perceived as important by customers, and which factors are the more important;
	gain a first rough understanding of willingness to pay for water and waste water services and the most important factors;
	understand the cultural context and wordings/formulations understood by consumers in relation to water and waste water utilities.

Two types of interviews were carried out in Poznan. Six face-to-face interviews and one focus group with six respondents. An open-ended topic guide was applied in both types of interviews.

The face-to-face interviews were conducted in an interview room. Two interviewers interviewed each respondent with consecutive translation by a professional interpreter. Each interview lasted between 30 minutes and 50 minutes.

The focus group was carried out with simultaneous translation when respondents were speaking and consecutive translation when the moderator was speaking. There was one moderator supported by an assistant moderator. The focus group was taped on video. The focus group lasted about 2 hours and 15 minutes.

The qualitative research is critical, as the outputs form the limitations to what is going to be explored during the quantitative research.

5.2.3 Design of questionnaire

On the basis of the information gathered in the background research and the qualitative work the questionnaire is designed. The questionnaire includes:

	present water and wastewater services;
	attitude toward the water services;
	willingness to pay for improvements and to avoid a worsening;
	socio-economic background.

Many subjects can be covered by a questionnaire. However, a selection has to be made in order to keep the length of an interview acceptable to the respondent. Therefore e.g. wastewater treatment has not been covered in depth in the research for Poznan.

A long list of possible improvements to and worsening of the water services was identified in the qualitative research. The possible changes in service levels are divided into three groups. The most important services are included in a stated preference game as described below, but only a limited number of services can be evaluated in the stated preference game. Importance-rating questions are included in the questionnaire to have the respondents' evaluation of other services. Finally, some possible changes of service levels were assessed to be of minor relevance/importance and they have not been included in the questionnaire.

The willingness to pay is examined by using stated preference games. An example of a choice task in the stated preference game is presented in Table 5.1. Here the respondent must decide whether they would prefer to pay 50% more to have water without any smell at all, or whether they would prefer to have completely clear water with a chlorine smell and pay the same amount as at present. If smell is an important issue to the respondent B is preferred, if clear water and/or money saving is important to the respondent A is preferred.

Table 5.1:
Example of a choice pair

A number of choice-tasks, such as the above, are presented to each respondent. There is a limit to the number of choices a respondent can make while remaining concentrated and while still presenting a realistic choice.

The stated preference game consists of four factors:

	Interruptions;
	Smell;
	Colour;
	Cost.

The stated preference analysis explores both the willingness to pay for improvements and the willingness to pay to avoid worsening. Three levels represent each of the factors. The levels describe different service levels and they are the service levels that can be evaluated when analysing the game. For the service factors the first level is a worsening, the second status quo, and the third is an improvement. The costs only increase in comparison to the present situation.

Table 5.2:
Factor and levels in the stated preference game

5.2.4 Pilot survey

The pilot survey is used to test the design of the questionnaire and to identify necessary changes. In Poznan, 25 interviews were conducted and the results were analysed. The answers are checked in order to ensure that all questions are well understood and that the stated preference game was working well. Checking the stated preference games includes assessing if all parameters are relevant to the consumers, and if the levels of e.g. cost are perceived to be within realistic limits. As an example if respondents choose alternatives with the lowest cost in most stated preference questions the cost levels should be adjusted downward.

In the pilot, the respondents were presented with 12 choice-tasks, and in the final the number of choice-tasks was reduced to eight. In this stated preference game, eight choice-tasks are within the capabilities of the respondent, while 12 choices were too many. In other applications, eg with a shorter total questionnaire, the number of choices can be higher without incurring problems.

5.2.5 Final survey

Including the changes to the questionnaire from the pilot survey the final questionnaire was made. 125 respondents where chosen at random and interviewed. However, only respondents responsible for paying the water bill were interviewed.

5.2.6 Data analysis

Both the data from the pilot questionnaire and the data from final questionnaire is included in the statistical analysis. This is possible because only few changes were made to the pilot questionnaire. However, where questions differ in the two versions the results from the pilot questionnaire are excluded.

The stated preference data is analysed by applying advanced statistical tools. A so-called logit model is estimated. Before estimating the model a set of a priori hypotheses is described and these are tested in the model. Examples of such a priori hypotheses are:

	consumers with higher income have a higher willingness to pay;
	consumers with a water meter have a higher willingness to pay because they are able to adjust consumption as a response to an increase in tariffs.

The model also allows for different willingness to pay for consumers with different backgrounds, e.g. age and gender. For age and gender the model process is exploratory, that is no priori hypotheses are needed. However, all effects in the model must have a clear interpretation.

In order to ensure that the sample is representative, it is tested whether the age and gender distribution in the sample differs from the distribution in the Poznan region. Census data from 1996 on urban inhabitants is used. The test indicates that some groups are over represented in the sample, and therefore all results are weighted by age and gender. By weighting with the age and gender distribution of entire population, it is assumed that all groups are equally responsible for paying the water bill. Hence, the results can be interpreted as representative.

5.3 Qualitative research

The qualitative interviews were based on a topic guide prepared using background information about Poznan including information from the technical part of the team.

Respondents were selected by random. The respondents covered a large variety of age, household size, income and employment status. Also, respondents from different districts of Poznan were included. However, there was an over-representing of respondents with higher education. In general, the target should be to have all groups of the population represented.

Results from the qualitative work

A wide variety of subjects were discussed.

Water quality

The tap water is perceived as undrinkable. The interviewees boil the water before using and buying bottled water is normal. Few of the interviewees have water filters installed. The interviewees mentioned the following problems with service: Pressure, chlorine taste, bad taste, sediments, and rust. Several of the interviewees have experienced service interruptions.

The interviewees did not receive information from PWiK on water services. Some of the interviewees obtain limited information on the water services through local media.

Water consumption and metering

Metering is common and most of the consumers interviewed in the qualitative research have individual metering and some pay per head in the household. However, PWiK does not manage the individual meters in a block of flats.

Some of the interviewees have undertaken measures to reduce consumption. However, saving water was not a key issue.

Water cost

The interviewees were aware of how much their normal monthly payment is but were not aware of the unit costs. Some of them thought water and wastewater services had increased in price at the same rate as other prices, but some thought there have been no increase for water services the last two years. Prices for gas and electricity and petrol were in general perceived to have increased much more.

The respondents in the qualitative research would pay for better quality of tap water, but they would probably continue to buy bottled water and continue to boil water for drinking. People would in general not accept lower prices with lower service. This could indicate that there is still some willingness to pay. In the group, there was some resistance against tariff increases. However, this is a natural "defensive" reaction by respondents when prompted directly about price increases.

Table 5.3:
Subjects discussed in the qualitative research included in the stated preference game and the importance ratings.

5.4 Quantitative research

In this section the results of the questionnaire are presented. The socioeconomic characteristics of the respondents are analysed in order to see if all groups of respondents are represented in the sample. However, the respondents in the sample are all responsible for paying the water bill.

The results from the questionnaire indicate that the consumers are quite positive towards the water services in Poznan but only few drink the water straight from the tap. There is some willingness to pay for improved service and for some aspects an even higher willingness to pay to avoid a worsening.

5.4.1 Socio-economic characteristics

There is an overrepresentation of women in the sample. 63% of the respondents are women. In Poznan women are also over represented - 53% of the inhabitants in Poznan are women.

The age distribution is illustrated in Figure 5.1. All age groups are represented among the respondents.

The age and gender distribution is compared to the age distribution of urban part of the Poznan region in 1996 (population 960.859). There is no general overrepresentation of e.g. young people or retired people, cf. Figure 5.1. However, e.g. males between 35 and 44 years of age are underrepresented, while women between 45 and 60 are over represented. To make the results of the analysis representative the observations have been weighted to reflect the population in the region.

Figure 5.1:
Age distribution of respondents

Most of the respondents do not have children living in the household. In 31% of the households there are children aged 6 to 17 years, and in 15% of the households there are infants less than 6 years old, cf. Table 5.4. Most of the households with children have only one child living in the household.

Table 5.4:
Type of household

Note: The data is not weighted.

The households are equally divided into respondents living in rented accommodation and privately owned accommodation, cf. Table 5.5. More than half of the respondents live in flats.

Table 5.5:
Type of accommodation

Note: The data is not weighted.

A majority of the respondents are employed, both in the public sector and the private sector as well as self-employed. No farmers are represented in the sample, cf. Figure 5.2.

Figure 5.2:
Employment status of the chief earner of the household

Note: The data is not weighted.

The distribution of the monthly household income after tax is illustrated in Figure 5.3. Most of the households have an income between 500 and 2,000 PLN. One fifth of the respondents did not wish to state their income.

Figure 5.3:
Household income distribution

Note: The distribution in the table is based on 100 households; 26 respondent refused to state their income and the pilot data is omitted because of a different categorisation. The data is not weighted.

5.4.2 Water and Wastewater services

The results presented in the rest of this chapter are weighted to reflect the age and gender distribution in Poznan. As basis for the weights, the urban population in the Poznan region is used (population: 960.859). By weighting the observations, the results reflect the entire population in Poznan. However, there are only minor differences between the weighted results and the unweighted results.

Payment

The consumption on water is likely to be affected by the way consumers are billed. If consumers are billed according to the amount of water consumed they are more likely to reduce water consumption as a result of an increase in prices.

Two thirds of the respondents interviewed have their own household meter for cold water. 10% of the respondents have a meter for the block of flats where they live, and 19% have no meter at all. Almost all households with meter are billed according to the consumption.

More than one fourth of the households pay the water bill directly to PWiK, cf. Figure 5.4. Almost all households living in their own private house pay directly to the PWiK. The rest of the households pay to administration, co-operative, landlord etc.

People living in households not paying directly to PWiK are not interested in doing so; 12% of all households would like to pay to the PWiK.

Figure 5.4:
Payment of water bill

Note: The data is weighted by the aged and gender distribution of the Poznan urban region, census 1996.

One third of the consumers in the sample pay the water bill with other items that is especially the consumers not paying directly to PWiK. Consumers living in privately owned house pay the bill separately.

20% of all households know the water company PWiK. The knowledge of the name of the company is highest among the consumers paying directly to the company. Among the consumers paying their bills somewhere else only 10 percent know the name of the water company.

The distribution of the amount paid for water services is illustrated in Figure 5.5. The average amount spend on water services is 43 PLN per month and it is increasing with the number of people in the household, especially children.

Figure 5.5:
Household payments for cold water services

Note: The figure is based on 141 consumers. 9 consumers were not able state the amount paid. 51 respondents gave estimate on water bill, 90 respondents brought their water bills to the interview. The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

On average around 3% of the household income after tax are spent on water services, but the percentage varies between different income groups, cf. Figure 5.6. 17% of the households pay more than 5% of the income.

Figure 5.6:
Water bill as a percentage of the household income after tax

Note: The figure is based on 114 consumers. The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

The average household consumption of water is ca. 11 m3 per month. This is equivalent to between 3 and 4 m3 water per member of household. More than half of the consumers has not changed the water consumption the last two years. One fourth have increased the water consumption mostly because a change in the number of members of the household and for reasons like garden watering and the children getting older.

12% of the households have decreased the water consumption. More than half of these respondents give money saving as the reason for the decrease and some consumers have reduced their consumption after having a water meter installed. None has reduced the water consumption for environmental reasons.

A majority of the consumers do not find themselves able to reduce water consumption. The consumers able to reduce water consumption will do it e.g. by using less water when they wash the dishes and by watering the garden less often.

Quite few consumers are aware of the increases in water tariffs within the last two years. One out if six gives their opinion about the increases and they vary from a 15% to a 100% increase.

Compared to other utilities fewer consumers find that the cold-water services and wastewater services is not worth the money. However, 40%of the consumers think that the cold-water services and wastewater services is not worth the money at present, cf. Figure 5.7.

Figure 5.7:
Rating of services in terms of the money paid for the services

Note: Not all of the services are relevant to all respondents. This applies especially to hot water, public transport and housing cost (consumers who have their own private house do not find the question applicable). The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Quality of water services

The consumers are divided in equally sized groups in the question of water quality, cf. Figure 5.8. Almost 40% of the consumers find that the water quality is neither good nor bad. Most consumers have not experienced a change in the water quality within the last few years. 13% think that water quality has improved at 8% find that water quality has worsened.

The consumers have less knowledge about the standard of wastewater treatment. A large proportion does not know the standard of wastewater treatment, and there is the same number of consumers finding the wastewater treatment poor as finding the wastewater treatment good. 86% of the consumers are not aware of a change in the wastewater treatment within the last few years, and the last 14% have experienced an improvement.

Figure 5.8:
Rating of the quality of cold water and the standard of wastewater treatment

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Few consumers drink the water straight from the tap, cf. Figure 5.9. Compared to the number of household that does not drink the water straight from the tap, the overall rating of the water quality is quite positive. The most important reasons for not drinking the water straight from the tap are:

	healthiness/pollution of the water, 54%
	taste, 24 %
	habit, 15 %
	smell, 3 %
	colour, 2 %

There is a large proportion referring to healthiness and pollution as the reason for not drinking the water straight from the tap, and these are aspects not easily monitored by the consumers. Hence, the perception that the water is unhealthy might also be due to habits. If the water is healthy to drink as most tests indicate, cf. Chapter 3, there is a need to inform the consumers that the water is actually drinkable.

Figure 5.9:
Drink tap water straight from the tap

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Instead of drinking the water straight from the tap 85 % of the households buy bottled water. Each household buys almost 7 litres per week on average. Only few households have a water filter; 8% have a separate small container to filter the water, and 4% have a filter in the pipe.

Most consumers are very satisfied with the water pressure. The quality of the water in terms of colour and smell is also not rated poor by a lot of respondents, cf. Figure 5.10. On the other hand the consumers are dissatisfied with the healthiness and the sediment in the water.

Figure 5.10:
Rating of various aspects of the water quality

Note: Between 1% and 5% were not able to rate the quality aspects. The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Consumers are quite satisfied with the frequency of interruptions and also the speed of resupply after an interruption, cf. Figure 5.11. Hence the frequency of interruptions is not a matter a large proportion of the consumers find important to improve.

Figure 5.11:
Satisfaction with information provision and the speed of re-supply after interruption

Note: Between 1% and 5% were not able to rate the quality aspects. The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

There is more dissatisfaction concerning information provision from PWiK. Less than one third receives information about the water services. Those consumers that do get information are primarily obtaining the information from local newspapers, radio and television. Hardly any consumers receive information from PWiK.

5.4.3 Willingness to pay for water services

Although few consumers drink the water directly from the tap not all consumers think water services should be improved - that is if improvements are accompanied with an increase in the cost. On the other hand only 3% think that water charges and water services should be decreased, cf. Figure 5.12. 49% of the consumers think that charges should be increased and quality should be improved.

Figure 5.12:
Preferred strategy concerning water services and water charges

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Reasons given for not improving water quality and increasing water charges are e.g. that consumers find that charges are already too high (24 %), and that the consumers find that they are not able to pay more (16 %).

Stated preference analysis

The stated preference analysis is exploring both the willingness to pay for improvements and the willingness to pay to avoid worsening. Factors included in the analysis are:

	Interruptions;
	Colour;
	Smell.

The purpose of the analysis is to find the willingness to pay for improvements or to avoid a worsening of these factors.

Unplanned interruptions are included because a lack of investment might imply an increasing number of interruptions and therefore it is relevant to assess the willingness to pay to avoid interruptions. However, it should be noted that the average age of water supply pipes is reasonably young and current level of interruptions is better than most cities in the region.

Two possible changes in the frequency of interruptions are included in the analysis:

	Monthly unplanned interruptions;
	No unplanned interruptions at all.

Colour and smell are included in the analysis because the qualitative work indicated that these are important parameters to the respondents. As for interruptions two changes are included in the analysis, a worsening of the colour and an improvement:

	The water is slightly coloured;
	The water is always completely clear.

Finally smell is represented by the changes:

	The cold water has no smell at all;
	The cold water smells of chlorine even after boiling.

The average willingness to pay for the interruption changes is illustrated in Figure 5.13. The willingness to pay is reported in PLN per cubic meter.

There is no measurable willingness to pay to avoid monthly, unplanned interruptions. On the other hand there is a willingness to pay to have no interruptions at all. The respondents are on average willing to pay 12% of the current average cost per cubic meter.

Figure 5.13:
Average willingness to pay to avoid monthly interruptions, and to have no interruptions at all

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Interruptions are rather infrequent at present, e.g. the frequency is lower than in Brno and in most CIS countries. So the consumers might have difficulties in eva-luating the disutility of a monthly interruption.

In terms of willingness to accept higher tariffs, avoidance of more frequent interruptions does not seem to be an argument that is appreciated by the consumers.

The highest willingness to pay is to avoid a smell of chlorine in the cold water; the consumers are willing to pay 64% more to avoid the chlorine smell. The willingness to pay to have water with no smell at all is insignificant but positive. This indicates that the consumers find that the smell of the water is very good at present, cf. Figure 5.14.

Figure 5.14:
Average willingness to pay to avoid that the cold water smells of chlorine even after boiling, and the cold water has no smell at all

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

The water is chlorinated at present. The result here indicates that the consumers are not heavily dissatisfied with the present smell of the water, but that consumers would be willing to pay higher tariffs to avoid even more chlorine in the cold water.

If an investment in water services makes it possible to avoid using more chlorine consumers are willing to accept higher tariffs.

The consumers are willing to pay both to avoid the water getting slightly coloured (with traces of rust) and to have the water completely clear. This indicates that the water is not perceived completely clear at present and that the water is not slightly coloured. The consumers are on average willing to pay 41% more on the monthly bill to avoid that the water gets slightly coloured, and they are willing to pay 24% more to have completely clear cold water.

Figure 5.15:
Average willingness to pay to avoid that the cold water is slightly coloured, and the cold water is completely clear

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Improvements to the colour of the water can be appreciated as an argument for increasing tariffs in Poznan. Also, avoiding that the colour of the water gets stronger can generate some willingness to pay.

The willingness to pay varies somewhat between age groups and between income groups. The consumers are divided into two income groups based on the household income per member of household:

	Consumers with income in the lowest quartile (25%). That is less than 375 PLN/capita monthly;
	Consumers with income above the lowest quartile.

The willingness to pay as a percentage of the present water cost is given in Table 5.6.

Table 5.6:
Willingness to pay for improvement and to avoid worsening. Increase in current payments

Note: * represents that the effect is not significantly different from zero. The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

Consumers with a low income per member of household are in general willing to pay less than consumers with a higher income. For instance, the willingness to pay to avoid the chlorine smell varies between 27 and 69% extra for consumers in the lowest quartile and between 32 and 129% extra for rest of the consumers. The variations depend on age and gender.

Young consumers are in general willing to pay more for the water services than older consumers are. When seeking acceptability of the water tariffs special attention should be given to make consumers above 55 years accept the increasing charges. Also, the willingness to pay is in general higher for women than for men.

Various hypotheses that did not lead to an affirmative conclusion were explored during the data analysis. These are:

	Consumers with income in the highest quartile (75%) do not have a willingness to pay that exceed the willingness to pay among other consumers above the 25% quartile;
	A different willingness to pay depending on if the water bill is based on consumption or not. Consumers having the water bill based on consumption were expected to have a higher willingness to pay because they are able to adjust the consumption but this is not the case;
	Households with children are not in general willing to pay more for better water services than households without. But there is some evidence in the sample that people with infants are willing to pay more in order to get improved services. However, this effect is omitted due to the low number of respondents with infants.

Importance ratings

The willingness to pay for changes in the services can be compared to the importance ratings of other items. This is possible because some of the service improvements included in the stated preference game are included in the importance ratings as well.

The respondent was asked to rate the items on a scale from "very important" to "very unimportant". In order to compare the results, an index was calculated from the importance ratings. The values of the index give a priority of the items, cf. Table 5.7.

Completely clear water is the most important improvement. This indicates that the consumers are willing to pay less that 24% extra for each of the other service improvements in the table. Having no unplanned interruptions at all is prioritised no. 11. This indicates that consumers are willing to pay less than 12% extra in average for the service improvements at priority 12-13.

Table 5.7:
Priority of service improvements

Note: The data is weighted by the age and gender distribution of the Poznan urban region, census 1996.

There are two environmental aspects in the table and they are prioritised second and third. Although respondents can find an improvement important without being willing to pay for it the results indicate a willingness to pay for better wastewater treatment. Therefore environmental improvements can be used as an argument for increasing tariffs⁵.

Also, no sediment in the tap water is a possible improvement that will enhance the acceptability of an increase in water tariffs.

Uncertainty

The results of the stated preference analysis are statistically uncertain. In order to illustrate the uncertainty a confidence interval is calculated for the willingness to pay to avoid chlorine smell of the water. This is the willingness to pay that is estimated with the best precision. The confidence interval is calculated for men aged between 34 and 44 in the income group with an income above the lower quantile, cf. Figure 5.16.

Figure 5.16:
Confidence interval for the willingness to pay to avoid the water smells of chlorine even after boiling, males with income higher than 25% quantile, 35-44 years old.

The willingness to pay varies within 45%and a good 75%in a 90% confidence interval. This illustrates that while the magnitude of the result is reasonable the exact figure is quite uncertain.

Finance

Finally, the consumers were asked if they prefer an increase in water charges up front or they prefer an increase water charges that is implemented over five years. The options are:

	Full 20% increase next year and no further increase for the next four years;
	7% increase year on year for the next five years.

The consumers are divided equally between the two options. 46% prefer the full increase upfront, while 52% prefer the more slow adjustment of prices. The consumers preferring the full increase up front have a higher average household income.

5.4.4 Market study on water and wastewater by Ankieter

The market research company Ankieter conducted a study on water and wastewater services in Poznan and surrounding municipalities in 1999. In total 999 interviews were conducted, 802 in Poznan and 127 in the surrounding municipalities.

The results from the Ankieter report do not differ substantially from the research presented in this report. The results for Poznan were:

	72% of the household pay based on consumption. In the stated preference sample used in this report 67% pay based on consumption.
	20% of the respondent do know the actual tariffs for water (1.47 PLN) and wastewater (1.55 PLN). A majority of the respondents find wa-ter tariffs are too high.
	Most consumers think that households should economise on water usage, and most respondents find that the current tariffs make them economise on water usage.
	79% of the households never drinks the water but most households use tap water for tea and coffee, etc. In the sample used in this report 72% never drink the water straight form the tap.
	Among the four items taste, smell, colour, and pressure, taste is found the most unsatisfactory, smell is the second most unsatisfactory and colour third most unsatisfactory - respondent are quite satisfied with the pressure. In the sample used in this report the taste of tap water is also found poorest of the four, but not the most important to improve.
	39% of the respondents have had at least one interruption of the water supply during the last 12 month - most consumers find interruptions onerous.
	A majority does not know how wastewater is treated, but 72% think that authorities should spend more on wastewater treatment. In this report it is found that to improve the environment is also very important.

There are a lot of common results when comparing the results of the research by Ankieter and the results in this report. So the main conclusions of this report are supported by the report by Ankieter.

5.5 Conclusions on market research

The consumers in Poznan are not, in general, dissatisfied with either the cold water quality or the standard of wastewater treatment. However, few consumers drink the water straight from the tap, and almost half of the interviewed respondents are willing to pay higher tariffs to improve quality. Quite few prefer a worsening combined with lower tariffs.

The consumers find healthiness of the water poor and there is a willingness to pay for improving the colour of the water and a decrease in the frequency of interruption, although the consumers are not unsatisfied with the present situation.

The willingness to pay to avoid a worsening of the present water quality is higher than the willingness to pay for an improvement. In particular, this applies to the colour of the water and the chlorine smell. This indicates that consumers are willing to accept higher water tariffs if a worsening of the water quality can be avoided.

The willingness to pay varies between different income and age groups. The higher income the higher willingness to pay, and the group of respondents more than 55 years of age are not willing to pay as much as the younger consumers.

The following policy guidelines can be derived from the analysis:

	Significant WTP to avoid decreasing quality;
	WTP is not fully exploited;
	Avoid smelling water is very important argument for price increases;
	Avoid unclear water is very important argument for price increases;
	Environment is an argument for price increases (for waste water services);
	Information level is considered low;
	Different information approaches for different age groups; and
	Metering will not increase WTP.

5.6 Lessons learnt for "toolkit" methodology

Qualitative research

Both the focus group and in-depth interviews worked well and did provide valuable information about the water services in Poznan. The tested translation concept worked well and this is important, especially in the focus group.

Quantitative research

	The stated preference method worked well. The consumers understood the trade-offs and chose logically.
	It was not possible to identify a willingness to pay to avoid a worsening of the frequency of interruptions. The reason might be that most consumers are not familiar with the consequences of an unplanned interruption. It is important that all factors and levels of the game should be easy to understand and evaluate for the consumers.
	The sampling and interviews worked well. The method of conducting the interviews is very important to the quality of the results. Therefore the research aspect is dependent on good local counterparts.
	When deciding on the number of observations, a trade off between number of interviews and precision is made. If more respondents are interviewed more precise estimates can be estimated and the modelling procedure becomes easier.

5	The willingness to pay for a less polluted environment is examined in depth in a parallel study for Brno.

Chapter 6.
Demand for water and affordability

6.1 Demand for water

PWiK revenues depend on the quantity of water and wastewater services sold to different consumer groups. Therefore it is important to predict how the quantity of water demanded will respond to the increasing tariffs. Tariff is not, of course, the only factor influencing demand. The set of factors differs in importance for major consumer groups such as: industry, agriculture, institutional users and households. Here we deal only with households.

6.1.1 Households demand

Consumer taste and income are major determinants of water demand. Availability and prices of technical options for water savings are also important factors, particularly when the average income is increasing.

As households' wastewater bills are normally based on water consumption, the households' demand for wastewater services is therefore embodied in the demand for water services. Consequently, the relevant price variable determining the demand for water is not simply the water tariffs but the combined water and wastewater tariffs.

A high level of per capita consumption allows a quick reduction in water use, since the reduction can be achieved through simple measures. This is usually the case when very low tariffs are drastically changed. This is no longer the case in Poland. The next change depends largely on the income position of the households. Real price increase results in lower consumption but for low income households it is the result of cutting back consumption at the expense of convenience. Higher income households reduce their consumption through investments in water savings that allow them to maintain the same level of convenience.

In Poznan, household water demands have fallen by approximately 20% over the last five years, as illustrated in the figure below. They have now reached a level of approx. 140 lcd. This is still slightly higher than the low levels reached in some large Scandinavian towns (e.g. Copenhagen 121 lcd). However, the room for "easy" reductions is clearly exhausted and further reductions are likely to require significant changes in water use habits.

Figure 6.1:
Development of Water Consumption in Poznan 1994 - 1999

When comparing the development of water consumption with the increase in real tariffs, it can be seen that the reduction of water consumption took place from 1993 to 1997, which is also the period when consumers experienced a major increase in real tariffs. Since 1997, the increase in real terms has been very modest.

Figure 6.2:
Development of water (+wastewater) tariffs in real terms (1993 PLN)

Given that the water demand is already quite low, and that affordability for most income groups is reasonably high, the probability for a sharp decrease in water consumption, in response to future tariff increases, is not very high. As it is assumed in the feasibility studies, some decline can be predicted but it is likely that the consumption level would be stabilized in few years time due to income increases and exhausting the technical options for water savings.

6.2 Ability to pay

The ability to pay assessment is usually limited to a comparison of expenditure on water and wastewater services to the average disposable income. Problems with ability to pay, however, appear in lower income families. In the assessment of the acceptance of higher tariffs and the likely revenue stream after tariffs increase the impact on lower income groups must be analysed.

In case of wide range of income distribution even if the average family disposable income allows tariff increase, the large group of poor households can threat acceptance and undermine the revenue predictions through non-payment. On the other hand, if the tariff increase is affordable for average income families but too high burden for small group of poor families a well designed subsidy schema can smooth the way of implementing the higher tariffs.

Major problem with affordability analysis beyond the rule of thumb approach is the difficulties to get the region/city specific income distribution data.

Statistical data are usually available at the national level. These might be used as proxy for overall income distribution data. When city specific income data are difficult to get efforts to collect city specific income data could be concentrated on determining the minimum income level and ratio of households living at or below that level.

6.3 Availability of data

Poznan city specific disposable income and expenditure data is available for 1996 only. Poznan region specific data can be obtained from the national household expenditure survey for 1998.

The problems with that data:

	there are no income groups created and organised information accordingly;
	the sample size for Poznan region for the different occupational groups is not known but is likely too low to make statistically sound conclusions.

National data are available for 1997 but also only according to occupational groups.

6.4 Income distribution assessment

Income distribution is shown below by occupational category for Poznan relative to the rest of Poland. The share of water/wastewater expenditures in total expenditures is also shown for these groups.

Table 6.1:
Income and Water Expenditures in Poznan and Poland

Bearing in mind the caveats with regard to data quality mentioned above, the income distribution in Poznan doesn't seem excessively skewed. The families receiving social assistance comprise about 4% of the households. These can be considered the low income families.

Representatives of Department of Health and Social Affairs, Poznan City Administration inform that the poorest 4-5 %of the population de-facto will not be affected a lot of higher water prices. Already now many people in this group does not pay for water but are dependent on various subsidies to cover daily costs. Rather, the impact will be felt heavily by those not living on subsidies but a small personal income. The possible distribution of real impact is illustrated below.

Figure 6.3:
Simplified illustration of the impact of higher water tariffs

The socio-economic impact of a high level of investments and thus tariff increases might have as a sideeffect that the municipality would have to allocate more resources to subsidies.

Moreover, there is a political dimension to this. The UW voter segment belongs to the better off part of the population - the people least affected by water tariff increases - whereas SLD voters typically will be among those mostly effected. This may also explain why the UW party in particular favours water tariff increases, whereas the AWS party and the SLD party may calculate that increases in water tariffs will burden their voters.

6.5 Concluding remark

In Poznan there is not likely to be a major affordability issue for tariff increases of the volume being discussed in this report (approximately + 20%)

Appendix 13.1:
SP Questionnaire

Look here!

Willingness to pay

I am now going to ask you to choose between different options for your cold water services. These options will include different levels for:

	Unplanned interruptions to the cold water supplied to your household during the day time for 1-2 hours: - either as it is now or - no interruptions at all - once a month
	The smell of the cold water from the tap: - either as now or - no smell at all - smells of chlorine even after boiling
	Colour of the cold water - either as now or - always completely clear - slightly coloured (with traces of rust)
	The cost you pay for cold water services per month*/two months* (*Interviewer use whatever period they get billed in): - either current, that is.....(see Q22) - current plus 10%, that is.....(Q22 plus 10%) - current plus 50%, that is.....(Q22 plus 50%)

Look here!

Appendix 13.2:
Statistical Tables

Look here!

Appendix 13.3:
Literature Used

Important background documents for the technical profile include:

	Investment programme for PWiK, carried out by the local firm Aqua in 1996;
	Brief technical review in connection with preparation of Concept Paper for the Restructuring of Poznan Water and Wastewater Company by Booz-Allen & Hamilton in 1998; and
	Technical Audit of Poznan Water and Wastewater Assets by VA-Projekt, 1999. This report was available in October 1999 to read, but not to copy, and was then not issued in its final edition.

Appendix 13.4:
List of Persons Met

Appendix 14:
Case Study: Brno, The Czech Republic

March 2000

Read Appendix 14: Contents

Contents

Preface

This case study, prepared by COWI, is being made available to the public to illustrate the methods presented in the main text of the toolkit. Neither DEPA, EBRD nor the Municipality of Brno has verified or takes responsibility for the factual findings contained in this document. The opinions and recommendations expressed in this document are those of COWI and do not necessarily reflect the opinions or recommendations of DEPA, EBRD or the Municipality of Brno.

Due to the time period involved in preparing the toolkit we acknowledge that certain information may not reflect the present situation of the city.

Abbreviations and Acronyms

Chapter 1.
Introduction

This paper constitutes the working paper on water services in Brno. The working paper is a part of the toolkit project on acceptability of water prices in central and eastern European countries.

Background

Over the past thirty years major infrastructure investments have often been implemented based upon detailed and systematic engineering analyses, but without much analysis of the prospective demand for the service. Today, an investor, whether public or private, will require that detailed studies of future demand and surveys of willingness to pay will have to be undertaken before investing in major infrastructure, such as transport infrastructure.

Within the water services sector, similar requirements are only now gaining ground. This may partly reflect that the nature of the revenue risk is different in water services. Cars can avoid a toll road by taking alternatives routes, but urban households cannot avoid receiving water / delivering wastewater from / to the monopoly water utility.

The rationale

However, water/wastewater utilities also face revenue risks, for example:

	Reduction of water consumption by consumers;
	Political protests impacting on the level of approved tariffs;
	Poor collection rates for water bill, etc.

EBRD and DANCEE have entrusted COWI to prepare a toolkit for consultants / analysts working for policy makers who want to address these, and related revenue risk issues, while designing water and wastewater service infrastructure investments. The toolkit will include practical guidelines on how to assess affordability and willingness to pay for water and wastewater services.

An integrated approach

The design (and cost) of a water and wastewater service infrastructure is not just a technical issue. Different designs lead to different service levels and cost structures, and each of the service levels are likely to be perceived differently by the consumer and thus to lead to different acceptability levels of the applied water prices. This should be integrated into an infrastructure design to reduce revenue risk and to make sure that a service level and an associated price level, acceptable to/optimal for the consumers, is applied. At the same time, affordability issues may set an overall limit for the possible increase in average tariffs and thus for the level of ambition with regard to future service levels if these are to be financed by the users. This implies that the analyses of the toolkit should be carried out concurrently with the technical analysis.

Reduction of revenue risk requires integration of design, cost and WTP considerations. This requires a close dialogue between the technical team, the affordability and WTP analysts, and the policy makers.

The research project and its case studies

COWI is carrying out the project in order to design a toolkit based on literature research, extensive consultations with stakeholders and three case studies.

The Brno case study is one of three case studies being undertaken by COWI as part of the preparation of the toolkit. The other case studies are being undertaken in Poznan (Poland) and Kaliningrad (Russia). The subjects of analyses, and the analytical methods used, have differed somewhat between the cities in order to provide the best basis for the preparation of the toolkit.

The primary purpose of each case study has been to provide insights into the design of the toolkit. The secondary purpose has been to provide city authorities with information on the link between acceptability of future (higher) water tariffs and customer perceptions of water service levels in a broad sense.

Acknowledgements

The present working paper has been prepared by Peter Christensen, Mikkel Birkeland, Karsten Vest Hansen, Michael Jacobsen and Zsuzsa Lehoczki, all COWI. Chris Heywood and Michelle Wheadon, from Accent Marketing and Research contributed to designing and implementing the stated preference survey. Ladislav Tuhovcák was instrumental in implementing the stated preference survey and provided comments on the design. Many people in Brno generously provided their time and inputs in discussions with the team. Peter Christensen (COWI) supervised the market research and Michael Jacobsen (COWI) is overall responsible for the "Acceptability of Water Prices in CEE and CIS countries" project and for this working paper.

Chapter 2.
Willingness to pay

2.1 Introduction

The objective of this chapter is to present the methodology applied and the results of the stated preference survey.

The methodology comprises a number of steps. These include background research, qualitative research and quantitative research. Each of the steps is discussed in the section on methodology.

The quantitative research is based on interviews with 150 consumers living in Brno and being responsible for paying the household water bill. While the estimates for the willingness to pay is presented in this chapter the estimates for the water demand elasticities are presented in Section 2.5.

In order to assess the willingness to pay a stated preference approach has been used, and the results indicate some willingness to pay. There is willingness to pay both to have improved water quality and to have a cleaner environment.

2.2 Stated preference survey methodology

The method applied in this stated preference survey contains a number of tasks. These include:

1. Background research
2. Qualitative research
3. Design of questionnaire
4. Pilot survey
5. Final survey
6. Data analysis.

Each of the points is discussed below.

2.2.1 Background research

The first step in the analyses is background research. The purposes of the background research are to:

	Understand the realistic technical alternatives and in particular their impact on realistic service levels;
	understand payment collection, enforcement and usage measuring princi-ples and practices, and the financial standing of the utility;
	understand the socio-economic context, in particular income levels and di-stri-bution and types of households.

The background research have also included:

	Discussions with other team members covering technical and financial issues;
	consultation of earlier reports, statistics, working papers giving general introduction to the utility and the local economy in Brno.

2.2.2 Qualitative research

Following the background research, qualitative research amongst consumers is undertaken. The purposes of the qualitative research are to:

	Gain a first understanding of which service factors are perceived as important by consumers, and which factors are the more important;
	gain a first rough understanding of willingness to pay for water and waste water services and the most important factors;
	understand the cultural context and formulations understood by consumers in relation to water and waste water utilities.

In Brno twelve face-to-face interviews with consumers were carried out. An open-ended topic guide was applied. The face-to-face interviews were conducted in an interview room. Two interviewers interviewed each respondent with consecutive translation by a professional interpreter.

The qualitative research is critical, as the outputs form the limitations to what is going to be explored during the quantitative research.

2.2.3 Design of questionnaire

On the basis of the information gathered in the background research and the qualitative work the questionnaire is designed. The questionnaire includes :

	present water and wastewater services;
	attitude towards the water services;
	attitude towards BVK;
	willingness to pay for improvements of the tap water quality and the wastewater treatment;
	water demand elasticities (for price and income);
	political observance and attitude towards EU;
	socio-economic background.

Many subjects can be covered by a questionnaire. However, a selection has to be made in order to keep the length of an interview acceptable to the respondent.

A long list of possible improvements to the water services was identified in the qualitative research. The most important services are included in a stated preference game as described below, because only a limited number of services can be evaluated in the stated preference game.

An example of a choice task in the stated preference game is presented in Table 2.1. Here the respondent must decide whether they would prefer to pay 14 Kc extra to have tap water as good as bottled water, or whether they would prefer to have better wastewater treatment and pay the same amount as at present. If tap water quality is an important issue to the respondent B is preferred, if clean wastewater and/or money saving is important to the respondent A is preferred.

In both alternatives wastewater treatment meets the EU standards. This is altered in other choicetasks.

Table 2.1:
Example of a choice pair

Eight choice-tasks, such as the above, are presented to each respondent. There is a limit to the number of choices a respondent can make while remaining concentrated and while still presenting a realistic choice.

The stated preference game consists of four factors:

	Water quality;
	Standard of wastewater treatment;
	Cost;
	Wastewater treatment and EUstandard.

Usually four is the maximum number of factors the respondents are able to evaluate in one stated preference game. This is the reason why e.g. information issues have not been included in the game.

The stated preference analysis focuses on exploring the willingness to pay for improvements. Two or three levels represent each of the service improvements. Each level describes a service improvement and these service improvements are the ones that can be evaluated when analysing the game. The costs are increasing in comparison to the present situation in all choicetasks. The levels are described in Table 2.2.

Table 2.2:
Factor and levels in the stated preference game

Note: (1) One third of the respondents was presented to a game with lower cost levels, i.e. 28, 32 and 34 Kc.

Three different designs of the stated preference game were made. Two designs with the levels in the above table and one design with lower cost, i.e. 28, 32, and 34 Kc. This is in order to be able to make a statistically sound model.

Price and income elasticities for water demand are also examined in the survey for Brno. The respondents are asked to state water consumption and income in 1997 and 1999. This enables a calculation of the income elasticity.

In order to estimate a price elasticity stated intention questions are included in the questionnaire. An example is:

If cold water and wastewater costs were 42 Kc per m3, do you think your household would reduce the amount of cold water it uses? If affirmative: How much?

Each respondent is presented to two stated intention questions where the price per cubic meter differs. Also, like the cost levels in the stated preference game, the prices per cubic meter is varied for different types of questionnaires.

The estimated elasticities are presented in Section 2.5.

2.2.4 Pilot survey

The pilot survey is used to test the design of the questionnaire and to identify necessary changes. In Brno, 25 pilot interviews were conducted and the results were analysed. The answers are checked in order to ensure that all questions are well understood and that the stated preference game is working well. Checking the stated preference games includes assessing if all levels are relevant to the consumers, and if the levels of e.g. cost are perceived to be within realistic limits. As an example, if respondents choose alternatives with the lowest cost in most stated preference questions the cost levels should be adjusted downward. This was in fact the case for the pilot in Brno.

2.2.5 Final survey

By including the changes to the questionnaire from the pilot survey the final questionnaire was made. 125 respondents where chosen at random and interviewed. Only respondents responsible for paying the water bill were interviewed.

2.2.6 Data analysis

Both the data from the pilot questionnaire and the data from final questionnaire are included in the statistical analysis. This is possible because only few changes were made to the pilot questionnaire. However, where questions differ significantly in the two versions the results from the pilot questionnaire are excluded. This is the case for the stated preference game.

The stated preference data is analysed by applying advanced statistical tools. A so-called logit model is estimated. Before estimating the model a set of a priori hypotheses is described and these are tested in the model. Examples of such a priori hypotheses are:

	consumers with higher income have a higher willingness to pay;
	consumers with a water meter have a higher willingness to pay because they are able to adjust consumption as a response to an increase in tariffs.

The model also allows for different willingness to pay for consumers with different backgrounds, e.g. age and gender. For age and gender the model process is exploratory, that is no a priori hypotheses are needed. However, all effects in the model must have a clear interpretation.

In order to ensure that the sample is representative, it is tested whether the age and gender distribution in the sample differs from the distribution in Brno. Census data from 1998 is used. The test indicates that some groups are over represented in the sample, and therefore all results are weighted by age and gender. By weighting with the age and gender distribution of entire population, it is assumed that all groups are equally responsible for paying the water bill. Hence, the results can be interpreted as representative.

2.3 Qualitative research

The qualitative research was based on a topic guide that was prepared using background information about Brno. Interviews were carried out as face-to-face interviews in interview rooms. Two members of the project team interviewed each respondent with consecutive translation by a professional interpreter.

Each interview lasted between 30 minutes and 1 hour and 5 minutes (design time around 35 minutes). Twelve interviews were carried out.

Respondents were selected by random. The respondents were between 24 and 75, and represents different employment status and different income groups. Also, the respondents covered in the qualitative work have different political standpoints and resided in various districts throughout Brno. Hence, the respondents interviewed represent a broad spectrum of inhabitants in Brno.

2.3.1 Results from the qualitative work

Water quality

Most of the respondents interviewed do not drink the water directly from the tap. Instead they buy bottled water.

The majority of respondents interviewed are willing to pay for better tap water, but some respondents would prefer to keep the low quality of tap water alongside the present price and continue to buy bottled water for drinking.

Wastewater standard

The respondents interviewed are aware of the environmental problems implied by a low standard of wastewater treatment. The main perceived indications of problems with present wastewater treatment are smelly river, lack of fish or not possible to eat fish cached in the river, and not possible to swim in the river.

The respondents also mentioned other sources of pollution than wastewater from households. A few respondents believe industries are the main polluters, and one claims that households do not to pollute at all.

A majority of the interviewed respondents were aware that the EU requires a certain level of wastewater treatment for the Czech Republic to become a member of the European Union.

Most of the respondents are be willing to pay more for better wastewater cleaning. Accepted increase of price ranges from 10% to "several times". One respondent wished to have a guarantee or refund of price increase if improved wastewater treatment do not benefit the local environment.

Water cost

Most of the interviewed respondents are not aware of how much their normal monthly payment is, but aware of the unit costs.

Most respondents think water and wastewater services have increased in price at the same rate as other services. This is in spite of the fact that water prices have increased much more than other prices and wages in the past two years.

Perceptions of what would happen if consumers do not pay the water bill are mixed. Some think that consumers not paying are cut off and some think nothing happens. Almost all respondents interviewed find it reasonable to cut off consumers not paying their water bills - at least after a warning.

All twelve respondents would keep on paying their bill even if the price was increased.

Metering and water consumption

Most of the twelve respondents have individual metering for the flat or house and the rest have a meter for the block they live in. However, the individual meters in a block of flats are not managed by BVK. The landlord uses these to monitor the use of water.

Most respondents interviewed have undertaken measures to reduce consumption e.g. by repairing leaks fast, showering, and using less water in the bathtub. Some indicate that they can reduce consumption further.

There is a certain level of environmental concern among the twelve respondents interviewed. A majority recycles or would like to recycle if facilities were available. But also, some do not undertake any actions at all to act friendly to the environment.

Knowledge of BVK

Most of the twelve respondents know BVK. They do not believe that BVK is inefficiently managed. However, some indicate that competition would be better, that BVK is a monopoly, and that foreign involvement would lead to better management.

A few had heard about some foreign involvement in BVK, and there are no clear preferences for a Czech versus a foreign operator among the twelve respondents. On the contrary, there is not a lot of confidence in a state-owned company among the interviewed respondents.

Many respondents are aware that a new major wastewater treatment plant is being planned. The aware respondents know that the plant is expensive to build.

Upon prompting, most of the respondents trust that investments by BVK will lead to better wastewater treatment and a better local environment.

Information

The respondents interviewed do not find themselves well informed about water issues by BVK. However, they are able to obtain information through local media (press and radio) on the water and waste-water services.

2.4 Quantitative research

The number of respondents included in the stated preference study is 150, i.e. 125 from the final questionnaire and 25 from the pilot questionnaire. Because of modifications between the pilot and the final questionnaire the 25 respondents from the pilot questionnaire are not always included in the results presented in the following.

While the results for the willingness to pay is presented in this section the survey results for the water demand elasticities is presented in Section 2.5.

2.4.1 Socio-economic characteristics

A majority of the 150 respondents are women (58%) and more than half of the respondents are older than 44 years. For this reason the age and gender distribution is compared to the age distribution for the Brno population by 31 December 1998. The total population at this date was 384,727 inhabitants.

The comparison between the sample distribution and the Brno distribution is shown in Figure 2.1. Males between 18 and 34 years are under-represented whereas males between 55 and 60 years are over-represented. For females the age groups between 18 and 24 years and between 55 and 60 years are under-represented, whereas women between 25-34 years are over-represented. In order to have a representative sample of Brno the results of this survey have been weighted. This means that the results are representative to the entire population and not necessary to the consumers responsible for paying the water bill.

Figure 2.1:
Age of the respondents, stated preference survey and the population in Brno by 31.12.1998

Three quarters of the respondents have been living in Brno for more than ten years. The average time in Brno, for all respondents, is 21 years.

The employment status for the respondents is shown in Figure 2.2. Two thirds of the respondents are employed. The largest employer is the public sector (31%). There is a relatively high proportion of retired people (24%) among the respondents, which is expected considering the number of respondents older than 60 years.

Figure 2.2:
Employment status of the respondents

Note: These results are not weighted.

The distribution on type of accommodation is shown in Table 2.3. The respondents are equally divided into rented accommodation and privately owned accommodation, cf. Table 2.3. A majority lives in flats.

Table 2.3:
Type of accommodation

Note: These results are not weighted.

The number of household members varies between one and eight with an average just above three. More than half of the households do not have children, cf. Table 2.4.

Table 2.4:
Type of household

Note: These results are not weighted.

The distribution of monthly household net income is represented in Figure 2.3.

Figure 2.3:
Distribution of monthly household income after tax in Kc

Note: The 25 answers from the pilot questionnaire are not included. The results are valid for 124 respondents. These results are not weighted.

Figure 2.4:
Distribution of monthly net income per person

Note: These results are not weighted.

The income data in the survey can be compared to the official income data from the second quarter of 1999. In the second quarter of 1999 the monthly net income was 6,774 Kc per person. This can be compared to the monthly average of 5,936 Kc per person in the stated preference survey. When comparing the figures it should be kept in mind that the average from the survey is calculated by using the midpoint of each interval, and is collected in the third quarter rather than the second. A majority of the respondents experienced an increase in the income during the last two years. 17% of the household have experienced a decrease in the income that amount to between 5 and 70% of the previous income, and 20% did not have any change in their income. The change in income is equally distributed among different age groups.

Political observance

Table 2.5 compares the votes of the respondents in the 1998 municipal election with the results for the 1998 regional election in Brno. The column showing the municipal election is the one from the stated preference survey.

The results are very close for the main political parties, which indicate that the stated preference survey is politically representative to the inhabitants of Brno.

Table 2.5:
Brno 1998 municipal (stated preference sample) versus 1998 regional election

Note: These results are not weighted.

Some of the respondents did not want to reveal their votes in the 1998 municipal and 28% answered that they did not vote. In the 1998 regional election in Brno 61% did not vote.

Almost half the respondents (46%) think that the Czech Republic should join EU in 2003 as planned. 17% think that it should be later. Only 12% do not think that the Czech Republic should join EU in 2003.

Environmental concern

More than three-quarters of the respondents recycle waste. They mainly recycle paper, glass and plastics. 19% of the respondents states that they agree with various environmental organisations like Greenpeace, Children of the Country, Rainbow Movement, and Veronica. Half of the respondents do not have an opinion towards the organisations.

2.4.2 Public services

For the respondents the most important public services to improve are health and police and prisons. These services are followed by protection of local environment, public transport, local roads and housing. Treatment of wastewater and supply of cold water are in the low end. However, most consumers find protection of the local environment important, and a large group is aware that the lack of wastewater treatment results in local environment problems.

For all these services the majority states that improvements are important or very important to them.

Figure 2.5:
Level of importance for improving the public services

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

The consumers are generally dissatisfied with all utilities in terms of value for money, cf. Figure 2.6. They are also quite dissatisfied with the value for money of cold and wastewater services.

Figure 2.6:
Ranking utilities in terms of value for money

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

2.4.3 Water and wastewater services

Water consumption

The average monthly water consumption is approximately 9 m3 per household. On the top of this consumption, two thirds of the respondents buy bottled water. The weekly purchase per household is 11 litres, which amounts to 3.5 litres per person. 7% of households buy more than 20 litres per week. The large amount of bottled water consumed indicates that a large proportion of the consumers do not drink the tap water directly from the tap.

Around half of the respondent changed their consumption of cold tap water in the last two years. 30% reduced the tap water consumption and 20% increased the tap water consumption. The main reasons for these changes were to save money (45%) and because of a change in the number of people in household (30%).

35% of the respondents find themselves able to reduce their water consumption while most consumers find that they cannot reduce consumption any further, Table 2.6. The highest ability to reduce consumption of water is found among consumers that are not aware of the change in consumption during the two years.

Table 2.6:
Possible reduction in water consumption

Note: The data have been weighted

The main proposals made for reducing the cold water usage are a more economical way of washing dishes, toilet use, and to take shower instead of bath.

Water payment

More than two thirds of the households have separate cold water meter, and almost al households with a meter are billed according to the meter. Half of the households pay the bill for cold water and the wastewater is with other items, and the other half pay the water bill separately.

Table 2.7 shows the consumers perception of the increase of the cost per cubic meter for cold water and wastewater treatment during the last two years.

Table 2.7:
Increase of the cost per cubic meter for cold water and wastewater treatment in the last two years

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

In fact between 1997 and 1999 price have increased of 27% for water and 33% for wastewater. A lot of consumers are underestimating the real increase. Also, a majority is not aware of what part of the bill is for cold water supply and what part of the bill is for wastewater treatment.

The average amount paid by the consumers is illustrated in Figure 2.7. The amount has increased from 260 Kc in 1997 to 279 Kc in 1999.

Figure 2.7:
Average household payment for cold water and wastewater, Kc per month

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

The distribution of the monthly water bill is shown in the table below for 1999. Most households pay less than 300 Kc. per month.

Figure 2.8:
Distribution of the household water bill in Kc per month, 1999

Note: The figure is based on 144 consumers, 6 did not state the amount they paid. From the final questionnaire 87 consumers brought their water bill to the interview and 32 gave an estimate. Data are weighted by the age and gender distribution of Brno, census 1998

The consumers' attitude towards non-payers was also examined. 64% of the respondents think that non-payers of water charges should be disconnected.

The average payment for water services is just below 2% of the household net income. The distribution of the proportion of the income spent on water services is shown in Figure 2.9. More than a third of the consumers pay less than 1% of the income, while less than 5% pays more than 5% of the net household income.

Figure 2.9:
Distribution of the household water bill in Kc per month, 1999

Note: Data are weighted by the age and gender distribution of Brno, census 1998

Water quality and standard of wastewater treatment

The consumers are divided into equally sized groups concerning the quality of cold tap water. A third of the consumers find the water quality good and another third find the water quality poor; the rest find that the water quality is neither good nor poor. The ranking of the quality of cold tap water and wastewater treatment is shown in Figure 2.10.

It is more difficult for the consumers to rank the standard of wastewater treatment. Almost half of the consumers (47%) cannot rank wastewater standard. This is quite a lot compared to the few consumers that cannot rank the cold water quality. For wastewater, the consumers who state their opinion have an opinion in favour of good quality.

Figure 2.10:
Ranking of the cold tap water quality and wastewater services

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

Half of the respondents did not notice any change in the quality of cold water in the last few years and one-third think that quality has improved. For wastewater, only 16% think that quality has improved and 36% did not notice any change.

One-third of the respondents thinks that the wastewater treatment results in local environment problems and 46% have no opinion. The following table describes the type of environment problems they have in mind.

Table 2.8:
Local environment problems due to wastewater treatment

Note: The table is based on the 31% of the respondents who do think that the current wastewater standard causes problems to the local environment. The data have been weighted

Comparing the Czech standard for wastewater to EU standard, 20% of the respondents think that waste water treatment in the Czech Republic are the same as EU standard, 32% do not know and 43% think that Czech standard is worse than EU standard. Only 7% state that the Czech standard is better than EU standards.

In fact the new instruction of government no. 82/1999 from 22 March 1999 that sets up new acceptable indicators of water quality from Czech wastewater treatment plant is stricter than the current EU standard. The wastewater treatment plant in Brno satisfies all except one of the indicators. So the inhabitants are not aware of the difference between Czech and EU standards, and have a perception that differs from the facts.

The most important reasons for improving wastewater standard are to protect the environment, cf. Figure 2.11.

Figure 2.11:
The most important reason for improving wastewater treatment

Note: The data have been weighted.

Attitude towards BVK

Most consumers are aware that BVK is the organisation responsible for the cold water supply and wastewater treatment in Brno. The consumers find that the water company in Brno should be own by the municipal authorities, cf. Table 2.9. Only 13% are in favour of the present ownership, that is a combination of public and private ownership, and domestic and foreign.

Table 2.9:
Who should be responsible for providing cold water?

Note: The data have been weighted.

The perception of BVK's corporate policy is that they are more interested in profits and in servicing consumers. 64% of the consumers think that the BVK cares more about profits than customers and only 4% have the opposite opinion.

Information

A fifth of the consumers do not receive any information about the water services. Another fifth get information from BVK whereas the media such as newspapers, television and radio provides most information.

Table 2.10:
Sources of Information about BVK, or water and wastewater services

Note: The data do not sum up to 100% as the respondents can refer to more than one source of information. The data have not been weighted

As an example of the information level among the consumers 53% of the respondents know that a new wastewater plant was planned in Brno.

2.4.4 Willingness to pay to improve water and wastewater services

Although consumers are buying a lot of bottled water only 15% are in favour of increasing charges and improving quality and 60% would like to keep the charges and the quality as it is now, cf. Figure 2.12. More consumers are in favour of reducing prices and quality than improving quality and increasing prices.

Figure 2.12
Preferred strategy concerning water services and water charges

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

Among the 77% of the respondents who are in keeping or reducing the price levels the reasons are presented in Table 2.11.

Table 2.11:
Reasons for not increasing charges for cold water and wastewater treatment

Note: The percentages do not sum up to 100% because respondents were allowed to state more than one reason. The data have been weighted.

The purpose of the stated preference analysis is to find the willingness to pay for improvements of the services. The factors included in the analysis are:

	The quality of the cold water supplied,
	The standard of the wastewater treatment,
	Wastewater treatment meets EU standard.

For the quality of the cold water two possible changes suggested to the respondents:

	The water is drinkable but with a chlorine taste,
	The water is as good as bottled water.

According to the results the perception among consumers is that the present water quality is superior to the first change proposed, i.e. water is drinkable and without a chlorine taste. However, the quality is not as good as bottled water. The notion of bottled water is easy to handle for the respondents. It both guarantees quality of taste and healthiness.

For the quality of the wastewater treatment there is only one improvement proposed in the first factor:

The wastewater treatment means that the surrounding rivers and reservoirs are clean enough for a wide variety of fish and to be able to swim safely

In order to examine the importance of meeting EU requirements a factor is included where the standard of wastewater treatment either meets or do not meet the EU standard. The change presented to the consumer is:

Wastewater treatment meets EU standards.

This factor enables the analysis to identify a willingness to pay for meeting EU-standard that is not due to the improvement in the environment.

The ranking of the factors included in the stated preference analysis is shown in Figure 2.13. The ranking is presented in prioritised order with the most important improvement at the top. The most important improvement is to meet the EU-standard. Half of the consumers find it important to keep the charges as now.

Figure 2.13:
Ranking of the factors included in the stated preference game

Note: The data have been weighted.

There is a willingness to pay for improvements, both for improvements to the water quality and the wastewater treatment. The average willingness to pay is illustrated in Figure 2.14 as extra payment per cubic meter.

On average the consumers are willing to pay about 3 Kc extra per cubic meter to have water as good as bottled water. This indicates that respondents do not find the present tap water quality as good as bottled water.

There is an even greater willingness to pay to avoid "drinkable water with a chlorine taste". The willingness to pay is ca. 11 Kc per cubic meter, which indicates that consumers find the present quality better than that description.

Figure 2.14:
Average willingness to pay to avoid drinkable water with a chlorine taste, and to have a water quality as good as bottled water

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

Consumers are also willing to pay more to get an improvement in the wastewater treatment. They are willing to pay 6 Kc more if the better wastewater treatment leads to an improvement to the environment.

Hence, a cleaner environment can be used as an argument for increasing water charges.

Also there is a willingness to pay if wastewater treatment meets the EU standards. This indicate both that consumers find it important to meet the standards per se - a majority think that the Czech Republic should join EU - and that the perception is that the EU standard is higher than the Czech standard.

Figure 2.15:
Average willingness to pay to have an improved environment and for meeting EU standard

Note: Data are weighted by the age and gender distribution of Brno, census 1998.

The willingness to pay differs for different socio-economic groups. In general:

	women have a higher willingness to pay than men;
	consumers with a low income have a lower willingness to pay than other consumers; and
	young consumers are willing to accept a higher increase to get an improved environment.

The willingness to pay as a percentage of the present charges for various groups is presented in Table 2.12.

Table 2.12:
Willingness to pay per cubic meter

Note: (1) Monthly household income per person. Data are weighted by the aged and gender distribution of Brno, census 1998.

The consumers have been divided into two groups according to the income per person: Consumers having an income lower than the 25th percentile of the sample and consumer having a higher income (4,200 Kc after tax). There is a difference in the willingness to pay for these income groups but a correspondingly higher willingness to pay cannot be found among consumers in the highest 25th percentile.

This result indicates that the water charges are perceived high for the 25% of the population that is less well off economically.

Consumers aged younger than 35 years are willing to pay more in order to have a "clean environment" than older respondents are. This indicates that young consumers will be more willing to accept increases if a cleaner environment can be the result.

Furthermore, it was examined if consumers with a meter installed are willing to accept higher charges than consumers without a meter. The reason for this could be that consumers with a meter are able to adjust water consumption as a reaction to higher charges per cubic meter. However, this hypothesis could not be affirmed and hence installing individual meters does not seem to lead to a higher acceptability of an increase. Finally, it was examined if consumers in favour of EU membership are willing to pay more for the wastewater treatment in order to meet the EU standard than other consumers are. This is not the fact.

2.5 Estimation of price and income elasticities

In order to analyse the relation between tariffs, income and water demand, detailed information on these issues is needed, on a household level. Macro-economic data on income, water consumption and tariffs can also be used if a sufficiently long time series is available. However, microeconomic models often give a more precise description of the customers' behaviour.

The price sensitivity can be found by using both revealed preference data (RP) and stated preference data (SP). SP data should be used if good RP data is not available. In Brno some RP date were available. The case study used a combination of RP and SP data to estimate the price (and income) sensitivity of water demand as described below.

No registered data was available on water demand and income in Brno. Therefore, the respondents were asked to bring their water bills for the last three years to the interview. These water bills were used to obtain data on the amount spent on water by each of the households. In cases where the respondents did not have the water bills, the amount was estimated. Furthermore, the respondents were asked to state the changes in their income over the past three years.

Two specific changes in the water tariff were presented to the respondents as SP questions. The respondents were asked to state the expected consumption for each of the tariffs. This was done in order to obtain an assessment of the sensitivity of water demand to changes in price.

For each household in the sample we collected data on the water consumption, tariffs and income for the last three years. The data were collected by asking the respondents to bring their water bills to the interview. Further, we collected SP data by asking the respondents if they would change the amount of water consumed if the tariff was changed by a specific amount. See the table below for an overview of the data collected.

Table 2.13:
Data for calculation of price and income elasticity of water demand

It is assumed that respondents who answer "don't know" to the change of income have had unchanged income. Furthermore, the price changes within the last two years were "estimated" 31% (equivalent to de facto price change) for people who state that they do not know the change and to the perceived price changes for those who do "know" the change.

The sensitivity is measured by elasticities. The price elasticity is defined as:

the percentage change in water demand in response to a 1% increase in the price per cubic meter.

This elasticity is assumed to be negative, as the consumption is expected to decrease in response to higher tariffs. Furthermore, it is expected that the elasticity is low, i.e. numerically less that one. This means that the water consumption decreases by less than 1% in response to an increase in the water tariff of 1%.

This is anticipated because water is a necessity that most households would continue to consume even if the tariff increases. A decrease in water consumption can be due to more water efficient installations, changed habits, etc.

The response in water consumption is expected only if the tariff is paid per cubic meter. If, instead, the tariff is paid per household member, the price elasticity of demand is expected to be zero, i.e. no change in water demand as a result of a price change.

The income elasticity is defined as:

the percentage change in water demand in response to a 1% increase in income.

The income elasticity is assumed to be positive, as consumers are expected to increase their consumption as they become wealthier. The general income elasticity may change over time and differ among income groups.

In economies with high incomes, most consumers have satiated their demand for water, and a further increase in water consumption is therefore not likely. In this case, the income elasticity is low. On the other hand, in economies where water consumption is a significant item in the household budget, an increase in income is likely to have greater impact on water consumption. In this case, the income elasticity is high.

It is plausible that the income elasticity changes for households with different levels of income. For instance, a poor family might increase its water consumption more than a wealthy family in response to an increase in the family income. This is because the wealthy family has reached a threshold where it uses the amount of water it wishes to use without considering the price.

To benefit from historical data collected in Brno, a model is estimated. To compute the price and income elasticity, it is necessary to know how the respondents will react to an increase in price, other things being equal. Therefore, a demand model including all data collected is estimated.

The prefix ln indicates that a logarithmic transformation has been made, b is the price elasticity and g is the income elasticity. eit is the unexplained part. The index i is the household, while index t indicates that there are more observations for each household.

The price elasticity is estimated at -0.18, which means that a price increase of 10 per cent results in a 1.8 per cent decrease in water consumption. The income elasticity is estimated at +0.33, which means that an increase of 10 per cent in income results in a 3.3 per cent increase in water consumption.

Hence, the water consumption of the respondents is, quite insensitive to price, but the income elasticity is relatively high. The results show that the households are not likely to reduce their water consumption very much in response to an increase in price, but that they will use more water if their income increases. The low sensitivity to price is expected since households in Brno have already ready reduced their consumption to a level that is similar to that of West European cities with low per capita water consumption.

2.6 Conclusions

The consumers in Brno are not, in general, dissatisfied with either the cold water quality or the standard of wastewater treatment. However, two thirds of the consumers buy bottled water. More than three-quarters of the interviewed respondents are not willing to pay higher tariffs to improve quality. 17% prefer lower quality of service combined with lower tariffs.

However, the stated preference analysis reveals a willingness to pay for improving the water quality and wastewater standard. The willingness to pay to avoid a worsening of the present water quality is higher than the willingness to pay for an improvement. In particular, this applies to the taste. Also, consumers are willing to pay for better wastewater treatment in order to improve the environment.

The willingness to pay varies between different gender, age, and income groups. Consumers in the low income group are willing to pay less than other consumers, and women are willing to pay more than men are. The group of consumers younger than 35 years are willing to pay more for an improvement of the wastewater treatment leading to a better environment than older consumers are.

The following policy guidelines can be derived from the analysis:

	Environment is an argument for price increases (for wastewater services);
	To make wastewater treatment meet the EU demand is a good argument;
	Tap water as good as bottled water is also an argument that is appreciated:
	Different information approaches for different age groups;
	Avoid chlorine taste is very important argument for price increases; and
	Metering will not increase WTP.

2.7 Lessons learnt on method

Qualitative research

The in-depth interviews worked well and did provide valuable information about the water services in Brno.

Quantitative research

	The respondents in the qualitative work reveal somewhat higher willingness to pay than found in the quantitative research.
	It is possible to find willingness to pay for environmental improvements, and the connection between wastewater treatment and environment was well understood.
	It is possible to estimate elasticities from survey data by collecting the most important determinants for water demand. This includes water consumption, income and number of persons in household.

Chapter 3.
Technical Profile

The following chapter comprises a brief technical profile of the water and wastewater systems of Brno, and anticipations of future investment requirements.

The objective of the technical profile is to provide technical background information necessary for the assessment of the public's acceptability of water and wastewater tariffs.

The profile is brief, and is based on data collected from available reports and discussions with utility staff.

The water and wastewater services is entrusted the BVK (Brnenské Vodárny a Kanalizace) a joint stock company owned by City of Brno (51%), Suez Lyonnaise des Eaux (39%) and minority share holders (10%). An original lease is now being renegotiated for a period of 25 years.

Important background documents for this technical profile includes annual reports and the report Proposed Price Control Formulas - Water and Wastewater (BVK), COWI & London Economics, July 1999. Furthermore, a number of meetings were held with BVK, VOV (responsible for development of the VIR project) and Brno City Administration (Department of Water and Forest Management and Agriculture, and City Hygienic Station).

3.1 Overall Service Level

Brno has about 400,000 inhabitants. Almost 100% of the population is connected to the water supply system, and about 94% are connected to the wastewater collection system.

3.2 Existing Water Supply System Brief

Brno has three main sources of raw water:

	Brezová. Groundwater of high quality. Capacity: 780-1400 l/s depending on year and season. This source provides about 1,180 l/s or 96.5% of the water supply to Brno.
	Pisárky: Surface water from River Svratka. Capacity 680 l/s. This source only provides 43 l/s or 3.5% of the water supply to Brno.
	Vir: Surface water from the existing Vir Reserervoir (on the Svratka River some 60 km north of Brno). Capacity 1,700 -2,300 l/s. Scheduled for taken into production in 2000.

The groundwater is not treated except for chlorination. The surface water of Pisárky is treated in the Pisárky Water Treatment Plant, renovated some 6-7 years ago. The Vir water will be treated in the new Svarec WTP with a capacity of 2,300 l/s.

There are 32 pumping stations and 59 reservoirs in the water system, and 1,086 km of water pipes. About half of the pipe network is in dimensions > 150 mm. 77% of the pipes are of grey iron. The pipe network is rather old. 47% of the pipes are more than 30 years old, and 29% of the pipes are more than 50 years old. About 1% is even about 100 years old.

3.3 Existing Wastewater Collection and Treatment Brief

The wastewater system is mostly of the combined system, mixing sewage and stormwater. There are about 875 km of wastewater collectors, about 15 wastewater pumping stations and one mechanicalbiological wastewater treatment plant at Modrice.

The existing Modrice WWTP has a capacity of 2,500 l/s. The present load is 1,150 l/s. Sludge is disposed off on agricultural land.

3.4 Consumer Groups, Unit Water Consumption and Metering

The water consumption / water balance can be assessed at:

This means that the domestic consumption comprises about 58% of the consumption. The domestic unit water consumption (126 lcd) is comparable to unit demands in North-western Europe.

3.5 Water and Wastewater Operations

The water supply provides a 100% coverage of 24 hours of supply per day.

The water quality has changed in recent years. Previously the water quality of the surface water from Pisárky was poor. In 1994-95 up to 50% of the samples taken by the BVK did not fulfil the standards.

In 1997 the failure rate had improved to 4% and in 1998 it was 0%. For samples taken in the water network the water quality has likewise improved from failure rates of 25% in 1994 to < 1% in 1996-98.

With regard to wastewater effluents the failure rate (according to the current standards) has been constant at < 1% over the past 5 years.

New wastewater effluent standards have been introduced by Regulation no 82 of 22 March 1999. The new standards require stricter biological treatment (reduction of BOD) and nitrification, more strict phosphorus removal and some denitrification. The current wastewater treatment plant does not have the required capacity to provide nitrification, denitrification and biological phosphorus removal to cope with the new standards.

Annual number of recorded breakdowns is 268 per km per year, which is quite high compared to North-western Europe. The number of blockages in the wastewater network is reported at 37 per km per year, which is comparable to for instance the average for UK.

The annual rehabilitation intensity has been estimated at:

	Water pipe network: 0.9% per year, which appears on the low side, but reasonable.
	Wastewater collection network: 0.6% per year, which also appears on the low side, but reasonable.

3.6 Staffing and Staff Efficiency

The staff of the water and wastewater utility comprises 604 employees. Selected staff efficiency indicators are:

These indicators are comparable with other CEE countries. Compared to North-western Europe, the staffing is high.

3.7 Investments

The current investments into maintenance comprises about 110 mill CZK for annual repairs (financed by BVK) and 217 mill CZK for annual reconstruction (financed by the City), in total 327 mill CZK.

The planned investments into maintenance have been forecasted at about 180 mill CZK for annual repairs and 250 mill CZK for annual reconstruction, in total 430 mill CZK in maintenance per year.

The construction costs for the new (expanded) Modrice Wastewater Treatment Plant have been estimated at 1,610 mill CZK.

Finally, it has been decided to entrust the operation of the VIR water transfer scheme to BVK. It has been assumed that water from Pisárky will be phased down to cover only a marginal percentage of the supply, simultaneously with introducing water from VIR. In 2004 it is anticipated that 20% of the water is supplied from VIR.

In connection with the new 25 years concession a study on price formula has been carried out. This report contains several scenarios for future investments and corresponding tariff levels. An implementation of Modrice WWTP would result in tariff increases of about 30-40%.

Brno, Technical Profile Summary

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4.1 Purpose and Structure of Analysis

The chapter's aim is to analyse the political and institutional factors that influence the process of setting water tariffs in Brno. Specifically, the chapter addresses the following issues:

	The process of water tariff setting: Which actors are involved? What are their main interests when it comes to deciding on tariff levels? What is the relative importance of public acceptability in shaping decisions as opposed to other interests?
	The current status of water tariffs as a political issue: Are tariff levels perceived by the different actors in the policy process (the "Policy Network") as a politically sensitive issue? What are the factors that explain these perceptions?
	The public perception of the water tariff issue: What are the public's attitudes to water related issues? How will these perceptions influence the likelihood of getting acceptance of higher water tariffs? How are these attitudes channelled into the Policy Network? To what degree do existing institutional arrangement themselves influence public opinions?

4.2 Tariff Setting

4.2.1 Responsibility for Tariff Setting

In the Czech Republic municipal authorities are ultimately responsible for setting the level of tariff increases. In practice this means that Brno's tariffs are set by the City Assembly based upon a proposal from the water utility (BVK).

The Czech Ministry of Finance is officially charged with ensuring that these tariffs only cover "justifiable costs" and do not lead to "inappropriate profits". However, interview sources indicated that the lack of a clear definition of "justifiable costs" and "inappropriate profits" mean that the actual influence of the Ministry of Finance in the tariff setting process is very limited.

4.2.2 Description of the Process

Figure 4.1 provides a detailed overview of the tariff setting process. It should be noted that until 1998 this procedure was an annual one. However, with the City Assembly's adoption of a 5-year tariff formula in August 1999 the tariff levels will not be on the City Council's agenda again until 2004.

Figure 4.1:
Tariff Setting Procedures

This diagram represents the "formal" process for tariff setting. However, it can also be considered as the process, since there is no evidence of any "informal" actors (such as consumer groups, industrial users of water etc.) being actively involved at any stage in the setting of water tariffs.

Consultation

The process of tariff setting is currently characterised by a lack of public information and consultation and the proposals for tariff increases are not published until they have been finally agreed by the City Assembly. BVK did organise a presentation of the proposed tariff formula to interested political parties and NGO's, but it was felt by several participants that the presentation was overly technical and did not clearly spell out the implications of the proposed tariff increases on household budgets. A lack of access to financial information about BVK (including information on tariffs) is a concern voiced by (opposition) political parties, NGOs, and even selected members from the city administration.

4.2.3 The Main Actors in the Policy Process and their Interests

During the interviews carried out in Brno it became apparent that the most important actors in this process were BVK and the City Council. These two bodies have a very good working relationship which is demonstrated by the fact that, without exception, BVK's proposals for tariff increases have been accepted unamended.

The City Council

Brno City Council is the 11 person executive body made up of representatives from the ruling political coalition. The coalition which makes up the current City Council is dominated by the Civil Democratic Party (ODS) which has controlled the city administration since 1992. The parties which make up the coalition have an effective majority in the City Assembly and therefore the Council is able to exercise effective control over local policies.

The City Council have good relations with BVK and until July 1999 the only city representatives on BVKs supervisory board and board of directors were those from the ruling coalition.

According to interviews with the political parties in the City Council the main interests in raising wastewater tariffs can be summarised as:

	Technical - modernising the city's outdated wastewater treatment facilities; and
	Political - the long term objective of EU membership is clearly one of the main motivations for carrying out investments in the water supply and wastewater sectors. Public opposition would have to be very substantial before it became a more important issue for policy makers than meeting the requirements for EU membership.

BVK

On reason for the strength of BVK's position is its access to technical and financial information/expertise - which makes it very difficult for other actors in the policy process to question the assumptions which lie behind the proposals for tariff increases. BVK also benefits from its good working relations with the City Council.

Its main interest in increasing wastewater tariffs is that this will allow for a major upgrade of the system which it is responsible for running. This will in turn allow the company to meet environmental standards and thereby reduce the fines and charges which are payable for the emission of pollutants.

4.2.4 Assessmen

In the absence of either public debate or organised lobbying it would appear that public acceptability is not the major consideration when deciding on tariff levels. Indeed, given the public's "silence" on this issue, it would be reasonable for the key policy makers to conclude that tariff levels are generally acceptable for the population of Brno.

It would therefore appear that technical and political interests are the key determinants of the level of investment and hence the level of tariffs (i.e. EU membership, technical requirements , and - in the case of BVK - reducing pollution charges).

4.3 Water Tariffs as a Political Issue

To date, the level of water tariffs has not emerged as a significant political issue in Brno. Neither officials from BVK nor local politicians have ever been lobbied on the specific issue of water tariffs and they have not been a major issue in the local press.

As a consequence of this situation it is not surprising that water tariffs have not figured as an important issue for local politicians. The level of water tariffs was not a campaign issue for any of the parties either during of since the last local election. However, despite this low level of explicit politicisation different perceptions of water tariffs can be detected among the different political parties. These different perceptions are discussed below.

4.3.1 The Political Parties

There are three political parties represented in the Brno City Council (i.e. in the ruling coalition). A brief description is given in Table 4.1 and Table 4.2.

Table 4.1:
The political parties in the governing coalition: Attitudes towards future water tariff increases.

   
Table 4.2:
The political parties in opposition: Attitudes towards future water tariff increases.

Even the main opposition parties are generally supportive of investments in water infrastructure and accept the broad principle of increasing tariffs to facilitate these investments. As the above tables illustrate, water tariffs are not seen as being a major political issue by any of the main political parties.

This situation can explain why during the Autumn 1999 vote on the future management of water services (which included a proposed formula for tariffs increases) the only major political party to hold a formal position against the proposals was the Communist party - and even then, it was the ownership status of BVK and not tariff increases that was the main reason for their opposition.

While water tariffs are not viewed as a specific campaigning issue, it is worth noting that the increased cost of overall living expenses is a major concern for many political parties . In addition, there is some hostility from certain political parties towards BVK (due to a perceived lack of consultation, and "excessive" levels of profits and salaries).

4.3.2 Interest Groups

"Veronica" is an environmental NGO, which is actively campaigning on water issues. However, the group's main objective is improving water quality and it does not directly address tariff issues. It is generally supportive of making investments in the water sector although it is concerned about getting "value for money" - for example, the investments in Modrice WWTP are welcomed but there is also a feeling that an equivalent reduction in pollution could be achieved at less cost.

According to all interview sources there are no other interest groups involved in water issues.

4.3.3 Structural Factors for Reduced Politicisation

A study of the existing situation in Brno reveals several structural factors which reduce the political sensitivity of water tariffs:

	The ruling coalition is in a very strong position. The Civil Democratic Party (ODS) has controlled the city administration since 1992 and there is no obvious threat to its position. The next elections are reasonably distant - in 2002. These factors mean that the local politicians in the City Council are likely to feel confident enough to push through potentially unpopular measures - such as increases in utility charges.
	There are no organised interest groups interested in initiating a campaign on the issue of tariff increases.
	The limited extent of public information and consultation is likely to reduce public debate over tariff increases which in turn will reduce its importance as a political issue.
	The agreement on a 5-year tariff formula means that the level of annual tariffs is effectively on "auto-pilot" and, baring unforeseen circumstances, will not be discussed by the City Assembly until 2004. This mechanism is likely to "insulate" the issue of water tariffs from the political process.

4.3.4 Assessment

Since Brno's water tariffs are decided by a political body (the City Assembly) it is reasonable to anticipate the attitudes of the public (i.e. voters) would have a major, if not decisive influence in deciding the city's policy. But in reality this is not the case. The study of the existing situation reveals that tariff policy is considered as a technical as opposed to a political issue. Reasons that can help to explain this situation are: (i) the lack of public involvement in the tariff setting decision process on water tariffs, and (ii) the different structural factors described above.

In order to obtain a clearer picture of the present situation it is necessary to move beyond the political process and look in some further detail at actual public attitudes. This will be the subject of the next part of this chapter.

4.4 Public Perceptions

The survey carried out by the Stated Preference team revealed many important issues relating to public attitudes to water issues in general and water tariffs in particular¹. The most relevant of theses attitudes, for the purposes of the institutional analysis, are described below:

Opposition to Tariff Increases for Many

A clear majority of respondents were against an increase in charges (55% wanted a standstill on both tariffs and new investments, and 22% were prepared to accept reduced investments in water infrastructure in return for reduced charges). The main reason given for this opposition was on the grounds of affordability and there was a noticeable feeling that charges were already too high (an opinion expressed by 38% of those opposing further tariff increases).

Affordability not an Issue for Others

At the same time, a sizeable percentage of the population (36%) had no idea if their bill went up over the last two years². It must be assumed that for this percentage of the population that the question of affordability has not arisen as a practical concern - which can help explain the fact that water tariffs do not appear to be a major public concern.

Perceived Need to Improve Services

There is a general consensus that it is important to improve standards of local water supply and waste water treatment. However, this sentiment is weaker when it comes to water supply and treatment than for other public services. The most important public services are health, public order and education: a finding that suggests that these issues are more likely to be important to voters (and therefore to local decision makers) than water services.

Reasons for Making Investments

Wastewater

In the case of wastewater treatment, only 11% rated the existing service as poor or very poor, 26% of the population saw it as good or very good, and 45% felt themselves unable to give an opinion on the quality of wastewater services. This finding indicates that popular demand for increased investments in waste water is low and with no obvious dissatisfaction with the existing situation it is likely to be a difficult task to convince the population that new investments are necessary.

In a hypothetical situation, respondents felt that improving local environmental conditions was clearly the most important reason for investing in wastewater treatment - but only one third of those questioned felt that wastewater was an actual environmental concern in the Brno region.

Water supply

The situation is somewhat different in the case of drinking water, where 35% of the population rated the quality of drinking water as being poor or very poor (even though technically the water is of a good quality). This finding is backed up by the relatively high consumption of bottled mineral water, and these consumers are likely to be prepared to pay more for an improved water quality.

At the same time, just over 35% of population rated the quality of drinking water as being good or very good. It is unlikely that these individuals would find it acceptable to raise tariffs in order to improve the quality of tap supply.

The Dogs that Didn't Bark

In terms of testing the methodological approach, it is also instructive to look at potential reasons for making investments that in reality did not influence public attitudes. These were:

	EU accession (while most citizens are supportive of the Czech Republic joining the EU very few link this to the need to make investments in the water sector);
	the level of charges in Brno compared to other towns;
	a perception of excessive profits for BVK; and
	a feeling that the proposed investments are not actually needed.

4.5 Influence of Institutional Factors on Public Opinion

The only institutional factor that registered in the opinion survey was concerning the ownership of the water utility.

A clear majority of the population were aware that BVK was responsible for water supply and there was some implicit opposition to the existing institutional arrangement with 71% of the population expressing the opinion that water services should be provided by local government. Only 2% of those questioned felt that the best service would come from a foreign owned company (which is in fact the current situation).

There is a marked difference between public opinions and those of policy makers. This is most noticeable in the following instances:

	policy makers perceive a strong technical need to invest in the system while the population do not appear to be particularly dissatisfied with the existing level of service;
	the other major motive BVK and the City Council have for making the investment is meeting EU standards, but this is only a very minor concern for the population; and
	over a third of the population are of the opinion that the quality of water is poor - when the technical assessments confirm that water quality is actually high.

The survey provides no indication of the reasons for this situation, although it is possible to conjecture that the limited PR activities carried out by BVK and the lack of public consultation on tariff/investment questions are contributory factors.

4.6 Conclusions

This study of the political acceptance of higher water prices, and the description of the current setup for setting the tariffs, gives grounds for drawing the following main conclusions.

It is therefore in the interests of BVK and the City Council to invest in public information and public relations activities in order to gain acceptance of their investment and tariff proposals.

Appendix 15:
Case Study: Kaliningrad, Russia

September 2000

Read Appendix 15: Contents

Contents & Table of Appendices

Preface

This case study, prepared by COWI, is being made available to the public to illustrate the methods presented in the main text of the toolkit. Neither DEPA, EBRD nor the Municipality of Kaliningrad has verified or takes responsibility for the factual findings contained in this document. The opinions and recommendations expressed in this document are those of COWI and do not necessarily reflect the opinions or recommendations of DEPA, EBRD or the Municipality of Kaliningrad.

Due to the time period involved in preparing the toolkit we acknowledge that certain information may not reflect the present situation of the city.

Abbrevations and Acronyms

Chapter 1.
Intruduction

Project objective and output

The aim of the current project is to develop an enhanced methodology to assess households' ability and willingness to pay for improved water and wastewater services. The project is being carried out for the European Bank for Reconstruction and Development (EBRD) and Danish Co-operation for Environment in Eastern Europe (DANCEE) funded by DANCEE.

The EBRD and DANCEE intend to publish the improved methodology as a guide for consultants working on the preparation of major investment projects in the water and wastewater sector in the CEE and NIS countries. The enhanced methodology is being developed based on three case studies which have been made under the present assignment, Brno (the Czech Republic), Poznan (Poland), Kaliningrad (Russia).

The primary purpose of the project is to develop a methodology, not to present results on ability and willingness to pay for each of these cities. Therefore, the working papers focus on methodological issues and will not present answers to questions like: "What should be the future tariff in the case study town?"

Why this project?

In the water services sector even major infrastructure investments were hitherto decided based upon detailed and systematic engineering analyses, based on norms for the prospective demand for services.

At the same time potable water was, and continues to be, considered a social good. The public sector has an obligation to ensure that all citizens have access to safe and adequate supplies of potable water. In urban areas the public sector is also obliged to ensure collection and adequate treatment of wastewater. In the NIS countries there has been a tradition to finance provision of water and wastewater services mainly from public budgets and only to a limited extent from user charges.

However, public budgets are squeezed between revenue shortfalls and continuing large demands for expenditures. At the same time the water services sector in many cities has a backlog of necessary investments. It is necessary to carry out large investments in many cities soon in order to avoid significant deterioration in service levels or to achieve acceptable service levels.

NIS countries and municipalities are looking to international finance and investors to contribute to these investments. However, such investors will look to minimise the risk on debt service or will require a significant risk premium. Often the investor will go beyond a municipal guarantee and request detailed studies of likely future revenue for the water and wastewater utility.

What is the project about?

Revenues depend on tariffs, tariff collection and the demand for water and wastewater services. Household reactions depend on household acceptability of water tariffs. Political acceptability of water tariffs is another key variable in determining the likely future tariffs and collection rates.

This project attempts to develop a methodology to describe both household and political acceptability of water tariffs in quantitative and qualitative terms.

Water utilities are natural monopolies and urban households cannot avoid taking water/deliver wastewater from/to their monopoly producer. However, the water utility is still exposed to revenue risks, such as:

The level of approved tariffs is difficult to predict due to:

	changes in federal regulations;
	political protests in response to tariff increases (planned or approved);