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

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.

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