Water Prices in CEE and CIS Countries. Volume II: Case Studies
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); |
| Reduction of water consumption by (metered) consumers; |
| Poor collectability of water bills. |
What is specific for Kaliningrad?
The Kaliningrad case study demonstrates how (an early version) of this methodology has been used in Kaliningrad.
Similarly to the situation in other Russian towns, the Vodokanal in Kaliningrad has very little autonomy in proposing (or setting) water tariffs compared to the water and wastewater utilities in the CEE. Thus in Kaliningrad we have analysed political acceptability of water tariffs in the light of the federal regulations that influence revenues from municipal utilities.
At the same time, a major part of the transition to full cost recovery for a number of other municipal and public services, such as rent, heating and electricity still lies ahead, compared to the CEE, where the major transition (though not all of it) has taken place. Thus in Kaliningrad we have analysed household acceptability of water tariffs in the light of a future, where the cost of other utility tariffs are likely to increase, while wages will more or less remain at their present level.
Finally, the Russian macro-economic situation continues to be somewhat unstable. Renewed bursts of inflation and/or exchange rate depreciation cannot be ruled out. The planned investment project includes loans up to USD 31 million in foreign currency. Thus the Rouble denominated debt service will depend crucially on future foreign exchange rate developments. In Kaliningrad, we have given a qualitative assessment of household acceptability of higher tariffs as a result of exchange rate depreciation.
Acknowledgements
The present working paper has been prepared by Michael Jacobsen, Mikkel Birkeland, Alexander Martussevich, Sergei Zaletov and Arne Rønnest, all COWI. Chris Heywood and Michelle Wheadon, from Accent Marketing and Research contributed to designing and implementing the stated preference survey. Boris Novichkov of COWI Moscow has assisted the team. The Kaliningrad Statistical Committee was instrumental in implementing the stated preference survey and in providing comments on the design. Many people in Kaliningrad, and in particular Mr. Kovalenko, Head of the Economics of City Municipal Facilities Department, Division on Economics and Investment Policy, generously provided their time and inputs in discussions with the team. The people met have been listed in Appendix 15.1. Mikkel Birkeland (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 this working paper
This paper initially reviews the current and expected future service level in Kaliningrad, the major investment components and their cost implications. This is done in Chapter 3.
In Chapter 4 we assess the political acceptability of tariff increases in the light of the institutional framework.
In Chapter 5 we present the results of the household survey of consumer willingness to pay for improved water services. In Chapter 6 we turn to pertinent affordability issues based on available income and household expenditure data.
Finally, some conclusions emerge in terms of the methodology and these are briefly listed in Chapter 7.